NamSys Inc. Company Profile:
- NamSys Ticker: CTZ.V (TSXV) NMYSF (PNK)
- Website: NamSys.com
- Share Price: $1.09
- Market Cap: $29.7 million
- Shares Outstanding: 27.3 million
- Options and Warrants: None
- Cash and Short Term Investments: $4.4 million
- Debt: $0
- Enterprise Value: $25.4 million
- Insider Ownership: 11.3 million shares (41%)
- Note: All numbers are in Canadian dollars
Disclosure: I own shares of NamSys (CTZ.V).
I entered my NamSys position in Q3 of 2019. There is definitely a lot to like about the company: high gross and net margins, no debt and lots of cash on the balance sheet, high insider ownership, clean share structure, high recurring revenue and solid growth rate. Recently NamSys has received more attention and the share price has appreciated 42% since I initiated my position. I will try and determine if NamSys is still a buy as I hoped to double my position before the run-up.
1.1 NamSys Analysis: Company Overview and History
NamSys Inc. is a software as a service (SaaS) company that specializes in providing solutions for cash management and logistics. NamSys provides software that allows cash to be processed more efficiently, saving businesses time and money. The company generates the majority of its revenue from the United States but also generates additional revenue from Canada, Mexico, and Puerto Rico.
Formerly called Cencotech, NamSys is based out of Bolton, Ontario, Canada, about an hour North West of Toronto. NamSys has been in business since 1989 with the goal of making cash processing more efficient. In their earliest annual report, NamSys was selling its legacy Currency Controller software as well as deposit imaging software.
In addition to software, NamSys sold hardware until the hardware side of the business was sold to Armorsafe in December of 2006. The companies hardware products included deposit processing and verification systems, currency and coin dispensing systems and automated teller machines. By selling off this unit, it allowed NamSys to focus on building and selling its higher-margin software offering.
In 2013 NamSys rebranded its software as a service offering and called it Cirreon. Also beginning in 2013 NamSys saw its free cash flow start to ramp. Since 2013 NamSys has grown its free cash flow at a compounded annual growth rate of 64.5%. NamSys has partnerships with numerous currency management companies. Their largest and most important partnership is with Brinks.
1.2 Share Structure
NamSys has the type of share structure that I am looking for. They have 27.3 million shares outstanding and zero options and warrants. The company has only one share class and has not issued options since 2004.
The complete lack of dilution is a huge advantage for NamSys. It is much easier to grow earnings per share when you aren’t increasing your share count every year with options. The last share increase occurred in 2011 when NamSys’s share count went up 250,000.
2.1 NamSys Analysis: Business Model
NamSys operates in four business lines: Cirreon Smart Safe, Cirreon Cash-in-Transit, Cirreon Banking and the legacy Currency Controller. Each of these offerings is a software as a service offering that is facilitated through the cloud or the companies own network. Each one of these software apps integrates into one another creating a full cash cycle management solution. Cirreon also integrates into a customer’s customer management systems and accounting programs.
2.2 Cirreon Smart Safe
The Cirreon Smart Safe offering is used by numerous smart safe providers, including, Brinks, Tidel and Burrough. The smart safe we are talking about is not the kind of safe you would find in a hotel with a keypad. Instead, the commercial smart safe is connected to a network and minimizes the amount of time that is spent managing cash. The audit trail and handling minimization reduce internal theft and shrinkage.
The Cirreon smart safe accepts banknotes and authenticates them. The notes are then stored in a secure cassette within the safe. The software allows for strict controls on who can access the cassette. Often times only cash in transit companies are authorized to access the cassettes. The smart safes are often located in a back office but can also be placed under a counter to allow a cashier to quickly secure the money from their till.
In my opinion, one of the most important features is the ability of the safe to transmit data to the financial institution of choice and have the amount of money secured in the safe credited to the bank account of the business. This reduces the possibility of a cash flow crunch on businesses ultimately saving them money.
