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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Saturday, January 6, 2018

Dear Chairman Letter to PSSR Management ($PSSR)

I think a private company would pay more for PASSUR than the public markets are affording it. I think the company has assets - in senior management, in its niche product, in its reputation - that aren't reflected on the balance sheet or in the stock price. Even the currently bloated sales force could have value to an acquirer.

But I've been wrong before. This is beginning to remind me one of the first companies that really blew up for me, a small closely held telecom svcs provider called Ace*Comm that had a good product but got left out in a market where customers were consolidating and small service providers that remained small missed out. Eventually they sold for $0.60 / share.

I hope the same doesn't happen here.

----

Dear Beck,

Over the past few quarters PASSUR has embarked on a strategy to spend money on new hires in order to ramp business development opportunities.

I’m writing this letter to request some kind of progress report on this effort and express my concerns that perhaps there are alternatives that might better address both the company’s recent lack of growth and improve its capital allocation.

There are two specific issues that I’d like to address around the strategy:

1. While I realize that paying industry veterans to grow the business pipeline is “business as usual” and a “tried and true” tactic, it doesn’t appear to be working. Obviously, the appearance of success and failure is incredibly binary - either orders come or they don’t – and the fact that thus far they haven’t doesn’t mean its failed, it simply remains unknown.

The question, as with all investment decisions, is whether or not to continue the spend towards an uncertain outcome or change tack. Part of answering that question is asking whether or not you can identify, in the absence of substantial new order announcements, if you are hitting pre-determined markers that might offer evidence that we are on the right path.

In short, what can you share with shareholders to demonstrate that in the absence of new orders, this increased spending on new hires / SG&A is actually working?

2. At the last annual meeting, there was some discussion of whether or not you had the right product suite to address the needs of your customers. Specifically, the question was whether or not you needed to add or acquire some skills / capabilities in order to broaden your solution set for customers who might be seeking more comprehensive solutions and also to better leverage your larger sales force, by giving them more to sell.

There is the risk that you are bulking up your sales staff to a sell a product that is too narrow. If this is the case, can you address this through acquisitions / partnerships or would you be better off selling the company to an entity that can plug you into a wider solution and enable you to access the market more efficiently?

In one of our first conversations, you told me that you enjoyed your independence because “it’s more fun to beat the big boys” as a small, nimble and independent company. I get that logic and appreciate that you’re having fun.

However, one should note that you might be having more fun because you’re the company’s highest paid employee. I assure you, it is no fun for your employees to have worthless stock options or for your investors to have worthless stock.

I urge you to please insure that your capital allocation decisions are driven to maximize value for all your stakeholders – your employees, customers and shareholders - and not merely to subsidize your independence, which you may value more than others.

Sincerely

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Wednesday, January 3, 2018

SIFY Conf Call Dive: Q&A + Business Updates 3Q16 - 2Q18

There have been four question on SIFY's last eight quarterly conference calls going back to 3Q16. Here they are ...

3Q16: --
4Q16: Is there an increase in the dividend?
1Q17: --
2Q17: Just would like to repeat the Q2 earnings?
3Q17: --
4Q17: Analyst from Rodman: "The big question, it’s always been the room question and I know you touched on a little bit, but if it’s – the perception and the competitive action and the overall market against the heavyweight, Bharti, Tata, Reliance. I’m wondering if you could you share a little color on how you’ve seen competitive dynamics change over the past 12months?" (answer: "it's always competitive")
1Q18: An investor pissed off about the stock price: "... And I’m just sorry about my frustration. And I just don’t understand that you have good earnings again, and today who knows the stock. Are you going to merge? Are you going to have a stock buyback? Are you going to do anything positive in the company to show that this market – that your company deserves the respect that the technology and your company deserves?"
2Q18: --

... not much following here.

On each of those quarterly conference calls, CEO Kamal Nath gave his business updates. I've aggregated them all here.

SIFY 3Q16 BUSINESS UPDATE
Let me spend some time on the business highlights for the quarter, starting with Telecom business.

Revenue from the data business grew by 11% over the same quarter last year.

Revenue from internet grew by around 27% over the same period last year driven by the adoption of Cloud and Hybrid network by next generation companies.

Key wins in this category were from a Micro logistics company, a leading e-Commerce player in India and a slew of technology products.

The business signed up more than 130 clients during the quarter. Sify’s wide-area network transformation business continues to see traction with customers.

During the quarter, Sify won a contract to rollout a dealer network for a large auto major in India. This is the third such large win in the segment in the last 9 months.

Sify's Network Managed services business continues to grow, and Sify received industry and customer acclaim as the Best Managed Network Services Provider of the year at the fourth CIO Choice awards.

During the quarter, Sify handed over key projects to its customers including a high capacity network for a leading content player in India. Other projects handed over include a significant part of the deal won with Insurance filed in last quarter.

Sify kicked off its network up-gradation program designed to upgrade Data Center Interconnect multi-fold, both from a capacity and capability standpoint. The first phase of this new network upgrade will be available for commercial use by April 2016.

As far as the Data Center Services business is concerned,
revenue grew more than 14% over the same quarter last year. The business signed up 15 new clients during the quarter. Sify contracted to provide Data Centre services for a new age Payment Gateway Company of India.

A multi-national company providing home asset finance contracted with Sify for their hosting requirements.

Two nationalized banks also signed up for their Data Center requirement. Others who signed up for co-location services were a Mobile Value Added Services company and one of the country's leading online derivatives exchanges.

One of India's largest circulated English daily accorded Sify as the Best Enterprise Data Center award.

Cloud and Managed Services business.
This business revenue grew 24% compared to the same quarter last year.

Sify added a total of 14 new clients this quarter.

New contracts this quarter included a leading e-Commerce shopping website, an online wallet provider, one of the largest Home loan & housing finance companies in India, and a leading provider of Chemical and Cleaning supplies & services. An investment advisory platform also signed up for Managed Services objective.

Coming to Applications Integration Services business unit,
this business unit’s revenue recorded a 4% growth over the same quarter last year. We have acquired 7 new clients during the quarter. One of India's largest FMCG companies signed up for Managed SAP services with us. A State Government has signed up for Talent Management Solutions. A State Co-operative Bank signed up for Application Development project. And Sify also concluded three large deals with different players in the BFSI segment for Application Services.

The Technology Integration Services business
revenue grew by 86% over the same quarter last year. The Business added 20 new clients across Security, Collaboration and Network Integration business. A Public sector oil refining major signed up for a technology refresh across multiple plants pan-India. One of India's largest FMCG players signed up for a large scale infrastructure augmentation with Sify. There were multiple wins from the State governments in the area of Security services, Network services, Wi-Fi and Collaboration services.

SIFY 4Q16 BUSINESS UPDATE
To start with Telecom business, the revenue from this business – from the data business grew more than 15% over last year. Voice business grew 21% over the previous year.

