Currency Exchange International ($CXI/$CURN): Mis-Priced Covid Recovery Play

Every once and a while I like to put up guest posts on Ragnar (see this awesome one on $PMD). As such, here is a post from one of my favorite people: Chris Olin. He is one of the handful of people who helped keep me sane during COVID. We are both long the stock, and think that it is a really good price, for the flows of cash that should be coming. :)

Ticker: OTC: CURN; TSX: CXI

Market cap: $65M [1]

Net Cash: $53M

Enterprise Value: $12M

Last Share Price: $10.20

 

Currency Exchange International (“CXI”) is a fast-growing, unlevered reopening play whose main business was laid low by covid. After reducing its cost structure and taking share from competitors that have shut down operations, the company is poised to benefit from a recovery in international travel and a return to double-digit revenue growth. Valued at less than 9x FY2023 earnings, the stock has 130%-250% upside from here.

 

Business Overview

CXI operates in the US and Canada and is organized into two segments: ~85% of revenues are derived from physical banknote exchange and the remainder are from facilitating international payments. Geographically, ~80% of revenues are from the US and ~20% are from Canada.

The banknotes business physically exchanges foreign currencies for both retail clients (at high margins) and for wholesale bank/corporate clients (at low margins). This business was hit very hard by covid as it is heavily dependent on international travel. Covid-related revenue declines aside, this is a decent business with few competitors, from which CXI has been taking share for many years, growing revenues by ~10% per annum pre-covid [2].

The company’s main competitors in the wholesale business are large banks which enjoy the majority of the industry’s market share. However, smaller banks often prefer working with CXI because they don’t always feel comfortable securing their foreign currency from a direct competitor and most also don’t want to rely on a single vendor. The wholesale industry also largely competes on service, rather than price. CXI has an advantage here with smaller customers who are often not worth the larger wholesalers’ time.

Over the last decade or so, several wholesale bank competitors (e.g., HSBC, Bank of Ireland) have left the industry, largely because the small size of the revenues compared to those of their core banking businesses doesn’t justify the regulatory headaches. CXI’s main non-bank competitor, Travelex, also completely exited the North American market last year, partly due to covid and partly due to financial problems that pre-date covid. Despite the loss of competitors and CXI’s market share growth, the company is still a distant #2 (in Canada) or #3 (in the US) and has a lot of room to grow once transaction volumes return.

 

   Market Share Development

Source: Currency Exchange International.

 

Fortunately, the other business segment, international payments, has been unaffected by covid and continued its very rapid growth trajectory with revenues increasing by 29% in 2020 and 97% YoY in H1 2021. This segment was started from zero a few years ago and has quickly grown to become ~15% of the company’s revenues. Not all of this growth has been organic, as the company acquired a small Canadian payments business at the end of fiscal Q3 2020, but historical organic growth rates have been in excess of 25% and it is likely that this segment can continue to grow at ~20% per year for at least the next couples of years.

In the US, payments clients are primarily mid- and small-sized banks that don’t process enough international transactions to justify the costs of an in-house solution. The company also processes transactions for small non-bank clients in Canada that want a high-touch experience and don’t transact large enough volumes for the big banks to provide the desired service levels.

Compared to other non-bank fintech solutions, CXI is also a more attractive option for banks especially since the company is a regulated financial institution itself [3] and management has a long track record in the industry. CXI therefore offers its clients’ compliance departments peace of mind as well as cost savings. As in banknotes, a similar dynamic is at play in this segment as banks often prefer to work with CXI instead of outsourcing their payments business to a large commercial bank competitor. There is a lot of room for expansion in this segment and double-digit growth should be possible for quite some time.

 

Response to the Pandemic

As the banknote business sharply declined last spring, Management reacted quickly to cut costs by closing marginal retail stores, renegotiating rents, automating tasks (e.g., installing money-counting machines), combining overlapping roles, cutting salaries, etc., ultimately reducing operating expenses by about $2.5M per quarter as of the first half of FY2021.

A chunk of this reduction was due to variable costs and others that will increase again as the company gets back to historical revenue levels. However, it is likely that a return to FY2019’s $42M revenue level would be accompanied by at least a $1.75M-$2M permanent annual reduction in costs. That is quite significant given that the company only earned $3M in FY2019.

CXI has not only been playing defense, however. Since the pandemic began, the company has been aggressively signing new wholesale banknote clients onto their platform. Most of these were formerly Travelex customers and some were even referred to CXI by recent Travelex employees.

On the retail side, the company has expanded into locations that Travelex vacated using its agent model, where third-party retailers (e.g., Duty Free Shops) take banknotes for sale on consignment and share the economics with CXI. This has allowed the company to pick up some premier, high-volume airport locations that will likely be among the first to return to pre-covid volumes.

Management has also been winning new banknote business from foreign banks that need to source US dollars. This is a somewhat nascent business for the company, but it has the potential to become very big over time, potentially bigger than the legacy banknote segment.

While volumes from all these new clients and locations are currently small, the upside is that the base banknote business will be at least 15-20% larger than it was pre-pandemic once industry transaction volumes normalize. Furthermore, the company has also managed to raise prices on banknote transactions due to the reduction in competition.

As previously discussed, the payments business was unaffected by covid and grew 74% from the first quarter of FY2020 through H1 FY2021. Despite the difficulties in the larger banknote business, management continued to take steps to maintain the payment segment’s rapid growth, investing in additional salespeople and integrating the company’s offerings into additional banking software platforms (e.g., Jack Henry, Finestra, and Fiserv) that provide easy access to more potential clients.

