About Me

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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.

Saturday, May 21, 2016

The robot selling investments; brief thoughts on a trend

Summary bullet points:

  • No one likes being sold to. Poor selling - especially of financial products - feels condescending and judgmental. 
  • And in an environment where a generic Financial Adviser at a generic bank charges 1% to do essentially the same thing as a robot, it makes sense to choose the lower priced, self directed option. 
  • Robo-investing painlessly resolves the conflict a lot of people feel about investing, that they should know more about the market but they've never found that foothold on which to engage it. The various online robo-options provide non-judgmental, non-condescending ways of allowing people to engage the markets. 
    • But is it the best option? An undifferentiated approach to investing is now the most popular but it is not necessarily right for everyone. It reflects a misreading of academic studies as well as the lazy (and greedy) aspects of the mutual fund industry, which has become good at aggregating AUM yet can't possibly allocate it efficiently in an active style. This "race to the bottom" of AUM aggregation - not robo-investing - is hurting the industry. 
    • Selling differentiated aspects of active investing without compromising integrity or returns on capital seems the best and most attractive option to me as I try to grow a nascent asset management business. 

    I recently attended an event where a lobbyist spoke for three minutes of prolonged insincere, smarmy-ness, and towards the tail end - concluding with an awkward introduction to the event's organizer - I had this revelation: No one likes being sold to.

    It got me reflecting on the generational shift in attitudes around selling and how much the avoidance of salespeople and "being sold to" might factor into shopping online.

    Personally, I still enjoy the occasional face to face shopping experiences and the guided journey towards a better product. But online shopping is such a better alternative.

    Ironically, the entire online experience is made possible by constant shuk-like efforts to sell me stuff I just bought. Despite the ubiquity of those efforts (not on this blog, mind you), the intrusiveness is algorithmic and therefore feels impersonal and "just sort of there", like billboards in the city.

    I imagine the current batch of 20-somethings - the first generation to grow up exclusively with online shopping - is super experienced with the self-driven, yelp driven, review driven process whose independence makes the dopamine rush at its completion that much more of an accomplishment.

    Concurrently, I think every generation has their enlightenment, and if my experience in my 20's is any guide, it involves some recognition that whatever we've learned up until that point is propaganda and hypocrisy, and there's ample room for improvement to make things a bit better, more honest and real.

    With that frame of reference, I'm conflicted about the trend in "robo-investing", the simple, self guided, asset allocation method of online investing targeting today's 20-somethings.

    On one hand, of course they're investing online. The only people surprised by this are traditional financial advisers.

    On the other hand, I have a hard time understanding why the same person who might spend 20-minutes trying to find the right restaurant, glasses or sweater, might spend less time buying the least differentiated product with likely larger sums of money and more limited information.

    I struggle with this "dichotomy" (whatever that means).

    I have this nascent business - an investment management firm - focused on well-researched, patient ownership of terrific small businesses trading for discounts to my sense of what they're worth, and with enough integrity to avoid companies that despoil the environment and drop bombs on people's heads, (ie the roughly 30% of the S&P tied to energy, commodities, dirty power, and aerospace / defense).

    And I'm trying to come up with a good questionnaire to help clients better establish an awareness of how they think about money and investing so they can better understand themselves (what's more important than that?) and also so I can better understand if it makes sense for us to work together.

    So here I am exploring various ways of framing surveys to engage people in their attitudes about investing, when a friend suggested I was overthinking this and perhaps I should check out how a robo-investor establishes suitability.

    On Wealthfront I was asked TWO questions, quoted directly below ...

    1. When deciding how to invest your money, which do you care about more?
    Maximing gains
    Minimizing losses
    Both equally

    2. The global stock market is often volatile. If your entire investment portfolio lost 10% of its value in a month during a market decline, what would you do?
    Sell all
    Sell some
    Keep all
    Buy more

    ... and based on those two questions I was given a portfolio of Vanguard ETF's.

    In an environment where a generic Financial Adviser at a generic bank charges 1% to do essentially the same thing, I can see how it makes sense to use the robo-adviser. Undifferentiated AUM aggregation is a race to the bottom.

    And in an environment where a shady salesperson might ask only one question for appropriateness: "Do you want to invest? Perfect, I have the right product for you" the robot is certainly a better option (and the client won't feel dirty).

