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A Quick Take On Issuer Direct

Issuer Direct Corporation (NYSE:ISDR) recently reported its Q2 2022 financial results on August 4, 2022, missing expected revenue but beating EPS estimates.

The company provides a range of investor relations and compliance software and services to clients in the U.S. and internationally.

While management may believe the firm is well positioned for a ‘dynamic’ market environment, adding headcount on the way into a likely recession is not reassuring to me.

I’m on Hold for ISDR in the near term.

Issuer Direct Overview

Raleigh, North Carolina-based Issuer Direct was founded in 1998 to provide reporting companies with shareholder communications and compliance software and related services.

The firm is headed by Chief Executive Officer Brian Balbirnie, who was previously Managing Partner at The Catapult Company and joined ISDR in 2006.

The company’s primary offerings include:

  • Platform id

  • ACCESSWIRE

  • Online Newsroom

  • Event Management Software

  • Webcasting

The firm acquires customers through its corporate sales and marketing team efforts as well as through partner referrals.

As of June 30, 2022, the firm counted 3,715 customers, of which 966 were subscribers to its various service offerings.

Issuer Direct’s Market & Competition

According to a 2022 market research report by Cognitive Market Research, the market for investor relations software was an estimated $130 million in 2016 and is forecast to exceed $550 million by the end of 2029.

The chart below shows the historical and projected future breakdown of the market size by region:

Investor Relations Software Market

Investor Relations Software Market (Cognitive Market Research)

Notably, a rise in the desire for financial information by younger demographics via primarily mobile devices will provide additional demand for more capable investor relations software providers.

Major competitive or other industry participants include:

  • AIM (Alternative Investment Management)

  • SSC ADVENT

  • Broadridge

  • CB Insights

  • OmniVista

  • Dynamo Software

  • Sherpany

  • Eze Software

  • IMS Platform

  • Nasdaq IR Insight

  • Q4

Issuer Direct’s Recent Financial Performance

  • Total revenue by quarter has plateaued in recent quarters:

5 Quarter Total Revenue

5 Quarter Total Revenue (Seeking Alpha)

  • Gross profit by quarter has also flatlined:

5 Quarter Gross Profit

5 Quarter Gross Profit (Seeking Alpha)

  • Selling, G&A expenses as a percentage of total revenue by quarter have trended higher, as the chart shows below:

5 Quarter SG&A % Of Revenue

5 Quarter SG&A % Of Revenue (Seeking Alpha)

  • Operating income by quarter has varied over the past five quarters as shown below:

5 Quarter Operating Income

5 Quarter Operating Income (Seeking Alpha)

  • Earnings per share (Diluted) have remained positive in recent reporting periods:

5 Quarter Earnings Per Share

5 Quarter Earnings Per Share (Seeking Alpha)

(All data in above charts is GAAP)

In the past 12 months, ISDR’s stock price has dropped 8.2% vs. the U.S. S&P 500 index’ fall of around 11.9%, as the chart below indicates:

52 Week Stock Price

52 Week Stock Price (Seeking Alpha)

Valuation And Other Metrics For Issuer Direct

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Amount

Enterprise Value / Sales

2.99

Revenue Growth Rate

9.6%

Net Income Margin

13.5%

GAAP EBITDA %

19.1%

Market Capitalization

$86,190,000

Enterprise Value

$66,600,000

Operating Cash Flow

$4,290,000

Earnings Per Share (Fully Diluted)

$0.78

(Source – Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

ISDR Discounted Cash Flow Analysis

ISDR Discounted Cash Flow Analysis (GuruFocus)

Assuming conservative DCF parameters, the firm’s shares would be valued at approximately $18.66 versus the current price of $24.11, indicating they are potentially currently overvalued, with the given earnings, growth and discount rate assumptions of the DCF.

As a reference, a relevant partial public comparable would be Q4 (QFOR:CA); shown below is a comparison of their primary valuation metrics:

Metric

Q4

Issuer Direct

Variance

Net Income Margin

-53.4%

13.45%

-125.2%

Revenue Growth Rate

9.57%

19.1%

100.0%

Operating Cash Flow

-$10,184,000

$4,290,000

-142.1%

Enterprise Value / Sales

1.7

3.0

73.8%

(Source – Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ISDR’s most recent GAAP Rule of 40 calculation was 28.7% as of Q2 2022, so the firm needs some improvement in this regard, per the table below:

Rule of 40 – GAAP

Calculation

Recent Rev. Growth %

9.6%

GAAP EBITDA %

19.1%

Total

28.7%

(Source – Seeking Alpha)

Commentary On Issuer Direct

In its last earnings call (Source – Seeking Alpha), covering Q2 2022’s results, management highlighted record quarterly revenue at $5.8 million, margin growth and an increase in bookings over prior periods.

Notably, slightly less than $1 million is left for the firm’s stock purchase program and management said it is ‘evaluating further repurchase plans in the near term.’

As to its financial results, total revenue grew by only 2% year-over-year, while its ACCESSWIRE product grew by 16% for the quarter, which offset declines in its events and webcasting segments ‘due to lower demand for these products.’

Management did not disclose its net dollar retention rate for its subscription products, so we don’t have any visibility into this important metric for determining product/market fit and sales & marketing efficiency.

Gross margin rose by 3% year-over-year but G&A and sales and marketing costs increased due to growing stock-based compensation, headcount increases and higher advertising and marketing expenses.

Operating income rose sequentially but was down year-over-year.

For the balance sheet, the firm finished the quarter with $21.5 million in cash and equivalents and over the trailing twelve months has generated $4.2 million in free cash flow.

Looking ahead, management believes the firm is positioned to ‘weather a dynamic environment’, likely referring to volatile markets in North America as a result of rises in inflation and interest rates.

Regarding valuation, the market is valuing ISDR at an EV/Sales multiple of around 3.0x.

The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 7.7x at July 31, 2022, as the chart shows here:

SaaS Capital Index

SaaS Capital Index (SaaS Capital)

So, although the firm is not a pure SaaS play, by comparison, ISDR is currently valued by the market at a discount to the broader SaaS Capital Index, at least as of July 31, 2022.

The primary risk to the company’s outlook is a macroeconomic slowdown or recession, which may slow sales cycles and reduce the potential for revenue growth, which was already low.

While management may believe the firm is well positioned for a ‘dynamic’ market environment, adding headcount on the way into a likely recession is not reassuring to me.

I’m on Hold for ISDR in the near term.

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