On September 24th NamSys Q3 2020 results were released.
NamSys continues to grow in a tough economic environment. Revenue increased 11.8% in Q3 and 16.6% in the past nine months. This is below the three-year revenue growth rate of 19.7%.
NamSys’ margins showed weakness in the quarter. The big declines are due to expensing the employee long term bonus plan. This is a non-cash charge, however, gross margin is under pressure from increased staffing and compensation levels.
The long-term bonus plan also adopted a significant change that may activate it before a change in ownership.
My previous post on NamSys can be seen here: NamSys Q2 2020 Results.
Disclosure: I own shares of CTZ.V
NamSys Q3 2020 Results: Income Statement
Above we see modest revenue growth compared to Q3 2019. I am satisfied with this amount of revenue growth, 11.7% in the quarter. NamSys gave an update at the annual meeting in the spring and said that Smart Safe revenue had declined 10%. Based on this information I figured that NamSys would have no growth in 2020 so I am satisfied with 12%. I guess it comes down to what your expectations are.
The concerning item from the income statement is the pressure on margins. The gross margin for the quarter was 53.2%. A large portion of the impact on gross margin was due to the long term employee bonus plan, but not all. Even after adjusting out the bonus plan expense, the gross margin was 63%, compared to gross margins above 66% dating back to 2016.
Operating income margins saw similar declines. Operating income margins were 21%, and 41% when excluding the bonus plan.
Staffing costs are increasing as software developers are in very high demand. On previous conference calls, COO Siemens has spoken about the challenges they have hiring software developers. Even after backing out the bonus plan margins are under pressure.
Software Engineer Market
According to this research from Hired.com, salaries for software developers are increasing across the board:
I suggest you take a look at the report from Hired.com. It outlines what are the stated goals of software developers. I can understand the difficulty a company like NamSys would have attracting quality talent. They are a little Canadian company competing with tech behemoths to hire developers. I think the company will have to be creative to solve this hiring challenge.
COO Siemens stated on the last conference call that NamSys is not willing to increase their prices at this time. They are more focused on capturing market share. They will need to continue to grow revenue through the same cost structure for margins to improve. If employee salaries continue to increase along with the market the downward pressure on margins will likely continue.
(Note: I used software developer in my text but used an image with software engineer. In my uneducated brain, they are the same thing but I recognize they probably aren’t. I think the point is still valid that both are in demand).
NamSys Q3 2020: Balance Sheet
The balance sheet is solid with $6.2 million in cash and short term investments. They continue to have no debt.
Receivables have been collected in a good time since they popped up as a potential issue in Q1.
The amount of the bonus plan liability is remeasured at the end of each quarter and is calculated based on the stock price.
NamSys Q3 2020: Cashflow Statement
The cash flow statement shows us even more clearly that margins are under pressure even after the bonus plan is added back in. In Q3 NamSys made $341,868 before taxes and other adjustments. Compare this to Q3 2019 of $370,520. The company produced less cash from operations even though revenue was up 12%.
NamSys showed a very healthy total increase in cash for the period but this is due to collecting account receivables.
Employee Long Term Bonus Plan
The employee long term bonus plan underwent a drastic change in Q3 that could accelerate its activation.
So the big change is that if an entity other than CEO Sparks holds more than 20% of the company’s shares than the employee bonus will be activated. 15% of the total value of the company will be paid in cash or shares to employees. With a share price of $1.05, this would equate to $4.3 million.
With $6.2 million on the balance sheet, NamSys can cover the $4.3 million payment to employees. The company has done such a wonderful job eliminating any type of dilution I expect them to do the same and use its cash as payment instead of shares.
So why is this important? Topline Capital Management increased its position in the company to 15%.
Topline’s report indicated they purchased an additional 2.41% of NamSys since February. If Topline has intentions on buying more shares they may activate the bonus plan.
In my opinion, I think this is a good thing if the plan is paid out now. I anticipate NamSys will continue to grow and in turn, increase its value. The margin compression isn’t a good thing and could affect the multiple the company receives. My hope is with continued growth margins start to trend in the upward direction through operational leverage.
So if the thinking is the company continues to generate healthy cash flow than the stock price should follow. Paying out the bonus plan sooner than later should lead to a lower total payment. They have the cash on the balance sheet to cover the payment based on the current share price.
I am concerned that once the bonus plan is completed will the board of directors institute a new bonus plan.
Lastly, I’d like to look more closely at the news release that accompanied the Q3 results. NamSys is a very quiet company that does no promotion or media appearances. They don’t issue news releases outside of announcing their results so I think it is important to focus on what they do tell us.
NamSys appears to be trying to shift our focus away from Smart Safe and more towards their offer offerings. If I could hazard a guess this might be due to Brinks Complete launching in Q4. There are a lot of similarities between Smart Safe and Brinks Complete. It is very possibly Smart Safe customers transition to Brinks Complete if it is a more affordable option.
In the last two lines, they are announcing that they have signed new distribution agreements with North American Cash in Transit operators. Are these new customers or new agreements with existing customers? This seems like a good question to ask on the October investor call.
NamSys has been able to grow revenue in the COVID-19 world. At the beginning of the pandemic, it looked like their growth could be negative or flat.
Brinks appears to be dedicating significant resources to Brinks Complete which could help NamSys maintain or accelerate their growth rate. My expectations are still tempered since COVID cases are increasing in North America again. This could delay the launch and adoption of Brinks Complete.
The margin compression for the company is definitely a concern. It’s never a good thing when a company is generating more revenue but putting less cash in the bank. Hiring and retaining software developers will continue to be a problem and employee compensation might continue to increase. Another consideration is what happens when the bonus plan is paid out? Is it possible that some employees are staying waiting for the bonus and then leave for larger companies? It’s something I think is very possible.
I remain bullish on the company and look forward to the investor update at the end of October.
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