    And somewhere in the middle is the traditional FA who might unconsciously talk down to clients: "I know it's hard to understand, let me do this for you."

    In all of these worlds, I can also see how the robo-option painlessly resolves the conflict a lot of people feel about investing, that they should know more about the market - they hear about it everywhere - but they've never found that foothold on which to engage it. These robots - like online ads - provide a non-judgmental, non-condescending way of selling.

    But I also think: "Wow, Wall Street has gotten really good at separating people from their money."

    Because on one hand, if you want an undifferentiated approach, of course you should just take the cheapest alternative. But on the other hand, why should anyone accept an undifferentiated approach?

    We've taken these academic studies about how a long held passive index fund will outperform the "average active investor after fees" and turned it into an undisciplined mantra, as if its a solution to everyone's needs. Average the shady salesperson racing for AUM against an honest investor with sound judgment, and after fees you'll probably return below the market. 

    But find someone knowledgeable, trustworthy and good at this, and you might, for not much more money, become a shareholder in terrific business that you're proud to own, and some might turn out to be great returns on capital. 

    I'm framing this from my own bias as an active investor, where index ETFs seem like the investment analogy of a glory hole; it gets the job done at the lowest cost possible, just don't ask what's on the other side. (For the super-rich, secretive hedge funds fill the same void and at much higher costs, because the rich person's burden is the need to pay more).

    If you do ask what's on the other side, you'll find that it's a mass of businesses, and businesses within businesses, some too big to fail, others too big to succeed, which overall should grow at or near GDP, and whose value depends largely on interest rates and the comparative value of alternatives.

    This is "the market" - mentioned every 15 minutes on the radio, etc. in the form of "The Dow" or "The S&P" - and the huge propaganda machine that says we should invest in it absorbs people into doing things they wouldn't normally do, like wagering their retirement and savings on it, day in and day out.

    I think due to misinterpreted studies, people think the markets are less risky than individual businesses so they throw their retirement savings and 401k's and money at them. I can't wrap my head around that. Would you rather own a handful of things you know, want and like, or bags full of random things, including those that aren't necessarily good for you, that pollute, that despoil, that kill?

    I'd prefer to invest in actual businesses I (and my clients) won't feel dirty owning and that can provide meaningful returns on capital over time, no matter what "the market" does.

    There are lots of people out there investing this way. Like some of them, I aim to be an open book, a guided journey through investments and analysis, providing clients with exposure to individual businesses that generally aren't in the indexes, that are well managed, generate cash, seem inexpensive and over time could grow materially faster than GDP so that perhaps at some point - if things work out and the value is realized - ownership in these businesses can compound capital faster than the market. 

    And I do this without exposure to companies that drop bombs on people's heads or despoil the environment b/c my clients capital should have as much integrity as they do.

    It makes so much more sense to me than the undifferentiated approach. Maybe I just need to find the right robot to sell it?

    -- END --


    Saturday, May 7, 2016

    $WELX: An investment in Beatles history and nostalgia

    As readers of this blog know, owning stock makes you a part owner of a business. This is why owning shares in tiny $7.8M market cap pink sheet listed company Winland Electronics (WELX) makes shareholders part owner of Beatles history and nostalgia.

    I'll explain ...  

    WELX has a day job selling remote sensing equipment used to monitor (track, log and alert) temperature, humidity, water leaks and power changes within buildings. Their products include the WaterBug, TempAlert, PowerAlert and top of the line, EnviroAlert800-ip, which has inputs for up to 12 sensors and requires a subscription to a cloud based monitoring service, their entry into IoT.

    Here's the product catalog

    I've seen these products in the closets / mechanical rooms of rental buildings, but they are also in commercial refrigerators, food or pharma plants and other industrial processing that requires certain environmental monitoring. They are not fancy like the Nest but work out of the box. 

    There's a lot to like about that tiny little business though its not for every investor; revenues are highly concentrated and at 4x book, etc. it's trading at nosebleed valuations.

    The valuation reflects (obviously) a desire by some to own the stock for among other reasons that the company has transitioned from a manufacturer, to an asset light model, and some expect even possibly to an investment vehicle for its two Co-Chairmen: Thomas Braziel and Matthew Houk.

