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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Tuesday, February 10, 2015

$ARIS. CEO's employee agreement long overdue

$ARIS just filed an employee agreement with the CEO ending what had been a series of one years contracts. The company needs to keep its CEO to the very end.

The CEO of ARIS Roy Olivier has been in the catalog / EPC business since starting his own company in his basement in 1993. But he left money on the table selling it in 2000 and for only $9M. That business, now part of a larger catalog library, has grown into a $600M revenue division of Snap-On's.

It seems to me that with ARIS, Roy is intent on getting the full value out of the business he started back in 1993 and recoup the money he left on the table when he sold his business. So this employee agreement that no longer requires annual extensions seems long overdue.


ARI Network Services (ticker: ARIS) is a small cap growth company with a $51M mkt cap and $10M in net debt, leading to a total enterprise value of $61M. The company has $34M in trailing 12-mos revenues through F1Q15 (fiscal year end is July 31) up 5% y/y. At F1Q15, TTM EBITDA was $4M, up 38% y/y. This infers a 12% TTM EBITDA margin though management has long indicated that at “run rate”, when all services and verticals are established, margins should run north of 15%. The six year average EBITDA margin is 14%. Since 2006, annual operating cash flow has averaged 12% of annual revenues.

The stock currently trades for $3.66. At current prices, the stock is trading at 15x EV / trailing EBITDA. However, the trailing valuation is deceptively high because it includes debt from a recent acquisition (inflating the numerator) that hasn’t yet impacted the income statement (deflating the denominator). I estimate that the forward EV / FY2015 EBITDA including a full year of recently acquired EBITDA is 10x. This is at the low end of the company’s historical valuation.

The company was founded in 1981 on the "concept of delivering electronic catalog services to the agriculture industry." These catalogs remain the core of the company and though no longer in books or CD-ROM but via online licenses, the operating scale remains. ARIS pays for the catalog information from OEMs and resells it into dealer channels. 

In 1996, the company began to expand to other vertical markets with the same product; delivering electronic parts catalogs (EPC's) to enable dealers to identify parts and product. 

Their industry is a small choke point for independent dealers. The company has moved beyond the agriculture sector to powersports, outdoor equipment, home medical equipment, appliances, marine, RV's and more recently wheel / tire. The last of the ag business was sold in FY2011.

According to the most recent 10K, ARI content includes 500,000 models from more than 1,400 OEM’s and these are used by more than 22,000 equipment dealers, 195 distributors and 140 manufacturers worldwide.AT SOME POINT I WILL COMPARE COMPETITOR CATALOG LIBRARY SIZES

The core EPC business is straightforward and simple. Aggregate catalogs of parts licensed from OEM's and sell them via subscriptions to dealers, who use them to sell product to customers and find products for services, replacement and repair. This is the content that drives the business and ultimately becomes a photo on a webpage, a parts description for replacement or repair. The catalog business represents roughly 40% of revenues. It is the engine of the business and where the CEO has significant experience.

ARIS also provides a handful of dealer services around the EPC – website development, ecommerce, lead generation – services that primarily help a dealer get customers in the door. Roughly 50% of revenues are derived from developing websites and e-commerce sites for the dealers. On its own, website and ecommerce services are not particularly attractive, high margin or price protected but the catalog engine makes these sticky. These services help put the content to work.

The other 10% of revenue mix is an assortment of lead generation, and a relatively new (acquired in 2013) digital marketing service and newer (acquired in 2014) business management services - including point of sale devices – from the acquired TCS business.

Through organic and acquired growth, sales have increased 12% CAGR and EBITDA 10% CAGR through TTM F1Q15. By year end, with the benefit of a full year of acquired profit, the 7-Yr CAGR for EBITDA approaches 16%.

The growth is certainly acquired. If you look at NET ASSETS (assets less goodwill) LESS LIABILITIES , you would arrive at an proxy for "organic" shareholder equity. For ARIS one would see a decline from $3M to $1M of this "core" shareholder equity since F1Q12. It is a concern for me. Part of the uncertainty of owning the stock. But the company generates cash flow.

And the ingredients are there; It has a "choke point" product, a growing customer base, has added services and verticals and with additional marketing / customer svcs spending to support sales should grow revenues, cash flow and "organic" shareholder value.

Management and stewardship: ARIS is managed by a CEO Roy Olivier who owns 5% of the company and is an entrepreneur in the EPC world. According to published reports, in 1993 he started "Media Solutions International" in his basement as a service and catalog company focused on the construction, mining and material handling markets.

That catalog (at the time on CD-ROM), enabled OEM's, dealers and customers to automate and standardize parts, services, warranty, and sales functions. The business was not materially profitable, and he sold it in 2000 (according to public filings) to Bell & Howell for $9M (http://goo.gl/acj5U8).

Bell & Howell subsequently changed its name to ProQuest and MSI became part of the "Proquest Business Solutions" segment (search for "Media Solutions" in the ProQuest filings here http://goo.gl/ho3a92).

After selling his business, Roy lost his independence and became an employee. It is the bane of the entrepreneur who sells out too soon. In 2001, Roy - no longer running the business he'd founded - left Proquest and consulted, explored opening dealerships and profitably invested in real estate and construction projects. It was a good time for that type of venture.

But leaving left left money on the table; in 2006, Proquest Business Solutions, under the leadership of Andrew Wyszkowski, was sold to Snap-On for roughly $500M, mostly cash. At the time of the sale, PQBS was generating $180M in sales, $115M in gross profit and $50M in EBITDA. This business is now part of Snap-On's "Diagnostic and Repair Information" segment, which generates annual revenues of roughly $650M out of a total SNA revenues of $3.1B (Information on the sale of PQBS to SNA can be found here http://goo.gl/ir6amv).

Roy joined ARI Network Services as VP of Global Sales and Marketing in 2006, around the time that Proquest was sold to SNA. He was elevated to the CEO role in 2008.

So his role running the company is critical to its continued growth and my thesis that Roy is intent on getting the full value out of the business he started back in 1993 and recoup the money he left on the table when he sold his business.

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