The business launched the Cloud Interconnect services facilitating access to more than 10 leading cloud service providers across 30 global geographies. Enterprises now have perhaps the largest direct access to the cloud platform in India.

Business Internet saw a revenue growth of 25% with capacity almost tripling. This significant spike is on the back of explosive demand for bandwidth dependent applications.

Managed services strategy saw maturity with a 2x growth that saw the number of managed end points almost double. This was also recognized by the industry peers as the best network managed services at the CIO Choice awards 2016.

Among the biggest clients signed up were to build and manage a national banking network with multiple service providers with Sify as the primary network integrator for both infrastructure and managed services.

The eCommerce business across the country is also helping with the resultant signups to build the network for multiple large service providers. Other sign ups were a national sector telecom service provider, a national insurance provider, a total of three large public sector banks, a cement major, a non-life insurance player and a large private university. Three major international automobile manufacturers contracted the business to build their entire dealer management network and deliver comprehensive managed services to them.

Data Center Services business unit. The revenue from this business unit grew by 20% over the previous year. This business added more than 50 clients throughout the year. Our focused approach towards certain industry verticals paid rich dividends in this view. The fastest growing virtual wallet player contracted us for their complete hosting requirements in India.

A captive managed service provider for a national mobile services player has contracted the business for colocation services. During the year, the business also signed up two of the largest nationalized banks, a large format retail player, and a third-party medical insurance service player. One of the largest public sector bank has signed up for our Disaster Recovery services.

A world player in online search has signed up to park their PoP at our Noida facility, which will now enable multiple ISPs to host from here. This business has won awards for Data Center transformation services and Integrated Data Center services at the CIO Choice awards 2016.

The Cloud and Managed Services business revenue grew by over 45% over the previous year. Over the last 12 months, the business has seen increased demand from customers for cloud-aligned model of IT, including services leveraging cloud such as Backup on Cloud and Disaster Recovery on Cloud.

Content Delivery Network services has seen over 260% growth over the last year and has added more than 43 new clients in the last fiscal. The business recently signed up one of the largest power distribution companies in India to provide complete IT infrastructure on a business outcome driven “Pay per Bill” model generated from the platform. The platform is built to support over 5 million consumer bills per month and scale as needed.

Other clients added included a multinational financial subsidiary of an automobile major, a private bank, a multinational IT services player, and a pan-India housing finance company; to highlight a few. During the entire year, we transitioned more than 175 plus key customers onto our cloud platform.

The Applications Integration Services business has signed up over 25 clients for the eLearning business, while the Managed SAP services signed up more than 10 new clients across the industries like manufacturing, renewable energy, steel, and hosiery. The Managed SAP services acquired certifications like SAP Certified in Hosting Services, Cloud Services, HANA Operations, and in Application Management Services.

The business signed up multiple partnerships across India, Asia-Pac, and Middle East to enhance the service offerings and geographical reach in Talent Management businesses. The business has also won the National Education Excellence award for 2016 from ASSOCHAM.

Among the clients signed up were a multinational auto major’s financial arm, a cement major, two energy players, the national telecom player, a public sector power corporation, public sector oil exploration major, the regulatory agency for mines, a State Government’s testing and evaluation platform and one of India’s largest multi-mineral solutions provider.

Coming to the Technology Integration services business unit, the revenue of this business grew by 14%. The business added 85 new clients across Data Center IT infrastructure, Network Integration, Security and Collaboration services.

TIS Business has matured in terms of customer acceptability across customer segments of BFSI, Public Sector Unit, and Government and it helped customers setup robust IT infrastructure and services leveraging our strong service provider experience.

Business saw strong growth in focus areas with Network Integration Business growing by 23%. Data Center IT and Data Center Transformation business grew by 150%. Our Security and Collaboration Business also saw strong support from customers in BFSI and PSU and recognition of our skills in these areas.

SIFY 1Q17 BUSINESS UPDATE
I will start with the telecom business. The data business grew over 15% over the same quarter last year. The business has signed up more than 200 new clients during the quarter. Customer acquisition for the network managed services has accelerated, with over 100% growth over the last 12 months. Sify has signed contracts for wide area network transformation services with two ecommerce startups who were dealing with problems of scale and hyper growth.

During the quarter, Sify also completed implementation of Phase 1 of its network upgrade, tripling both domestic and global capacity. This capacity announcement specifically targets the new generation of internet traffic generated by a combination of information from the socials, mobile, analytics and cloud ecosystem.

During the quarter, Sify also commissioned more than 5,000 new sites for customers including successful project handovers for two wide area network transformation projects which were won earlier. The handover of these projects is a reflection of Sify’s commitment to deliver large complex transformational projects.

Some of the clients added this quarter included the Central Governments’ digital enablement platform, the global services of one of India’s largest public sector banks, a public sector insurance major, another public sector bank, a new-age payment bank, an online share trading portal, and a leading consumer finance provider.

Next comes the data centre services businesses unit. This business revenue grew over 17% over the same quarter last year. 12 new customer logos have been added during this quarter. The business has been awarded with contrast from both public sector and enterprise customers. Prominent among them was one to host the data centre and disaster recovery for the state run agricultural insurance institute.

A leading private life insurance company has partnered with Sify for data centre migration and hosting. Sify also has signed a contract with National Internet Exchange to set up a new point of presence in India.

Cloud and managed services business, the revenue from this business grew 25% over the same quarter last year. Customers from ecommerce, insurance, banking, manufacturing, healthcare, logistics, real Estate & government verticals have signed up with Sify for cloud and managed services. The business has signed up a leading real estate company for transformational IT and to build future ready IT infrastructure. The business has enabled a leading insurance company to launch new insurance products and create an online sales channel through Sify’s cloud services. Sify also signed up a leading FMCG company to host their new product campaigns and promotions.

Government of India’s Nodal ICT Agency has contracted with Sify for acceleration services as a part of their transformational portfolio. Another arm of the Government of India has contracted with Sify to accelerate end-user services for the Digital India Project. Other clients signed this quarter were a mobile services provider, a heavy engineering major, a prominent player in transactional data analytics and a private power distribution player.

As far as applications integration services deal is concerned, the business grew by over 30% over the same quarter last year. The business has signed up 16 new clients during the quarter. Sify partnered with the largest Government recruitment body in India to conduct computer-based examination for recruitment of police and paramilitary personnel for the first time. Sify conducted the examination smoothly for 345,000 candidates across 82 cities and 382 test centers.

One of the India’s largest PSUs has signed up with Sify to migrate their messaging and collaboration services on Microsoft Exchange platform. Some of the other wins for Sify’s Microsoft line of business include a co-operative bank, a large healthcare chain, a leading third-party logistics company, the online media services of an English daily, two major distributors of Indian spices, and a banking financial applications service provider. The SAP line of business has signed up with a major player in the electricity transmission line business, a large mining company, and a steel producing major.

