Disclosure: Long IVI.V with a cost basis of $.045
One thing that I have learned when investing in tiny, nano-cap companies is just how important investing in a company with a ‘margin of safety’ is. However, it isn’t always possible to purchase companies with a large ‘margin of safety’ because there are very few tiny companies that actually have one and the ones that do have a solid ‘margin of safety’ generally are priced at a bit of premium for that reason alone.
'Margin of safety’, to me, can mean several things. In the world of nano and micro-caps, recurring revenues amongst a fairly diversified customer base can provide that ‘margin of safety’, just as management showing a commitment by participating significantly in a private placement or by purchasing shares on the open market can provide a ‘margin of safety’.
When I began doing research on Ivrnet (IVI.V) several months ago I was immediately attracted to the current “margin of safety” in the company. Once understanding the potential for the business, coupled with the downside protection because of the current business, I took a sizable position. The company has moved into an aggressive sales phase after transitioning from a R&D phase for new and updated product offerings, and I think we are at a very exciting point in time in the company's lifecycle. I am happy to share with you details about the company and why I feel it can provide significant upside from current levels.
Note: Throughout this article I will reference the “legacy” products of the company. This simply refers to the products as they exist/are before any of the revisions and improvements are transitioned and sold into the marketplace.
Ivrnet (IVI.V) is a communications company that develops and operates intelligent software applications that facilitate automated transactions that include personalized communication between people; mass communication for disseminating to thousands of people at the same time; and personalized communications between people and automated systems. Ivrnet makes these applications accessible via voice, text, phone, email, fax, and the internet.
The Network Services division of the company consist of the basic texting services, audio conferencing, call management systems. Nothing too exciting here, except that the recurring revenue stream from this business unit is very attractive, providing a stable base for the business while the company focuses on the rollout of its Hosted Services and Hosted Applications division. AdCentral is the next phase for the company’s text services. More on this later.
The Hosted Services segment of the business is one of the segments that presents real opportunity for future growth. The division consists of a newly developed and soon to be released IvrnetCentral (“ICentral”), and hosted within this platform will be the current ITSportsNet (“ITSN”) and Ivrnet for Communities (“Communities Central”) services. Currently, ITSN and Community Central service over 1.2 million users and 1300 organizations across North America. When these services are hosted within the new ICentral, clients and users will experience a more user-friendly process and increased efficiencies. More on the potential of ICentral later.
The Hosted Applications segment of the business also presents significant opportunity for future growth. This segment consists of Safepay/Telepay (“Telepay”), which is a credit card processing system that allows governmental entities, corporate, and retail clients to process credit card payments over the phone in a compliant manner. These services meet the Payment Card Industry Standard (“PCI”) for automatically processing payments over the phone. The nice thing about Teleplay is that it allows the card holder to pay over the phone without ever exposing his/her card number to a live agent, thereby reducing any significant risk of fraud.
The Telephony Applications segment of the business consist primarily of CallTrak, Call Monitoring services, and Automated Reporting services. CallTrak is utilized solely by the auto dealer industry, and is sold exclusively by a reseller.
The company is led by David Snell (CEO) and Chris Topolniski (COO). David joined the company in 2003 and Chris joined in 2012. When Chris joined, he and David began the process of redeveloping the company, building a platform that would allow the company to transition its legacy products into new and improved product offerings. The company has made a lot of progress in doing this and 2016 will be the year that many of these could pay dividends as the company is now embarking on a very focused sales effort.
I am pretty comfortable with the share structure.There are roughly 70 million outstanding shares with 93 million fully diluted shares. Insider ownership is roughly 35% with management participating significantly in the last private placement in June, 2015. The issued warrants are exercisable at $.07, $.09, and $.12.
Brief Financial Overview
Ivrnet has essentially operated at breakeven over the past few years. Below, taken from the latest MD&A, provides a quarter by quarter overview of the company’s financials through Sept. 30th, 2015 (Q3, 2015).