    You've probably not heard of them but they've had some success investing, Thomas through his firm BE Capital and Matthew through his work at Horizon Asset Management.

    Houk, one would presume, is good at what he does since his boss at Horizon, Murray Stahl, acquired 15% of WELX in late 2014, which is another reason for the valuation, given Stahl's fame as a "guru" in the investment world.

    In short, this is really about putting money on two young jockeys (so to speak), and alongside Stahl.

    A lesson I learned a long time ago is that if you have a chance to meet a CEO or Chairman and you find them to be terrific capital allocators with high integrity and great ideas on long term shareholder value, sometimes its best to just make an investment in them and let them do their thing, even if "that thing" is not totally known ahead of time.

    Some might say this is investing with your eyes closed, misunderstanding everything you see, b/c another lesson I learned even longer ago is not to blindly follow what you read online or promises you hear from someone with an angle. Saying "no" a lot - A LOT - and the ability to separate the "A" ideas from the rest is the hallmark of the best investors.

    But unless you're building something yourself, investing is ultimately about entrusting your capital with the best capital allocators you can find, whether its a coffeeshop owner (entrusting them to build the right space that attracts customers), an industrial company (entrusting mgmt to anticipate the right product mix), etc., and at a price and with the right concentration so that the inevitable blips and bumps don't hurt you.

    The problem of course is how to find good capital allocators. I think my brief experience as a PI helps with that, though I might be overstating its benefits.

    In any case, the "investing in a jockey" theme isn't some new ground breaking idea. I doubt most people understand at all what's going on at Berkshire but a few own BRK b/c Mssrs Buffett and Munger are "terrific capital allocators with high integrity and great ideas on long term shareholder value." It is why I own WELX.

    The aspect of being a part owner of Beatles history came later and is just the sugar in my coffee. 


    Many museums don't have budgets to put on one-off special shows so companies like Exhibits Development Group (EDG) create shows, sell them as a turnkey solution and - if the shows are successful and desirable - keep selling it over and over, presumably collecting some % of ticket sales.

    Its an easy model to comprehend; build the exhibit and resell it over and over. The incremental cost after the first show is ostensibly zero, the rent in theory is zero since the museums host, the material is probably part of someone else's collection, insurance might even be carried by the museum. The point is, in theory its a tremendous business that requires little capital and if things go well, generates cash.

    One new show that EDG is putting on is a collection of Beatles memorabilia titled "The Magical History Tour", whose world premiere was at the Pacific National Exhibition, in Vancouver, BC in August 2015 and just opened at the Ford Museum in Dearborn, MI to good reviews. Other venues to host the exhibit include the Chicago History Museum, Chicago, IL; Putnam Museum of History & Science, Quad Cities, IA; and Minnesota History Center, St. Paul, MN.

    To put on this show, created an entity called EDG-PMA LLC, reflecting the partnership between EDG and Peter Miniaci & Associates, the group of four Beatles collectors who supplied items for the show.

    WELX, through an investment vehicle I'll explain below, currently owns 14% of an investment in this LLC but it won't be long 'til more belongs to them b/c - if everything works out - that investment will eventually convert into a 25% stake.

    Here's how the investment was put together: Two investment groups - WELX and FRMO Corp an unnamed third party* - created an investment vehicle called Northumberland with initial investments of $200K and $1M, respectively and owned proportionally. Thus, WELX owns 17% of Northumberland and an unnamed third party owns the rest. [* i'd previously thought FRMO was this unnamed third party but can't find my source for this info, so i've edited that out as of August 2018. it's not financially material but transparency has value for its own sake]. 

    Northumberland invested this $1.2M to EDG-PMA LLC. It looks like a loan but acts like a convertible preferred equity. In return for the loan investment, EDG will pay interest at an irregular dividend of 10% and once the loan  the investment is repaid - this is key - Northumberland will own 30% of the LLC putting on the show.

    Furthermore, when the investment converts to equity, WELX will end up owning 83.33% of Northumberland meaning it will own 25% of the LLC. (30% * 83.33% = 25%). I reckon its set up this way to utilize WELX's NOL's, so the profit they take might equal the profit they make without sharing it with the taxman (rim shot).

    The Beatles I hear, are pretty popular and if this ownership continues indefinitely and the show can continue, it should generate solid cash flow for as long as the LLC has access to the pieces in the show.