 

Future Financials

CXI has very little debt and a sizeable net cash position of over $50M. Yes, some of this is inventory, but ~$25M is operating cash. The minimal debt that the company has is comprised of a couple revolvers that are used for working capital. Management has reduced the cash burn to $1-$2M per quarter, so the company can withstand a protracted period of reduced banknote transaction volumes if necessary.

However, the ongoing covid vaccine deployment, especially in North America and Europe, makes it likely we won’t have to wait too long for the company to return to profitability. 2022 will likely be close to a normal year and we are likely to see a full recovery in revenues by 2023.

Given the changes in the business in the last year or so, what might the company’s financials look like once industry banknote transaction volumes have returned to pre-covid levels? Perhaps the simplest method is to start with FY2019’s results as a baseline and add in cost savings and incremental growth from there.

In FY2019, the company enjoyed peak revenue of about $42M and $6.2M of EBITDA. The permanent covid cost reductions translate into $1.3-$1.5M of additional after-tax earnings [4], such that pro-forma “recovered” earnings start at $4.5M-$4.7M, all other things being equal. Yet we know that wholesale clients on the platform are up 15-20% over the last year and CXI is well positioned to capture much of the retail share formerly held by Travelex.

If transaction volumes are also up 15-20% over FY2019’s peak numbers in a normalized environment, then CXI should conservatively increase earnings on that additional volume by 15-20%. Banknote revenue was $39.1M in FY2019, so revenue from this segment might be $45M-$47M if the industry were fully recovered today. Add in a little more growth since the business will likely not be fully recovered for another year or so and we are likely looking at $53M-$56M of banknotes revenue in FY2023. Using the 11-11.5% profit margin implied by the new cost structure, the company is likely to earn an additional $1.5M-$2M in after-tax earnings from this growth. This assumes no operating leverage, but of course there will likely be some. [5]

That’s also just on the banknotes side. The payments business could easily be bringing an additional ~$7M of revenue over FY2019’s levels by FY2023. Several payments salespeople and support staff have been hired so far this year, so some, but not all, of the additional SG&A required to support this growth is already baked into our pro-forma baseline “recovered earnings [6]” number. Taking this nuance into account, a conservative analysis might indicate that this growth would add ~$2.5M in after-tax income over the next 2.5 years.

Adding it all up, the company is likely to earn $8.5M-$9M in FY2023, which compares very favorably to a ~$73M fully diluted market cap, especially for a company with a strong balance sheet that is experiencing double digit top-line growth.

 

  FY 2023 Earnings Waterfall

Source: Author; Currency Exchange International

 

Prior to covid, the company frequently sported an earnings multiple of over 30x. Given the company’s relatively small market share in each of its segments, its attractive historical growth rates, and lack of net debt, a return to that valuation level doesn’t seem unreasonable. On my estimate of FY2023 earnings, a 30x multiple implies a market cap of at least $255M or ~$35 per share, nearly a ~250% return from here. A more conservative 20x multiple still values the company at ~$24 per share, providing a ~130% return.

 

Risks

In the short-term the obvious main risk is around international travel in North America. If such travel comes back very slowly, that would definitely be a negative for CXI. However, with the vast majority of Canadians and Americans vaccinated, I think it will be a hard sell to continue to place restrictions on travel.

There is also a risk that regulatory costs continue to be a drag on the payments business. Management was surprised a couple years ago when Canadian regulators kept asking for additional processes that required expensive employees to be hired. This “start-up” phase of the payments business went on far too long and there was clearly a learning curve for the company that needed to be overcome. You can look back and see how investors were also surprised and punished the stock. While revenues continued to grow quickly during this period, earnings stagnated due to the fixed costs required by the new payments segment.

That being said, the company is quite confident now that they have the right systems, processes, and personnel in place to satisfy regulatory requirements and that there will not be large future increases in expenses in the payments business, or at least not any that are not tied to increasing revenue. Management has been wrong on this before, but we did not see any big increases in FY2020 or so far in FY2021, so I think the team probably has it right this time.

Looking out over a longer horizon, cash is losing market share in developed countries. The previous trend was steady and slow, but covid has accelerated it. Whether covid-related reductions in use of cash persist is an open question. That CXI has already started to see recoveries in volume with the limited international travel occurring is a good sign. The company has also been so effective at gaining banknotes market share that, while a reduction in the overall pie wouldn’t be ideal, it might not be so bad for CXI. This is probably the most significant risk to the thesis, however.

Central banks are also talking about and, in some cases, experimenting with digital bearer cash that is transferred via blockchain technology. This is a near-existential risk for the banknotes business, but Western central bank efforts are in still in the nascent exploration phase and it will take many years for any digital cash system to be implemented. There are many regulatory and privacy hurdles to overcome for digital cash to be successful and there is a good argument that any such system will be unworkable, at least in the US.

 

Conclusion

When the banknotes business recovers, the company will look quite attractive: double-digit pre-pandemic growth rates, a streamlined cost structure, minimal required capital expenditures, and reduced competition, all for less than 9x FY2023 earnings.

Regardless of when international tourists start coming back in significant numbers to North America (or more importantly, when the market starts pricing their return in), CXI will be poised to benefit with its larger client base. The company has plenty of liquidity, no net debt, and will have no problems waiting.

___________________________

 [1] All figures herein are in USD.

