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The next section was excerpted from this fund letter.
Through the quarter we bought shares of Sylogist Ltd. and setting the stage (or desk, if you’ll) for this funding are the various cooking reveals in my rotation, the place I love watching cooks put together and speak about meals. These reveals provide many parallels to investing and portfolio administration, one among which is that the best cooks perceive that one of the best recipes are all concerning the substances. I consider Sylogist is following the recipe for achievement, with the substances consisting of a high-quality enterprise, sturdy progress prospects, a web money stability sheet, good administration, and free money circulation era at a cut price worth. Sylogist is a public sector software-as-a-service ((SaaS)) enterprise whose inventory has been orphaned attributable to its historical past of poor company governance together with a lately carried out technique shift and dividend reduce that caught buyers off guard however was executed with the only real focus of driving shareholder worth. This, together with the large selloff in small corporations and software program associated companies throughout 2022 has prompted the inventory to be left for lifeless, regardless of possessing some traits that time to an intrinsic worth a lot increased than the place the shares commerce at the moment. Over time, and with correct execution, I consider our shares may very well be price multiples of what we paid.
Sylogist is a Canadian listed SaaS enterprise that gives mission-critical software program options to almost 2,000 clients worldwide in three public sector verticals of Non-profits/NGOs by way of their SylogistMission section, Authorities by way of their SylogistGov section, and Training by way of their SylogistEd section. Inside these verticals, software program options encompass ERP, CRM, fundraising, training administration, and funds merchandise. These merchandise carry excessive worth propositions and sticky buyer relationships as they serve a crucial want for organizations of all sizes. The areas inside the area of interest that Sylogist occupies have much less competitors than enterprise degree software program companies, who sometimes keep away from these finish markets and aren’t properly tailored to supply the personalized options that Sylogist can. One instance could be a rising non-profit that requires extra superior fund accounting and donor administration software program that integrates with the remainder of the organizations functions, thereby eliminating typically handbook processes for knowledge enter and storage. The group may use Sylogist’s ERP product to handle these wants. Traditionally, regardless of underinvestment in buyer relationships beneath the earlier administration workforce, buyer retention has been within the excessive 90% vary as there’s reluctancy to modify suppliers given the combination into their workflows and programs.
Sylogist has three main income segments made up of Cloud Subscriptions (40% of revenues), Upkeep and Help (25%) and Skilled Companies (29%). Roughly 65-70% of revenues are recurring between Cloud Subscriptions and Upkeep and Help, offering each visibility and resiliency into future revenues, with software program gross margins in extra of 75% and money circulation conversion within the 70-80% vary. A number of of Sylogist’s merchandise are constructed utilizing the Microsoft Dynamics platform, the place Sylogist can’t solely customise merchandise for particular verticals however can even profit from the repute and monitor document of Microsoft throughout buyer acquisition and when cross-selling adjoining services. Shifting ahead, administration’s technique is to develop each organically and by way of M&A, whereas specializing in the natural progress of software program subscription revenues.
Software program companies, and amongst these, Sylogist’s friends, could be nice companies, particularly when tied to crucial components of a company’s operations. They share traits corresponding to sturdy natural progress, excessive income retention, excessive margins, and robust money circulation conversion, whereas offering outstanding sturdiness by way of all financial cycles. Publicly traded friends Tyler Applied sciences, Blackbaud and Sage have lengthy histories of progress and profitability, whereas every grew revenues by way of the monetary disaster with no decline in working margins. Sturdy fundamentals and sturdiness signifies that most of Sylogist’s friends commerce at valuations of 20x EBITDA or extra, in comparison with <9.0x NTM EBITDA for Sylogist.
For the explanations behind the valuation disparity, I’d level you towards the corporate’s historical past. The early model of Sylogist consisted of a low margin, no progress, reseller of software program till prior administration made some acquisitions within the early 2000’s to seize extra of the client relationship and to deal with constructing a public market software program enterprise. Sadly, prior administration made it a degree to deal with tuck-in M&A, handle acquisitions for money circulation, neglect natural progress, and milk the corporate for compensation. Poor company governance, an organization with no enterprise being public, and a administration workforce with no want to drive shareholder worth was going nowhere and would by no means garner a correct public firm a number of. Previous to the previous CEO’s retirement in late 2020, Sylogist ran a strategic overview (an try and promote the enterprise) and emerged with the Board figuring out that one of the best path ahead could be to pursue the near-term market alternatives for progress in an effort to drive shareholder worth. In addition they went on a seek for a brand new CEO who could be given an natural progress mandate.
