Description

Issuer Direct (Nasdaq: ISDR)

Issuer Direct is a 70% gross margin, mostly recurring revenue business with blue chip clients and the ability to meaningfully grow its ARPU in a large and expanding global addressable market.  It has a rock solid balance sheet with no debt and almost 25% of its market cap in cash.  CEO Brian Balbirnie owns over 20% of outstanding shares and the company is paying shareholders a modest 2% dividend from well-covered free cash flow.

ISDR currently trades for 9.4x 2015’s Non-GAAP EPS (adjusted for stock based comp, non-recurring integration items and other non-cash charges).  We believe shares are nearing an inflection point as the Company is in the process of transitioning its various legacy businesses into a cloud-based subscription model with higher margins that will command a higher earnings multiple.  Downside is protected by the roughly 1x EV/Sales and 1.6x EV/Gross Profit valuation.  ISDR has been EBITDA positive since 2009.

Executive Summary

Issuer Direct is the industry leader for corporate compliance, disclosure management services, and communications delivering a platform that manages a broad spectrum of information, including regulatory filings, news distribution, earnings calls/webcasts, investor relations services, etc.  The company is currently embarking on a business model shift which will pivot their focus from project based engagements to an annual platform subscription business. This opportunity is not reflected in the current valuation and stands to impact results during 2016 as they roll out services across their base of 2000+ customers.  As this occurs, the revenue model will reflect a scalable and recurring base, shorter sales cycle, and significant margin expansion.  We believe shares are significantly undervalued and as this transition unfolds, investors will more accurately value the business as a whole due to its strong profitability and free cash flow metrics.

Company Background & History

Issuer Direct was founded in 2006 as MyEdgar.  A majority of the Company’s historical revenue was driven by service engagements. The company has strategically acquired several companies over the years.

Operating Segments

Today, Issuer Direct has three operating segments:

-          Disclosure Management (Document Conversion, XBRL Tagging Services)

-          Shareholder Communications (ARS, Precision IR, Accesswire, Investor Hotline, Proxy Printing)

-          Platform & Technology (Blueprint, Classify)

A brief description of each segment follows.

Disclosure Management

This business consists of traditional document conversion, typesetting, and pre-press design services, XBRL tagging, and the issuance of securities (related to its stock transfer business).  A portion of this business is also derived from strategic relationships, where the company manages the compliance function for its partners’ clients.

Shareholder Communications

Service offerings are focused on annual and quarterly earnings events for public companies, which include press release distribution, investor outreach, teleconference services, IR hotlines, and proxy/printing services.  Many of the services are marketed and bundled together under annual agreements.  Issuer Direct has added services to this segment through acquisition over the past several years, including AccessWire which substantially enhanced Press Release Distribution.  Similarly, ISDR’s Annual Report Service, as part of Investor Outreach and Engagement, was acquired from PrecisionIR in 2013.

AccessWire is a premier news and communications network, providing regional, national, and global news to hundreds of clients globally.  The Acceswire business increased client count by 71% to 2,982 in 2015 as well as improved infrastructure and increased distribution points.  Accesswire is currently a point of strength for ISDR with sequential revenue increasing 12% during the first quarter of 2016.  Additionally, Accesswire EBITDA margins increased from 25% to 30% in 1Q.  The company is committed to further marketing outreach in 2016 and has positioned the brand for sponsorship at several industry conferences which will allow them to provide conference announcement press releases at no charge to many first-time customers.  This opportunity should open the door for them to capture many new customers and become the news provider of choice.  It is worth noting that on a stand-alone basis, Accesswire performed news related activities for fewer clients during the first quarter of 2016 compared to the fourth quarter of 2015.  As was the case during the fourth quarter of 2015, the Company's focus was on the average price per release which resulted in the removal of certain resellers operating in the lower margin segment of the market.

Platform & Technology

This segment is expected to be the primary growth engine going forward and predominant driver of revenue in the future. Both of the core operating segments, Disclosure Management and Shareholder Communications, are essentially being consolidated via product subscription into this category.