For the technology integration services, the revenue of this business has grown 115% over the same quarter last year. The business has added 14 new clients across data center IT, network integration, security, and collaboration services.

A large public sector insurance company has contracted with Sify to establish a wide area network across their 1000 plus branches. The business also won a large contract from a state Government to establish an end-to-end data center infrastructure, which includes design and setup of IT, network and security, and managed services platform. The business also won a large campus network infrastructure project to design, implement, and manage the campus network infrastructure for video and voice services for a state High Court.

Sify has added seven new clients in security services and had two large wins in public sector banks. Sify also elevated its partnership with a leading security partner to gold partnership level.



SIFY 2Q17 BUSINESS UPDATE
I will start with the telecom business unit.
The data business revenue grew by over 17% over the same quarter last year. The business added more than 240 new clients this quarter, key wins included two banks in South India, network expansion for a public sector insurance company and a large Indian enterprise network build for a government institute.

Our network transformation approach enables Sify to achieve a win from a leading Indian conglomerate in the power infrastructure sectors. During the quarter Sify also completed implementation of a project to upgrade the citywide metro networks in Mumbai to provide webscale capable Data Center and Cloud Interconnection capabilities. This transformational software defined network will be the foundation of the next generation network services will launch soon.

Sify also launched its Managed Enterprise Mobility solution based on Wireless LAN technology as a part of its SMACnet strategy. The launch is towards building a portfolio of solutions that enterprises can leverage to build a Digital Transformation strategy.

The Data Center services business unit,
the Data Center services business unit revenue grew by 34% over the same quarter last year. The business signed up 18 new Data Center client this quarter.

The business migrated one of India’s leading private insurance companies to its Data Center at Noida. In a first among their peers, a leading Japanese automobile component manufacturer company outsourced their entire hosting requirement to Sify. One of the world’s leaders in online search and aggregation choose our Noida facility to host one of their interconnection nodes.

A valued added mobility services company also signed up for their Data Center requirement.

As for the cloud and managed services business unit is concerned,
the revenue from this business fell by 9% over the same quarter last year. The business added nine new clients during the quarter. The highlight of this quarter was a transformational infrastructure and cloud project implemented on behalf of a private IT major for a state government in under a week.

Another existing client migrated their non-SAP workloads to Sify Cloud, this is in addition to the SAP HANA migrated earlier.

India’s fastest growing hotel room aggregator picked Sify Cloud to host their customer-facing online web portal and also Content Deliver Network Services.

Some of the significant wins during this quarter also include two online fashion entrants, a cement major, a scheduled bank and a media services company.

As far as Applications Integration Services business unit is concerned,
the business grew revenue by 85% over the same quarter last year. The business added 10 new customers this quarter. In a first, Sify completely overhauled the recruitment process for India’s largest government run joint recruitment agency by taking the entire test process online.

This is a huge milestone in realizing the Prime Minister’s Digital India vision.

One of India’s largest fixed telephony and broadband services provider digitized their hiring process also using Sify Talent Management Services. Sify successfully conducted an on-line examination drive for one of the Navaratna, Fortune 500 energy companies.

Sify has also won a distributor management system order from a prestigious Mini Ratna Public Sector Enterprise. Sify has won a multiyear Talent Management contract from one of the leading banks in Malaysia.

Coming to the technology integration services business unit, the revenue of this business has grown 65% over the same quarter last year.

The business added 12 new clients across Data Center IT, Network Integration, Security and Collaboration Services.

A private insurance company has contracted Sify for a Data Center Transformation project to design, deploy, host and migrate existing Data Center services to new platform along with managed services for their entire Data Center and disaster recovery center.

A large public sector bank has contracted with Sify to establish a Data Center infrastructure and network infrastructure across all their locations.

The business also won a large contract from a public sector oil and gas company to establish a Data Center infrastructure.

During the quarter, Sify successfully completed a significant Data Center transformation project to a state government electricity company, large scale Data Center and Migration services to private insurance company and a security project for a private insurance company. These projects reflect Sify’s commitment to deliver large complex transformational projects.


SIFY 3Q17 BUSINESS UPDATE
I will start with the Telecom Services business.
The data and network managed services revenue grew by 11% over the same quarter last year. Revenue for the quarter was negatively impacted by a one-off adjustment pertaining to the impact of the cyclone in Chennai. The business added 265 new customers in the quarter.

During the quarter, Sify expanded operations to the neighbourhood SAARC countries and recorded its first win in the region.

Key wins include a large South based public sector bank and a retail fashion chain.

During the quarter, Sify launched a managed Wi-Fi offering that enables large distributed enterprises to deploy a secure, scalable wireless LAN solution across their network. Key wins in this segment include a deployment for a large offshore center for a U.S. multinational and a manufacturing company.

Data Center Services business unit;
the DC Services business continued its growth trend with 40% revenue growth over the same quarter last year. The business added 12 new customers in this quarter. Among those who signed up were an online search major, a private insurance major, one of India's largest private banks and a heavy engineering group. Sify continued to invest in DC capacity expansion across all strategic regions, Mumbai, Delhi and Bangalore.

As far as Cloud and Managed Services is concerned,
the business recorded negative 6% revenue growth over same quarter last year.

Sify added 14 new customers in this quarter. Sify won some marque projects and customers, including a health insurance major, a leading infrastructure finance company, one of India's leading broking houses, a state government's research and training division and another state government's development body.

Sify launched new enterprise-centric services around the AWS stack with direct connect capabilities providing near zero latency for Sify-hosted customers.

For the Web Acceleration and Security portfolio, Sify added four clients, one large global fast food delivery chain for accelerating and securing their online Web order management system as well as one of India's largest mobile-wallet companies. The business also concluded two large contracts from Government of India to accelerate their online engagement media.

As far as Application Integration Services business unit is concerned,
the revenue grew by 64% over the same quarter last year.

Sify has signed up 12 new customers for the quarter. A pan-India consumer healthcare company has signed up for dealer management services. Four reputed customers including a large PSU bank have signed up for the Microsoft Azure business.

The business has also signed up three new customers for talent management. In all, the business has enabled over 0.5 million online examinations just this quarter. Seven prestigious brands have signed up with Sify for Managed SAP Infrastructure services and Sify eLearning won the prestigious Brandon Hall Silver Award for excellence in eLearning. This is Sify's 12th Brandon Hall Award.

Lastly, the Technology Integration Services;
the revenue for this business has grown 45% over same quarter last year. Sify added 22 new clients across data centre IT, network integration, security and collaboration services. A large public sector insurance company has contracted with Sify for data centre infrastructure refresh to deploy and provide infra integration services for DC network, IT infra compute and storage, and security services. Another large public sector insurance company has contracted with Sify to refresh Wide Area Network infrastructure across India.

During the quarter, Sify successfully handed over projects for data center transformation to two private insurance companies, deployed IT infrastructure and network security and collaboration services for a state government department, a Wide Area Network rollout across public sector insurance company, and security rollout for a public sector [oil] [ph] company. The handover of these projects is a reflection of Sify's commitment to deliver large complex transformational projects on time.


