SURG - SurgePays: Surging Profitability Leads To Opportunity

2024-01-04 20:35:59 ET

Summary

• SurgePays is a publicly traded company benefiting from the Affordable Connectivity Program and has seen revenue growth of 372% between 2019 and 2022.
• SurgePays offers wireless services and fintech services to underserved and underbanked populations, and plans to expand its product offerings.
• The company has reported strong Q3 earnings, with net income of $7.1 million, and plans to deploy more touchscreen terminals in stores.

Writing about profiting from poverty on an investing website seems like a bit of an oxymoron, but I am going to venture there anyway. As someone who no longer needs to worry about putting food on the table for my family (like when I was struggling to survive in my 40s) or wondering how I will be able to afford my wireless bill next month, it is challenging for me to grasp the fact that more than 12% of US citizens are now living below the poverty level, according to this Time magazine news story .

The U.S. poverty level is now $13,590 for individuals and $23,030 for a family of three. The new data shows that 37.9 million people lived in poverty in 2022.

Many people living in the southern states of the US in particular can barely afford to buy food, let alone pay for wireless services for their essential smartphones or other broadband devices. That is one reason why the FCC established the Affordable Connectivity Program or ACP.

A household is eligible for the Affordable Connectivity Program if the household income is at or below 200% of the Federal Poverty Guidelines

An August 14, 2023, press release indicated that more than 20 million households had signed up for the ACP. FCC Chairwoman Jessica Rosenworcel made this statement in the press release:

For a long time, closing the digital divide focused on one part of the equation—the lack of physical infrastructure to get online. But we know that for many people, even when there was technical access, the cost to get online was too high. Thanks to investments from Congress, we have new tools to tackle both challenges, including the Affordable Connectivity Program that is helping struggling families to get or stay online to pay for this modern-day necessity.

One publicly traded company that is realizing massive benefits from the establishment of the ACP program is SurgePays (SURG). According to their website, SurgePays is dedicated to bringing financial and telecom products to the “underserved and underbanked” populations of the United States. Until I came across this rapidly growing small company that was named to the 2023 Deloitte Technology Fast 500 list (for the fourth time), I was not even aware that there was an underserved and underbanked population that could benefit from their products and services. According to the press release, SurgePays enjoyed revenue growth of 372% between 2019 and 2022.

In fact, the SURG annual estimated revenue of $139M in 2023 far exceeds the current market cap of about $102M, while the stock currently trades at a forward P/E of less than 5 as shown on the summary page.

What exactly does SurgePays offer to its customers?

The company offers both wireless services via two MVNOs , SurgePhone and Torch Wireless, as well as fintech services. Some of those fintech services include wireless prepaid and debit card activations, ACP enrollment, top ups, gift cards, and other financial empowering services.

The market for their products is best explained on their website:

Both of the MVNO companies offer ACP enrollment and tout “free Internet” on their websites for those who qualify for the ACP. To further enable the clerks at those local stores to offer SurgePays products and services, they entered into an exclusive partnership with ClearLine Mobile to launch 10-inch touchscreen tablets for use at store checkout registers.

"We expect the point-of-sale tablets to be a catalyst for higher revenue per store and allow us to expand our presence in stores nationwide, without the need for salespeople to consistently visit and manage stores in a territory,” said Jeremy Gies, President of SurgePays Fintech.

The touchscreens will be integrated with company servers that will market SurgePays products 24/7 and customers will be able to use the devices to easily sign up for the Federal ACP program and conduct wireless activations or make payment transactions right at the register while checking out.

SurgePays intends to expand into a multi-product company that offers additional products and services to underbanked individuals, those who cannot afford or do not wish to open traditional bank accounts. For example, the company intends to offer a new LinkUp Mobile prepaid wireless brand that can be marketed directly from the new touchscreen tablets.

“This is a huge technological advance and a step forward in our business model. SurgePays will now occupy a physical footprint, front and center, right at checkout – the most valuable space in the store. We believe this is an essential step in pushing towards and ultimately beyond $1 billion in sales per year. The ability for the consumer to enter information for ACP signups, prepaid wireless activations, monthly prepaid top-ups, and the ability to scale development into loyalty rewards, discounts, and other QR code-driven payments is the next phase for SurgePays’ expansion,” said Brian Cox, CEO, SurgePays.

Q3 Earnings Summary

On November 14 the company reported Q3 earnings with net income of $7.1 million (compared to a net loss of -$1.5 million in Q322) and EBITDA of $7.5 million with revenue of $34.2 million. In the third quarter of 2022 revenues reported were $36.2 million, however, since that time the company shut down the LogicsIQ business, which was responsible for about $4M of those revenues as explained in the press release :

The decrease was primarily due to management's decision to streamline the company's focus and messaging by winding down the LogicsIQ subsidiary operations, and all legacy business outside the core business model. LogicsIQ, the mass-tort lead generation subsidiary, decreased by $4.1 million in the third quarter, while revenues related to the company's core business objectives, providing wireless and financial services to the underbanked, increased by $2.1 million.