Enter present CEO Invoice Wooden, an business veteran who was a founding member of Blackbaud, one among Sylogist’s direct rivals, additionally beforehand serving as President and CEO of two software program companies throughout a 17-year span that culminated in each companies being acquired, one by Constellation Software program and the opposite by a personal fairness agency. Shortly into his tenure, Invoice reduce the dividend (a 9% yield), liberating up practically $12mm in annual money circulation, and formally introduced the corporate’s strategic shift towards rising organically and by way of M&A. As a part of the technique shift, EBITDA margins could be taken down from the low-mid 50% vary to 30%, whereas sustaining a Rule of 40 posture, with the surplus money circulation being reinvested into product improvement, gross sales and advertising, and M&A. The corporate’s credit score facility was additionally elevated by 65% to $125mm, offering further firepower for acquisitions, whereas a share buyback program was put in place that may enable the corporate to repurchase as much as 10% of shares excellent. The market, together with yield targeted buyers, didn’t like this information. I, nonetheless, am thrilled with these choices, as I have a tendency to hunt out administration groups keen to endure short-term discomfort in trade for potential long-term worth.
The technique is working, and buyers have been sluggish to acknowledge the shift, regardless of what I consider to be an vital inflection level. In simply three quick years, Sylogist has made great progress towards constructing a software program platform by strengthening the administration workforce, launching and buying in-demand merchandise, repairing buyer relationships, bettering the NPS rating, and returning the enterprise to natural income progress. Thus far, efforts to speed up gross sales, advertising and product improvement have been and may proceed to show profitable because the sticky merchandise that Sylogist affords, and the collegial nature of their finish markets signifies that a continued natural progress profile shouldn’t be too tough a hurdle to beat. In actual fact, Sylogist is firing on all cylinders, rising bookings, revenues and money flows successfully, and as of the latest quarter, reported optimistic sequential progress in natural software program subscription income. Throughout the latest earnings name, administration highlighted a sexy gross sales pipeline and new bookings matriculating at a better price than at any level for the reason that present administration workforce was introduced on. This, together with the hiring of an skilled Chief Income Officer and the continued flexing of selling muscle bodes properly for future natural progress. A current improve to the CFO place also needs to include improved communication and disclosures, serving to buyers higher perceive the story and robust fundamentals.
Sylogist’s technique shift can be bolstered by important tailwinds together with the big addressable market amongst their buyer base, low digital penetration among the many similar buyer base, the acceleration of software program instruments post-COVID, and a fragmented marketplace for services that Sylogist can faucet into for M&A. Since their hiring, administration has accomplished 4 acquisitions, all largely accretive and offering each the chance for continued natural income progress and the chance so as to add helpful services to their platform. In keeping with administration, the deal pipeline stays extremely full, with lots of of potential targets on their record. As non-public market valuations proceed to come back down, we should always see further transactions happen that assist develop the highest and backside traces over time. Sylogist may additionally discover themselves on the receiving finish of an acquisition provide, as the federal government software program area is extremely acquisitive because of the fragmented nature of those companies, worth to each strategic and monetary acquirers, and sturdiness of the enterprise fashions. In a macro surroundings the place two of the most important worries are inflation and a recession, the mixture of non-discretionary recurring income and pricing energy makes for a sexy setup. Even share-losing Blackbaud, who has persistently underinvested within the enterprise to the purpose of declining revenues and margins, finds itself within the midst of a take-private provide from a PE agency.
Sylogist stays a ‘present me’ story however I consider the appropriate substances are in place. The corporate is small. Publicly traded float is minimal. Shares commerce over-the-counter within the US and have zero US analyst protection. Administration is non-promotional and IR efforts may enhance. The potential for mispricing right here is important and I consider shares may very well be price multiples of what we paid searching just a few years. I just like the setup and stay up for discussing Sylogist in future letters.
| Disclaimer: Previous efficiency is not any assure of future outcomes. Investing entails dangers which purchasers ought to be ready to bear, together with however not restricted to partial or full lack of principal initially invested. Investing in small and microcap corporations may end up in further volatility and better threat attributable to comparatively low market capitalization, extra sensitivity to financial and market situations, and extra restricted managerial and monetary assets. As well as, small corporations sometimes commerce in decrease quantity, making them tougher to buy or promote on the desired time and worth or within the desired quantity. Please check with Kind ADV Half 2 brochure for extra details about Greystone Capital Administration and its personnel. |
Editor’s Word: The abstract bullets for this text had been chosen by In search of Alpha editors.
Editor’s Word: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please pay attention to the dangers related to these shares.
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