Description

RMG Networks is a global provider of end-to-end enterprise digital signage solutions that allow its customers to deliver intelligent and real-time visual content to customers and employees.  These solutions encompass installing and maintaining the hardware and the software which include the content and the content management systems that drive the content on the screens. 

RMGN has 3 revenue streams:

• Product sales of screens (bought from third parties), proprietary software and media players (30-40% of total)
• Maintenance and content services are recurring revenues that are recognized over 1-3 year contracts (35-45% of total with 80-90% gross margins)
• Professional services consist primarily of installation and training services (30-40% of total)

Their primary business vertical has been contact centers.  As the CEO explains: "what goes up on those screens is critical information for people in the call center. How many calls in the queue? What's the average length of time for a call to be answered? How is the team associated with one particular group? Maybe they're a sales team on the phones. How are they performing against other sales teams' leader boards?"  Despite its microcap status, RMGN actually already serves 70 of the Fortune 100 and a majority of the Fortune 500.  While providing a solution to a company's contact center needs may seem trivial and unsexy, it is actually a significant competitive advantage: "if you are accessing information in companies, 70 of the top 100 companies, you've got to work within the IT organization. And all of these companies, after being in business for many years, we've developed that capability, relationship and trust, and contractual ability to access the data. That is a real barrier; not many companies have that ability."

The growth opportunity is in additional areas of "internal communications" which can be broadly defined as any application where the company is trying to communicate to its employees. One particularly exciting opportunity that RMGN has recently made meaningful strides in penetrating (or rather establishing as there is no de facto provider of these types of solutions) is the supply chain vertical where it is providing real-time information to employees on a warehouse, plant floor, or distribution center.  For these visual solutions to have their intended effects, the content management systems need to have flexible data integration capabilities.  The data might be pulled in from a company's ERP system and aggregated with multiple additional data sources and then ultimately displayed in real-time to employees to promote increased efficiency.  More on this later.

RMGN has been in turnaround mode for the past two years since CEO Bob Michelson was brought in to rein in excessive spending and provide a coherent strategic growth plan.  The former management team was the result of a combination (through a SPAC) of the current Enterprise Solutions business and the former Media Networks business (sold for $5.5mm in early 2015). Roth Capital Partners re-initiated coverage on them in August 2015 and provides a good summary of the business and outlined the basic thesis at the time:

• Large and growing digital signage market estimated by Frost & Sullivan growing to $3.2bn in 2020 from $1.5bn in 2014.
• Completed divestiture of the Airline Media business for $5.5mm (had generated $6mm in TTM cash losses)
• Early success in execution of turnaround strategy
• Jumpstarted new product innovation including launching the largest platform upgrade in 5 years which led to persistent product sales growth
• Redirected focus to expanding into supply chain and internal communications verticals where RMG had demonstrated prior success and technical expertise
• Cut 40% of salesforce and brought in new sales leadership resulting in 30-40% higher sales productivity and increasing pipeline of $1mm+ deals
• Closed global offices in China, India, and LatAm and reallocated resources to profitable Middle East region

Since then, RMGN has traded as one would expect of an underfollowed microcap, falling down to 0.55 and up to 1.30 but is more or less flat since that August report.  However, several developments in the past year have significantly increased the probability of a successful turnaround and some revenue timing issues due to macro slowdown in the Middle East and the exiting of a large holder (for apparently non-fundamental reasons) in recent months have provided an attractive entry point into what I think could easily be a multi-bagger by 2018.

I believe the market is underappreciating and/or investors are not paying attention to early signs of increasing acceptance and validation of RMGN's supply chain visualization solution as evidenced by the successful supply chain pilot programs and the channel partnership with Manhattan Associates.  RMG first debuted its visual supply chain solution back in early 2014 under the prior leadership team.  However, despite providing evidence of double digit productivity gains in distribution centers and warehouses with digital signage systems, there was no cohesive go to market strategy of penetrating this new vertical.  Former management's poor historical execution, lack of focus, undisciplined spending, and inefficient salesforce were all reasons to maintain a healthy skepticism.  Contrast that against the milestones that RMGN has steadily achieved under the new leadership team:

• 1Q15: Supply chain sales pipeline estimated at $11.5mm ("We continue to believe that the market opportunity for our supply-chain solution is as large as if not greater than the size of the opportunity within the contact center of market.")
• 2Q15: Large pilot programs installed and underway at several Fortune 500 customers
• 3Q15: Completed a number of pilot programs with "well received" results:
• "For example, one of the 10 largest consumer packaged goods company in United States conducted a controlled blind pilot program and teams using our solution realized double-digit percentages productivity improvements."
• "in almost every case, we are going to a customer and saying, let's start with the pilot…and once they see the data, boy, they move fast because it's compelling and companies operate rationally when they see either cost reductions or revenue increases, and this particular application addresses both of those."
• 4Q15: Generating initial orders from completed pilot programs and completed pilot agreements with 5 new customers
• "We are beginning to generate initial orders from these pilot customers and if rolled out fully across these organizations would represent multi-million dollar opportunities."
• "we have today 40 prospects…Our target customers in supply chain are $5 billion or larger companies that have anywhere from 20 to 80 distribution centers…And each individual opportunity, we are looking at being able to do $1 million."
• 1Q16: Received orders from three new fully paid pilot program which represent multi-million dollar opportunities if rolled out fully across the organizations
• "Each of the pilots implemented in previous quarters have demonstrated material gains in productions and or labor savings for our customers."
• 2Q16: Partnership with Manhattan Associates and developing proposals to widely rollout the 3 pilots from last q
• "Manhattan will add RMG's supply chain visualization solutions to the product offerings it sells to its impressive global base of more than 1,300 customers. And the RMG Solution will be in the sales book of the individual sales reps at Manhattan. We intend to move as quickly as possible to ramp up this new partnership, but expect that it will take a few quarters to begin seeing a material impact on sales."
• "Somewhere in the neighborhood of 60 to 65 active leads and I will tell you that probably a good 15% of those leads now we are in discussions with the customer since we want to do a pilot"
• 3Q16: Engaged with 8 prospects on initiating a pilot and performed joint account planning as well as product and sales training to Manhattan sales team
• "We had found every time we have [engaged with a prospect in the supply chain that is interested in us], it has converted into a pilot…I believe that we have a good shot and ..six of the eight are big, giant global companies."
• "we expect sales opportunities with Manhattan to follow typical sales cycles and believe we will be seeing our initial sales in early 2017 and ramping up throughout the year."

There isn't much to say on valuation as it's crazy cheap even if you don’t factor in all the potential growth from new verticals. This is a ~30mm EV company with ~40mm in ttm revenues and breakeven EBITDA (should be able to achieve mid-teens EBITDA margins).  As with any turnaround, the main question one needs to get comfortable with is whether the new leadership team has correctly diagnosed prior management's mistakes and made the necessary changes to set the foundation for growth.  I would recommend reviewing the transcript from the April Roth conference for a more in depth review of all the mistakes of prior management and an outline of the 3 other "planks" to grow the business but I think the above timeline is a clear indicator of traction in what I believe to be the most exciting supply chain vertical and are reflective of the CEO's ability to execute on his strategic plan.

Catalyst

additional channel partners

supply chain pilots and conversions

recovery in Middle East business