SIFY 4Q17 BUSINESS UPDATE
Over the past year, we have booked new orders that represent an Annual Contract Value in excess of INR 10,000 million.

We’ll start with the telecom business;
The revenue from data services for the year grew by 15% over last year. A total number of 950 clients were added during the year.

During the year, Sify expanded its reach by adding 246 new sites.

The rollout of the next generation data network in Mumbai is now complete. The network was rolled out using the next generation DWDM equipment, providing customers with a highly resilient network to support data center-to-data center and cloud traffic.

Sify launched a unique Internet Exchange in partnership with global pioneer AMS-IX Internet Exchange. This multi-location Internet Exchange fabric will provide cloud and content players, as well as India service providers, a neutral interconnection platform for IP and private traffic.

This year saw Sify establish dominance in the nascent Payments bank industry in India. Sify also launched its Enterprise grade Managed Wi-Fi solution, offering New Age Connected Solutions to Enterprises going Digital.

Major wins this quarter included a Public-Sector bank in the South and another Payments bank in the North.

Multiple customers contracted for Managed Wireless LAN services, including a large global manufacturing company and a Public-Sector bank. Our SMACnet was chosen as the Most Innovative Offering of the year by a leading industry media.

Data center services business unit;

the revenue from this business unit services grew by 29% over last year. Sify added 36 new clients for data center services across various industries.

Sify commissioned a primary data center for a public sector insurance company along with near DR and far DC to be housed in Sify’s data centers. Sify’s data centers now host network POPs for several global content players. This has led to significant orders for peering from Indian telecom operators and ISPs.

A national level private insurance company’s data center was successfully migrated to Sify’s data center. Sify was awarded the CIO choice award 2016 for integrated data center solutions and data center transformation services.

Cloud and managed services unit;
the revenue from cloud and managed services business unit remained flat versus the prior year. One of the world leaders in medical devices and software for oncology signed up to set up their first facility in India on our private cloud. This contract includes software, infrastructure and connectivity.

A leader in creating and operating next generation technology-centric financial exchanges contracted for multiple cloud managed and security services, including the newly launched GoInfinit Acceleration services.

One of the largest luxury real estate players will migrate their entire database to our cloud environment. This contract also includes connectivity among different ongoing projects. A three-wheeler manufacturer signed up for a similar cloud setup to optimize and leverage their existing investments. 18 new clients were added during the last quarter and nine new partnerships were signed during the year.

Applications integration services;
applications integration services grew by 100% over the previous year.

The talent management line of business showed robust growth with over 10 million assessments conducted over the past year; largest among them was the nation-wide recruitment examination for the Government of India, for which 6.5 million candidates registered.

A total of 16 new clients signed up for forum, talent management and e-learning services. One of our major forward supply chain customers have extended their contract by three years.

Sify signed 12 new clients for the SAP business and six new clients for Microsoft Azure business. Sify also acquired their first SAP Business Warehouse on Cloud Client for the subsidiary of a major IT player.

Key wins include an engineering and construction arm of one of the largest Government employers and a public sector bank that contracted the business to upgrade and consolidate their database using a combination of open source and old SQL versions.

Sify was accorded the Hosting Partner of the year for 2016-2017 by Microsoft.

Transformation integration services unit; (THIS SHOULD BE "TECHNOLOGY INTEGRATION", THE DESIGN / CONTRACT SIDE OF THE BUSINESS)
the revenue for transformation integration services has grown 55% over last year. Sify added 62 new clients across data centers, IT, network integration, security and collaboration services. A large public sector insurance company has contracted with Sify to deploy and provide Infra Integration services for data center network, IT infra compute and storage, and security services.

Another large public sector insurance company and public sector bank has contracted with Sify to refresh WAN network infrastructure across India. A private insurance company has contracted with Sify for a data center transformation project to design, deploy, host and migrate existing data center services to a new platform along with managed services for DC and DR.

A large public sector bank has contracted with Sify to establish a data center and network infrastructure across all their locations.

Sify won a large contract from a public sector oil and gas company to establish a data center infrastructure.

Sify also won a large contract from a State Government to establish an end-to-end data center infrastructure, which includes design and setup of IT, network and security, and managed services platform.

SIFY 1Q18 BUSINESS UPDATE
I will start with Telecom centric services.
Revenue from Data business grew by 9% over the same quarter last year. Overall, revenue from Telecom centric services decreased by 5% versus the same quarter last year, primarily due to a reduction in revenue from India voice termination business.

Sify signed up approximately 200 new clients for Telecom centric services during the quarter.

Sify’s data network reached a milestone, covering 1,500 cities; this is approximately a 62% presence across India.

Sify also completely upgraded its international PoPs and capacities in Europe and Asia to deliver the next generation of scale and services for its global enterprise customers. As part of a multi-city Hyper-Scale network rollout, Sify’s Mumbai network was upgraded to 100G level to support scalability for Cloud and Data Center Interconnect services.

Our recently launched Managed Wifi services is gaining significant traction in the Banking industry with multiple Private and Public banks signing up.

During the quarter, Sify completed a pan-India wide data network for a Large Public Sector Insurance company, and expanded the wide data network for another Large Public sector Bank.

Data Center centric IT services,
revenue from Data Center centric IT services grew by 31% over same quarter last year. 98 customers were signed up for Data Center centric IT Services in this quarter.

Sify enhanced its Cloud services portfolio with India’s first All-Flash storage. This is the highest performance per-Terabyte available today in the country.

Sify partnered with SAP to roll out a quick-implementation solution for Enterprises migrating to the new indirect tax legislation, the Goods and Services Tax or GST.

Sify partnered with Enghouse to rollout Contact-Center-as-a-Solution, migrating all existing Contact Center customers to the new platform.

Significant wins for Colocation services were from a leading power transmission company and a world leader in logistics.

A large public sector general insurance company contracted with Sify for data center and disaster recovery infrastructure services and to provide infra integration services for data center network, IT infra compute and storage, virtualization and security services.

A large public sector bank signed up to virtualize its entire data center infrastructure and applications. Sify was also awarded Partner of the Year at the VMware Partnership Leader Forum.

SIFY 2Q18 BUSINESS UPDATE
I will start with telecom-centric services.
Revenue for the data network and managed services business grew 10% over the same quarter last year.

Investment in expanding the network infrastructure continues as Sify’s domestic network now reaches more than 1550 cities. The 7th Global PoP at Marseilles went live this quarter.

Hyperscale network now connects 45 data centers and network nodes and six public and private cloud nodes. The global capacity on the Sify network doubled over the last quarter.

Key wins during the quarter were from a power distribution company, a public sector insurance company, a public sector bank and a leading hyper local ecommerce player.

Other wins during the quarter include those from a large MSO, a leading private trust and a smaller banking player.

