ISDR - Issuer Direct Proceeds Carefully With Newswire Integration As Operating Profits Disappear

2023-03-10 09:29:52 ET

Summary

• Issuer Direct recently reported Q4 2022 financial results.
• The firm provides a range of investor relations and communications services in North America.
• ISDR recently acquired NewsWire to expand its communications portfolio.
• Management has chosen to pursue a thoughtful integration process but operating profits have vanished in the short-term.
• Until I see promised cost synergies begin to be announced or show up in its financial results, I'm on Hold for ISDR.

A Quick Take On Issuer Direct Corporation

Issuer Direct Corporation (ISDR) reported its Q4 2022 financial results on March 2, 2023, beating revenue but missing EPS consensus estimates.

The company provides a range of investor relations and compliance software and services to clients in the U.S. and internationally.

Given continuing macroeconomic uncertainties and the firm's worsening operating results, until we see cost synergies from its acquisition of Newswire begin to show up in the financials, I'm on Hold for ISDR.

Issuer Direct Overview

Raleigh, North Carolina-based Issuer Direct was founded in 1998 to provide reporting companies with shareholder communications and compliance software and related services.

The firm is headed by Chief Executive Officer Brian Balbirnie, who was previously Managing Partner at The Catapult Company and joined ISDR in 2006.

The company's primary offerings include:

• Platform id

• ACCESSWIRE

• Online Newsroom

• Event Management Software

• Webcasting

• Newswire

The firm acquires customers through its corporate sales and marketing team efforts as well as through partner referrals.

As of June 30, 2022, the firm counted 3,715 customers, of which 966 were subscribers to its various service offerings.

Issuer Direct's Market & Competition

According to a 2022 market research report by Cognitive Market Research, the market for investor relations software was an estimated $130 million in 2016 and is forecast to exceed $550 million by the end of 2029.

The chart below shows the historical and projected future breakdown of the market size by region:

Notably, a rise in the desire for financial information by younger demographics via primarily mobile devices will provide additional demand for more capable investor relations software providers.

Major competitive or other industry participants include:

• AIM (Alternative Investment Management)

• SSC ADVENT

• Broadridge

• CB Insights

• OmniVista

• Dynamo Software

• Sherpany

• Eze Software

• IMS Platform

• Nasdaq IR Insight

• Q4 ( QFOR:CA )

Issuer Direct's Recent Financial Results

• Total revenue by quarter has produced the following results:

• Gross profit margin by quarter has trended slightly higher in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have risen in recent reporting periods:

• Operating income by quarter has dropped sharply in recent quarters:

• Earnings per share (Diluted) have also turned negative in the most recent quarter:

(All data in the above charts is GAAP)

In the past 12 months, ISDR's stock price has fallen 13.8% vs. that of the Nasdaq 100 Index's drop of 8.4%, as the chart indicates below:

As to its Q4 2022 financial results, total revenue rose 25% year-over-year, with the sharp growth likely due to non-organic revenue growth from the Newswire acquisition.

Management did not disclose any company or customer retention rate metrics, only characterizing them as 'good'.

However, the additional costs of the acquisition and its headcount weighed on other important financial metrics, reducing operating income to close to zero and EPS to negative $0.03 for the quarter.

For the balance sheet, the firm finished the quarter with $4.8 million in cash and equivalents and $22.0 million in current debt.

Over the trailing twelve months, free cash flow was $3.9 million, of which capital expenditures accounted for only approximately $100,000. The company paid approximately $800,000 in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Issuer Direct

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be Q4 ( QFOR:CA ); shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ISDR's most recent GAAP Rule of 40 calculation was 23.2% as of Q4 2022, so the firm needs some improvement in this regard, per the table below:

(Source - Seeking Alpha)

Future Prospects For Issuer Direct

In its last earnings call (Source - Seeking Alpha), covering Q4 2022's results, management highlighted the firm's growth potential in the immediate wake of its Newswire acquisition.

Leadership also noted that it has taken the time to fully understand the scope of its proposed streamlining and integration efforts.

This has taken a toll on the combined firms' short-term financial results, but management believes this extra time will make for a more effective transition which will target annual savings of $2 million.

Management is working to refinance the short-term note used to acquire Newswire and said it will have more information later in March.

Looking ahead, management plans to focus on new product features, especially integrating an 'AI narrative-based suggestion platform for content optimization across all communication mediums.'

The company's financial position is subject to refinancing the above-mentioned $22 million debt into a term loan.

Regarding valuation, the market is valuing ISDR at an EV/Sales multiple of around 2.8x, which is a further multiple compression from its 3.0x valuation as of Q2 2022.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.2x on February 23, 2023, as the chart shows here:

So, by comparison, ISDR is currently valued by the market at a significant discount to the broader Meritech Capital SaaS Index, at least as of February 23, 2023.

The primary risk to the company's outlook is the potential for a macroeconomic slowdown, which may produce slower sales cycles and reduce its revenue growth trajectory.

Management previously had added headcount despite a slowing economy and now with the acquisition, it hopes to take advantage of cost synergies and new revenue potential.

Maybe it can pull it off, but the market is further compressing its topline valuation multiple in recent months.

Given continuing macroeconomic uncertainties and the firm's worsening operating results, until we see synergies from its acquisition of Newswire begin to show up in the financials, I'm on Hold for ISDR.

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