Who is Amber Road, Inc.?
Amber Road, Inc. (NYSE:AMBR) provides global trade management (GTM) solutions in the United States and internationally. Its GTM solutions comprise modules for logistics contract and rate management; supply chain visibility and event management; international trade compliance; and global knowledge to importers and exporters, nonvessel owning common carriers, and ocean carriers. Amber Road, Inc. offers its solution to enterprises in various industries, including chemical/pharmaceutical, high technology/electronics, industrial/manufacturing, logistics, oil and gas, and retail/apparel through a software-as-a-service model.
AMBR held an IPO on March 21, 2014. Their shares have appreciated 14% since the offering.
What do they do and how do they expect to stay competitive going forward?
I should start by telling you that I only became interested in AMBR because a well-known stock promotion service started pumping this stock a few days after the IPO making outrageous claims that the stock was headed to the moon. I was expecting that in my research I would find a company that would be added to my list of stocks with short potential but was turned the other way at the conclusion. Based on the fundamentals, and the technicals are now confirming it as well, I see good value in AMBR and am interested to see what they report in their upcoming earnings release.
Amber Road owns and operates a cloud based software platform that in its entirety serves a broad range of purposes, offering a wide range of solutions to known and prevalent problems in the global trade arena. Their software platform can also be broken down and sold into pieces that can be tailored to meet each individual client's needs. What makes their software unique is that it provides an amazing mixture of already existing services that are provided by huge global corporations. For instance, AMBR's global trade management software solution platform can provide up to date (and constantly updated) information in regard to harmonized tariff codes, restricted party lists, export regulations, import regulations, shipping documents, preferential duties and taxes, specifications for free trade agreements, transportation rates, and sailing schedules, or it can simply help you track shipments of goods more effectively. AMBR's solution can connect customers to their extended supply chain partners or help better predict the aggregate cost of importing/exporting goods. It's entirely customizable and as stated above can help consolidate needs that are currently being outsourced to multiple larger providers. AMBR's value proposition is that they can help automate import and export processes to enable goods to flow across international borders in the most efficient, compliant and profitable way. Their solution combines enterprise-class software, trade content sourced from government agencies and transportation providers, and a global supply chain network connecting customers with their trading partners, including suppliers, freight forwarders, customs brokers and transportation carriers.
The global trade market is huge and really needs no further explanation; however, it must be said that as globalization continues to become the norm so will the growing complexities in the overall market. Supply chain complexity, time zone changes, currency changes, complex laws and regulations, and multi-party transactions that take place at any point in the import/export cycle all are helping drive demand for AMBR's services. The market is in no danger of shrinking nor is demand. I've recently been very critical of shipping tanker IPO's and the sector in general but don't want that criticism to be confused with criticism of the global trade market or servicing it. I see no risk to market potential on any time frame that would harm AMBR's potential operations, strictly speaking in market potential terms.
AMBR believes their competitive advantages are in process automation and that they eliminate the slow, unorganized, tedious manual processes of global trade; that they help optimize route and cost savings by providing in real time (HUGE value) information relating to preferential duties and taxes, specifications for free trade agreements, transportation rates, and sailing schedules that allow supply chain execs to be more efficient and hit metrics; that they greatly improve supply chain visibility by providing in real time (HUGE value) updates to goods as they move past (or hit delays) set checkpoints in the supply chain; and finally that they help make customers more compliant to regulations helping them avoid fines and criminal liability. As stated above, most of Amber Road's clients are already having these needs serviced but through multiple providers, platforms, and contracts. AMBR helps bring the needs under one umbrella and can even implement their platform on an existing operating system that a client is using, should the client request that. They want to be the one stop shop solution for their clients and by being able to assist with the full spectrum of issues, I believe they can. That list of competitive advantages is real, with the major differentiator being that AMBR can provide services in real time. One of the largest risks of updates being slow or not implemented at all is that in the quickly evolving global trade market arena old news is often times costly (old rates, changes in duties or taxes, etc) or can even lead to legal fees and penalties if their have been changes to any number of international or domestic regulations. AMBR believes they are the only provider that provides real time updates and is proud to have made over 13 million regulatory updates to its global knowledge repository of trade regulations in 2013.