NamSys has numerous competitors in the smart safe market, including, Fiserv ($80 billion market cap, Safeology (Europe), and Suzohapp. As of October 2019, NamSys had the Cirreon smart safe in 20 countries.
Cirreon smart safe is billed per device per month.
2.3 Currency Controller
Currency controller is NamSys’ legacy offering. Controller is a cash vault management software that streamlines the handling of cash to be more efficient and accurate. Numerous cash vaults can be managed with currency controller. Currency controller is built to be integrated into counting and sorting equipment from all major manufacturers. Cash in transit companies that collect from numerous different smart safes can still take advantage of all the functionality of currency controller.
Currency controller is billed per cash vault per month that uses the application.
2.3 Cirreon Banking
Cirreon Banking in online banking for commercial customers. The banking app allows tracking of deposits and scheduling pickup from armoured carriers. Through Cirreon banking customers can place change orders. Much of the functionality provided by the smart safe is also available through Cirreon banking, including provisional credit.
Cirreon banking is billed as a monthly fee per store.
2.4 Cirreon Cash-in-Transit
The last business line for NamSys is its cash-in-transit application. The CIT application is an Android app that is used on a beefed-up smartphone equipped with a bar code scanner. Drivers have a manifest with pickups and deliveries in their hands on the CIT app. They can scan barcodes on the bags they are picking up. This information can be delivered instantly to the customer so they can track their deposit. Customers are also able to cancel or reschedule pickups saving the armoured carrier time and money.
NamSys also offers route optimization in their CIT app. This is becoming increasingly important as many CIT companies are looking for ways to be more efficient. The route optimization app is unique in that it was specifically designed for armoured carriers that have unique needs and limitations.
The Cirreon CIT app is billed on a per truck per month basis.
3.1 NamSys Analysis: Business Performance
NamSys has shown the ability to consistently grow revenue with strong profitability. It is a capital-light business model. This means that NamSys is able to generate profits off of very few assets and little continued investment. They have shown a very strong ability to generate cash flow consistently year over year.
Revenue has grown at a 16% on a ten year compounded annual growth rate (CAGR). NamSys has also been profitable in nine of the past ten years, with 2012 being the only exception. If looking back five years that growth rate jumps to 25% CAGR. That five-year growth rate was again achieved in 2019 with 27% revenue growth. Free cash flow has grown at a CAGR of 51% in the past five years contributing to a very solid balance sheet and no debt since 2015.
As you can see NamSys makes up a large portion of their revenue from their Cirreon smart safe application which is still growing at a healthy 18%. In Q3 of 2019 NamSys broke out its revenue mix.
- Smart Safe: 68%
- Currency Controller: 20%
- Cirreon Banking: 8%
- Cash-in-Transit: 4%
83% of NamSys’ revenue is recurring which is billed on a monthly basis. This consistency is a huge advantage for NamSys. It gives NamSys a very solid base to continue to build off of.
NamSys has been able to earn a profit in nine of the last ten years. They have been able to do this by sustaining near 70% gross margins and a 30+% net profit margin.
A possible concern is a five-year decline in the gross profit margin, from 74% in 2015 to 66.8% in 2019. NamSys’ gross margin in 2019 was negatively affected by the Employee Long Term Bonus Plan. The COO’s portion of the long term bonus plan is being expensed through cost of sales and in selling on the income statement. Although this is a very real expense, and one I will discuss later, it is a non-cash charge. If the $81,000 for the bonus plan is added back to gross profit the gross profit number returns to a more normal 68.7%. I will explore exactly what the Long Term Employee Bonus Plan is and what I think it means for the company in the “Negatives” section.
To look at the overall profitability of the business I’ll use the pre-tax income. I prefer this line instead of net income because NamSys has years where they receive tax credits and more recently when they are paying taxes. The pre-tax income line takes out this noise.