The financials show a company with rather consistent revenues each quarter over the past few years. It’s pretty consistent because roughly 85-90% of the companies revenues are recurring with around 75% gross margins.
Without any real growth, the company has just done its thing quarter over quarter, basically operating the company at breakeven from year to year. This explains the relatively small range of stock price movement over the past few years. However, with the strong recurring revenue base for its legacy products, and with significant new products ready to launch, the company is nearing what could be a real inflection point (see my past article on “Inflection Points” by clicking here).
Cash is definitely low, only $70k on the balance sheet. While this is concerning, it may not be an issue since the company is operating at breakeven with cash flow and profit being generated. But, if traction for it’s new products doesn’t occur quickly, I suspect we could see the company enter into a non-dilutive transaction for additional working capital.
My investment thesis for Irvnet is centered around three main areas:
1. Margin of Safety with legacy products provides very limited downside risk
As noted above, over the past few years the company has operated around breakeven simply by continuing to service customers with their legacy products while building out its new ICentral offering and other improvements to existing products. Funds for the companies R&D for the new platform and products were raised from several private placements, as well as with profit and cash flow generated from operations. So, while the company moves it’s focus to selling ICentral and its other products, the business will continue to plug away with its existing legacy products. It’s a nice backdrop for the company to operate against as it scales ICentral and its new products to existing and new customers.
2. Potential for ICentral, Teleplay, and AdCentral
The potential for all three products is quite significant. The company has spent extensive capital and resources in the development of ICentral, which is going to provide a completely new, innovative, and self-sufficient way of managing the ISTN and Community Central products. It has significant scalability that would allow the company to sell the product to very large customers without having to spend resources like they have had to to on the legacy ITSN and Community Central products. And with ICentral, the company will be able to target new potential markets that the legacy products couldn’t effectively manage, such as property management companies. With significant gross margins and recurring revenues for ICentral, any growth (which we can be fairly confident there will be) should provide very positive monetary results for the company.
I am most excited about the potential for Telepay. The company has some smaller clients utilizing the product (including the Government of Alberta), but the real catalyst here would be landing a deal that I know the company has been going after with the British Colombia government as look to become PCI compliant with their payment systems. The company has additional business opportunities in the pipeline for Telepay as well.
The last product worth noting is AdCentral, which is essentially replacing the company’s legacy bulk text messaging services. December 2015 is when the company is launching the AdCentral product and it anticipates its first customers being various transit authorities and/or private companies hired by the transit authorities to run their technological infrastructure back-end and/or their sales/marketing departments. The company expects immediate incremental revenues with the launch of AdCentral.
3. Significant Reduction in expenses as the company moves from R&D to Sales
The development of ICentral cost the company close to $2 million in total. The reason for the significant costs were because the company needed to re-code ITSN platforms, thus the company had to commit significant resources to the ICentral development to allow ITSN and Ivrnet for Communities to co-exist under one program. In addition, many resources were spent ensuring that ICentral is incredibly user-friendly, thus eliminating many of the current support costs required by the company in supporting its current user base. The new ICentral further will allow the company to increase its capacity significantly without having to hire additional staffing to support the application. Based on the above explanation, Ivrnet’s Operating Leverage could drive significant net income to the company via increased gross margins by increasing sales while overhead and fixed costs remain relatively constant.
An investment in Ivrnet allows one to invest in a company with significant downside protection with the companie’s consistent revenues and legacy products. Coupled with the downside protection is a significant opportunity for returns should the company get traction with any of the new product offerings (iCentral, Telepay, AdCentral). There are competitors in the space, but very few, if any, with the competitive advantages that Ivrnet has, especially now with the new ICentral product that is incredibly scalable and priced very competitively given the company’s low overhead structure. There is also a risk that the company doesn’t gain traction with their new products, and if this is the case there is downside protection that exists. However, after speaking with Chris (the COO) and others I feel pretty confident that 2016 could be a milestone year for Ivrnet, and one that can provide investors with tremendous returns from current levels.
Disclosure: Long IVI.V with a cost basis of $.045