I really like AMBR's software platform and their existing clients all seem to like it as well. AMBR's subscription agreements have an average initial term of 3.75 years and for 2011, 2012, and 2013 the recurring revenue retention rate was 102%, and that's with large well known competitors like Oracle and SAP stepping into the space. All statistics that turn heads from a revenue base stability metric standpoint and provide unique ballast to a young and growing company. The value add is real, its recognized, and it's helping this company and their stock move to new highs.
What's the growth strategy and where's the trade?
AMBR has experienced steady, impressive growth over the last few years. AMBR saw revenue grow 21% Y/Y from 2012 to 2013, 20% subscription revenue growth Y/Y, and 25% service revenue growth Y/Y. While not outrageous growth figures these are numbers that are sustainable based on the activities and general strategies at AMBR, can be improved on, and are explainable. The general subscription based revenue strategy at AMBR is one where the front end sales cycle can be drawn out and that also has mid run lag time that takes place before clients will become more involved in the software solution ecosystem. They have to develop a trust and familiarity with the software before wanting secondary and tertiary channels, assuming they didn't purchase the entire suite up front. That being said, the revenue growth has greater potential for stability than it does explosive growth and that's exactly what AMBR has shown.
Now even with these solid growth numbers AMBR actually saw a pretty sizeable uptick in net loss Y/Y. I feel like this surface level net loss is misunderstood by the non-Adjusted EBITDA accepting community; some still frown on this, but when subtracting the restricted stock expense and the SG&A from the below image, you can see that almost the entire net loss is gone.
Neither of those have anything to do with the underlying profitability of the business (I can hear the readers typing about SG&A) and shouldn't be held against the company. I understand SG&A is real and matters but it's expected to see an uptick in SG&A (on a percentage basis) that outpaces the revenue growth for a subscription based development stage company. I should also say that SG&A should be a major contributor to the cost of both subscription and service rev in 2014 and 2015, but that's expected and not an unhealthy sign. I look at this net loss uptick as a reason the stock is undervalued and as something that should be considered by the reader.
The Amber Road growth strategy going forward is pretty simple. It boils down to three basic focuses: do more of what they're already doing, continue to innovate their platform by anticipating the needs of their clients, and expand into the international markets further than the 11% of sales that they are currently deriving. The expansion into the international markets can be done organically or through acquisition according to management. The company recently acquired a China-based company in an effort to speed up its development into that particular market.
I like that they are keeping the growth strategy simple, that a simple growth strategy can work in this market, and that they aren't afraid to use stock and the little cash they have ($5.0 million as of the IPO) to speed up increasing their footprint. They are also smart enough to realize that they can become experts in particular national regulatory and compliance environments by buying existing successful shops in those local areas and that if they see a competitor who is doing one particular channel of their business better than they are, that acquiring the company isn't admitting defeat. I like everything about this growth strategy and as a potential investor I also understand tat a bit of stock dilution will probably come with this. That's OK as long as the acquisitions make sense and make the holistic approach of the company more attractive.
So where's the trade? I like these guys as a long, especially coming into earnings here shortly. I think that they are smart, open minded, and realistic about how to take this development stage company to the next levels. I think they've done well to retain earnings, not pay dividends to the concentrated ownership, have managed their accumulated deficit well, and don't look at the recent net loss as that big of a deal. I think that they are just scratching the surface on their international potential and are going about it in the smartest way possible. I think that when they finally start to hedge their currency risk (FX from Renminbi, Rupee, and Euro contributed 7% to the cost of revenue uptick total in 2013), that they'll be able to spend that money more smartly and I think that they will continue to see that consistent mid-20% growth rates across the board for revenues into the balance of 2014 and into 2015. I do expect expenses to rise, but for all the right reasons so as long as they're managed I won't look at that as a negative. Finally, as with all these SaaS companies, the overwhelming majority of the CAPEX and risk was taken pre-IPO and as long as you don't buy these shares up 100% you're probably right in the sweet spot of the risk range for a long position. I'm excited to see what these guys say on their next earnings conference call and look forward to their development. Good luck to all.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.