There were two key wins in the network transformation and outsourcing category. A leading IT/ITES company entrusted Sify with its network and security consolidation led network transformation.

A large single format European retailer awarded Sify a contract to manage the entire Wide area network, security and wireless local area network across their domestic retail footprint. Sify won its first commercial contract for IoT asset tracking during the quarter.

As far as our data center-centric IT services concerned the revenue from this business services grew 24% over same quarter last year.

Sify signed up 18 new data center customers during the quarter, including India Post, a power conglomerate, an Indian MNC, a housing finance company and a mobile engagement company.

Other key wins were from a pioneering online trading platform, an infrastructure finance company, a GCC based remittance company, an upcoming health insurance provider, two payment gateway players, a co-operative bank and a Fintech startup.

A large financial services company in India has contracted with Sify for complete strategic outsourcing and managed services, comprising of data center and disaster recovery infrastructure services, infrastructure integration services for data center network, IT infra compute and storage, virtualization and security services.

Sify signed five new national level talent management accounts for applications services. Sify signed two existing customers for Sify’s cloud and mobile solutions, and won a large order from Safescrypt which is our digital certification services.

Sify signed its first SAP S/4HANA implementation along with cloud infrastructure hosting. Sify made two more customer acquisitions for S/4HANA.

Sify signed three large customers for SAP digital compliance solutions. Sify also added 35 new clients for technology-led integration services across data center IT, network integration, security and collaboration services.

An umbrella organization for operating retail payments and settlement systems in India has contracted with Sify to expand and build network and security infrastructure with technology from a leading global partner.

A central government department responsible for providing data center services to key government ministries has contracted with Sify for a complete technology refresh of one of their large data centers and for managed services.

Another government of India department contracted to have their data center built by Sify. During this multi-year contract period, Sify will partner with global technology players to design, build and set up the data center, as well as offer managed services. This quarter Sify has been conferred gold level of partnership for acceleration and security services from Akamai.

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Monday, November 27, 2017

on telling the difference between the exceptional and the everyday ($QRHC and $SIFY)

I apologize in advance for taking a moment to talk about religion but its part of my life and there's something I've been reflecting on that ties a bit into investing. So ...

... I spent the last summer running the woodworking shop at a sleepaway camp - a Jewish sleepaway camp - where I was engaged with religion pretty intensely for the first time in ~25 years. (I grew up in an observant home but there's too much good food to eat in the world; once I went off to college I started eating it).

Ritualized religion isn't my preferred version of practice - investing, music, exercise and woodworking probably top my list - but with the perspective of age / experience / worldly travels / comparative religion as my guides, I could at least re-engage with it for a few weeks, and in doing so, reflect on its meaning and meaningfulness.

I'd summarize my experience as similar to that of a visitor to Montreal eating poutine; with some interest but more an avid curiosity about why everyone else does it? All of which is to say, it's not my jam.

However, there's one short prayer that really resonated with me and I continue to think about it quite a bit. It's the last and final prayer of the Sabbath (and every Jewish holiday): "Praise God [...] who distinguishes between the holy and the everyday."

Obviously, it's a fundamental premise of all religion that such things exist that are "holy" and "not-holy", so this struck me as a foundational prayer. But at the same time, it didn't sit well with me as it it conflicts with something I've observed in my life during whatever fleeting spiritual encounters I've had - perhaps others have as well - where we are occasionally endowed with a feeling of oneness, wholeness and completeness.

In short, I was troubled by this gratitude of separation when it seems preferable to want to experience everything as "holy".

I struggled with this for awhile then eventually inverted it: What would life be like if we didn't know the difference b/t the exceptional and the everyday? This question answers itself. If we couldn't distinguish between joyous events (having a baby) and everyday events (telling that child 10-years later to clean their room, flush the toilet, wash their hands, etc.) we would lose out on a large part of our emotional selves.

... Most assuredly, and bringing this back to the subject of this blog, how different would investing be if we didn't know the difference b/t a good company and a not so good company, or a good investment and a not-so-good investment.

My initial take on this was tongue in cheek; that passive investing, which does NOT distinguish between good companies and bad companies, is - cue Dana Carvey - the work of ... Satan?! (That sorry humor aside, we should recognize that passive investing's isn't simply about avoiding the "how to pick a stock" problem as it is avoiding the "how to pick an investment manager" problem.)

It's not here for me to describe all the attributes of a good investment. I think at the very least a good business should solve a tangible problem for a customer at a price that's reasonable to pay with a quality of service that makes the customer not want to look elsewhere. (I discuss one such possible idea below.)

Whatever attributes you want to assign to a "exceptional investment" vs an "everyday investment" it is our job as investors to know the difference and be comfortable with that process so we can endure whatever happens with the stock price (ie the market telling you you're wrong) until it figures out what you've known all along^^.

Finally, in wrapping this up, lest there's any confusion, I must emphasize that while both religion and investing deal with unknowns (the future is unknowable despite what you hear on TV), the foundation of one is faith and the other is facts and if anything should be separated it should be these.

I even observe a weird irony or contradiction around this:

Investing is an outcomes based business - the outcome is everything - yet when we make an investment, we don't really know what the outcome will be b/c the future is unknowable. In absence of this foresight, we have to be supported by our facilities to reason and weigh a full set of probabilities - including failure - such that the imbalance leans heavily towards the variety of favorable outcomes that will benefit shareholders. When we believe we've found them, we should buy them in large enough numbers to be meaningful to the portfolio.

In contrast, with religion, daily faith supports its believers despite the fact that the outcome is the same for everyone. Praying harder won't change that. Investors in contrast need to be comfortable with the discomforting limits of our own certainty.

***

^^ I'm thinking here about QRHC, a stock I've been painfully buying all the way down, and had expected to buy more after what I'd anticipated would be a quarter negatively impacted by hurricanes in TX and FL. Instead 3Q became the quarter of "holy shit they just guided to 2x the EBITDA I expected" (ie $6M-$7M)

I don't put much credence in guidance b/c nobody knows the future.

I think its reasonable they will do +$6M in EBITDA at some point in the near future. But why narrow the time set to 12-consecutive months? The calendar year is an ancient concept. Even the seasonal years are changing.

So rather than excitement this guidance causes me concern. Part of this is the high expectations. If they only do $4M on the year, what would previously have been a strong step in the right direction will be considered missed expectations. That this risk was created by the aggressive guidance eats at me. This risk did not exist before.

The other part of my concern is b/c the earnings growth that drives the guidance is from new markets, customers and industries. Whatever the business, new lines present risks. Industry expansions always worries me.

In this case, the company is ramping up its exposure to the construction waste business. Just let that sink in a minute. Does anyone associate "construction waste" with "GAAP accounting"? I do not.

Did they leave themselves wiggle room to learn this new market? I do not know. It is impossible to know how much of an adjustment period "wiggle room" exists in the guidance. Mgmt has delivered on everything else it's said it would do, but I would hate for this to be the case sticking one's neck out only to have their head cut off.