Gross profit margin increased to 30.7% during the quarter from 27.9% in Q2. The company cash balance stood at $12 million with minimal debt. Q3 EPS improved to $0.49 from $0.42 in Q2.

As of the date of the November earnings report, 100 tablets had been installed in stores with an additional 1,000 units ready to deploy. The strong financial position of the company was explained in further detail by CFO Anthony Evers on the earnings call, with the additional benefits of government subsidies from the ACP program adding to the bottom line:

Our cash balance as of September 30 was $12.6 million compared to $7 million at the end of 2022. Accounts receivable have increased by $540,000 from year-end 2022 to $9.8 million. The receivable is from the U.S. government for the mobile broadband subsidy. Payment generally occurs approximately 30 to 60 days after a new subscriber is verified and signed up.

The benefits of the ACP program have clearly been good for business and the upcoming introduction of the new LinkUp Mobile product offering is another potential growth area that can piggyback off the new touchscreen terminals. When asked about it on the earnings call, CEO Brian Cox explained:

So the actual screens at the point of sale are going to drive the Linkup Mobile, the prepaid wireless brand. And am I excited about that? Absolutely. That -- before ACP, that was a part of our -- that was really going to be the anchor of our entire business model moving forward, bring on stores with the sales pitch of doing prepaid top-ups, then launch our prepaid wireless company that has a savings to the customer of $5 to $10 per plan, and we're able to pay a little bit higher commission to the store owner for the activations and for taking the payments because we own the platform.

Everything -- we own every component of the product delivery all the way to the actual tower where the service is provided. So it's a whole lot better than my original business plan because of ACP and then utilizing ACP to grow the prepaid wireless brand. And I think we've talked about this before, but ACP is limited one per household that qualifies. A prepaid wireless brand, there's no limits. It's -- there's four or five smartphones in that household on prepaid wireless.

Valuation, Ratings, and Risks

Although the company has been around since 2006 the business has gone through a massive transformation in the past year due to the ACP legislation. It has opened up new opportunities for SURG to expand their product offerings and streamline their operating costs by taking advantage of the POS touchscreen terminals that can deliver targeted marketing to thousands of customers at stores across the country, leveraging the benefits of ACP for low-income households that desire inexpensive wireless plans and other fintech solutions.

The SA quant factor grades are very high with A’s in all categories and SURG is ranked #1 in the Wireless Telecom Services industry and #6 out of 245 in the Communications Services sector.

When asked about the current macroeconomic conditions and whether a souring economy might pose a risk to the business, the answer offered by CEO Cox was that lower income folks are not as impacted as the middle class by the state of the economy, inflation, interest rates, etc. Those who are struggling will continue to struggle and will always be looking for ways to save money.

So our potential customer base does increase by the day. I don't look at that as wishing any type of economic downfall on folks, but we do provide significant essential services to folks that may be in these situations. And I think you're always going to have that lower-income prepaid market and for us to be able to provide them a savings on their wireless services. These are essential services now. A savings on most of the services that we offer, it does free up cash to spend on other things that they might have.

The key metric for the company moving forward will be the number of stores that are on their platform, using the new touchscreen terminals and marketing expanded product offerings. The model of acquiring customers using ACP as the incentive has opened up new opportunities to deliver more ways for customers to save money, and more profits for the stores themselves. A win-win-win situation for up to 25,000 store locations that the company is targeting.

Recent partnerships have also helped to grow the business as explained in the management commentary from the Q3 earnings report :

New partnerships have been a recent highlight in our growth strategy. We partnered with ParichuteConnect, a social impact investor who looks to use their investment dollars to effect social improvements. This collaboration allows us the opportunity to provide ParichuteConnect's representatives with the resources necessary to increase awareness about ACP in state or city school systems, community service organizations, and public service organizations. Recently we partnered with LeadEx Solutions, whose proprietary banking software provides SurgePays integrated access to place full-screen ads on ATMs during a transaction and enable the customer to opt-in to the ACP enrollment process. These partnerships are a great opportunity for us to expand our ACP subscriber base and grow our network by partnering with synergistic companies, nonprofits, and governmental organizations.

The 2 Wall Street analysts who follow the stock rate it a Buy and a Strong Buy. The one-year target estimate according to Yahoo Finance is $13.25 and the stock is very undervalued at the current price of about $7. The average volume is less than 200,000 shares so some price volatility is to be expected, especially for a stock with such a small market cap.

I rate the stock a Strong Buy and will be watching for the Q4 earnings report to see how many terminals they place in stores and whether that translates into even more earnings growth. The news of the LinkUp Mobile offering should be coming out soon as well, which may also be a catalyst for the stock price to shoot higher. Due to the low trading volume and small market cap, this is a potentially risky investment that has the potential to deliver outstanding returns over the next few quarters.

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