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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

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.

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9 comments:

  1. Good writeup. I was intrigued by the Chairman's position to not sell and decided to do some more digging.

    G S Beckwith Gilbert became Chairman around 1997-98 and has held notes since 2001 atleast. He's earned 6% - 9% interest depending on the year. Add in his salary, like you did in your writeup, and he's probably made 15% return for 15+ years.

    But it seems that he's also enabled PSSR to get to where they are currently. He loaned upto $10M in 2002-3 when the revenues were only in $2M range so that PSSR could build out their network. Eg: in 2004, rev was only $2.9M, but note outstanding to Chairman was $8.8M. Seems like he saw a compounding machine (Both interest on note and stock appreciation) and decided to keep it as independent company.

    The revenue CAGR from 2004-2016 is ~15%, and Book value has gone from -6.6M to 12.6M. So good history and seems promising for the future too given their deferred revenue increasing as shown in your chart.

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  2. An odd thing about PSSR: They have 49 employees according to 10K, but there are 21 listed executives on their website, many of them hired recently. I've never seen such a top heavy team, but it indicates that this is a relationship based sales model.

    I can see two potential outcomes:
    a. Highly paid executives bring in more sales and earnings go higher
    or
    b. They don't bring in enough sales and PSSR can cut down spending

    Both cases look good for stockholders. I'm not invested in PSSR, but its looking interesting.

    ReplyDelete
    Replies
    1. another corollary to the hiring spree could be that the product isn't so good so they need more people to sell it(?)

      whatever the reasons, they've loaded up on expensive execs which is why SG&A has grown so much and they need to grow sales to get a return on this expense.

      but i've heard from other folks in the industry "that's how it's done (ie relationship based selling)" + looooong sales cycles = we don't know if / when they'll get a return on that investment.

      a rational review implies they expect a better return than they would on an outright sale but as I indicated, they don't seem keen on selling.

      this business isn't going away so i am content to patiently wait

      Delete
    2. Your approach to wait patiently makes sense since there's limited downside and potentially big upside (based on deferred revenue and higher sales spend)

      Delete
  3. here are links to the broward county FLL agreement that PSSR press released

    agreement summary >> http://cragenda.broward.org/docs/2017/CCCM/20170613_542/24809_Exhibit%201%20-%20Agreement%20Summary.pdf

    purchasing agent's report >> http://cragenda.broward.org/docs/9999/CCCM/99990909_423/24809_Exhibit%203%20-%20Most%20Reasonable%20Source%20Memorandum.pdf

    ReplyDelete
  4. Hey,

    May I ask what do you feel is the margin of safety here? When you look at the balance sheet they actually trade at almost negative tangible book because one should takeaway the development costs and the PASSUR costs. This creates a significant premium to the current market cap.

    While they certainly are able to generate cash from ops, this is consumed by the costs and thus I see their FCF as insufficient given the hefty premium to market cap.

    Just as an estimate;

    Equity ($11.86 million) - capitalized costs ($8.9+$6.1) + short-term and long-term deferred revenue ($3.76) = $0.62 million in 'tangible' book (and probably I should also takeaway deferred tax asset, but they will likely use it.)

    This estimate then shows a premium of $20.71 million to tangible book.

    I understand that they might have a favorable position in the market and that their revenue stream is unlikely to disappear soon, but given the low FCF I am quite sceptical of the stock.

    Also why do you feel that deferred revenue should justify higher share price when all it means is that they already received the cash so the fact that they have not been able to generate FCF in the past nine months is not entirely positive because yes they might show higher revenue on income statement but cash flow will falter without any new deals. Again I understand that you feel that they will be able to sell more, but I am just curious to see what do you feel is the downside protection if they don't.

    Best,

    Jan

    ReplyDelete
    Replies
    1. thanks for your interest Jan.

      1. margin of safety = what I think a strategic buyer would pay for this company in a private transaction based on talent and literal / figurative real estate on airport premises / within the enterprises.

      2. balance sheet. why deduct those intangible assets? i get adjusting i/s costs to account for the cash flow use (see below) but not the b/s. these are not intang assets. those Passur Network expenditures are spent typically ahead of a sale / with contracts in mind and / or in hand. They are not built on "spec" and i think are as indicative of future revs as DR.

      3. FCF. since 2013 this company has done 13% / 10% / 11% / 11% FCF margins (FCF = OCF less all capitalized costs). I don't believe this is low or insignificant. the last 9-mos have sucked for sure - FCF, returns, etc - but is that a new l/t trend or reflective of current spending for future sales? if there are no future sales, everything suffers, not just FCF.

      this gets back to point 1: i believe a prvt enterprise would see value in the company's on and off balance sheet assets, its people, relationships, enterprise presence, etc.

      Delete
    2. Thanks for the reply.

      1) Sure understood. The property near airports is handy that is for sure.

      2) So you think that if the contract does not go through or is stopped then they can get the cost back? I see that they depreciate PASSUR so there could be something tangible here but the software dev. costs are certainly intangible as they amortize. I believe that in a scenario where the project is stopped they can't do much regarding that cost and would have to write it off. Also in a liquidation scenario this would come down to zero eventually (but obviously this is not that relevant here).

      3) So that's revenue you are using for the margin? I would be more interested in FCF yield compared to market cap which seems to be around 7% for 2016 (and probably I am using a conservative market cap of $20 mil).

      Although the PP&E is quite depreciated as well and as you said the property is tied to the airports and thus could have an inherent cash flow connected to it.

      Interesting, I will check out the company more closely and will for sure highlight it in my newsletter - http://jansvenda.com/otc

      Best,

      Jan

      Delete
    3. the PASSUR Network used to be a piece of hardware - the rotating radars of yore - and now are multiple pieces of hardware present around runways and gates to track asset ground locations (planes, trucks, etc). they don't own the real estate but they own the presence and I think that presence has value, as it does within the "enterprise" of the ATC, FAA and on desktops in Airline / Airport Ops. its part inventory and part network.

      re: liquidation, this is where I often take a different points of view from net / net, deep value investors, which is that with services companies or software (like this one), liquidation isn't the right backstop. there are no / few heavy assets. with these companies, I think the question is how much a strategic would pay in a private transaction to want to own it.

      Delete