    Obviously, all investment carries risk as does this one, and of course, if you really want to own Paul McCartney's pick or George Harrison's notebook, eBay or other venues might be most appropriate. The value of Beatles memorabilia might even be enhanced as a result of the new show, which I hear is worth a visit if you're passing through Dearborn.

    Full text of the investment language follows.

    "On Friday, July 10, 2015, the Company completed an investment of $200,000 in Northumberland IX LLC (“Northumberland”), an entity formed with another third party to invest a total of $1.2 million in EDG-PMA, LLC (“EDG-PMA”), itself an entity formed in cooperation with Exhibits Development Group, LLC (“EDG”) to develop, design, construct, market, place, own, and operate a traveling museum exhibition presently known as The Magical History Tour: A Beatles Memorabilia Exhibition. 

    "Northumberland’s investment in EDG-PMA is effectively structured as convertible preferred equity. 

    "The convertible preferred equity pays an irregular preferred dividend at a rate of 10 percent per annum on any outstanding principal balance and is immediately convertible into 30 percent of EDG-PMA common equity upon repayment of Northumberland’s $1.2 million principal amount, the timing of such repayment being dependent on the distributable cash flow of EDG-PMA." 

    "Until repayment of Northumberland’s $1.2 million principal amount, the convertible preferred equity is entitled to the entirety of EDG-PMA distributable cash flow. Prior to the repayment of principal, the Company’s interest in Northumberland is proportionate to its $200,000 investment. Following the repayment of principal, the Company’s interest in Northumberland shall be 83.33 percent." 

    -- END --

    This is not a solicitation for business or a recommendation to buy the stock just something unusual about a stock that I thought readers would appreciate. It is based on public filings but I can't vouch for the accuracy of those filings or of this blog post.. This "safe harbor" statement is meant to cover my ass and to remind readers they are responsible for their own research and investment decisions. At the time of this writing, I own some of the stock. All investing carries risk particularly small cap equities and that risk includes the potential for a total loss of capital.

    Sunday, May 1, 2016

    Kicking around a new idea: $PSSR Inexpensive and Independent Airspace Technology Company

    Summary bullet points:

    • $PSSR is a micro-cap with long operating history in aerospace technology and improving balance sheet.
    • Book of business is growing with recurring revenue subscriptions and the tailwind of long term industry trends.
    • Trading at inexpensive 5x EBITDA despite visibility into continued revenue growth.

    In a recent article in the WSJ about a successful test using blockchains (ie bitcoin technology) to record transactions in the credit default swap market, I read the following quote ...

    "Some may be reluctant to make changes that threaten their own market share or introduce new complexity to current systems that have been tested and refined over the years."

    ... and it struck me as something that could have been written about any industry, at any point in time in history.

    This post is about technological change in the aerospace industry, NextGEN, and a tiny company called PASSUR Aerospace (PSSR) that until 15 years ago had a niche in "old technology" but is evolving with the "new technology" and could have an opportunity - given its established space in the industry, its slate of solutions that support NextGEN and recent hires - to grow revenues, maintain margins and thereby expand ROE and ROA back towards double digits.

    The "old technology" is locating airplanes on a map, once essential, soon to be ubiquitous. The "new technology" is helping their customers - airlines, airports and ATC's - analyze, understand and make sense of enormous amounts of information to make better, faster and more efficient decisions around airspace and airport operations; scheduling, on the ground asset management, and routing.

    Many larger companies are focused on using algorithms to provide better information for these customers. PSSR says its competitive advantage is +20 years of data analysis tracking its own and other information for more accurate predictive software.

    I see another advantage as the stickiness of real estate in the enterprise, in the airport and ATC - the company has been there for more than 30 years - combined with finding solutions for airline customers that actually improves efficiency (a member of the board Kurt Ekert says he was formerly a sr employee at Continental Airlines when he found the company as a customer and fell in love with the product).

    If ...the industry continues to modernize and evolve, if ... the product continues to improve and if ... the company continues to focus on meeting needs of existing customers, the stock could be attractive - revenues have grown recently and deferred revenues (a measure of subscriptions) imply continued growth - while the current valuation of of 5x trailing EBITDA seems to discount much in the way of a positive outcome.