 [2] Note that banknotes revenue growth can be volatile, depending on whether any high margin “exotic” currencies are popular in a given year. This was the case in FY2018 when Iraq dinars and Vietnamese dong suddenly came into vogue, adding $1.65M in revenue that was not repeated in FY2019. Top-line growth in FY2019 therefore appears anemic if you don’t make any adjustments.

 [3] In Canada, the company runs its business through a regulated bank. While the US subsidiary is not a bank, the company and its management have decades of experience complying with AML and other relevant regulations, something that start-up fintech companies cannot claim.

 [4] 26.5% tax rate.

 [5] I’ve also glossed over the fact that banknotes revenue and payments revenue likely have different contribution margins, but payments was small enough in 2019 that I think this math still gets us conservatively in the right direction.

 [6] This additional payments SG&A is included in H1 FY2021’s results, which is our comparator for determining how much cost was taking out of the business vs. FY2019.

Thryv Warrants and Thryv Stock- A Value Creating Positive Feedback Loop

Please reference the Thryv post on RagnarIsAPirate, which can somewhat catch you up on the situation at my favorite company. Also, a notable update is the Sensis acquisition, and debt refinance... Thryv has been busy!

Sure, THRY has had a slight lag in growth, but that is reaccelerating, and the company is projecting that it will have over 200,000 subscribers to its SaaS business in the medium term (from here). That represents a more than 400% growth in SaaS subscribers in the coming years!

And while that is a HUGE deal... I want to talk about something else- Thryv Warrants and what they mean for the common stock. Because these warrants exist, I believe the company will be able to pay off its debt much sooner than is presently appreciated by the market. While there is not a ready market for the warrants, I have been actively buying them in private transactions. Yes, this post is technically about the warrants, but try not to focus on them as the overarching theme of this post. I am long shares of THRY, and think that these warrants give the stock some compelling upside AND downside protection.  In fact, I think that the presence of the warrants give the stock some “icing on the cake” so to speak. 🎂🍰🧁

________

As you can see below in the company's S1 filing, Thryv has roughly 10.6 million warrants outstanding, which will convert to ~5.8 million shares of common stock. Currently, there are a hair more than 31 million shares outstanding, per the company's most recent 10Q. Normally, seeing that a company is facing dilution of ~18% from warrants is reason for pause. Let me explain why it is not.

Thryv’s legacy business (the Yellow Pages) is a melting iceberg, and is loaded up with debt. It seems that people who are not comfortable with the company's financials always gravitate to the debt load. The risk of the company not being conservative enough in correctly projecting the revenue decline of the Yellow Pages business is simply too much for them. As this relates to the warrants, I think that the dilution and concurrent cash infusion into the company effectively eliminates the risk of the debt blowing up the company, and will actually help the company make more acquisitions, as well as fund growth. Here is why.

The warrants, if exercised, will bring in A LOT of money into the coffers of the company. The math here is simple... If the stock trades for more than $24.39 between now, and August 15th, 2023 (2.5 years out!) and all of the 5.8 million warrants get exercised, that will bring in, in excess of $141 million dollars to the company coffers. Put another way, that is ~1/5 of the total debt that the company currently has. 

Per a recent Bloomberg release, related to THRY’s debt offering, the company is in the process of raising $700 million in debt. The goal is to refinance their current debt and to fund the acquisition of Sensis. It seems that the deal has been priced (again, per a Bloomberg news story), and is ready to go... Sure, the interest rate for the debt is high, but the company is cash flowing more than enough to cover the debt and principle payments. Additionally, this lets the company get a REALLY compelling deal done, as I will highlight below. Just think what the company could do, if these warrants exercise, and they use the cash to pay off debt! $100 million in cash would save the company $8.5mm a year in interest- and the next year, $9.22mm- and the next year, another $10mm... that’s pretty compelling, on top of paying down principle!

Aside from the savings on their debt- the BIG idea here, is that Sensis is a business that will help Thryv recruit paying customers to its SaaS business. The company has stated that when they began rolling out Thryv software to its Yellow Page customers, they had roughly 10% of them sign up for the SaaS offering. Sensis has about 130K customers, so, that would indicate roughly 13,000 new SaaS customers. Frankly, I would be all about them doing the acquisition JUST for the customers.

It’s a bold statement to make, but I do so, because this is a very interesting customer acquisition strategy- not only do they have experience doing this sort of customer conversion, but, they can bring value to a Yellow Pages style business that almost no one else can because of the Saas business they offer. Hypothetically, lets say that you assign no value to the cash flows of Sensis (hint- there will be cash flows), and allocate 100% of the $195mm purchase price to the 13,000 Thryv SaaS customers that the company hopes to gain. That’s ~$15,000 per user. The average Thryv user spends about $293/month or $3,500 annually- meaning that the acquisition cost per customer under some pretty conservative assumptions (ie they don’t grow their ARPU via ThryvPay or other offerings) is ~4.2x revenue. Thryv seems to be (per its presentations) at the critical mass where incremental increases in revenue have a huge impact to earnings and cash flow- so this acquisition has the potential to really bulk up the company. After all- another 13,000 customers would grow the current customer count by nearly 30%!

Keep in mind, this is happening in an environment when SaaS businesses trade for double digit multiples of revenue... And, I will admit that Sensis probably has fewer customers now, than it did last year from the melting iceberg effect- but the math still roughly works for whatever level of conversion and customers you want to assign. 

