Website
Google Finance
Filing
Dec. 18, 2017
Q1 2018 Data, Year end June 30th.
Price: $0.75, Share outstanding 34m. Cap: $25m
1.Basic Information
(1) History .
The company was founded by David Mandelstam at around 1984 and IPOed at 2000. Its main product was PBX related hardware etc. It was doing quite well until 2010 when the whole industry switching to IP BPX system. In 2010, the company hired Bill Wignall as new CEO. He started a long transformation of the company to IP BPX based products. It was quite successful as revenue grew from $11m to $26m by 2017. However, due to the high growth strategy, its profit down compared to pre-2011 time.
(2) Business-related:
The company's main product contains hardware related to VOIP PBX for the small and medium corporation. It offers hardware, software and cloud-based SaaS.
Main products:
1) FreePBX: The open source PBX software the company maintains. It sold compatible hardware.
2) PBXact: The commercial version of FreePBX with add-ons and support. It has two license model, one is one-time license. Othe is SaaS which is around $11/month/extension. The PBXact hardware is same as FreePBX.
3) PBXact Cloud: This including the PBXact server on the cloud. Provided as SaaS.
Currently, there is close to $2.8m/quarter revenue in service which I think includes both the PBXact SaaS and the Cloud service. Also around $9.2m in hardware sale at Q1 2018 which was much higher than before because of the contribution from VOIP Supply acquisition. Also Q1 2018 gross margin drop to 51% which is much lower since VOIP Supply's margin is way lower.
Before 2012, its gross margin is above 70%. After 2012 it dropped below 70%. It intentionally did that or other reason.
(3) Management.
Bill did quite a good job tuning the company's product from concentrated on analogy to VOIP. From 2012 to 2017, the company achieved very good organic revenue growth. However, profit level is actually down from previous years.
(4) Debt and Credit Facility.
No debt and around $3m in cash.
(5) Insider holding, options, Insider trading info, share buyback.
David Mandelstam: 4.3m shares. 13%.
Nicholas Galea: 4.5m shares. 16%. He is the owner of 3CX phone system, a windows-based PBX system. Very interesting. He bought shares mostly at half of the current price. I view him as insider since he should know way better about STC's products.
Bill owns quite few share of the company although he was issued quite a lot options.
(6) Employee numbers
(7) Industry comparison.
The company is competing in the small business market and DIY market. Larger enterprises might go with the big player like Cisco, Microsoft, Huawei, Mitel etc.
All the big player might have large shares in the small business market as well. However, I think those small players like STC might be competitive since the software it uses is open source and also the big players' products might be more expensive.
Digium: The company support Asterisk which is the opensource system FreePBX is based on. It is a private company and host AstriCon, a conference, every year. It offers Switchvox phone system and Switchvox cloud. It is very similar to PBXact.
GrandStream: Another US private company using Asterisk.
Xorcom: Seems a small player also using FreeBPX. It is a private Israel company.
3CX: Windows-based IP PBX. Main advantage includes easier to integrate with Office 365 and other CRM etc.; can be installed on Windows server so might not need extra hardware(I think most companies will using a separate server for this). It is a private company. It says it has 50k customers and 10k partners. It seems 3CX is larger than STC.
(8) Major events
June 2017, the company acquired VOIP Supply for USD$3m. VOIP Supply is s distributor and its annual revenue is around $15m. Obviously its margin is low, otherwise, it won't be sold this cheap. Interestingly, it has its own branded IP BPX hardware called RenegadePBX which can host both Linux or Windows-based BPX systems. It also sells Switchvox hardware by Digium. Its PBX hardware seems mostly for DIY users.
2. Financial data.
3. Valuation
(1)For the past few years. The company made less $500k in real income. On that basis, it is not really cheap.
(2)From a growth perspective, it might be able to achieve $100m revenue in the next 5 years if the high growth rate continues. Even as the profit grows slower, it should be worth Price/Sale at 1:1 base, which indicated 4 times of current price.
(3) 3CX now is its biggest shareholder. There is a chance that the two companies get combined.
4. Risk
(1) The hardware it uses is not much different than its competitors like Digium and GrandStream. Now over 70% of its sales are from hardware which makes the business vulnerable to competition.
(2) Still, I am not quite sure how it achieved such fast growth lately. What are its competitive advantages compare to the other two players?
(3) The profitability needs to be improved to support my valuation. It might never happen.
(4) The CEO owns quite a few shares.
5. Conclusion
Based on the high growth the company had. It is quite a good price at the current level. However, the company also needs to improve profitability in the future to support the valuation.
6.Links
Bill Wignall's speech at AstriCon 2015
May 16, 2018
Q3 2018 data
Price: $1.07. Cap: $50m
(1) The company issued 13m shares at around $1.00. Now it has around 47m shares. Q3 it generates $16m revenue and $1.9m EBITDA. Income around $750k. FCF around $1m. It seems it can achieve $100m in revenue much earlier than 2022. Maybe by 2020 if it can achieve a 20% annual growth rate.
(2) The company did a lot better than I have expected. Although I do not fully understand how they did it, it seems there some inner competitive advantages to enable it to increase its sales.
Aug. 24, 2018
Price $1.25, Cap: $60m
(1) The company announced today that it will acquire Digium for US$28m. Including US$24.3m in cash + 4m in STC stock valued at $1.22/share. The company will take $28m in debt to finish the acquisition.
(2) Digium currently has US$30m in an annual sale and $4m in losses. It is EBITDA positive in June 2018 quarter. Combined the company will have a $100m/year revenue running rate. EBITDA might be hard to predict. I guess it will down before it will go up.
(3) Now it is really hard to evaluate the company. The management intent to grow the company to $250m to $500m in revenue by 4 years. I believe it might be able to achieve that, but it is hard to estimate what its EBITDA and debt level will be. Also, it is unknown whether the company can integrate those acquisitions well. I need to put faith in the management.
Oct. 21, 2019
Price $1.63. Cap: 110m. shares 68m(6m pending).
(1) The company finished 2019 with 109m in revenue and around 12m in EBIDTA which is very good. Using 1.6m for interest, 2.4m for Capx. 2m for income tax. Its real income is around 6m.
(2) The company issued 15m new shares after the year-end for 1.55/share. In Oct. it announced the acquisition of VOIP Innovations for US$30m in cash +US$6m in shares(which should be close to 6m shares). Also, it might need to pay US$6m more if rev reaches certain milestones.
(3) After the acquisition, it might have $45m in debt. $8m in cash. Interest is around 6.75%.
(4) For 2020, it projects rev of $140m. EBITDA $20m. using $3m interest, $4m Capx, $4m in tax, Real income might be 9m.
(5) For 2021, assuming $160m. EBITDA $25m. using $3m interest, $4m CapX. $5m in tax, Real income could be $13m. Using 260m Cap. Using 75m share. it supports a $3.5 share price.
