ViryaNet: An Undervalued Nano Cap

| About: ViryaNet Ltd. (VRYAF)
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ViryaNet is an emerging player in a highly fragmented global market of mobile and Web-based software solutions for optimizing field service.

Recent financial results suggest a step up into a new plateau of performance; high return on invested capital and expanded free cash flow.

Growth in market demand and high return on capital invested compel acceleration in revenue growth beyond the current operating scale.

Minimal institutional interest provides the opportunity of a stock price at a significant discount to fundamental value for the intrinsic investor.


Over the past 25 years, ViryaNet Ltd. (OTCQB:VRYAF) developed, marketed and supported field service management software. Organic expansion and acquisitions, divestitures and significant re-sizing in headcount (from 148 in 2005 to 61) have brought the company to where it is today. Currently the company has some 60 clients with 35,000 users, 61 employees, significant partnerships, the technology behind the company's product offering and short of $20 million in enterprise value. Financial results in years 2012 and 2013, discussed below, suggest build-up momentum that promises to energize prospective performance. For the most part ViryaNet is outside the radar of institutional investors and buy-side analysts.

Clients and prospects are global and nationwide organizations. ViryaNet clients include recognizable blue chip names in industries such as energy, telecom, utilities, healthcare, insurance, government and general service providers. Eighty-four percent of sales are in North America, 9% Europe, and the rest in South America and Asia/Pacific. Sales in North America are direct supplemented by key partners. Outside North America, sales are mostly through indirect channels.

ViryaNet's eco-system encompasses channel partners, such as GE Energy, Vodafone, Amdocs, Vertex; implementation partners, such as Cognizant (NASDAQ:CTSH), Infotech, Logica, and Indra; and technology partners, such as IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), GE (GE) and Intalio. In 2012, 31% of sales were indirect and 69% direct.

ViryaNet's fourth generation product suite, ViryaNet G4, provides solutions to optimize field service operations by enabling clients to plan, execute in real time and monitor trends and current events with an eye toward the achievement of operational goals. The focus is on client benefit - enhancing the clients' own economic returns with solutions that enable them to resolve conflicting objectives such as enhancing workforce productivity, delivering high-quality service and achieving regulatory compliance. Solutions effectively align all clients' employees within a business model devised to balance conflicted business objectives and deploy resources consistent with their goals and with enhancing operating and managerial proficiency. ViryaNet's workforce management solution is delivered either on premise or in the Cloud. The company's role is critical to the competitiveness of field service organizations.

Principal competitors include Astea (NASDAQ:ATEA), ClickSoftware (NASDAQ:CKSW), Oracle (NYSE:ORCL), Service Max and TOA Technologies. Competitors include vendors that address field service optimization and end-to-end field service management vendors who offer a broader range of service processes. ViryaNet competes by emphasizing its own product features and by appropriately leveraging its partner's capabilities into integrated solutions. Product review is available here.

Research and development is primarily conducted in Israel, administrative, marketing, sales, service and technical support in Massachusetts, and services and technical support in Florida. Of the company's 61-employee headcount, 15 are in sales, marketing and business development; 12 in R&D, 26 in professional services and technical support, and 8 in finance, administration and operations.

"ViryaNet: An Innovative Player in a Rapidly Growing Consolidation Market" is a recent article by Moatology, a fellow Seeking Alpha contributor. The article provides an excellent prospective on the investment opportunity.

Management and Ownership

Management is stable and holds an important ownership stake in the company. Samuel HaCohen is chairman of the board. He is a co-founder and was CEO from 1988 through 2001. Memy Ish-Shalom has been CEO since 2001. Yohanan Engelhardt has been CFO since 2012, previously he was VP Finance, since 1996. Vladimir Morgenstern, co-founder, is director since 1999. Previously he was technical manager and chief technology officer since 1998.

Mr. HaCohen and Mr. Morgenstern beneficially own 13.1% of shares through their financial interest in Jerusalem High-tech Founders, Ltd. and Jerusalem Technology Investments Ltd. Memy Ish-Shalom owns 10.4%, Mr. Engelhardt owns 3%. As a group, these gentlemen own 26.5% of ViryaNet's ordinary shares. As a team, years of experience in systems, software architecture, electronics, technology, research and development, and their academic education in computer science, applied mathematics, statistics, physics, accounting, economics and finance, seem very appropriate and relevant to ViryaNet's role.

Lewis Opportunity Fund Group owns 16.5 % of the stock resulting from a private placement completed in 2007. Arthur Lewis IV, director of ViryaNet, is CEO and founder of Lewis Asset Management Corp., an investment management company headquartered in NY City.