Because of the company being able to do deals like this, and provide value in ways that others cannot- I believe that Thryv will at some point make a play for other Yellow Pages companies. Specifically, I think that they will make a play for Yellow Pages Canada once Y.TO pays off the remainder of their debt in the coming months. Yellow Pages Canada has already begun declaring dividends- which seems to be a way of prepping the company for a sale this coming summer or fall. 

One last thing: let's take a minute to look at the incentives of the company, via a screen shot below of the recently repriced executive stock options. I have talked about the repricing of the executive stock options before, so, I will not get into the logic of the reprice in this write up.

You will note, that the warrants conveniently expire 6 months after the first set of executive stock options expire, and 6 months before the next set, for the company's CFO. the net value of the stock options, at the exercise price of the warrants, is $10.57/share, and when you multiply that by the ~37,000 shares he is entitled to buy in that first swing, that's a total of $391K... And the more the stock goes up in that time, the better the warrants will do, and the better the stock options will do. 

Furthermore, if you look at the options that are expiring in the year surrounding the warrant expiration, the amount of exposure for the executives DOUBLES... For the CFO, that means that there is over $782K on the line...

It gets even more interesting for the company's CEO, Joe Walsh:

His more than 1.1 million stock options start to expire in monthly installments, as of January 1, 2021... Meaning that for ~87.5% of his options, they all expire BEFORE the end of the warrant exercise date. 

Here is a link to a spreadsheet highlighting the option setup for the executive team, as well as a screen shot.

If exercised at the price of warrant exercise, the total value for all executive stock options is ~$17 million dollars, and the value of the options expiring just in the year of warrant expiration is $5.67 million... If the price of the stock goes up to $30 (just $7 more than the current price) this would ensure that the warrants get exercised, the company gets infused $141 million to play with (pay down high interest debt), and the executives would make over $26 million dollars. 

So as to say... the incentives seem VERY interesting here, and in my mind, kind of acts to weight the scales to more money to be coming into the company because of the various incentives surrounding the warrants. This should significantly mitigate any risks that the company has with declining revenues and debt, which eliminates risk. It will also give the company some firepower to potentially acquire the Yellow Pages in Canada (Y.TO) to further get customers and grow the SaaS business. Furthermore, the company seems to have a decent shot of getting included in the Russell Indexes at some point as Dex Media had been in the past. This would create demand for the stock that would also help the price rise due to what is in essence, forced buying. This is awesome as it relates to the exercise of the warrants, and thus the overall strategy of the company to grow and deleverage.

Oh... and one last thing that just came out in the most recent earnings guidance from the company. They have released a large amount of the valuation allowance for the company's tax asset. Generally, a company cannot do this without some really compelling reasoning. In fact, there are a lot of scenarios where they wouldn't WANT to do this. Can you imagine the auditors' scrutiny that this would have had to go through? The company was at one point bankrupt in the past 5 or so years, has a side of the business with declining revenue, and a credit rating that gives them junk bond status.... Yet, the company’s auditor is comfortable enough to let them release over $100mm in tax valuation allowances. If this doesn’t scream “Thryv is earning money and that shouldn’t stop anytime soon” I don’t know what does.

I believe that individually, some of the items I bring up may not mean much... BUT, when combined, and looked at in their totality, these points should act to propel the stock price significantly higher. Because of this, it is my belief that these cumulative factors have created the setup of a reflexive virtuous cycle that will richly reward the executives, shareholders, and customers of the company.

Now, if the company can just get these warrants to trade- that would be amazing... This way, arbitrage funds can come in, buy the warrants at a slight discount, and exercise them. This would bring money into the company sooner, rather than later...

Disclosure: Long THRY and THRY Warrants.

$PMD Psychemedics Corp: Trucking Along Into A Potential Big Catalyst ($21 PT)

Every once and a while I like to put up guest posts on Ragnar. As such, here is one from once of my favorite people on Twitter: @vanckzhu We are both long the stock, and think that it is a really good price, for the flows of cash that should be coming. :)

Here is his original post: https://lightbluevalue.wordpress.com/2021/01/27/pmd-trucking-along-into-a-potential-big-catalyst-21-pt/

$PMD is a $39M market cap (similar for EV assuming PPP loan is forgiven) hair follicle testing company. It pioneered the first commercially-available drug test for hair in 1986, and states that they have the best hair follicle test on the market currently, 2-3x better than any other hair test. $38M in revenues in 2019, $25M on TTM basis ($5M in MRQ), historically operating margins range from 5% to 25%, although generally it hovers around ~20%. At peak Brazil was about 30% of revenues and was part of an expansion initiative, but Brazil sucked even in 2019 (revenues down nearly 30% y/y) and has since dropped basically to zero revenues. If we run-rate 3Q revenues to $20M, I think they can achieve 15-20% operating margins, or $3-$4M in operating income. So pretty cheap as is.