***

I have been spending a lot of time on a new idea that I think might be an exceptional investment. The company is SIFY Technologies (SIFY), an Indian "Information and Communications Technology" ICT company.

I'm attracted to the company by its recent financial performance, its valuation, its adherence to a vision laid out - and somewhat reviled - nearly seven years ago, the business acumen / success of its Chairman who I think is the strategist behind the vision, and finally its (theoretic) access to a potentially robust market for long-term technology expansion.

Here's the financial performance summary in USD.



I observe growth in revenues, stable margins, and cash flow generation over time. The company is also comparatively underlevered vs many larger ICT's likely more familiar to investors like CenturyLink (CTL) in the US or even Reliance Communications in India (NSE:RCOM) both of which have 1.6x Debt / Equity ratios.

Concurrently I observe a valuation of around 7x - 8x EBITDA.


I'm going to submit a longer write up on this for a contest on SumZero so this will simply be a brief take but allow me to at least elaborate on one aspect of this:

If it's such a good idea, why is it so cheap? I view this predominantly as a fallen / forgotten turnaround that has several strikes against it.

Before delving any deeper, the best place to start is this absolutely brilliant and prescient short report on SIFY from the VIC in February 2012. It is a must read to understand the historical background and the evolution to where they are today.

My take on reading it is ... look how far they've come! The company's investment decisions that generated ridicule back then now generate cash and profit. And yes, while they were in pretty bad shape back then, something had to change for them to remain in business. Also, back then it was trading at a 60x EBITDA while today on a total outstanding share basis (178M) they trade at a not unreasonable multiple for a growing cash flow generating company.

But then one must consider the following strikes against it ...

1. It's in India. There is a lack of proximity, knowledge and clarity to Indian investments.

2. As the short report mentioned, 5-10 years ago there were a series of insider transactions that severely diluted shareholders. People with long institutional memories will be wary.

3. It's been a pretty low ROA and ROE business.

4. DSO's are absurdly high

5. The company admits this is "Version 3" of the company.

... digging more deeply into it reveals that since the recapitalization, share count has remained pretty stable, that ROA and ROE are growing (thought still too low), that trade DSO's have been historically pretty stable, and that Versions 1 & 2 were carried out under prior management.

The briefst summary here is that I see an owner / operator business that's undergone an attractive l/t evolution finally bearing fruit. This owner / operator is Chairman Raju Vegesna who owns 85% of the company. Vegesna is a former Motorla engineer and chip designer. He has two mentions on the page "Who are the Computer Architects?" associated with developing workstation processors.

He's also founded and sold two companies ...

ServerWorks, sold to the semiconductor company Broadcom for $1.8B in January 2001. He then worked at Broadcom for two years until 2003 and apparently lead a highly successful division before he was pushed out. (Broadcom was acquired by Avago in January 2016)

ServerEngines to Emulex for $225M EV in June 2010. (Emulex was acquired by Avago in 2015).

... I think it's fair to say he's smart. There's an old article about him from 2011 that highlights his interesting background (here's the link but the website isn't secure).

I'll add more details on this in the future. As always, do your own homework.

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

Tuesday, October 10, 2017

A Brief Thought Experiment (+ 3Q Results)

A brief thought experiment: Imagine a company that sells snow to eskimos. Now imagine it's growing and profitable and generates cash ...

... then maybe you start to rationalize it. Maybe they have a brand that's so powerful customers want to pay for something they don't need. And that brand creates a moat. Maybe its the greatest company in the world! Or not? "Climate change will kill them! Climate change will create more demand!?" You can follow any line of reasoning your mind takes.

Maybe this is a sign of brain damage but this idea has been on my mind a lot lately.

Companies whose products we don't need and are only differentiated by some perception-of-differentiation or services sold well in the man-hour impression are selling snow to eskimos. EVen outside the consumer space there are more of these than one cares to think and some may be considered excellent investments b/c they are so darn good at selling.

This is not a ground breaking observation nor a suggestion to buy a small company ahead of an eventual product or brand development or new service hire, just to recognize the power of the sales function. It's something we miss at times. Maybe an unwillingness to acknowledge that differences are matters of perception and perceptions are pliant and easily manipulated.

Which is where a good salesperson or a good sales experience comes in. I know it sounds antiquated but in less modern terms anything that eases a transaction forward - or enables a bias or emotion - is a good salesman. It is invaluable at differentiating. A "like" on the great confirmation bias machine. These are hard to generate but scale well across a network.

I'm not stupid enough to compare Jobs' Apple with a waste brokerage business or any other small services companies LCA owns, but a handful are growing their costs / expenses / expenditures towards selling / marketing / product improvement with the expectation that revenues will follow.

The market sees shrinking profitability and cash flow. Short term thinking by "the market" is part of the opportunity set for patient investors. At the right multiple, not much needs to go right. I see companies that have in the past generated returns on their investments, indicating a business where history and management show up. A long growth history in BVPS is more valuable than most recent BVPS.

If the market considered a return on investment likely or probable, these stocks would trade at higher multiples in anticipation of the eventual rebound in earnings. Neither me nor the market knows the future but we are anticipating different outcomes. 

***

Long Cast Advisers recently published it's 3Q17 letter:

"3Q17 was our eight quarter in business. Cumulative returns on accounts managed by Long Cast Advisers increased 8% in 3Q17, net of applicable fees. This was better than the various indices against which we benchmark ourselves. YTD returns through the end of 3Q17 are 21% net of fees. Since inception, we have returned a cumulative 57% net of fees, materially ahead of our benchmarks."

-- END --

ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE. I MAY OWN POSITIONS IN T

Tuesday, October 3, 2017

On obfuscation and the cynicism of investor stupidity ($EVI)

A short seller's presentation on $EVI was published yesterday. It is a long read. IMHO readers would be better off reading EVI's just published 10-K for 2017 and for 2015 as well. Go straight to the source.

But time is short and relative. "Should I read this or that?" The report's author hacks this concept of constrained time - as do many other media - to tell us an abbreviated version of things from their perspective.

It succeeded in serving its purpose, as it often does in the info/business/complex, but failed to adequately inform, as as it also often does in the info/business/complex. We the audience should expect more lest we fall to the level of stupidity expected in its consumption.

This was a valuation / technical short dressed up as fundamental analysis with absurd allegations, self serving drivel and a misunderstanding of the industry served. It reflects a cynicism about investors' intelligence, assuming people will believe it since it comes from a source that's been reinforced by the authority shaping mechanism of the info/business/media. I don't buy it.

For example, of a main allegation, that the company is "teetering on a covenant breach":

"Per the terms of its credit agreement, EVI must maintain quarterly profitability or risk a covenant breach. Q4'17 earnings of just $0.5m means that EVI is already teetering on a covenant breach"

The record shows that in the last 5-years quarterly and 15 years annually the company has never reported a loss. The report should include that information if it considers a quarterly loss a risk.

