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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.

Sunday, November 29, 2015

ARIS' annual report: Guides to 20% topline + margin expansion towards high teens

Last week, ARIS released its annual report. The shareholder letter highlighted very briefly (one page) the company's evolution from a two product / four vertical company with 70% of its revenues in the no growth / high cash flow e-catalogue business to a company with five products addressing lead generation and business management software, et al. and serving eight different verticals.

The letter also included a bit of forward looking guidance:

"As we look forward to FY16, we expect our current organic growth rate and the impact of the acquisitions we completed in FY15 to generate $47M to $49M in revenues. We also expect to see continued improvement in adjusted EBITDA and cash flows. We are on pace to achieve a $50M annualized revenue run rate in the back half of FY16 and a $10M adjusted EBITDA run rate shortly

IF they're right - and I always take guidance with a grain of salt b/c who knows the future? - it would imply 20% topline growth AND expanding EBITDA margins all within the structure of the company as it looks today.

If that means no more equity dilution, than conceivably EPS would grow faster than revenues and this would be the third straight year of substantial EPS growth.

I've been thinking a lot about EPS growth since meeting a PM friend of mine who uses sustainable EPS growth as one of the five metrics in his investment framework.

It resonated with me b/c I've never really weighted EPS that heavily, preferring instead to focus on cash flow or margins, but it's a great little metric that captures in one line and over time: operations, tax, capital management, acquisition strategy (b/c there's no GAAP EPS growth with goodwill writedowns) and or course equity dilution.

I've written in the past about the destructive nature of ARIS'  share dilution but based on where the company is today, I think we are past the point of using expensive shares for acquisitions and moving towards inexpensive debt. (I say "expensive shares" b/c although the valuation of the shares were cheap when the deals were consummated, if the stock does what I anticipate it will, these purchases will seem very expensive in hindsight).

With a strong balance sheet, recurring revenues and solid cash flow, debt becomes a more palatable option for future growth, though even better would be organic growth. There is for example, the opportunity to grow their subscriber base with the new platform of projects as well as a high churn rate ~15% that should be converted into organic growth.

This will be the year where the company proves whether these acquisitions truly created a portfolio of services and solutions that resonates with customers. If it does, as my research indicates, then the stock remains very inexpensive.

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