NamSys has grown pre-tax income at a CAGR 52% in the past nine years and a CAGR of 33% in the past five years. The pre-tax income margins have been very consistent since 2015, staying between 41% to 46%. Again, if you add back in the expensed portion of the employee bonus plan the pre-tax income margin increases to 46% in 2019.
The decline in margins is concerning. It appears the additional expense is due to increased staffing. NamSys had only ten employees and has recently increased its staff to thirteen. They also have two open job postings on Linkedin. There may even be further margin decline as NamSys increases staff to support its growth. Once they are fully staffed to meet the demands of their growth we may see margins increase again.
3.4 Balance Sheet
NamSys has a very strong balance sheet. Since 2016 NamSys has had no debt. As seen above NamSys is very profitable and cash on the balance sheet has steadily increased year after year.
At year-end 2019 NamSys had $1.8 million in cash and $2.5 million in short term investments generating 1.6%. This equates to 15% of the companies market cap.
The only blemish on the NamSys balance sheet is the increase in accounts receivables.
In 2019 revenue increased by 27% so it is natural for accounts receivable to also increase. However, from 2018 to 2019 accounts receivable increased by 105%. Even more concerning is that receivables past sixty days overdue increased 392% in 2019. NamSys is confident that it will be able to collect these receivables as they have not made any allowance for doubtful accounts. You have to go back to 2012 to find any impairment on their accounts receivable.
Is the dramatic increase in accounts receivable a sign of weakness to come? I’m not convinced yet that it is. On the positive side, NamSys has shown a very long track record of being able to collect all of their revenue. They also have a very strong balance sheet with plenty of cash so the extra time it takes to collect shouldn’t affect the business.
4.1 NamSys Analysis: Positives and Negatives
As with any company, there are positives and negatives and a good NamSys analysis wouldn’t be complete without examining the negatives. In this section, I’ll look at some issues that I have briefly mentioned above or haven’t mentioned at all.
4.2 Negatives or Risks
The biggest risk to NamSys is their reliance on cash in transit carrier Brinks. NamSys is very reliant on Brinks as they account for 39% of revenue.
Management has addressed their concentration to Brinks and the efforts they are making to diversify their revenue stream. Brinks as a portion of revenue has steadily grown and peaked in 2018: 2017: 34%, 2018: 40%, 2019: 39%.
Without Brinks, NamSys has said that they are still profitable however it would be a major blow to their business to lose the contract. The Brinks contract automatically renews in June of 2020. COO Jason Siemens believes that NamSys and their Cirreon products are deeply integrated into Brinks business. If Brinks were to decide to not renew the contract NamSys would have some notice to try and repair the relationship.
NamSys has proven its value to Brinks over the years and has built a very strong relationship. By creating software that can remotely manage the smart safes NamSys was able to save Brinks millions of dollars on technician visits. This type of initiative and execution resulted in NamSys signing a global agreement with Brinks.
Brinks Continued: Balance Innovations
While looking through the Brinks annual report I did come across an acquisition Brinks made that raised some concerns. In June of 2019 Brinks acquired a company called Balance Innovations. After reviewing the Balance Innovations website I saw a significant overlap between NamSys’ products and Balance Innovations. I sent an email to COO Jason Siemens for his opinion on Balance Innovations.
He replied very quickly and at 9 pm at night. COO Siemens knows Balance Innovations and NamSys has worked with them for many years. There are some similarities, however, Balance Innovations focuses more on integrating in-store equipment (cashiers, self-checkout). The software assists in balancing these devices in the store. The Balance Innovations software is licensed directly by the retailer. The retailer can also integrate the software into its legacy accounting and payment systems.
In comparison, Cirreon is designed from the bank/cash-in-transit company to the store. Balance Innovations designs their software from the in-store cash room out to the different hardware systems. This gives Cirreon numerous advantages. Cirreon is a more turn-key system, easily distributed by CIT companies, and easily scaled due to its SaaS offering. While the companies appear similar they focus on different areas of the cash process.