There’s four reasons for excitement today:
1. The federal government is in the process of requiring hair testing for the transportation department. If you read the public docs (link below), it appears that there’ll be ~3M hair tests once this fully ramps and hair tests appear to cost about $40 (maybe $20 goes to $PMD? just guessing…). Maybe $PMD takes 1/3 of market share, or 1M tests (although I think there’ll be some cannibalization as some trucking companies already require hair tests). $20/test…is $20M, which is quite material vs ~$30M in U.S. revenues in 2019. If incremental operating margins are 25-30%…that’s $5M+ in operating income and you can see how this gets pretty exciting pretty quick. https://www.federalregister.gov/documents/2020/09/10/2020-16432/mandatory-guidelines-for-federal-workplace-drug-testing-programs
2. Peter Kamin took a 5.9% stake in December. His historical investments have generally been excellent (loved what he did with $CLWY), and his MO is to buy legacy cash flowing businesses and really turbo-charge the earnings.
3. The 2Q:20 10-Q disclosed that they were approached by third parties and hence are undergoing a strategic review. That language dropped off in 3Q:20 strangely…but it seems that there does exist takeover interest. Quest Diagnositics would be a natural buyer IMO, since Quest also operates in Brazil in addition to the U.S. I think this actually is off the table now with Kamin invested.
4. Management was awarded 35K in options ($4.07 strike price) and 150K in RSUs on 11/11/20.

So I think in a “normal” world they return to $30M in revenues at ~20% operating margins (~$6M operating income), and we’ll likely see another $5M with the passage of the law. $11M in operating income, $41M current EV. I think fair value could push this to $120M EV or even higher, so this could be a triple to ~$21 even with the recent runup. Not to mention, Brazil could be worth something still, and Kamin could work some magic on the expenses side. We probably find downside support around where Kamin bought his shares, which ranged from $3.74 to $4.68.

I think this is a pretty good business assuming a “normal” environment. While they do have 9 patents, I don’t think the technology is the key competitive advantage (pops who is a chemist says the rough science is pretty straightforward). I think it’s really the process, reputation, and relationships in a regulated industry that’s built up over the decades. Historical returns on equity/capital/etc. are all pretty strong.

This business is economically sensitive and basically is levered to hiring levels of blue collar workers (those who operate heavy machinery such as truck drivers, oil and gas workers, construction workers, etc., where the legal liability for accidents is high). In 2009, revenues fell by 28% and operating income by 45% but the company remained profitable. COVID has been worse, and they’ve lost money in 2Q and 3Q. However, I think we should be somewhere around breakeven in 1Q:21, with trucking tonnage indexes inflecting back positive y/y (https://www.bulktransporter.com/fleet-management/article/21153185/atas-truck-tonnage-index-jumps-74-in-december).

While they’ve been losing money this year, there’s no credit risk here IMO. They were slightly net cash as of 9/30/20. There’s about $1.4M in income tax receivable credits coming in 4Q:20 and 1Q:21, and potentially a bit more PPP loans as well. Their 3Q 10-Q stated that they expect to have sufficient liquidity for the next 12 months, and that was filed on 11/10/20 which basically coincided with the vaccine announcements so their projections are likely conservative.

Risks
1. There’s some lawsuits about hair tests not being sufficient to disqualify job applicants, but the solution seems to be implementing an additional test (urine) when someone tests positive: http://masscases.com/cases/app/90/90massappct462.html
2. Competition. LabCorp and Quest are large. However I think $PMD’s ability to stay in business since 1986 (and is used as a lab by federal gov’t) demonstrates sufficient staying power.
3. Trucking hair test regulations scrapped. I view this as unlikely as this regulation has already entered public comment phase and some of the largest for-hire public trucking companies (Knight, Schneider, JB Hunt) are all pushing to require hair tests. The FAST act of 2015 mandates the development of hair testing as an alternative testing method. I do expect that implementation of the regulation will be delayed. As an anecdote, the timeline for the last major piece of trucking legislation on electronic logging devices suggests it could be another 5 years before actual enforcement:

1) June 2012: MAP 21 act passed

2) April 2014: Public comment period opened (we’re roughly 4 months after public comment period opened for hair tests)

3) February 2016: becomes law

4) December 2017: early adoption allowed, beginning of 2-yr trial period

5) December 2019: electronic logging becomes mandatory

Disclosure: Long

Thryv (THRY): Buy A Melting Iceberg; Get A SaaS Business For Free

Thryv is a bit of an oddball... first, it’s a melting iceberg of a business- The Yellow Pages. There is also a SaaS business that no one seems to have discovered. I know, I know... Dex Media was a value play that ended up going bankrupt back in the day, so hear me out hear the company out in their various presentations. They do a really good job of laying out the case for the company, both good and bad. I think that the 2 most interesting presentations, are the most recent- the Global TMT Virtual Conference and the conference call for the last 10Q (transcript). Their Investor Day Presentation is also a good source.

For the "TL;DR" crowd, this company is actually 2 companies- 1 that is declining, the other is potentially worth multiples of the present valuation. There are several catalysts at hand, and the incentives all seem to line up. Plus, this is run and controlled by very sharp, very rich, and very well incentivized people. The current price is $13.50 and the market cap is $420mm. I think that it could be worth multiples of that. The catalyst that is in the nearish future is the spinning off the SaaS business. Management has said will occur, and that John Paulson is pushing for it to happen in the next year.

Two Businesses For The Price Of One

Thryv is 2 separately run businesses- the first, being the “shrinking iceberg” that is the Yellow Pages (doing over a billion with a “B” in revenue ~$1.1bb in the trailing 12 months) and the second is the SaaS business- Thryv (more on this, later, after talking about YP and management). The YP business should see revenue declines in the low 20%’s. This lines up with revenue declines for dial up ISP customers and such- which while certainly NOT the same, the scenarios do rhyme, as it is reasonable to think that the same people using dial up, use the Yellow Pages. A geographic search of Google Trends seems to validate that, when comparing to dial up usage. 