    I don't make price targets or predictions but I can imagine a future where continued and consistent steady growth and cash flow justify a higher valuation off of a larger pool of profit, while the balance sheet continues to delever, implying the potential perhaps for material growth to shareholders. Or not?  I am still trying to learn more; continued study and patience will be key.

    PASSUR was founded in 1967 and has been publicly traded for more than three decades.

    For most of this time, it operated under the awful / awesome name “Megadata” until 2008, when it changed its name eponymously to the pronunciation of the acronym of its heritage product, “Passive Secondary Surveillance Radar”.

    Underlying PSSR – the acronym – are fixed radar sites – currently 185 in all - the largest passive commercial radar network in the world - at or near airports mostly in the US but also in Europe and Asia - that provide faster and more accurate position updates to airline operations control and ATC's. (These are the spinning radars that are used as establishing shots in movies, typically followed by skidding wheels on the runway).

    The company once sold the machines, then sold the information from the machines as a subscription service. This fixed asset - and the service from it - gave PASSUR its name in the industry for solving the problem of locating an airplane and putting it on a map. As an example of this legacy, after the 1996 crash of TWA Flight 800, its radar network helped establish the precise location of the airplane at the moment it exploded and also the locations of other airplanes in the vicinity that might have witnessed it.

    For several decades that legacy business was niche, yet essential and unique in busy airspaces. But new technology - notably ADS-B - is disrupting that position. By 2020 all airplanes flying in US airspace are required to have ADS-B - whether or not this actually happens is unknown - but it would make passive secondary surveillance radar a redundancy.

    However PSSR is evolving ... and this brings us to NextGEN 

    If you read the newspapers you've heard of NextGEN, perhaps as a bloated and expensive, FAA program; a failure; a plodding success; an over-promised and under-delivered program to - depending on your viewpoint - upgrade airspace technology to improve efficiency and safety in US airspace; or to simply force all the air traffic controllers out of work.

    But NextGEN's over riding ambition is to modernize the US aviation system "... to improve the operational performance of the national airspace system."

    Because of the collaborative nature of the US airspace, the benefits of any modernization at one airport or in one airplane isn't effective unless surrounding regional airports and airplanes using those airports also upgrade.

    In the simplest least complicated explanation of NextGen, it is an effort by the FAA to "quarterback" the collaboration required between the primary agents in the industry ...

    Airlines (ie operators)
    Air Traffic Control Towers

    ... in order to modernize the US airspace.

    The whole plan unfolds in a tough politicized environment where there is reluctance to change "... or introduce new complexity to current systems that have been tested and refined over the years" as per the introductory quote.

    Big contracts. Government agencies. Modernization. It's all very complicated, long term and likely to benefit the large industry players, right?

    The RTCA (Radio Technical Commission for Aeronautics) is an industry advisory committee used by the FAA as a "Public-Private Partnership venue for developing consensus among diverse, competing interests on critical aviation modernization issues in an increasingly global enterprise."

    And here - among many places - is where PASSUR plays a part; despite their small size they are trusted, independent and known in the industry, so they have a seat at the table helping to develop, implement and track NextGEN priorities as well as participate in opportunities to improve operating efficiencies in the industry.

    Furthermore, their "last generation" technology isn't so last generation; they continue to roll out new SSR systems at airports, as backups and redundancies.

    And finally, they have been generating meaningful - and it seems recurring - revenue growth helping airlines and airports use the enormous quantities of data available to airlines from a variety of sources to solve one of three general problems that occur primarily when weather disrupts flights ...

    Better ETA’s and ETD’s to airlines improve on time performance and better prepare for arrivals and departures.

    Better on-the-ground airport information (ie “surface management”) to improve – among other things - turnaround times and on-ground performance.

    Better air-traffic management to safely accommodate increased overall capacity in the airspace and airports.

    ... in predictable environments these things on their own are not terribly complex but throw in diversions associated (most frequently) with poor weather and non-linear problems around availability of runways, gates, crew time, surface equipment, etc. begin to escalate.

    This is where PSSR's service / solution / revenue generation comes in. The company integrates its own sources (PSSR) with other available data sources (ADS-B, ASDE-X, Mode S, En Route Radar, Airline OOOI data, ACARS, fleet databases, etc) as a data feed to flight and airspace information, then runs the data through its own algorithms and uses it to provide better analysis for predictions and performance, which ultimately supports better decision making by its customers.

