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
Monday, August 28, 2017
Thursday, August 24, 2017
Checking in on PSSR
A little more than a year ago I wrote about PSSR, which continues to generate cash and again trades for what seems to be a low valuation, below 6x EV / EBITDA, a 5% FCF yield, exposure to commercial airline, airport on time arrival and FAA technology budgets.
If someone impatient is selling, they're likely turned off by the recent decline in revenues and EBITDA, which have fallen off peak levels even as deferred revenues, which is an indicator of future revenues, has returned to near peak levels.
The company's quarterly statements indicate there's been a non-renewal impacting current earnings. But are these temporary or terminal issues?
In this case, the data indicate that even with Revenues and EBITDA declining - an expected outcome given a non-renewal - Deferred Revenues has grown back towards peak levels. To justify a strong a return on the stock at current levels, we would need to see Deferred Revenues continue to achieve new highs in the coming quarters. They are not there yet.
Our expectation for greater sales is buoyed by increased spending on sales personnel. The company has added former airline / FAA talent to market the product. If these are good hires then they will convert their expenses into sales and earnings.
However, SG&A spend is now up to 55% of revenues. The "normal" level is in the mid-40% range. Back of the envelope, they need to generate at +10% sales growth just to get back to "normal" and probably to justify their return on their SG&A spend and an investor's return on the stock.
No doubt, this is a competitive space and PSSR is a small player. Over the last year, I've talked with a handful of sources in the industry who work for larger competitors that offer a wider array of solutions (Navtech, now owned by Airbus; Jeppesen, owned by Boeing; IBM). None have heard of the company and most stressed the biggest issues facing all operators in the business - long order cycles and the industry's reluctance for technological change - as major headwinds, though one person thought PSSR's role as a big data warehouse with industry level information was qualitatively a positive differentiator.
It is possible that the company's marketing spend, which has propelled SG&A to new highs even as Revenue and EBITDA dip, is as good as torched cash. But deferred revenue growth indicates otherwise and furthermore increased marketing spend by rational actors is the kind of indicator that patient investors observe for signs that weigh the odds in favor of future growth.
A sale might also provide an exit for investors that does not charge our hopes. This is the same company whose Chairman (and largest shareholder) blithely told me two years ago that he's never sold because "it's more fun to compete with the big guys." He will have to prove this spirit for outside shareholders.
-- 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.
If someone impatient is selling, they're likely turned off by the recent decline in revenues and EBITDA, which have fallen off peak levels even as deferred revenues, which is an indicator of future revenues, has returned to near peak levels.
The company's quarterly statements indicate there's been a non-renewal impacting current earnings. But are these temporary or terminal issues?
In this case, the data indicate that even with Revenues and EBITDA declining - an expected outcome given a non-renewal - Deferred Revenues has grown back towards peak levels. To justify a strong a return on the stock at current levels, we would need to see Deferred Revenues continue to achieve new highs in the coming quarters. They are not there yet.
Our expectation for greater sales is buoyed by increased spending on sales personnel. The company has added former airline / FAA talent to market the product. If these are good hires then they will convert their expenses into sales and earnings.
However, SG&A spend is now up to 55% of revenues. The "normal" level is in the mid-40% range. Back of the envelope, they need to generate at +10% sales growth just to get back to "normal" and probably to justify their return on their SG&A spend and an investor's return on the stock.
No doubt, this is a competitive space and PSSR is a small player. Over the last year, I've talked with a handful of sources in the industry who work for larger competitors that offer a wider array of solutions (Navtech, now owned by Airbus; Jeppesen, owned by Boeing; IBM). None have heard of the company and most stressed the biggest issues facing all operators in the business - long order cycles and the industry's reluctance for technological change - as major headwinds, though one person thought PSSR's role as a big data warehouse with industry level information was qualitatively a positive differentiator.
It is possible that the company's marketing spend, which has propelled SG&A to new highs even as Revenue and EBITDA dip, is as good as torched cash. But deferred revenue growth indicates otherwise and furthermore increased marketing spend by rational actors is the kind of indicator that patient investors observe for signs that weigh the odds in favor of future growth.
A sale might also provide an exit for investors that does not charge our hopes. This is the same company whose Chairman (and largest shareholder) blithely told me two years ago that he's never sold because "it's more fun to compete with the big guys." He will have to prove this spirit for outside shareholders.
-- 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.
Tuesday, August 22, 2017
Letter to ARIS Management on Pending Deal
I've written a handful of draft letters to the Board, but as the vote on the deal approaches (8/28), I've grown resigned to its reality and decided to write directly to management, to thank them for their work over the years.
The ARIS CEO / CFO team were among the highest quality I've encountered in my years of institutional finance and it wholly sucks that we public investors can no longer access their expertise. I'd hoped to own this company for far longer and with more value creation. It is a risk of public ownership for such assets to be taken.
Among the issues that really burns is how the whole proxy seemed an exercise in "mansplaining" that this idea to sell was actually a good one for investors. It spoke often (16 times) of the effort to "explore alternatives" but in the end it seems an impatient Board made the decision to sell then sought the highest price it could get at the moment, alternatives be damned.
