Description

Issuer Direct (ISDR) was last written up in 2020 when the stock had fallen from the mid-teens to $11. It has recently had a similar drop, from the mid $20s to $19/share, despite what I think is a good setup for growth in the years ahead. I am projecting EPS (excluding amortization) of $2.30 in 2024, putting the shares at a forward PE and EV/EBITDA of 8.5x and 7x respectively. I think that’s an attractive entry valuation for a high margin business with room to raise price and take market share in the years ahead.

ISDR has two core businesses, communications/PR distribution and compliance, split roughly 80% to communication and 20% to compliance on revenue (compliance is lower on an earnings basis). Compliance, which includes reporting for edgar, sedar and annual meetings, is mature and run for cash. The PR distribution is historically a double-digit grower, and should represent most of the enterprises’ revenue in a few years. As discussed below, I believe the communications business is a high margin, low churn business with a long runway for growth.

Last November ISDR announced what it expects to be a transformational acquisition, acquiring iNewswire.com, a competing distributor of press releases, for $44 million, or roughly 10x post-synergy EBITDA.  That purchase roughly doubles ISDR’s customer base and newswire revenue while also offering new products that could support longer term growth. It also came with cost redundancies which will be addressed over the next year.

I also think that if the company doesn’t achieve its objectives over the next few years, it would be a relatively straightforward acquisition for one of its competitors. That should put a longer-term value on the shares at or above the current price, which is substantially below the multiple ISDR paid for iNewswire. There is no other newswire asset of scale which would be a plausible target for the big three as no other newswire has even 1% market share. And an acquiror could likely cut some SG&A post-acquisition, even though ISDR is already running lean.

Business Background

Issuer Direct’s main business within communications is AccessWire (70% of total company revenue), which is a press release distribution platform. Accesswire competes with the big three newswires, Cision/PR Newswire (50% share), Global PR/Notified (25% share, owned by Indrado/Apollo), and BusinessWire (18% share, owned by Berkshire). As of this March, ISDR has roughly a 6% share on volume.

Newswire / PR distribution is a sticky, high barrier to entry business. ISDR reports 94% customer retention. It’s difficult to establish distribution relationships with major news and finance providers (Yahoo finance, Bloomberg, Wall Street Journal, etc) without a track record, and it’s impossible to establish a track record without distribution. It took a number of years and significant expense for ISDR to establish relationships with all of the key distribution platforms.  It’s not clear there is sufficient financial incentive to attract more entrants to the market.

For public companies, broad dissemination of information in real time is a regulatory requirement, so while price is relevant, larger customers won’t risk a regulatory misstep to save thousands of dollars. That makes it more likely that ISDR’s lower price points will resonate with smaller companies with tighter budgets. 

ISDR offers Accesswire distribution on both an a la carte and subscription basis. Subscription revenue represents slightly under half of total communications revenue. The company ended 2022 with 1,000 subscribers spending $8,600 per year, compared with roughly twice that spend for competing Newswire’s. This breaks out to roughly $1,000 per press release for the large PR firms (GlobeNewswire is the least expensive around $700/release), with ISDR offering a la carte pricing at 30% to 50% discount. ISDR is able to earn high gross margins while offering services at lower cost due to substantial formatting and editorial automation, where the larger players rely more on human editorial and also have somewhat bloated legacy cost structures.

ISDR’s goal for 2023 is to reach spending of $10,000 per customer by adding additional services as well as raising price. The company is also introducing a broad outsourced PR product that uses AI and other tools to help smaller businesses create broad PR marketing products with limited manpower. That product is priced at $12,000 per year and for now is codenamed ‘AIME’ although the name may change. ISDR also offers webcasting and virtual events as ancillary services packaged with Accesswire as part of a broader PR subscription.

The company sees longer term opportunities to offer additional services. ISDR’s competitors are increasingly offering clients a broad platform of communications services in addition to PR distribution. ISDR believes the iNewswire acquisition gives it more tools to compete on a platform basis. These include capabilities to monitor and provide clients data on who is reading a client’s press releases, as well as where their information is being discussed by journalists and in social media.

ISDR has room to raise prices given its significant discount to its larger peers. There is little incentive for its competitors to cut price given higher-cost structures as well as the consolidated nature of the industry and Accesswire’s small market share. As such, it’s likely that Accesswire will be able to pick off cost-conscious customers over time, gradually increasing its market share. And because it is such a small part of the industry, even a one percent share gain represents a twenty percent revenue lift. Between share gains and price increases, the company has guided to twenty percent revenue growth. For conservatism I’ve assumed high single digit top line growth over the next eighteen months. That conservatism partly reflects cyclicality to press release volumes, as reducing non-essential press releases is an easy way to reduce spend during periods of cost constraint. In addition, given its customer concentration among smaller companies, ISDR could see a hit to revenue from business failures in an economic downturn.

Deal numbers and projected synergies

Prior to the deal, Issuer Direct was generating roughly $22 million of revenue and $5 million of EBITDA, with quarterly growth rates ranging from low single digits to teens. The company has said it can maintain high teens top line growth in its Newswire business based on pricing and share gains (translating to low double digit total company growth), but I model mid-single digit top line growth to reflect the currently tough economic conditions. iNewswire run rate revenue at the time of deal closure was $12 million, putting pro forma combined revenue at $34 million before any revenue growth. iNewswire's pre-synergy EBITDA was roughly $2 million.

The cost savings on iNewswire appear straightforward. iNewswire was a reseller of Global Newswire, and moving it onto the Accesswire platform saves more than $1 million, as iNewswire’s 67% grow margin should approach Accesswire’s 80% gross margin (potential 13% margin gain on $12 million of sales). Eliminating duplicative vendor and technology costs, for example AWS services which aren’t needed by ISDR, is expected to reduce $2 million in cost. Over time staffing cuts are likely to save an additional $1 million. Those cuts, added to ISDR’s roughly $5 million of pre-deal EBITDA, should get the company close to a $10 million EBITDA run rate by late 2023. Moderate growth and some longer-term cost savings should get the company to my $11 million 2024 EBITDA target which supports $2.30 of EPS before adding back SBC. Note that this is also a cash generative business with limited cap ex, and by year end 2024 the company will likely have paid down the majority of its debt.

Note that pro forma EBITDA in 4Q23 was only $1 million, but I think that quarter is not representative of future profitability, as the company had integration expenses for the merger, and has yet to implement cost cuts.

Catalyst

Integration of iNewswire leading to cleaner quarters unimpacted by merger costs. Continued execution and growth.