    It sells services and software systems via subscriptions that provide more efficiency in various aspects of the airline industry. Large material customers include $LUV and $JBLU in their most congested regions that experience weather.

    I hate to rely on cliches and jargon but this where I'll throw out the term "big data" with a link to an HBR article about how PSSR - and Sears Holding (lol) - are using "big data" to improve operations. (take it FWIW, I felt I had to reference the article).

    A key question here when we reflect on the world of big data is why aren't other people doing it, why is PSSR still independent, why aren't revenues higher, etc? 

    On the face of it, having better resources to solve these problems sounds like a “no-brainer”. However, based on our research and our understanding of the industry, there are headwinds to customer adoption of both solutions.

    On ETA / ETD, it’s not generally seen as a complicated problem where the benefits of shrinking the ETA / ATA gap is seen as critical. When a plane leaves late it can fly faster, weather remains an acceptable excuse for delays and with the exception of the most congested airports, “good enough is good enough”.

    On on-ground performance and turnaround times, the biggest factor is planing and deplaning customers. A subscription service that improves on ground performance without improving that process does not appear to be a problem customers feel need solving

    And finally, reference the quote at the beginning of this post. A source I spoke with at a competing company who said the PANYNJ, which manages some of the busiest airspace in the world, is a huge obstacle to investment in new technology for reasons as simple as "turf battles".

    In light of these obstacles, the answer to selling a customer a solution to a problem they don’t feel they have and in a crowded and competitive field is to increase and improve selling and marketing function. PSSR is doing this, it appears with early initial success albeit with some degradation of margins (EBITDA margins now 28% down from the mid- 30% range; we'll get to this in a minute).

    But the investment thesis that underlies the opportunity for material long term gains is that there will be an evolution in how these problems are viewed by the customers.

    We have seen examples in other markets and industries where marginal improvements were deemed unimportant and unnecessary until eventually they became essential and ubiquitous.

    That is the path to a maximal and exciting return. For the patient investor, if that evolution occurs and customers are willing to pay, there could be material gains. In the meantime, you're getting some solid "blocking and tackling" at a low multiple.

    We see a company growing revenues and backlog, this as a decent cash flow generating growing business trading for a low multiple at today’s prices.

    Revenue and Subscription (aka backlog) Growth
    The evidence demonstrates that since losing contracts in 2012/2013, quarterly revenues have been growing through 1Q16 (quarter ending 1/31/16) with pronounced sequential and y/y over growth over the last four quarters. The company indicated the "lost contract" was not a recurring revenue "core" program but a one-off for DHS.

    This chart tells the current growth story (revenues) as well as the future growth through two balance sheet items that capture the equivalent of “backlog” (ie subscriptions); they are deferred revenue netted against accounts receivables. Higher levels of subscriptions should lead to continued higher levels of revenues over the next 12-months leading to potential growth acceleration.

    Balance Sheet Improvement 
    When we think about a business and its all-in consistency, we look for companies with good balance sheet management as reflected in growth in shareholder equity. Here the improvement since 2012 has been slow and steady . The bulk of improvement prior to that came via a partial recapitalization / debt to equity conversion in 2012. The company’s primary shareholder GS Beckwith Gilbert owns 4M shares (53%) and is also the note holder on the $3.5M in outstanding debt.

    High EBITDA Margins, but Investments in SG&A a Headwind
    Until recently, EBITDA has largely kept pace with the growth in revenues. However, new hires in the last 12 months have absorbed a greater share of expenses.

    The new hires that impact SG&A include back office talent as well as customer facing talent:

    David Brukman, CTO.
    David Henderson, CFO
    Leo Prusak. Former FAA Deputy Director to head airport operations
    Bob Junge, formerly head of JFK airport operations, to sell airport solutions
    Howie King, formerly of competitor Saab Sensis, to be a director in business development

    Other evangelists for the product include …

    Jim Barry, CEO
    Tom White, head of product
    Chris Maccarone, airline performance

    The impact of these new hires might be evident in future revenue growth but it is certainly evident in current SG&A which at 1Q16 had increased 38% to $1.6M; it is as high as its ever been and is now up to 48% of revenues, up from the 38% average in the prior five years.