It is rare to see - perhaps even antithetical to ego and hubris - a group of men get together, put in work and effort, and decide that "not doing" is the best solution, but unless operations are changing for the worse in ways we do not know, then "not doing" seemed the best course.
The compounding benefits of generating cash and re-investing it at high rates creates explosive value over time. I don't know why the Board decided they were short on it.
***
Roy / Bill -
This is likely my last opportunity to communicate with you as a public shareholder and I'd like to use it - primarily, but not exclusively - as an opportunity to express gratitude for the way you've run your business, for the enlightening conversations and interactions I've enjoyed since becoming a shareholder in 2013 and of course for the return on investment I experienced over that time.
Not everything you did was perfect - no one should ever expect that - but you've done a remarkable job adjusting and learning from mistakes, adapting as necessary, not shying away from difficult decisions that others likely would have avoided and especially for always explaining your reasons when they were not obvious.
All of this is to say that in my nearly 15 years as an institutional analyst on "Wall Street" you are among the most extraordinary executive teams I've ever encountered, a belief that is not diminished by the pending sale.
However, I do object to the sale, for the following four reasons:
1. The valuation multiple is too low. The Board is selling an extraordinary company at a slight premium to a "median multiple". That is absurd. They should have used the Cox / DealerTrack acquisition as a starting point to negotiations and if they couldn't get the appropriate multiple for this extraordinary asset, they should have walked away.
2. Your projections are too low. Your EBITDA this year and next is understated. Investments in India haven't yet come to fruition. Auction123 hasn't matured. No credit is given to your ability to generate cash flow and reallocate it towards high return acquisitions.
3. The deal reeks of impatience. I know you and Board believed your stock wasn't trading at "the right multiple" but selling it at the wrong multiple doesn't fix that, it only makes the mispricing permanent to public shareholders. This affront is multiplied by the fact that this sale is taking place just as the market was starting to value the company more prudently, something the Board completely discounted.
4. Finally, you are rare and unusual assets. This deal doesn't compensate us for the difficult task of having to find another "Roy and Bill".
Though it is most unfortunate that we public shareowners will no longer be able participate in the compounding effect of your managerial prowess, there is nothing I can do about it now. I can simply take away from this experience an example of what quality leadership, cash flow generation, capital allocation and engagement with shareholders is supposed to look like.
Sincerely ....
-- 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.
The ARIS CEO / CFO team were among the highest quality I've encountered in my years of institutional finance and it wholly sucks that we public investors can no longer access their expertise. I'd hoped to own this company for far longer and with more value creation. It is a risk of public ownership for such assets to be taken.
Among the issues that really burns is how the whole proxy seemed an exercise in "mansplaining" that this idea to sell was actually a good one for investors. It spoke often (16 times) of the effort to "explore alternatives" but in the end it seems an impatient Board made the decision to sell then sought the highest price it could get at the moment, alternatives be damned.
It is rare to see - perhaps even antithetical to ego and hubris - a group of men get together, put in work and effort, and decide that "not doing" is the best solution, but unless operations are changing for the worse in ways we do not know, then "not doing" seemed the best course.
The compounding benefits of generating cash and re-investing it at high rates creates explosive value over time. I don't know why the Board decided they were short on it.
***
Roy / Bill -
This is likely my last opportunity to communicate with you as a public shareholder and I'd like to use it - primarily, but not exclusively - as an opportunity to express gratitude for the way you've run your business, for the enlightening conversations and interactions I've enjoyed since becoming a shareholder in 2013 and of course for the return on investment I experienced over that time.
Not everything you did was perfect - no one should ever expect that - but you've done a remarkable job adjusting and learning from mistakes, adapting as necessary, not shying away from difficult decisions that others likely would have avoided and especially for always explaining your reasons when they were not obvious.
All of this is to say that in my nearly 15 years as an institutional analyst on "Wall Street" you are among the most extraordinary executive teams I've ever encountered, a belief that is not diminished by the pending sale.
However, I do object to the sale, for the following four reasons:
1. The valuation multiple is too low. The Board is selling an extraordinary company at a slight premium to a "median multiple". That is absurd. They should have used the Cox / DealerTrack acquisition as a starting point to negotiations and if they couldn't get the appropriate multiple for this extraordinary asset, they should have walked away.
2. Your projections are too low. Your EBITDA this year and next is understated. Investments in India haven't yet come to fruition. Auction123 hasn't matured. No credit is given to your ability to generate cash flow and reallocate it towards high return acquisitions.
3. The deal reeks of impatience. I know you and Board believed your stock wasn't trading at "the right multiple" but selling it at the wrong multiple doesn't fix that, it only makes the mispricing permanent to public shareholders. This affront is multiplied by the fact that this sale is taking place just as the market was starting to value the company more prudently, something the Board completely discounted.
4. Finally, you are rare and unusual assets. This deal doesn't compensate us for the difficult task of having to find another "Roy and Bill".
Though it is most unfortunate that we public shareowners will no longer be able participate in the compounding effect of your managerial prowess, there is nothing I can do about it now. I can simply take away from this experience an example of what quality leadership, cash flow generation, capital allocation and engagement with shareholders is supposed to look like.
Sincerely ....
-- 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.