Sunday, April 6, 2014

Issuer Direct ( NYSE - ISDR ) -- Automates S.E.C. Compliance

Issuer Direct (ISDR $11.50) is a leading provider of disclosure management solutions used by publicly traded corporations to comply with S.E.C. regulations.  The company also provides a wide range of investor communication products and services.  Most of those were obtained in a recent acquisition ("PrecisionIR").  Those include investor outreach, webcasting, annual report distribution, and hotline services.  Demand is expanding as companies broaden their compliance and communication activities.  Issuer Direct is gaining market share, moreover, by bundling its recently acquired services together with its legacy products to provide customers greater convenience and better pricing.  The company has been developing a series of software products that it licenses to end users, moreover.  That segment is building momentum and promises to yield a greater contribution in the coming year.

The PrecisionIR acquisition more than doubled the revenue base.  PrecisionIR had been a leading investor relations company, but under private equity ownership it hadn't reinvested in new technology since the mid 2000's.  Issuer Direct bought the company last year and now is rebuilding those platforms.  The overall customer base more than doubled with the transaction.  Existing customers on both sides now are being cross sold the entire product line.  New customers are being added at a modest pace, as well.  Financial performance has accelerated as a result of the combined marketing effort.  Further gains are likely in subsequent years as products are enhanced and new offerings are introduced.

Margins already have widened to superior levels.  That trend could have farther to go as software becomes a larger part of the line-up.  Next generation offerings are likely to include more social media integration so that press releases and S.E.C. filings can be distributed more broadly.  Those products also may include interactive features and analytics that allow issuing companies to see immediately how its investor base is reacting.  Facebook and Twitter integration may help companies shape those responses.

Longer term, the addition of a more dynamic news release operation could help Issuer Direct attract privately held companies.  There are approximately 9,000 publicly traded U.S. companies.  The number of private companies that could be realistic targets for Issuer Direct's services might exceed that by a wide margin.

Meantime, revenue growth of 20% or more appears sustainable.  We estimate 2014 sales will advance 81% to $16 million, bolstered by the PrecisionIR acquisition.  Earnings could rise 33% to $.85 a share.  Official numbers will be lower due to recurring non cash (warrant) expenses associated with the acquisition.  Margins are likely to decline in the current year by comparison because the acquired operations are less profitable than Issuer Direct's legacy products.  Greater average shares (+19%) will be outstanding, too.  Organic growth is expected to be in the 15%-25% range, depending how the cross selling works.  Initial results have exceeded the company's expectation.

In 2-3 years sales could reach $23-$25 million to produce earnings of $1.25-$1.35 a share.  That assumes no margin expansion from our 2014 estimate.  Marketing and product development costs could offset the anticipated improvement in gross margins.  If they don't, income could expand more rapidly.  Applying a P/E multiple of 20x to the low end of the range suggests a target price of $25 a share, potential appreciation of 115% from the stock's current level.  Acquisitions of complementary products and services, penetration of the private company market, or better than predicted margin expansion could support a higher valuation.

Near term, the stock may mark time until a major shareholder unwinds its position.  Hedge fund Red Oak Partners helped to finance the PrecisionIR acquisition in August 2013 by purchasing a convertible note from the company that is exchangeable into 626,566 shares.  Until that overhang is resolved the share price may have a hard time advancing.

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