Also, looking at the declining popularity of the Yellow Pages in Google searches over the previous 5 years... it seems like revenue declines in the low 20%s is actually a decent guess- historically, that seems to be about the decay rate, in terms of google searches- so, maybe that guess is even cautious? Who knows. But, it is representing a HUGE amount of revenue, and is on a variable cost structure. So, that is GOOD for a melting ice cube. Rather, iceberg.

Given that the company has a decent debt load, it takes the large amount of cash flow generated from the Yellow Pages business, and generally uses it to pay off debt- not only that, but, they are REQUIRED to put 100% of excess cash towards debt repayments, per their credit agreements (this is in their S1, page 138). Keep in mind, the majority of debt holders, also own the vast majority of the equity. So as to say, it seems that even though there are 4 billionaires controlling about 91% of the stock (and a lot of the debt) there isn’t much of a way for management to blow the money on something stupid and potentially company wrecking. I DON’T think this would happen, because of the credentials of management, but that backstop is kind of nice, just to make things a bit more predictable. Check out the wording of the pre-payments.

The company still has 3 years until the maturity of their debt, of which, the vast majority should be paid off by that time. I think it is a safe bet to assume that they will be looking to reduce the interest rate in the future, either through refinances, or, other creative measure- such as a bond offering. The cash flow from last year alone was enough to pay off ~2/5 their long term debt obligations (as of 6/30/2020).

And, this company actually makes money (they lost money in Q3, due to a pension contribution- more on that later)... check out their Income Statement and Cash Flow:

Massive amounts of depreciation. SG&A going down as the revenues from the YP decline, and cash flow that is about 1/2 the market cap of the company.... Seems like a compelling play, just based on that. So, the bottom line, is that all this operational cash flow will be going to pay off debt in an expeditious manner. As this happens, the interest they pay, will go down too! 

Presently, the debt is generally yielding LIBOR +9%. But, with some debt pay down, why not be able to refinance at a lower rate, and use the cost savings to pay down even more of the debt? Additionally, depending on the the method for the monetization of the SaaS business, all the debt could be paid off, and the remaining common stock could in all likelihood, trade kind of like a bond. 

Management

The company is run by Joe Walsh. He owns over 6% of the company via call options. So, it's fair to say that he wants to see the stock do well. Previously, he built a competitor to the Yellow Pages, sold it to a larger company, then grew it more, then sold that to a public company. Then he joined a company called Yellow Book and grew that to be a $2bb company via acquisitions- they combined that with the Yellow Pages in the UK and went public. Then started a board advisory firm. after that, he was involved with a public company called Cambium, that was taken out by a private equity firm... so, he seems to really know his stuff. When the Yellow Pages was in bankruptcy, via DexMedia, he was brought in by the debt holders, to make something work. Since then, he has guided Thryv to where it is today.

Check out the Cambium Learning chart, just before the buyout for 14.50 a share...  

More on Joe Walsh, here and here.

SAAS!!!

HERE IS THE KICKER... Thryv also has a Saas business, called “Thryv.” Interestingly, they used their dying platform from the Yellow Pages, to get users on the white label SaaS business. To me, THAT is really interesting and shows a VERY creative way to use and monetize assets of an old business, and keeping development costs down. In the instance of other companies, such as Sears or virtually every local newspaper out there, there was never enough execution. But Thryv has a legit customer base of approximately 45,000 users, who are paying well over $200/month for services. Per management, this business is already profitable. Through diligent selling of their workforce, the company literally got 10% of the Yellow Page customers (and are still trying to get more, look on their webpage), on to the Thryv platform. Walsh refers to this strategy of “hunting in the zoo” for customers. If you have yet to check out the software- it is absolutely fantastic. Actually, it is PERFECT for the home services sector. The program is SUPER simple, and quite effective. It won’t scare anyone away with too many options, settings, or frills that no one needs, or wants- which is key. SaaS platforms such as Service Titan and CoConstruct (which I use, and love) are both great, but for a lot of smaller shops, they are just waaaaayyyy to complicated for what they need. And that is how you get past a lot of resistance for small businesses that don't have the time to learn a complicated system. Simple is the key, and Thryv is simple.

Something else that I find neat thing about Thryv, is that a hair stylist, plumber, veterinarian, or even a school tutor could use it. It is a very versatile software! As an antidote to this, I am buying 5 townhouses off of an investor I know, and his son owns a franchised floor epoxy coating business. So, I reached out to the son, to see if he uses any sort of CRM. Turns out, and I swear that I am not making this up... He uses Thryv! Also, he LOVES it- only issue was a QuickBooks compatibility issue a few months ago (which, is pretty par for the course with anything QuickBooks related, in my experience). The issue got resolved in a few days. Other than that, he loves it. So, that was a cool data point of sorts, for me. 

Also, on recent calls, the Thryv execs talk about the great economics of dealing with franchises. Which if you think about it, is a beautiful model. Not only are you not having to sell the software to new businesses, you have a totally separate company that is out trying to grow their business, and in turn, is helping Thryv grow theirs! That is a unique type of operating leverage that I don't think many people, or businesses think about. 

So, given that I like Thryv, and so do 45,000+ other people, what does Thryv do? 

*SEO optimization, and makes sure that a company’s hours and other details, are consistent throughout the internet to around 60 different sites... Small things like this, make a HUGE difference for businesses.