While the renewal of the Brinks contract is vital to NamSys’ success I feel confident that they will get renewed. Cirreon smart safe is deployed worldwide alongside Brinks. It would be a huge undertaking to implement their own smart safe software into the twenty different countries that Cirreon smart safe is deployed. Would Brinks undertake this project in order to save $1.6 million it pays to NamSys every year? This doesn’t seem to make much sense to me. Brinks is a $4 billion dollar company with $3.7 billion in revenue. It seems like Cirreon provides very significant value to Brinks and the return on implementing their own software doesn’t seem to be there.
The Decline in Cash Use
It is no secret that cash use is declining all over the world. In my personal life, I rarely use cash and find it a total inconvenience. But is cash going away? I don’t think it will anytime soon.
G4S wrote a report on the use of cash worldwide. It can be found here. The report concluded that cash was still the most commonly used payment method throughout the world. That being said non-cash payment methods are expanding across the world and the options consumers have at the register are greater than ever.
Cash still presents numerous advantages for the consumer. Cash is 100% reliable and available. There is no need for infrastructure for settlement and it provides anonymity. Cash is often times the only payment option for the unbanked population.
Even the highly advanced Amazon Go store is now accepting cash. In May of 2019, San Francisco placed a ban on cashless stores. The city felt that stores that refuse to accept cash were discriminating against customers from lower-income brackets. Uber has also started to accept cash in countries around the world, primarily in Asia, Africa and South America.
The decline in cash use is a very real concern for NamSys. However, even though cash use has been on a steady decline NamSys has consistently grown its revenue and net income in the face of this headwind. On their most recent investor update, COO Jason Siemens gave his insight on what kind of technology would truly replace cash, some type of anonymous stored value card or chip. I don’t see this technology coming anytime soon.
Employee Long Term Bonus Plan
A NamSys analysis would not be complete without examining the Employee Long Term Bonus plan and its implications.
The Long Term Bonus Employee Plan (Bonus Plan) presents a unique situation for investors. At first glance, NamSys has very reasonable executive compensation. CEO Barry Sparks is paid in the $60,000 range and COO Jason Siemens is paid in the $250,000. Zero options are awarded as compensation which results in zero shareholder dilution.
My NamSys analysis gets a little more complicated when you start to factor in the bonus plan. Essentially, when the company is sold 15% of the sale goes to employees and officers. So if the company is sold for a 15% premium to market price shareholders will receive the market price for their shares.
In the summer of 2019, the bonus plan got a little more complicated. COO Jason Siemens was added to the board of directors which would have excluded him from the plan. That was amended so he could still participate. We also learned that COO Siemens is entitled to 40% of the 15% bonus plan. If the company is not sold by December 31st, 2021, COO Siemens is paid his share which amounts to 6% of the company. With a share price of $1.09 and a market cap of $29.7 million his compensation through the plan amounts to $1.8 million.
NamSys has started to expense COO Siemens share of the bonus plan as explained above. This has caused a drag on gross margins however until the company is sold or December 31, 2021, hits the expenses are non-cash expenses.
Long Term Employee Bonus Plan: My Thoughts
Is the Bonus Plan very generous to employees and officers? Absolutely. Is it unfair to shareholders? I think you can argue it is but this is a negative on the company I am willing to live with.
The first reason I can live with the bonus plan is NamSys does not dilute shareholders through options. The share count has not increased since 2011 and I don’t see them changing that trend anytime soon. Their complete lack of options issuance and steady share count reminds me a lot of microcap darling Xpel Inc.
The second reason is the bonus plan creates a very clear incentive for officers and employees. Their goal is to grow the company to the highest possible valuation. It could be argued that they could just take on debt and make acquisitions that don’t benefit shareholders and increase the market cap. Their track records and discipline indicates that this won’t happen. Although 15% is coming directly from shareholders it is also an incentive to grow the company to also benefit shareholders.