Market Opportunity

The market opportunity in field service management is extensive and growing at a fast pace. Industry sources, including from ViryaNet's February 2014 investor presentation point to ample and growing demand.

  • Field service management application revenues are estimated at $1.2 billion in 2012, with a compounded annual growth rate of 12.7% (Gartner, 2013).
  • Addressable market for field service applications is only 25% penetrated (Gartner, 2012).
  • Software solutions for mobile field service is estimated to reach $2.8 billion in 2016, from $1.7 billion in 2011 (VDC Research).
  • 15% of the current mobile workers are currently using a mobile device to support an enterprise mobility application (VDC Research).
  • Service businesses comprise over 70% of the world economy and continue to grow.
  • The global worker population will be reaching 1.2 billion workers by 2014 (VDC Research).
  • Mobile workforce management is emerging as an enabler of service delivery and as a competitive differentiator in the marketplace.

Fundamental Value

Evaluation of ViryaNet focuses on fundamental value; the present value of prospective free cash flow discounted at the cost of capital. Value is created by using investors' capital to generate future cash flows at rates of return (ROIC) in excess of the cost of investors' capital (OTC:WACC), and by sustaining revenue growth over time. Below is the definition of the value metrics used in the estimation of value.

  • ROIC (Return on Invested Capital) = NOPAT / OC
  • NOPAT (Net Operating Profit after Taxes) = EBIT (1 - Tax Rate)
  • OC (Operating Capital) = NOWC (Net Operating Working Capital) + OLTA (Operating Long-Term Assets)
  • WACC (Weighted Average Cost of Capital)
  • EVA (Economic Value Added) = (ROIC - WACC) OC
  • FCF (Free Cash Flow) = NOPAT - (Changes in OC)
  • EV (Enterprise Value) = PV of prospective FCF, growing at g; discounted by WACC
  • IR (Investment Rate) = Increase in OC / NOPAT
  • g (Growth) = IR x ROIC

Value Metrics

Table 1 shows ViryaNet's value metrics for the last four fiscal years, and last quarterly results and a y-o-y comparison.

Table 1. ViryaNet's Value Metrics

(Amounts in millions of US$, unless otherwise noted)

FYE 12/10

FYE 12/11

FYE 12/12

FYE 12/13

4-Yr. Avg.

4Q 2012

4Q 2013









Revenue Growth (y-o-y)















NOPAT / Revenues
































OC / Revenues
















FCF = NOPAT - Inc. in OC








FCF / Revenues








R&D Expense








R&D / Revenues








  • ROIC averaged 25% for the four fiscal years, with notable improvement to 83% in 4Q12/13.
  • ROIC in excess of WACC (estimated at 12%) creates substantial value. EVA averaged $470,000 per annum [(25% - 12%) * $3,640,000 = $470,000]. EVA is the value added to the business, net of the cost of all capital invested. (Different than EVA, GAAP's Net Profits do not deduct the cost equity).
  • FCF / Revenues averaged 4% in the 4-year period; average revenue growth was 3%. They improved respectively to 18% and 15% in 4Q2013.
  • R&D averaged 13% of revenues for the four-year period. IR in the last two fiscal years was particularly healthy - 22% in 2012 and 25% in 2013. R&D and IR are causal in product improvement and competitiveness, which in turn enable revenues and FCF.

Business Risk

Management maintains risk-taking within the boundaries of knowledge and expertise in the field service management business. Consider the following metrics:

  • NOPAT is subject to operating risk- the risk in the firm's commercial cycle (NOWC). The commercial cycle encompasses the company's day-to-day relationships with stakeholders and entails risks such as concentrations with clients and suppliers and dependence on partners and resellers for performance. Disruption in these relationships can disrupt the commercial cycle and negatively impact financial results. In year 2012, four clients each accounted for 6% of revenues, as an aggregate they accounted for 32% of revenues. Direct sales were 69% of revenues, indirect 31%.
  • Stable OC / Revenues suggest predictability in the trading conditions with clients and suppliers.
  • Variable but positive FCF results from a stable commercial cycle with inherent moderate risk. Low risk improves WACC and boosts fundamental value.
  • Debt is manageable: at the end of 4Q13 cash exceeded debt. ViryaNet does not pay dividends.

