Issuer Direct Is A Cheap, Profitable Business

Summary

• Issuer Direct (ISDR) is an illiquid micro-cap company trading under the radar and going through a business model transformation.
• Led by a management team that owns 26% of the company with an excellent owner and CEO.
• Issuer Direct is selling for only 8.3x EV/FCF or a FCF yield of 12%.

This article was highlighted for PRO subscribers, Seeking Alpha’s service for professional investors. Find out how you can get the best content on Seeking Alpha here.

Here is a company managed by an owner/operator, transitioning to a recurring revenue model while being profitable, trading at a FCF yield of 12%.

Issuer Direct (NYSE:ISDR) is an illiquid micro-cap company trading under the radar. The company have grown revenues from $12M in 2015 to $16M in 2019. In each year, they had positive net income and operating profits, an uncommon characteristic for a high growth company transforming its business model into SaaS.

Recent market volatility is providing a good entry point to own an excellent business, led by a management team that owns 26% of the company with an excellent owner and CEO.

Business Overview:

Issuer Direct is a company going through a business model transformation. The company went public in 2007 and has since been led by the company’s founder and CEO Brian Balbirnie.

The mission of Issuer Direct is simply to enhance the communication of corporations with their shareholder base. They do this via their Accesswire press release news distribution offering or by webcasts during which corporations can reach shareholders by virtual presentations. If you have attended a webcast from LD Micro, in which different companies do presentations about their future plans, then you have used an Issuer Direct product.

As you can expect, the company has been transforming itself from literally printing annual and proxy reports and mailing them to their customers shareholders, to developing their main digital product called Platform ID:

Source: LD Micro Presentation

With Platform ID, the company is going into the SaaS business model. They want to provide companies with a one-stop solution for their communication needs and give them tools to analyze the data gather from different events to know if their message is resonating with their shareholder base.

Source: LD Micro Presentation

The business model evolution is important for two reasons: scale and better margins. The Platform ID product can generate gross margins in the high 70’s to low 80’s, compared with the “old” business model, which the company calls its Services Business, of 63% gross margins. As of year-end 2019, 67% of revenues came from their Platform segment.

Scale opportunities comes from the ability of the company to upsell and cross sell different services at a minimum or no cost at all. For example, a client might be interested in the press release distribution service. Once the client is acquired, services such as data analytics or webcasting can be offered to them, increasing their ARPU and possibly their lifetime value, as more services used can increase switching costs.

Major competitors include Berkshire Hathaway’s Business Wire, Cision’s PR Newswire, and GlobeNewswire. All these competitors take the lion’s share of the market.

Competing with the Giants

How can Issuer Direct compete against the three giants in press release distribution?

Why would a company as big as Business Wire or PR Newswire allow a tiny company to take market share away?

Issuer Direct is mostly focused on proving services to smaller companies (in the micro to nano cap space). They are focusing their marketing efforts in bringing customers that need to reach their shareholders while being in compliance with regulators but that cannot spend a lot of money on it.

On average, Issuer Direct charges a flat fee ranging from $12,000 to $6,000 per year, compared to competitors that charge by individual press release, with costs varying by word count and links.

Source: LD Micro Presentation

Their cost structure is also an advantage. For a small company like Issuer Direct, revenue per client of $6K to $12K can move the needle in terms of profitability because their costs are aligned with the amounts of revenues coming in. For a company as big as PR Newswire, which was acquired by Cision in 2016, it doesn’t make sense to go after small clients because their costs are too high. In 2018, Cision had $670.2M in operating expenses compared to $13.1M for Issuer Direct. The difference in cost structure allows Issuer Direct to carve a niche market within the market and doing so profitably.

Are they making money?

The company operates profitably. In 2019, they generated $16.3M in revenues and $2.1M in EBITDA compared to $14.2M in revenues and $2.6M in EBITDA. The decrease in EBITDA was due to increases in operating expenses.

Last year the company invested heavily in expanding their sales force and marketing efforts, which compressed operating margins for the year. Sales and marketing expenses increased 18% during the year, compared to only a 14% increase in revenues. However, I see those capital investments necessary to bring in recurring future revenue streams.

Issuer Direct also had some one-time expenses associated with an increase in bad debt expense related to two customers from their lost investment commentary business.

The loss of the investment commentary business was material to revenues mostly impacting Accesswire. From an organic standpoint, Accesswire revenues grew 5% during the year. However, excluding the impact of the loss commentary business, revenues would have grown 38%.

From a working capital point of view, the increasing revenues of Platform ID is positioning the company to have a negative working capital situation by an increase in deferred revenue and accounts payable offset by accounts receivable as shown in the following table:

Source: company filings

This is important because the growth in revenues doesn’t require investments in working capital. It is the other way around. As the percentage of revenues coming from their Platform ID subscription service becomes a larger part of the pie, working capital starts becoming a source of cash, which benefits shareholders as less capital is coming out from their pockets. The company becomes self-funded.

Good Quality Management

Issuer Direct is led by CEO and owner/operator Brian Balbirnie. I find investing in public companies led by an aligned management team with shareholders key to good investing results.

The management team has a lot of skin in the game by owning collectively around 26.12% of outstanding shares as of the last proxy statement in April of last year:

Source: Proxy statement

The CEO Brian Balbirnie and CFO Steven Knerr have some of the lowest salaries I have seen in a public company with total amount earned in 2018, including bonuses of $218K and $177K respectively.

Is the company cheap?

Issuer Direct has 3.8M shares outstanding selling at $9.85 for a total market cap of $37.4M. The company has zero debt on its balance sheet. Their total current assets of $18M (of which $15.8M is in cash) covers 2.8x their total liabilities of $6.2M. Enterprise value is $21.6M.

The company generated cashflow from operations of $2.8M in 2019 and 2018. Capital expenditures came in at $420K and $51K respectively. I calculate FCF to be $2.6M.

So here we have a company achieving profitability and growth selling for only 8.3x EV/FCF or a FCF yield of 12%.

Keep in mind that the company is transitioning into a recurring revenue model and can self-fund operations from its transition into a negative working capital model as they grow their Platform ID customer base. Also, current operating expenses are high as the company invests in sales and marketing which should position the company for higher customer growth.

At current prices I believe Issuer Direct provides a compelling 12% FCF yield with room to grow, which is why we are long ISDR.

Analyst’s Disclosure: I am/we are long ISDR. 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.