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Summary

  • GSB is 90% undervalued on an EV/EBITDA and DCF basis.
  • GSB has been generating ROIC that dwarfs its WACC by 2x.
  • GSB will likely generate FCF of ~15% in 5 years.
  • GSB will compound revenue at even faster rates as its new third-party distributor model begins to take hold.
  • GSB has a fortress balance sheet.

Company: GlobalSCAPE

Symbol: GSB

Recent Price: $2.37

GlobalSCAPE (GSB) is what I believe to be a GAAAP (Growth at an amazing price) stock! It's not every day that one comes across a company that has a pristine balance sheet (debt/equity of just ~20%), and continues to grow revenue and free cash flow as steadily as a violinist's bow hand. GSB will continue to compound recurring revenue, EBITDA (op. profit + D&A), and free cash flow as it executes upon its strategy of focusing on expanding its domestic distributor and partner network. On a DCF and EBITDA basis, GSB is worth between $4.57 and $4.60, respectively, implying ~90% upside.

Business Overview

GSB is a leader in the Managed-File-Transfer industry (MFT). Simply put, GSB offers the solution to an ever-increasing problem: transferring confidential information from one computer to another (or with the recent launching of the company's mobile app, from one smartphone to another-or smartphone to computer). The company breaks it revenue down into 4 categories: software licenses (33% of revenue); maintenance and service (M&S) (56% of revenue); professional services (6% of revenue); and other (5% of revenue).

In 1996, GSB launched CuteFTP, its first file-transfer product that was aimed at smaller businesses. CuteFTP was and continues to be a success (4/5 stars on TopTenReviews, and 3.5/5 stars on Download.com). Since then, the company has expanded its product breadth to meet the needs of larger enterprises. As per its recent investor's presentation, some of GSB's customers include Xerox, J.P. Morgan, Hewlett Packard, Virgin Atlantic, Microsoft, and the U.S. Army. One of the largest of GSB's customers is the U.S. Army, which in June of 2013 exercised a first year contract option (out of a 2 year contract) to extend the contract to July of this year. GSB will receive $1.45 million of M&S revenue during this period, and if the U.S. Army exercises the second option, GSB will receive $4.4 million over 3 years, potentially making this the largest contract win of the company to date. It is also very important to note the importance that has been placed on GSB by the U.S. Army: out of 3 different vendors, GlobalSCAPE was the only one that could meet the government's list of requirements (view them here), and according to GlobalSCAPE (emphasis added), "no other product meets, or can be modified to meet, the government's needs without a substantial duplication of costs and unacceptable delays."

Much of GSB's revenue streams are recurring and are expected to compound substantially as the company executes upon its strategy (more on this later). Recurring revenue, for the most part, includes M&S revenue and subscription revenue for its SAAS offerings. The company believes that due to the compounding effect that will-and has-taken place, operating margins will continue along in accretive fashion.

Beginning in 2007, it is clear to see just how successful the company has been at growing its revenue and margins. Barring 2012 and 2008 for non-recurring events (abnormally large operating expenses in 2012 which have since reverted, and the financial crisis in 2008), the company's average Gross margin has been sitting at 96%, and its average EBIT margin has been sitting at ~14%. It is also well-worth pointing out that the company has almost no debt, and for the years between 2007 and 2010 the company operated with no debt at all. A detailed income statement is presented below.

(in thousands)

Income Statement

2013

2012

2011

2010

2009

2008

2007

Soft. Licenses

8.1

9.4

9.1

10.2

10.2

10.9

14.8

M&S

13.7

11.3

9.4

7.8

6.0

4.9

3.5

Prof. Services

1.5

1.5

1.8

0.4

0.1

Other

1.1

1.1

0.5

0.2

0.1

Total revenues

24.3

23.4

20.9

18.6

16.5

15.8

18.4

% y-y

4%

12%

13%

13%

4%

-14%

#DIV/0!

COGS

1.0

1.3

1.7

0.6

0.3

0.2

0.3

Gross Profit

23.3

22.1

19.2

18.0

16.1

15.6

18.1

%

96%

94%

92%

97%

98%

99%

99%

SG&A

14.9

16.8

14.5

12.8

10.8

10.9

10.0

R&D

3.8

3.5

3.1

3.0

2.8

2.8

1.9

Asset impair.