    The question of course is, can the revenues scale these new hires? The evidence from recent revenue and subscription growth is that it is on the way.

    Current competitors that sell “data driven” solutions tied to weather diversions, on ground performance and operations systems management include SAAB Sensis, Navtech (an airspace technology company recently acquired by Airbus) and IBM / weather channel, but none are as narrow and focused as PSSR.

    The risk associated with competition should include the question: "When does google get into this space"? In some respects, though the degrees of complexity are different, the evolution of NextGen is not materially different from the evolution towards self driving cars. Many of us already use devices for routing, ETA management, etc when driving. I would argue its easier to penetrate the automobile since there's no "gatekeeper" (or union) advocating obstacles to automated driving the way there is keeping it out of the ATC or cockpit.

    To this aspect, I see the company's legacy through the lens of that initial quote as a benefit. The company's real estate in the cockpit, ATC, and operating control room has value; the company is trusted and present. Best of all, they have been evolving slowly and successfully in the right direction.

    As I've dug into this industry, I've been surprised with how "old fashioned" it is. On the front end, the customer interface seems to have leapt forward with ticket ordering and boarding pass apps and the evidence shows that overall safety has improved as well.

    However, on the back end, based on what I've learned, many companies continue to operate inefficiently - and more critically - airports, municipal authorities and ATC's are as well. As someone told me recently, "the air traffic control system in this country is so antiquated, it would scare the shit out of you if you knew about it."

    Because airlines, airports and ATC's are all partners in the industry ecosystem, the full benefits of an improvement by one agent - an airline say - in on time arrival might not result in faster turnarounds if the airport or ATC doesn't improve efficiency and a gate isn't available. Again, this is the reason for NextGEN.

    It makes for an interesting investment quandry, because the situation can go on indefinitely. Ultimately however, my investment thesis is driven by the view that while improvements in efficiency can be overlooked and ignored eventually they became essential and ubiquitous. And in the meantime, you're getting a company that has a long history of quality management,

    There are obvious risks with investing in general, nano-cap specifically and in particular companies - like this one - with ownership concentrated in the hands of one person.

    Beckwith Gilbert owns ~53% of the equity of the company (4.1M shares) plus the $3.5M note paying 6% interest. He is by many accounts committed to the success of the company and was willing to stand by when it had financial difficulties but it is unclear he is committed to returning shareholder value and that's made me cautious on this position in my portfolio.

    Two issues specifically give me pause:

    1. His compensation. Mr Gilbert is paid  $300k / year for his role as the Chairman, which is as much as the CEO, Jim Barry, who does most of the heavy lifting. I have no view on what Mr Gilbert does to earn his compensation but it is in addition to the interest he receives on his $3.5M in debt to the company. Viewing that $300k comp as a form of interest expense on the debt, the implied rate on the debt is closer to 16%, which is well in excess of junk yields.

    At face value, perhaps it should be viewed as an indication of the speculativeness of the investment with as high a degree of risk as a junk bond.

    2. A comment to me about his goals for the company. I recently attended the shareholder meeting and followed up with questions after digesting what I'd learned. A final question of mine, which I like to know from all executives of all my investments, is what are the goals for company, or in short: "why"? Why be in business? Why do this? Often its just lip service but sometimes there's a commitment to customers, to employees, to shareholders, etc.

    In this case, when asked why they're still independent (given that some have rolled up and been acquired) his answer was along the lines of "b/c it's more fun to be independent and take on the big boys."

    And when I asked about the long term goals for the company, where they expected to be, etc. there was no comment beyond "having fun".

    I don't think that's untrue - there is something refreshing about that - but what does it mean for shareholders and maybe even about the employees who don't have the same financial independence as he has.

    I think its much more fun to have winning investments. 

    ADS-B. Automatic Dependent Surveillance - Broadcast

    ASDE-X. Airport Surface Detection Equipment, Model X

    ERAM. En Route Automation Modernization.

    TAMR. Terminal Automation Modernization and Replacement. "The TAMR program is upgrading air traffic control systems at terminal radar approach control (TRACON) facilities across the national air space (NAS) with the Standard Terminal Automation Replacement System (STARS) platform."

    TRACON. Terminal Radar Approach Control

    STARS. Standard Terminal Automation Replacement System

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