Blueprint is ISDR’s brand within Disclosure Management that encompasses cloud based document conversion, as well as editing and filing for corporate issuers.  It is an annual subscription platform offering modules such as Edgar and XBRL. Annual subscription fees are $3,000 per module per user and average annual subscription per company on the platform is 2-3 modules, thus $6,000-$9,000. A market comparable would be RR Donnelly’s ActiveDisclosure, however there are several areas of differentiation. The most compelling exists within event management as opposed to simple document management.  Blueprint allows for efficient document creation, editing, and management over time whereby one edit can update across all related information outputs.  For example, a quarterly earnings event requires a press release, distribution to shareholders, an 8-K, 10-Q, financial tables, etc.  The competition is not as integrated and thus considerably more inefficient.

Blueprint is available in both a secure public cloud within the Company’s disclosure management system, as well as in a private cloud for corporations and the legal community looking to further enhance their internal document process. Blueprint includes both the Edgar and XBRL process for corporate issuers.  ISDR’s belief is that once it is fully marketed and Blueprint sales begin to ramp, the Company will see a negative impact on its legacy disclosure services business.  However, the margins associated with the subscription based business compared to the services business are considerably better.

A video overview of Blueprint can be found here:  http://bit.ly/1RV0zT5

Classify is ISDR’s newest platform and only Buy-Side, Sell-Side, and Media data set that includes 4.4M professionals. The company is targeting $2,500-$8,000 per user. Classify will significantly increase ARPU in 2016 due to its cloud licensing options. This segment competes with the likes of Ipreo and Intralinks, two companies we will touch on later from a valuation perspective.

A video overview of Classify can be found here: http://bit.ly/1tbfbcT

PrecisionIR Deal Included a Large Shareholder

PrecisionIR is worth extra mention, because of its size, scope and key shareholder/Board member who was brought into the ISDR fold.

ISDR bought PrecisionIR in August of 2013 for $3.45m in cash.  Simultaneous with the closing of the acquisition, ISDR entered into a Securities Purchase Agreement, whereby Red Oak Partners, LLC purchased a convertible secured 8% promissory note in the amount of $2.5m convertible into 626,566 shares of common stock.  Additionally, David Sandberg, Founder & Managing Member of Red Oak Partners, LLC, was elected to the ISDR Board of Directors.  Sandberg remains on the Board of the Company to this day, and Red Oak Partners is the Company’s largest shareholder holding 23.3% of the shares outstanding.  As noted previously, CEO Brian Balbirnie owns just over 20% as well.  Together, Balbirnie and Sandberg control ~45% of the Company.

On November 12, 2014, Red Oak converted $833,327 of principal and $23,369 of accrued interest payable on the 8% Note into 214,710 shares at the conversion price of $3.99. Effective August 22, 2015, Red Oak converted the remaining $1,666,673 of principal on the 8% Note into 417,712 shares. As of December 31, 2015, there was no remaining balance on the note.

Recent Events

2015 was not a good year for ISDR with shares falling 35% from $8.96/share to $5.80/share. Revenue declines YoY began in 2015 as the company began the transition process with its legacy offerings.  Those offerings and traditional compliance services have reflected industry pressures contributing to declines above and beyond the business transition.  This combination of industry pressure along with the pivot led to a significant shift in investor sentiment to the negative.  The industry pressure felt is consistent across the compliance and investor relations group as growth has been limited over the past 12-24 months. However, 2016 has brought about change and a return to growth driven in part by their new technology offering.  To that point, though the company does not have formal guidance issued, management has noted expectations for top line growth in 2016 during previous conference calls.  1Q supports that notion as the company experienced their first quarter with revenue growth YoY in over a year. As the company executes on this transition, we think several factors can impact valuation and sentiment in the near term.

1.      Top line growth will bring forth newfound trust in management, both as part of the near term results but also in the longer term growth opportunity.

2.      Gross margins will consistently exceed 70%.  1Q margins at 77% were artificially inflated, but they will maintain 70%+ driving profitability going forward.

3.      The subscription revenue model will be embraced by investors as it scales. The company has a large 2000 customer base to sell into first.  We view this as low hanging fruit.