*Billing

*Contracts

*Conversation Tracking

*Scheduling

*Website Support

*CRM database

*Estimates

*Payments

*Appointments

*Email

*Marketing Campaigns

*Follow ups for reviews for various sites, that go out for distribution

*Payments*- The company just introduced Thryv Pay. This is a great way for small businesses to take payment. Key is that it is built into their software- automatically connecting with, and reconciling to QuickBooks. It’s early on in the product's launch (coming online in the past few months) but the company is already reporting lots of transactions, has loads of signups, and- just look at the addressable market they have!

Fees are almost identical to companies such as Square, and if someone pays the vendor with a credit card, there is the option to add fees onto the transaction. Additionally, the money will be in the vendors bank account the next day. This is HUGE for many small businesses. 

Thryv also has different verticals where they are going- such as legal, and the like. Really compelling stuff...

One last thing... Thryv's SaaS business is PROFITABLE. While not currently separated in SEC filings, I think that sort of reporting will be coming soon. Management has said on conference calls that the SaaS business is profitable- this is something that is not the case for many SaaS businesses that have sky high valuations. Also, the SaaS business and the legacy Yellow Pages business are run as totally separate entities, so, the segregation of their operating results will be easy to show, as the company looks to monetize Thryv in the coming quarters/years.

OH!? And guess what? Their churn rate? It’s about 2%. That’s pretty low on the face of things, but think of the stickiness of the customer base, especially when it is made up of the RIGHT customers. As mentioned earlier, I use CoConstruct for my business. A new, better, and cheaper software could come along, and there is no way that I would switch- it would be WAAAYYY too much of a pain, and would take forever, for not much better results. Retraining the people I work with would take forever, and be demoralizing. For my business, this would be about a hundred times more of a pain than switching from an iPhone/iPad/iMac/Apple Watch/Apple TV to an Android setup. By extension, we know what the market thinks about the stickiness of the ecosystems that AAPL and GOOG provide- and it makes sense, because there are long articles on HOW to do the switch- and thinking of that would probably give a person a hint of anxiety. Seems like a lot of work... There are even examples of governments using inferior softwares for a very long time, because switching is a pain. So, think of all these examples as a corollaries for small businesses and Thryv. So as to say... I doubt there will be people switching away from Thryv, once they get onboarded and use it for any length of time. 

When looking at the growth rate for the Saas business, things are a bit deceiving at first. The company was originally selling to whoever would sign up. They admitted that didn't make for a good setup, because it made the churn so high. It also keeps referrals down, if people aren't happy with their software. It uses up valuable employee mind power, and time, too. So, they refocused on businesses that have multiple employees, and are in industries they feel are good to work with. The software simply is not that great for the type of business that is "a guy and a truck." It needs more working components than that to really provide value for a business. As such, they are really looking to set people up for success.

I recently did a product demonstration with one of the Thryv team members and this is exactly what the sales person asked me FIRST. They wanted to know my business setup, because they wanted to make sure that they were a good fit for us. While I already have software that I use, I work with contractors that will be purchasing the software soon- because they see the value in it, once it is shown to them. 

Now that there has, in essence, been a "flushing of the system" where Thryv purposely lost and didn't sell to certain types of businesses, It seems apparent that the growth trajectory of Thryv will start again, making the situation even more compelling. The company can already see its EBITDA margins increasing. With COVID, software solutions are all the more important for small businesses, and small businesses are starting to really see that they NEED these solutions.

Reducing Pension Liabilities

From the most recent 10Q, in the “subsequent events” section:

They are working to shed themselves of pension liabilities... while not huge in the grand scheme of the SaaS valuation, and me not wanting to focus on the pension, I do find this really interesting. Just that they are working to get rid of this is good, in the sense that they are paying attention to all aspects of the business, and actively shedding those liabilities. We should see in the next 10Q how much of the liability was shed. It should be material though, as they did disclose the matter in their subsequent events. 

Subleasing Office Space In Dallas Fort Worth

Due to COVID, the company went to a “remote first” setup. As such, they impaired their office's value...

BUT, they still have a lease in place. Keep in mind that they have been paying rent, and as they continue to pay it, their earnings and cash flow should be roughly the same as they had been historically... BUT. They could sub lease it - in fact- they are trying to. Granted, office space is plentiful now- but with organizations like Oracle moving to Texas- this seems like to the THE PLACE you would want to be subleasing space, if you had to be in that spot. Being close to the airport in Dallas ain’t a bad spot, either...

So, while it may not be a catalyst- it could certainly shore up earnings- and more importantly, help get rid of more debt and interest payments. Formerly, the lease payments were a straight up drag on net income- they shouldn't be as much, net, in the future. Let’s say that they were paying $15/ft/year for the lease- that’s $5.1mm of a hit to the income statement. Let’s add in some for utilities, repairs, and things like that. Maybe they had security guards that they don’t need now, that they are work from home first. So, let’s round that $5.1mm up to an even $6mm. 

Then, assume that even with the glut of office space, they can rent it out for half what they are paying, and eliminate the $.9mm of misc office expenses. That comes to $3.45mm in additional income that they didn’t have before. Sure, it’s not HUGE, but it’s something. Feel free to use whatever multiple you want, if you throw a 20x multiple on that (20x just as an example), then that represents a nearly $70mm uptick for the stock... that’s a hair more than 20% upside. Not bad!

Effects Of The Pandemic

In addition to working from home for a lot of the employees, the company also issued pandemic credits to help some of its customers. While they probably won’t be getting 100% of these revenues back, it will certainly buy them goodwill, and the additional revenues should go straight to the bottom line (and even better, to debt repayments). 