The third reason is that the CEO is giving up more than anyone else. When the plan was instituted in 2015, CEO Barry Sparks owned 9.3 million shares (34% of the company). No one will lose more of their share of the company than the CEO. He was also on the board of directors when the plan was instituted.
The fourth is employee retention. On the investor update, COO Siemens mentioned that the NamSys is having difficulty finding qualified cloud-based engineers. North America is experiencing low unemployment. I confirmed with COO Siemens that only current Namsys employees can participate in the bonus plan. This should give an incentive to employees to stay with the company which could end up being a big advantage in a competitive tech job market.
COO Jason Siemens Portion
One last point on the bonus plan. COO Jason Siemens’ share (6% of the total company) is due to be paid in cash at the end of 2021. At a $29.7 million market cap, this equates to $1.8 million. NamSys is in a good position to be able to cover this portion of the bonus plan but this puts a huge dent into their cash reserves. If NamSys continues to grow revenue at 20% per year and trades at it’s current price to sales of 7.2x NamSys would have a market cap of $42.48 million. This would make COO Siemens share of the plan $2.5 million. This is just an exercise to get an idea of what his portion could be worth in two years.
Now that I’ve worked through the negatives and risks I see with NamSys I’d like to look at the positives.
Overall Business Quality
Take a quick look at NamSys’s 2019 financials and you will find a very high-quality business. They are consistently growing revenue around 20% a year, have near 70% gross margins, and over 30% net income margin. The business requires very little reinvestment so all net income is turned into free cash flow. And to top it off 83% of their revenue is recurring yearly. This is a growing, cash-generating company with no debt.
While doing research on Namsys it became clear that they are laser-focused on customer service. The company has a philosophy that if its customers succeed they will also succeed. They anticipate problems in their industry before anyone else and develop a solution. There are a few examples I came across while researching. One example I think speaks volumes about the value of NamSys was provided at the 2019 annual meeting.
Brinks acquired another cash in transit provider called Dunbar. Before the acquisition was closed, and, before being asked to do so NamSys developed the software necessary to incorporate the Dunbar safes onto Cirreon smart safe. Dunbar uses a safe provider that was not previously supported by NamSys. Their ability to identify problems and solve them before anyone else is a major advantage for NamSys.
Another great example is found on the NamSys website. A company called Burrough approached NamSys to switch their safes to Cirreon. In order to do so without disrupting customers, NamSys ran its system alongside Burrough’s current system. They switched over to Cirreon without disrupting clients.
“Gagnier says alignment and communication with NamSys was a highlight of the migration process. NamSys was ready and available to resolve any snags that came up during the switch, and they were knowledgeable enough to quickly implement those fixes.”
NamSys and their focus on the customer is one of the reasons I believe they will continue to work very closely with large organizations like Brinks.
A lot of software providers share this competitive advantage. Once you implement their software it becomes a mission-critical piece of your business. It is very difficult and oftentimes costly to switch to something else. Brinks operates in forty-one countries. it would be very difficult to switch their smart safes to a new software platform without disrupting their client’s businesses.
The same could be said for Cirreon online banking and Currency Controller. Once these systems are in place is becomes very difficult to switch your whole network onto a new solution. I’ve often wanted to change banks but the headache to do so is not worth the potential benefit. This is not a perfect comparison but an example of a business with high switching costs.
Relationship With Brinks
Brinks shows up as both a potential negative but also a huge positive. Brinks is aggressively consolidating the cash in transit industry. Since 2017 they have made thirteen acquisitions. In 2018 Brinks spent $520 million to acquire Dunbar, the fourth largest cash management company in America.
Brinks has also budgeted $1 billion for future acquisitions. As long as Brinks renews their contract with NamSys, NamSys will continue to grow alongside Brinks. Brinks will also be a major driver of NamSys’ international expansion as more companies adopt smart safes. As shown in the G4S cash report consumers in emerging countries use cash more frequently creating even more value for smart safes.