-0.1

2.0

9.0

D&A

0.9

1.2

0.8

0.9

0.7

1.0

0.3

EBIT

3.9

-1.4

0.8

1.3

1.8

-8.1

5.9

%

16%

-6%

4%

7%

11%

-52%

32%

Interest income

-0.1

-0.1

0.0

0.0

0.0

-0.1

-0.1

Interest expense

0.2

0.3

0.0

0.1

0.0

0.0

EBT

3.7

-1.6

0.8

1.3

1.7

-8.0

5.9

%

15%

-7%

4%

7%

10%

-51%

32%

Income taxes

-0.1

0.2

0.2

0.4

0.3

-0.4

2.3

%

-3%

-14%

21%

32%

19%

5%

39%

Net income

3.8

-1.8

0.6

0.9

1.4

-7.7

3.6

%

16%

-8%

3%

5%

9%

-49%

20%

EPS

0.20

-0.10

0.03

0.05

0.08

-0.44

0.20

% y-y

-305%

-389%

-30%

-39%

-118%

-323%

#DIV/0!

S/O

19.08

18.36

18.75

18.26

17.69

17.24

18.29

EBITDA

4.8

-0.2

1.6

2.1

2.5

-7.2

6.1

%

20%

-1%

8%

11%

15%

-45%

33%

GSB has also been able achieve a 7 year average ROIC, calculated as NOPAT/debt + equity (while barring the black swan years) of ~14%, which dwarfs its 3 year average WACC of ~7% (I assume a cost of equity of 9%).

ROIC

2013

2012

2011

2010

2009

2008

2007

Debt

4.4

5.7

7.0

0.0

0.0

0.0

0.0

Equity

16.3

12.0

14.1

12.2

9.9

7.5

15.1

Invested cap.

20.7

17.7

21.1

12.2

9.9

7.5

15.1

EBIT

3.9

-1.4

0.8

1.3

1.8

-8.1

5.9

Tax rate

-3%

-14%

21%

32%

19%

5%

39%

NOPAT

4.0

-1.6

0.6

0.9

1.5

-7.7

3.6

ROIC

19%

-9%

3%

7%

15%

-104%

24%

avg. ROIC (excl. Non-recur.)

14%

WACC

2013

2012

2011

Debt/Invested cap.

21%

32%

33%

Tax-adj. COD

4%

5%

3%

avg. adj. COD

3%

D/IV*(avg. adj. COD)

1%

1%

1%

Equity/Invest. Cap.

79%

68%

67%

COE

9%

WACC

8%

7%

7%

avg. WACC

7%

Strategy

GSB outlines its current strategy as the following:

· Developing new solutions and enhancing our existing products.

· Increasing sales through expanded third-party distributor channels.

· Growing recurring revenue.

· Establishing leadership in broader markets.

· Extending presence in the secure content mobility market.

· Growing enterprise and government sales.

· Developing corporate brand.

Historically, GSB has derived most of its revenue from direct sales, but that is largely about to change. The company has been rapidly adding third-party dealers to distribute more of its products and services. This diversification will allow the company to quicken the growth of its M&S and license revenues, as well as allowing the company to keep its operating expenses much lower than if the company attempted to penetrate new markets with its own employees. A growing customer base equals a more rapid revenue compounding effect, and because of the company's ability to compound annual revenue since 2005 at a rate of ~19% through direct sales, it seems logical that with the build-up of third party distributors, revenue will likely grow at a faster pace going forward.

According to the CEO (emphasis added): "Channel sales can help us establish a lower test delivery model through which we train and position the partners to sell industry solutions. We will leverage this approach to reduce our overall cost of marketing and selling our solutions in a direct fashion. Additionally, channel partner supplemented our demand generation efforts and provide access to client bases that previously would not have been available to us."

With GSB generating substantial value over its cost of doing so, and along with an average 90% renewal rate within its customer base, I believe this adequately shows that GSB's business is rather "sticky" and that the costs of switching MFT service providers is high.