Other Considerations

Large Addressable Market: The Company has over 2000 clients across 18 countries spanning public and private markets as well as mega cap to micro cap. TAM (Total Addressable Market) includes 20,000+ listed companies across North America and Europe, but also private companies adhering to Regulation A rules.

Customer List: Their diverse and growing customer list may be viewed as a strategic asset for a potential acquirer. Leading companies working with ISDR include: Exxon Mobil, KIMCO, BP, Yum Brands, Aflac, Shell, DR Horton, Pep Boys, Sherwin Williams, La-Z-Boy, etc.

Dividend Yield. Issuer Direct pays a quarterly dividend of $0.03, which equates to a yield of approximately 2%. The company has publicly stated they do not expect this to change in the foreseeable future.

Recent Hires: The Company plans to aggressively expand its sales force during 2016 and recently brought on new sales staff at the end of 1Q. Top line result should reflect their contribution as the company moves through 2Q.

Three Pillars of Value

We consider Blueprint, Classify & Accesswire to be ISDR’s three pillars of value.  Each of the businesses are subscription based cloud oriented engines with 70-80% gross margins.  The acceleration in any one or more of these businesses should make the Company worth substantially more than it is today.  Though revenue in legacy segments will decline as their “pillars” grow, margins will increase offsetting the bottom line impact to some extent.

Today (ttm):

Sales: $12M

Gross Profit: $8.6M

Gross Margin: 72%

EBITDA: $2.64M

EBITDA Margin: 22%

Three Years from now:

Sales: $16M (10% growth per year)

Gross Profit: $12.5M

Gross Margin: 78%

EBITDA: $4.8M

EBITDA Margin: 30%

Illustrative Target Value

ISDR trades at a $6.25/share or a $17.5M market cap. Trailing 12M revenue was $11.8M, EBITDA of $2.1M, and GAAP EPS of $0.24. Non GAAP EPS has been hard to predict in recent years with 2013 at $0.76, 2014 at $0.87, and 2015 at $0.67. 1Q16 was recently reported at $0.18. As evidenced by the table, shares have been volatile over the past few years. However, we feel the current valuation marks a low point with shares currently trading only 4.5x EBITDA expectations of $3.98M in ’16. We believe expectations are conservative with revenue only increasing 10% YoY.

near term potential EBITDA: 3-4m

Multiple: 7-8x (reflects new model)

Value: $21m-$32m

Net Cash: $4.3m

Equity Value: $25.3m-$36.3m

Shares out: 2.8m

Value per share $9.00 - $12.96

Current: $6.45

Upside: 39% - 100%

The range here is intentionally wide.  Most of the uplift in value comes from multiple expansion as the business model shifts.  Once it becomes clear that the transition is setting in, the shares will re-rate.

At the current price of $6.45, investors are paying around 1.1x EV/revenue.  This valuation offers decent margin of safety as few businesses with this level of recurring revenue (legacy or SaaS) trade this cheaply.

M&A / Comps

In 2014, Blackstone acquired Ipreo Holdings, who specializes in software for the capital markets, for a reported price of ~$975M or 15x+ EBITDA.

Intralinks (IL) is also a public comp which trades at a $450M market cap and ~15X trailing EBITDA.

RR Donnelly bought Edgar Online in May 2012 for $71m (2.1x sales)

Summary

Issuer Direct is a leading industry player transitioning its business model from a traditional service engagement to a platform first cloud offering.  The legacy service business transition is masking underlying growth that is and will continue to be realized in the quarters to come.  Management has not specifically provided guidance and the many moving parts, not to mention lack of analyst coverage, create a blurred view for many investors. However, when complete, the operating business will generate a very predictable recurring revenue base exceeding 75%.  The Company will continue to drive profitability forward as they shift their focus, and in the meantime investors receive a 2% dividend, very rare for companies of this size in the public marketplace.  We expect the combination of these factors to drive shares between 50% and 100% higher over the next 12 months.

Catalyst

Transition to a higher margin, more SaaS focused business model takes hold.

Company continues to return capital to shareholders in the meantime.

Current valuation of around 1x EV/Sales provides downside floor.