5.1 NamSys Analysis: Valuation
I bought a small position in NamSys at $0.77. I was hoping to double my position but NamSys has gone on a bit of a run. My plan was to do a more in-depth NamSys analysis that would help me figure out if Namsys is still a buy at $1.09 and a market cap of $29.7 million.
In the past five years, NamSys has a revenue CAGR of 25%. For safety sake, I will use a 20% CAGR. 2020 revenue: $4.9 million, 2021: $5.9 million, 2022: $7.11 million.
I would typically use enterprise value instead of market cap which would benefit NamSys because they have no debt and $4.4 million in cash. To account for the employee bonus plan and the cash owed to COO Siemens at the end of 2021 I will use the market cap instead essentially negating the cash on the balance sheet.
Based on those numbers and their historical margins NamSys is trading at a forward price-to-earnings of 19.8x 2020 and 16.2x 2021. This is quite a bit higher than their five year average of 15.32x. The current P/E is 23x.
Is 23x earnings a reasonable price to pay for a high-quality business with high margins and 80+% recurring revenue? Let’s take a look at the P/E of some other well known Canadian software companies and NamSys competitors.
- Enghouse (ENGH) Current: 42.4x, 5-Year: 37.8x
- Fiserv (FISV) Current: 93.1x, 5-Year:30.9x
- Descartes Systems Group (DESC) Current: 114.49x, 5-Year: 82.2
- RIWI Corp (RIW) Current: 51.9x (A favourite of mine)
- Real Matters (REAL) Current: 107x
NamSys appears to be undervalued based on these comparables. I recognize that P/E ratio isn’t the most comprehensive way to value a company and I acknowledge I haven’t researched each of the above companies. This is also not a comprehensive list of comparables.
5.2 Modified Price To Earnings Growth Ratio
I think it is also logical to look at NamSys using a modified price to earnings growth ratio, NamSys has grown operating profit by a CAGR of 23.4% since 2010. On a five-year time frame, NamSys has grown operating profit 32.4% CAGR.
I prefer to use operating profit to calculate their growth rate instead of net income because NamSys has some years where they received some tax credits. In more recent years they have been paying the full amount on their taxes.
I think it is very reasonable to pay a 1.0 PEG for NamSys due to their high percentage of recurring revenue and asset-light business model.
At a 1.0 PEG at 23x net income: $1.09
At 1.0 PEG at 32.4x net income: $1.54
I think it is more reasonable to believe that NamSys will grow earnings at 23% a year than 32.4% a year based on their 2019 operating profit growth rate slowing to 19.2%. However, when you add back the non-cash expense from the employee bonus plan ($164,000) the operating profit growth rate rebounds to 30%.
NamSys appears to be fully valued based on it’s PEG ratio and most recent growth rate but undervalued compared to other software companies.
6.1 Namsys Analysis: Conclusion
- Strong balance sheet, no debt
- High insider ownership
- 80+% recurring revenue
- Zero dilution
- Asset light, takes no reinvestment
- High margins and excellent profitability
- Easily scalable
- Brinks relationship
- Focus on customer service
- Solid 20+% revenue growth
- Customer concentration with Brinks
- Employee bonus plan
- The decline in cash use worldwide
- Declining margins
I think NamSys is a very good business for all of the above reasons. However, their declining margins are causing me more concern than I anticipated. Margins were down across the board in 2019. Again, some of this is due to the $164,000 from the bonus plan that was expensed however this doesn’t affect the free cash flow margin. Margins may contract further as they add more staff. Once they are fully staffed and if revenues continue to increase we could see margins increase again.
I think NamSys is fairly valued where it is at right now, between $1.05 and $1.15. I will be looking to add to my position at the bottom of that range if possible. It will be very interesting to see if NamSys finds any opportunities to invest their cash into however a big portion of their cash will likely be reserved for COO Siemens payout at the end of 2021.
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