Valuation Ownership, And The Like

First- why is this cheap?

THRY just did a direct listing on the Nasdaq as they didn’t need to raise capital. Seriously- that's kind of the purpose of the direct listing that they did kind of counter intuitive for a Saas business, right? Aren't they always raising capital?! Anyway, they couldn’t talk about the company during this time- so there were no road shows or conferences like there are, now. COVID also put a damper on these shows. But with the company being more "free" to talk, they are, and the story is starting to get out. 

In addition to people just not knowing about the story- as I mentioned early in this write up, the company's true worth is obfuscated by there being 2 companies in 1. John Paulson explains:

Speaking of John Paulson, lets examine the ownership of the company:

*Only about 9% of the stock is really out there, in “float.” So who are the holders? A bunch of billionaires. 

~60% is owned by Affiliates of Jason Mudrick

~15.5% is owned by Affiliates of Goldenree- Steven Tananbaum

~10.5% is owned by Affiliates of John Paulson.

~6% is owned by Yosemite Sellers Representatives- Stephen Feinberg

This brings the total ownership of billionaire hedge fund managers to in excess of 91% of outstanding shares... that not only makes for a pretty tight float- but also an ownership structure where the major owners are well connected, and wanting to see this do well. They have the control of the entity to make it happen.

On top of that, CEO Joe Walsh owns 5.96% of the company via options... Sure, there are some warrants out there, but, that isn’t enough to really think about. So he would love to see the price shoot through the roof.

CATALYST: SPLITTING THE COMPANY

First and foremost, CEO Joe Walsh, going back to his Cambium days, seems to know a thing or two about selling companies... He has also stated that they are running the two businesses totally separate, and that they could split the company in two, tomorrow. Just in case you missed the John Paulson video earlier- did I mention that a 10% holder of the stock- billionaire John Paulson of subprime mortgage shorting fame, is calling for splitting the company in the next year?

To bolster this idea, there was recently a large re-pricing of stock options for the company’s executives.  In my mind, this makes the monetization of the SaaS business at Thryv even more eminent. Check out this tweet, for reference, and explanation.

Given the situation, as it SEEMS to be unfolding, it is my hypothesis that the plan was to wait to monetize the SaaS business, and to grow it more for a few years. That being the case (management said said it was on the call) then there were a set of assumptions made between management, and the board. If the plan changes mid game, wouldn’t it make sense to make it so that the executives were incentivized to not only change the plan, but to reward them for changing the plan, mid game? Repricing the stock options certainly aligns with this scenario- as the additional money represented by the repricing is pretty significant- well in excess of $1.5mm dollars, but as a fraction of the stock option vesting price? it's nearly 1/6th... that ain't chump change. Additionally, Mudrick was involved in a company called GoGo, and the same sort of option repricing happened RIGHT BEFORE the company announced that it was exploring strategic alternatives... not exactly the same scenario, but, it certainly rhymes.

As John Paulson noted in the conference call (here is a video of JUST the Paulson part of the call): Hubspot (HUBS) gets a premium valuation to THRY. Of note, HUBS only has about 2x the number of customers that Thryv does, but also gets about 50x the valuation...

So What’s It Worth?

With about 31 million shares outstanding, the company is valued at $13.50/share, or, a market cap of ~$420 million. John Paulson suggested in the last conference call, that the declining business was worth about 2.5x EBITDA... which seems pretty standard for declining businesses like this. On the same conference call that this was mentioned in, the Joe Walsh even said that when they were valuing the YP business, that they used very conservative DCF numbers. Just look at the amount of cash flow this company produces!

So, when adding the long term debt back in to the equity (tho, not all the liabilities, because the pension should be going down due the subsequent event discussed earlier) this is about the current market cap of the whole company... So, call this a break even based on the Yellow Pages valuation- with the SaaS business thrown in for free.

Valuation Of The SaaS Business

*A recent valuation for Monday.com (another software that I use, and love) who boasts around 100,000 users, came in at a whopping $2.7bb. A year before, their valuation was $1.9bb, when they had 80K organizations, and about a year before, had 35K... Based on what I pay for Monday, and the setup it has, it is a kissing cousin to Thryv, in terms of revenue generation. I think that Thryv has a platform that can scale more than Monday, based on my experience with both softwares.

*Airtable, around 2 years ago with 85K customers, was valued at $1.1bb.

*Notion was recently valued at $2bb with 4mm users.

Based on this, and everything you already know about SaaS valuations- you can tell that the real kicker with Thryv is the SaaS business. If you put a 5x multiple on the revenue, that represents an additional $625mm of market cap. If you put a 10x multiple on revenue, which is where numerous companies like this seem to get valued at, that’s $1.25 bb in additional market cap. At 5x revenue, the share price would be ~$33.60/share, and at 10x, the share price would be about $53.80/share... compared to a current share price of $13.50. Even if valuations crater for SaaS businesses, I don’t think a double in the equity price is unreasonable- especially because Thryv, the software, actually makes money- unlike others that constantly need to raise capital to grow, such as Hubspot (HUBS). By the way, HUBS is presently valued at over 20x sales. Granted, there are differences in the companies... but, these various points do a pretty good job of showing what the worth of Thryv could be, going forward. 

Add in the repricing of stock options, that I think were done to incentivize the executives at Thryv to monetize the SaaS business sooner, rather than later, and this the most compelling equity situation that I can think of. 

Disclosure: I am long THRY.