One can argue valuation until they're blue in the face. I'll frame up the short case a bit more simply quoting my backgammon opponent of last night, himself a former aerospace analyst: "Paying 20x pro forma EBITDA for a cyclical company is insane. We're mid-cycle for godsakes! When the cycle turns, you're going to get creamed. You should sell! You're buying into the cult of personality with this CEO!"

That's the short case: Valuation on a cyclical company.

Don't believe what anyone says about laundry being non-cyclical; capital goods are cyclical. EVI is cyclical. But, the record indicates that EVI is a late cycle play, that additional exposure to maintenance CAPEX mitigates some of the extremes of the cyclicality as does current and future geographic + product diversity.

Which gets to the bigger point on why I and others are bulls despite the nose-bleed NTM valuation. Investing is a business of probabilities. I see a high probability that EVI can continue to expand its growth, within and beyond the traditional capital laundry equipment into water reuse, remediation, perhaps even chemicals (the CEO's former business) and into add'l areas serving a client base that now stretches across the US and into Mexico, Central America and the Caribbean. (PS: All those wiped out resorts will need new equipment soon).

The point is, what's important is simply the company's effectiveness at  continuing to achieve it's "buy and build" expansion in the future.

So if you believe (as I do) that this company will report $16M or $24M in EBITDA in the future, than arbitrarily narrowing the opportunity set for that growth to a 12-month time horizon "b/c that's how we value things" is meaningless.

I also believe that the CEO is a rare and unusual talent and as I commented elsewhere, shorting this thing b/c 4Q17 margins are weak is like shorting Doc Gooden in '84 after he lost two games in a row, in August.

Obviously, one should only expand their comfort zone when using knowledge and information as a guide. Unfortunately, the short report contained neither. I actually expected more.

There's no harm in waiting for another pitch elsewhere. For me, I think EVI solves the problem of allocating capital b/c it allows me to buy a well run business that should grow significantly / materially over time. When the law of larger numbers starts to catch up, that's when the multiple will shrink, but at that point I suspect this will be a more expensive stock.

-- END --

ALL RIGHTS RESERVED. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS. I MAY OWN POSITIONS IN THE COMPANIES MENTIONED HERE.

Friday, September 1, 2017

Why I Own Quest Resources (QRHC)

Quest Resources (QRHC) is an asset light waste services company, a waste broker. Their's is a simple business model; connect haulers and customers and provide some value therein, for a markup.

There is no lack of competition in the waste services business and the competitive advantages are few and far between, depending on vertical of expertise. This goes as well for QRHC, which is differentiated from the industry stalwarts - Waste Management, Republic Services, Clean Harbors, etc. - simply through its asset light business model.

The large companies tend to own fixed assets such as incinerators, landfills and trucks and generate a return on these assets through utilization and volume. It is in their interest to push volume into their owned assets.

QRHC takes an asset light / service only aspect to this business. They do not own trucks or landfills or incinerators, and they generate no return pushing volume into their own assets. Rather they solely help their clients manage their waste streams, whether it goes to a landfill, is diverted to recycling or to organic composting.

In short, they are agents. They sell companies with multiple locations on the service of managing their waste stream, providing information on where the waste goes, tracking volumes and how much is diverted to compost and recycling.

Concurrently, they are a hauler's outsourced sales arm. The hauler typically agrees to offer volume at some fixed price and (in an ideal world) receives in return a customer on an existing route at a high incremental margin. This creates a situation where QRHC is a "frenemy" of the hauler, at times generating volume for them, at times creating competition.

So they essentially solve three problems:

1. "one throat to choke" service for their customers who don't have to deal with multiple haulers (by way of example, my brother in law runs a large facility and says he has a list of 80 waste haulers they call on a regular basis).
2. "better information" on volumes and where it goes than what a client or competitor could / would do themselves (thought this seems like an advantage that could easily be competed away).
3. outside sales force for fixed asset owners (hauler, landfill, etc)

Here's a sample of their sales pitch to the construction vertical copied from a video of theirs ...


... nothing terribly ground breaking. It's a "blocking / tackling" business.

As with most agent / broker models, the model works on the bill / pay spread. A wide bill / pay spread + growing customer base on low fixed SG&A means all incremental gross profit flows to cash. [Consider what happens around an event like a hurricane, where demand increases and haulers likely turn away work from QRHC within the impacted region. I imagine there's a narrowing of the bill / pay spread offset by increased volume].

There is no "moat" for QRHC. There is no hidden balance sheet asset. They do not own trucks or incinerators. There is no fixed asset leverage other than SG&A scaling. And as with other brokerage businesses (real estate, insurance) and business services (staffing, construction) there are low barriers to entry in the business. These are not normally the kinds of characteristics that screen for "good investments". So what makes this an attractive investment?

In my opinion, three things ...

First, it seems like the company is at an "inflection point" where gross profits are starting to grow much faster than (and at long last in excess of) SG&A. I have observed that services companies - even those with no moats and with low barriers to entry - "work" when their revenues are large enough to support the business and when gross profits grow materially faster than a flat or declining SG&A. The "operating leverage" generated through this business can be observed across many services companies.

Second, there is a misunderstanding about forecasts for declining revenues. The company has guided to a ~$32M decline in annualized revenue, starting in the back half of 2017 and into 1H18, that arose b/c they fired a large customer (WalMart, I believe). That announcement - and likely whispers about it ahead of time - have contributed to the stock looking like a "falling knife".

What may escape investors is that the this revenue had by our estimate a 1% gross profit margin, meaning the large "headline" revenue hit is close to a ~$320k hit in gross profit. Thus, the stock market reaction - $20M in market cap going away over a $320k decline in gross profit - for a company that will do $17M in gross profit this year - seems over done.

Third, and more qualitatively, the company has been in a turnaround and has hit all its marks. In the nearly two years since the CEO took over the company, he has been consistent with articulating and implementing his plans, with the results towards profit and cash flow finally showing.

I believe there is value in the consistency between a target and actions. I'll admit that I may assign too much value to this. What is the right amount? I don't know. But I met with the CEO Ray Hatch not long after he joined the company in February 2016, and he laid out a plan to fix what he acknowledged was a terrible business and has hit all the benchmarks of the plan to date.

The plan was to ...
  • reverse split the stock to get rid of excess float
  • shrink revenues to get out of low margin contracts  
  • increase gross profit through subtraction (getting out of low margin contracts) and addition (grow new industries)
  • leverage SG&A 
... all reasonable ideas. At the time it was not an appropriate an investment. Too soon. However 1.5 years later, the financial benefits are starting to appear. There have been few surprises. The corner seems to have been turned ...

QRHC has shrunk - and will continue to shrink - its revenue in order to get out of low margin contracts. The "shrinkage" will accelerate in 2H17 as management has guided to a steep decline in revenues  down 20% vs 1H17, as they exit customer contracts. This infers that they will exit 2017 with a run rate $135M in annual revenues.