Activity in commercial and investment processes translate into value metrics with underlying moderate risk. Notwithstanding moderate risk assessment, there is an abundance of risk events that can upset business, particularly in a small company. Natural catastrophes, or the loss of key managers, are easy examples of events that can disproportionately disrupt the business. Further, a track record free of major risk events does not preclude future negative risk events. This article does not cover all the conceivable risk events (including internal, external, or macro-economic risks, or those with low-probability-high-impact) that could cause serious harm the business. Instead, the focus is in ascertaining that activities in the ordinary course of business fall within a business purpose and management competence.

Value Estimate

Below are three estimates of the stock's fundamental value along with the corresponding estimate inputs. The estimates assume a continuation of ViryaNet's current operating scale.

  • $5.20/share value based on $1.20 million 2014 FCF growing at 7% per annum through 2017 and 4.5% thereafter in perpetuity. WACC is 11% through 2015 and 10% thereafter. On April 24, 2014, the stock closed at $3.90/share.
  • $4.80/share value based on $1.10 million 2014 FCF growing at 7% per annum through 2017 and 4.5% thereafter in perpetuity. WACC input is as noted above.
  • $4.50/share value based on $1.00 million 2014 FCF growing at 8% per annum through 2017 and 4.5% thereafter in perpetuity. WACC input is as noted above.
  • The FCF inputs ($1.20 million, $1.10 million, and $1.00 million) represent 8% to 9% of 2014 revenues (FCF/Revenues). Note the following: (a) Annual FCF based on $0.60 million FCF in 4Q13 is $2.40 million, (b) FCF in 4Q13 ($0.60 million) is over three times FCF in 4Q12 ($0.19 million), (c) FCF/Revenues is 18% in 4Q13, the highest recorded in the table since 2010 (abnormally strong).

Investor Risk

Investing in ViryaNet's stock requires ascertaining the opportunity in stock mispricing and having the fortitude to navigate through stock price volatility and thinness in trading volumes. Significant changes in the stock price occur without new information regarding the company. Low daily volumes restrict the ability to buy or sell quickly without pricing damage. Three-month average volume is 18,000 shares.

Value investing, paraphrasing Charlie Munger, is knowing enough to know whether the gamble is mispriced and having patience to wait for the right pitch for many years. Knowing enough rests on value and on the understanding that the price of the stock not only reflects the actual performance of the company but also changes in market expectations. Patience is the fortitude to stay invested, while the investment thesis remains true, until the mispricing gap is closed.

Challenge of Growth

Given the market opportunity, the challenge for ViryaNet is to accelerate revenue growth beyond the current scale. When ROIC exceeds WACC, expanded OC increases EVA [(EVA = OC (ROIC - WACC)].

ViryaNet's ecosystem enables selling through partners and broader product capability through effective linkage with the partners' product systems (to respond to variable client specification). Nonetheless, reliance on resellers and partners reduces ViryaNet's control over the attention and the resources devoted by third parties to ViryaNet's client needs. This increases ViryaNet's performance risk.

Accelerated revenue growth would benefit shareholders. Expanded OC (and sales and marketing, and R&D resources) would expand value by leveraging on ViryaNet's client roster, product competitiveness, eco-system, global reach and management competence. The most recent equity infusion was modest in size, in June 2011, and February 2012, two directors, Mr. HaCohen and Mr. Morgenstern, and their affiliated Jerusalem High-tech Founders, Ltd. invested a total of $125,000 in the company.

New capital is one of many strategic options to fuel growth. Another possible solution involves potential co-owners/buyers who have relevant attributes of knowledge, resources, scale and linkages in the industry, which represent potential avenues for growth and value. The construction of strategic options calls for a strategic perspective which emphasizes both ROIC and revenue growth as complementary drivers of value.


A notable improvement in ViryaNet's value metrics in recent yearly and quarterly reporting periods highlight the firm's capacity to create value. ViryaNet's stock mispricing is substantial and to the advantage of the investor who "knows enough to know" that mispricing is indeed an opportunity, considering the challenges and attendant risks.

Revenue growth beyond the current operating scale would appropriately leverage ViryaNet's strengths and capitalize on growing market demand. Market opportunity and constrained financial resources make ViryaNet an acquisition candidate for firms with a strategic fit and with the financial capacity to fuel value creation.

Disclosure: I am long VRYAF, CKSW. 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.

Additional disclosure: The material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Views and opinions in this article may be wrong. The analysis, including financial computations, presentation and views do not necessarily conform to any sanctioned or accepted standards. Presentation and computations entail a probability of error, which is entirely possible. I am not an investment management professional. Please do not rely on this material, do your own due diligence.

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