Supportsave Solutions, Inc. (SSVE.OB) runs a relatively simple and easy to understand business that is experiencing tremendous growth while offering a modest PE in a niche that should be well aligned with a cautious corporate spending environment in the midst of a tentative recovery.
SSVE's business is pretty simple. They offer business process outsourcing services, primarily customer service functions, for mid-size and small companies in a variety of industries. These services are provided from a leased facility in the Philippines with rates for contracts running at $5/hour plus. Ballpark wage figures for customer service representatives in the Philippines are $1.50/hr.
In a nutshell, the business is one of providing skilled educated labor at a margin of roughly 70% along with the other costs associated with running a call center such as rent, utilities, technology services etc. while keeping admin costs low and end customers satisfied. So far SupportSave seems to be meeting this challenge exceptionally well for a tiny company.
What caught my attention was the company’s most recent quarter which shows the potential operating leverage built into their business. Sequentially the company increased revenues from $597,000 to $954,000 or roughly 60%. Most of that revenue increase flowed to operating earnings partially due to reduced SGA expenditures. The result was sequential EPS increasing from .01/share to .025/share.
I believe this signifies an inflection point in the business where they will start to flow large parts of increased revenues to the bottom line. Some of these increases should be seen next quarter as the company announced an expansion of 70 additional representatives for existing clients which should result in about 175k in incremental quarterly revenue. They have also announced a move to a larger facility to accommodate expansion of the business.
It is worth noting that the company guided for 5 million in revenue for this fiscal year back in 2009. This would imply revenues of 3.4 million over the next 6 months. I am skeptical that this goal will be hit and an email exchange with the company's CEO suggests this is going to be a challenging target to reach, however anything remotely close to their guidance number would suggest a huge ramp up in earnings. Revenue looks to be on target for another year of 100% growth whether that target is hit or not.
Shareholder friendly management is a big personal issue for me. I give the company credit for its very modest compensation levels for management. At $30k a year their CEO makes less than a customer service representative in the US which is an interesting bit of irony. They have also refrained from issuing themselves options over the past year which is another area I find important.
Finally I would argue that BPO in general should see a good year in 2010 as companies tentatively dip their toes into expansion. An easy way to do that is to hire BPO firms where head count can easily be ramped up and down, unlike hired employees where labor levels are harder to adjust. This is consistent with the industry as a whole which saw a terrible 2009 but saw a strong uptick at the end of the year with total contract value more than doubling in Q4 from Q3.
According to Nelson-Hall BPO is expected to see 20% growth in 2010 which should be a revenue tail wind. One note of caution which is of no great surprise is that they are expecting margin pressure in the industry. It’s not clear to me given their low cost structure and base of smaller clients that this will be a short term problem for SSVE although long term it’s something to be aware of. Huge margins do not last forever in commodity businesses.
Finally it should be noted that this is a very tiny company with all the risks and potential rewards that go with that. My view is that given the growth and relative valuations that the stock is a bargain at its current price of a bit over 1.00/share and I think it’s likely to see prices between 1.50 and 2.50 in the next 6-12 months, assuming management executes.
Disclosure: Author holds a long position in SSVE.OB