They are growing gross profit margin and gross profit dollars. Despite the 20% decline in revenues, the company expects only a 2% decline in gross profit 2H17 vs 1H17. This implies ~180bps of margin expansion 2H17 vs 1H17, as well as GP dollar growth of +15% y/y 2H17 vs 2H16, and full year GP$ growth of close to 20%. This is addition by subtraction.

Once they lap these declining revenues, they expect to benefit from the addition of new verticals and industries served, notably the construction markets. Should see revenue growth in a year.

Here is a brief chart of Sales, Gross Profit and Cash SG&A (SG&A less stock based comp) from 1Q15 to 4Q17E. This graph tells the simple story of efforts to date: Shrink revenues, grow gross profits, keep SG&A flat to down.


Maybe it's still too soon, but the valuation seems attractive to this investor when one considers the benefits of a sound and experienced management team running a simple turnaround business for cash, profit and growth.

That said, and for the benefit of those (doubters) who avoid low moat / low barrier to entry companies, I include here an unedited pre-summer draft of this note when I initially sat down to write it, so that the reader may compare if the idea seems consistent with their expectations >>

"At the current $2.90 it has a $44M mkt cap and by virtue of the roughly $6M in net debt, a $50M enterprise value. This represents a multiple of 0.3x trailing twelve month revenues and 3.4x trailing twelve month gross profits."

<< "serves you right" those moat seekers / barrier investors might say, b/c obviously the stock is much cheaper now, trading for less than half  this value than when I first sat down to write this.

The stock now trades at ~$1.40 / share, implying a $22M mkt cap / $27M EV company, or 1.7x EV / Gross Profit. It is the same business model as before though certainly cheaper.

Let's say the decline in the stock from $2.90 to today is due to the revenue guidance. It might seem material that ~$32M in revenues are going away but if you back out the numbers, and realize it's a 1% GP margin hit, I say: "Sayonara". Keep in mind as well that this decline in revenue is consistent with what management long signaled to investors.

Let's say investors who sold this b/c of the decline in revenues, value it on revenues. It traded at 0.3x TTM revenues at 1Q17. Now it trades at 0.2x against the base runrate $135M, with easy comps / growth ahead. If you believe "the right multiple" is 0.3x, this "should" trade at $1.85.

But this is not about next quarters / next years numbers and the right multiple. And in reality, the stock's decline can be due to many things, a forced seller, someone with information I don't have, etc.

I see a company in the hands of an experienced executive in an industry that is not shrinking (waste is not going away) where changes over the last two years have lead to / are leading to a pathway for cash flow generation and growth, and the market doesn't seem to be assigning much value to this current and future opportunity.

It seems to me that the patient investor has an opportunity to buy something that is under appreciated and unloved with a fairly wide and predictable pathway towards growing profitability, such that over the course of the next few years one could benefit from earnings growth and multiple expansion.

It seems reasonable to this investor to buy at around ~5x expected EBITDA a company that once it laps the easy comps, can grow revenues double digits and grow EBITDA margins to the mid-single digits.


It might not be the greatest investment in the world, but when you can invest with a management team that articulates a plan, implements it wisely, can be acquired inexpensively, is generating cash and can point to a wide pathway for potential profitability and cash flow generation, that seems a good idea. In short, QRHC solves the problem of finding good companies to own at an inexpensive price, at least for this long term investor.

A few notes ...

Mitchell Saltz is Chairman and a principle shareholder. He owns  owns 5.7M shares / 37% of the company as of most recent proxy. "Mr. Saltz founded Saf-T-Hammer in 1987, which developed and marketed firearm safety and security products designed to prevent the unauthorized access to firearms, which acquired Smith & Wesson Corp. from Tomkins, PLC in May 2001 and changed its name to American Outdoor Brands Corporation."

There is a lot of overlap between the boards of these two companies ...



... I don't know much about these folks. There are some shareholder lawsuits against them stemming from 2010 / Smith & Wesson overstating guidance. Did that have merit? I don't know.

Also of note, CEO Ray Hatch has prior experience at Oakleaf, a similar asset light business that Waste Management acquired in 2011 for $425M, or 0.7x revenues. I believe this prior experience to be a materially positive indicator.

However, when you look at old $WM filings, you see this from their 2012 10K ...

"For the year ended December 31, 2011, subsequent to the acquisition date, Oakleaf recognized revenues of $265 million and net income of less than $1 million, which are included in our Consolidated Statement of Operations. For the year ended December 31, 2012, Oakleaf recognized revenues of $617 million and net losses of $29 million, which are included in the Consolidated Statement of Operations."

... which begs a question about profitability.

We do know - without a doubt - that this is a low margin business. The thesis for our investment is that this should be cash profitable in the 4% to 6% EBITDA range and with little CAPEX this is therefore trading around a 10% FCF yield at the base run rate revenue, even higher when you think about where it could be going in the hands of an experienced executive in the waste brokerage space.

But on the face of it, it looks like this "experienced executive" has never run a profitable business.

Or maybe he has? We have to deal with assumptions here but let's say Oakleaf was a 4% EBITDA margins. That's $25M EBITDA. So you'd need to see ~$50M in D&A in the first year of a $425M acquisition to have a negative $25M in net income. Given amortization of intangibles, that doesn't seem far fetched, but it's something to consider.

Finally, you can't consider an agent business without considering the risks that technology disintermediates the agent. Meet Rubicon Global, "the Uber of the waste industry". It has a $500M valuation. Oh wait, it has an $800M valuation. It even has Leonardo DiCaprio as an early investor!

I'm not going to whistle past the grave of technology, even as I make fun of the valuation et al, but there are many examples where an agent model exists alongside a technology model. I think the near term issue is less associated with the technology eating everything than with the likelihood that this private company can sustain losses for far longer than Quest can, meaning it can sign up clients at negative margins.

On the flip side, consider what would happen if Quest made an app and became the Lyft of waste management?

Quest Resource Holdings
Headquarters: The Colony, Texas
Incorporated: Nevada
Auditor: Semple, Marchal & Cooper, LLP
Phoenix, Arizona

https://www.linkedin.com/in/steve-marchal-65352415/
https://www.linkedin.com/in/robert-semple-99184168/
https://pcaobus.org//Inspections/Reports/Documents/2009_Semple.pdf

-- END -- 

ALL RIGHTS RESERVED. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS. I MAY OWN POSITIONS IN THE COMPANIES MENTIONED HERE.

Monday, August 28, 2017

2Q17 Investor Letter

Long Cast Advisers posted its 2Q17 Investor Letter yesterday. "2Q17 was our sixth quarter in business. Cumulative returns on accounts managed by Long Cast Advisers increased 2% in 2Q17, net of applicable fees. Since inception, we have returned a cumulative 45% net of fees, materially ahead of our benchmarks."

If you'd like to receive it in the future, you can sign up for it on my firm's website