Free Cash Flow

GSB is asset light and currently generates ~10% unlevered FCF yield. With management hinting at focusing on growing the company more organically in its most recent 10-K, I believe the company could achieve yields of ~15% (using the current market cap) in 5 years. A back-of-the-envelope valuation, assuming GSB can achieve $.335 per share in FCF, values the company at ~$3.50 per share if I place a 10x multiple on FCF (lower than its current 15x multiple). On this basis, the company is undervalued by ~40%.

Valuation

The crux of my valuation thesis rests upon my DCF model and a 15x multiple of forward EV/EBITDA. I will present my DCF model first.

DCF

2013

2014

2015

2016

2017

2018

2019

2020

Revenue

24.3

25.4

26.7

28.2

29.9

31.8

34.0

36.6

% y-y

4%

5%

5%

6%

6%

7%

7%

8%

EBIT

3.901

3.8

4.0

4.2

4.5

4.8

5.1

5.5

%

16%

15%

15%

15%

15%

15%

15%

15%

Income tax

-3%

15%

15%

15%

15%

15%

15%

15%

NOPAT

4.0

3.2

3.4

3.6

3.8

4.1

4.3

4.7

add D&A

0.9

0.9

1.0

1.0

1.1

1.2

1.3

1.4

%

4%

4%

4%

4%

4%

4%

4%

4%

less capex

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

%

1%

1%

1%

1%

1%

1%

1%

1%

Working cap.

-6.1

-6.4

-6.7

-7.0

-7.5

-8.0

-8.5

-9.1

%

-25%

-25%

-25%

-25%

-25%

-25%

-25%

-25%

∆ in working cap.

0.4

-0.3

-0.3

-0.4

-0.4

-0.5

-0.6

-0.6

Unlevered FCF

4.3

4.3

4.6

4.8

5.2

5.5

6.0

6.4

Period

0

1

2

3

4

5

6

7

Present value

4.3

3.9

3.7

3.5

3.4

3.3

3.2

3.1

per share

$ 0.23

$ 0.20

$ 0.19

$ 0.19

$ 0.18

$ 0.17

$ 0.17

$ 0.16

Term. Val.

58.7

Sum of DFCF

24.1

Entr. Val.

82.8

add cash

9.5

less debt

4.4

Market val.

87.8

Per share

$ 4.60

Upside

94%

I believe I used a conservative revenue growth estimate, as I only assumed the company would be able to grow revenue incrementally by 50 basis points annually. Keep in mind, also, that I discounted the FCFs by 11%, which I believe may be a bit too conservative, considering that the company's estimated WACC is only 7%. If I had discounted the FCFs using WACC, the stock would be undervalued by almost ~200%!

To explain the multiple I applied on my estimate of forward EBITDA (I believe the company can achieve ~$5.5 million in a conservative calculation of EBITDA-on an adj. basis, EBITDA will be much larger), I looked at other software companies (GSB derives revenue from multiple sources, but I felt software companies provided decent comps), and generally I found said companies trading at 15x EV/EBITDA [2 such companies include Intuit (NASDAQ:INTU) and ANSYS (NASDAQ:ANSS)]. Currently GSB's EV/EBITDA sits at a meager 8.4x, and forward EV/EBITDA sits at ~7.3x-I believe these multiples are far too low for such a profitable company.

Price

2.37

S/O

19.1

Mkt. val.

45.2

less cash

9.5

add debt

4.4

Entr. Val.

40.2

EV/EBITDA

8.4

For. EV/EBITDA

7.3

Multiple

15

Implied EV

82.1

add cash

9.5

less debt

4.4

Mkt. Val.

87.1

S/O

19.1

Per share

$ 4.57

Upside

93%

The company's net cash currently stands at ~11% of the total market cap, and I believe that with such a large cash balance and along with the company's current stance of pursuing growth organically, going forward it seems likely that special dividends will be distributed to shareholders, as they have been distributed for the past 2 years. While more speculative, I also believe GSB provides a good acquisition target.

Conclusion

I believe GSB is an attractive investment, and at its current financial trajectory I think the stock is worth at least 90% more than where it stands currently. With a strong history of generating consistent revenue growth, along with generating a ROIC that is 2x its WACC, and a FCF yield that will likely hit 15% within five years, I think GSB is an obvious GAAAP stock.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: GlobalSCAPE Is A GAAAP Stock With 90% Upside