Thanks for the informative write-up, I enjoyed reading it.
Couple of questions:
What leads you to the conclusion to say that TRCK's products are top-tier?
What do you mean by them financing monitoring centers? I understand they provide hard- and software only.
I don't understand the valuation - if this is a SaaS business, I would guess that incremental margins will be way higher. Why is the industry so strongly penalized with lower multiples? TAM? Client concentration?
Deleted my previous replies and re-uploaded them (fixed a few mistakes):
1. I spoke to a state employee that uses the company's products, and he thought they were top-notch compared to other contractors they had in the past. I also went through their patents and compared them to competitors (public domain). Patents on their products are much more sophisticated than the company's peers.
2. TRCK hires agents in their monitoring centers to be the "first responders" in case an offender does not respect his restrictions or needs help. Agents can then communicate with the offender's parole office if needed. Authorities also use the software to track offenders, see movement patterns, etc. but probation officers and authorities have 100+ cases at any given time, so they cannot spend all of their time tracking offenders. That is why they outsource to TRCK.
I believe you mistake the term recurring with SaaS. The company's revenues are recurring, but the mix is not simply SaaS, that is why gross margins are not 70/80%+
3. I believe there are a few reasons why the industry was penalized on its multiples in the past. First, the TAM used to be quite small, and that usually does not help a multiple. However, the TAM is expanding. Second, the industry used to be very lumpy prior to the introduction of leasing revenue. As such comparable transactions might be outdated. Client concentration is definitely another issue and the stock's lack of liquidity/IR is another part of the story. We don't really need multiple expansion for the story to work, so that would be an added bonus for us.
I skimmed the 10-K now and I understand the role / involvement of TRCK in the monitoring centers.
It's definitely an interesting story, but I am not so sure about their capacity to pay down $7-10m of debt p.a. - I get the interest savings and cash drain due to project in Chile, but still seems a stretch to me.
While my debt repayment targets might be aggressive, they are attainable. Remember they generated anywhere between 2-3.5M in FCF pre-COVID. Now, they save $2M in interest expense + EBITDA just expanded massively and is growing fast. Also, you could justify more upside on the income statement side; Revenue and EBITDA #s have major upside potential. My numbers are definitely conservative.
I like the idea, but i don't think they will save $2m. They used to pay 8% on about $31m of debt (and not on unpaid interest) and now they pay 4% on $43.8m. So savings are only about $700k.
IJW - Thank you for the comment. That prompted me to re-do some digging. My assumptions stemmed from the original contract which stipulated that any unearned interest would accrue at 12%. However, the contract was amended to waive the interest on unpaid interest. It seems I missed that. So you are correct, they used to pay 8% interest on $31m and now will be paying 4% on 43.8m. Apologies to my readers for this mistake! Given the strength of the recent quarter, I have updated my model with lower debt repayment but a higher growth rate in 2022 given Chile ramped up slowly this year. I still see significant upside and remain a holder here. Good catch on your part!
Thanks for the informative write-up, I enjoyed reading it.
Couple of questions:
What leads you to the conclusion to say that TRCK's products are top-tier?
What do you mean by them financing monitoring centers? I understand they provide hard- and software only.
I don't understand the valuation - if this is a SaaS business, I would guess that incremental margins will be way higher. Why is the industry so strongly penalized with lower multiples? TAM? Client concentration?
Deleted my previous replies and re-uploaded them (fixed a few mistakes):
1. I spoke to a state employee that uses the company's products, and he thought they were top-notch compared to other contractors they had in the past. I also went through their patents and compared them to competitors (public domain). Patents on their products are much more sophisticated than the company's peers.
2. TRCK hires agents in their monitoring centers to be the "first responders" in case an offender does not respect his restrictions or needs help. Agents can then communicate with the offender's parole office if needed. Authorities also use the software to track offenders, see movement patterns, etc. but probation officers and authorities have 100+ cases at any given time, so they cannot spend all of their time tracking offenders. That is why they outsource to TRCK.
I believe you mistake the term recurring with SaaS. The company's revenues are recurring, but the mix is not simply SaaS, that is why gross margins are not 70/80%+
3. I believe there are a few reasons why the industry was penalized on its multiples in the past. First, the TAM used to be quite small, and that usually does not help a multiple. However, the TAM is expanding. Second, the industry used to be very lumpy prior to the introduction of leasing revenue. As such comparable transactions might be outdated. Client concentration is definitely another issue and the stock's lack of liquidity/IR is another part of the story. We don't really need multiple expansion for the story to work, so that would be an added bonus for us.
Thanks for the helpful answers, much appreciated.
I skimmed the 10-K now and I understand the role / involvement of TRCK in the monitoring centers.
It's definitely an interesting story, but I am not so sure about their capacity to pay down $7-10m of debt p.a. - I get the interest savings and cash drain due to project in Chile, but still seems a stretch to me.
While my debt repayment targets might be aggressive, they are attainable. Remember they generated anywhere between 2-3.5M in FCF pre-COVID. Now, they save $2M in interest expense + EBITDA just expanded massively and is growing fast. Also, you could justify more upside on the income statement side; Revenue and EBITDA #s have major upside potential. My numbers are definitely conservative.
I like the idea, but i don't think they will save $2m. They used to pay 8% on about $31m of debt (and not on unpaid interest) and now they pay 4% on $43.8m. So savings are only about $700k.
IJW - Thank you for the comment. That prompted me to re-do some digging. My assumptions stemmed from the original contract which stipulated that any unearned interest would accrue at 12%. However, the contract was amended to waive the interest on unpaid interest. It seems I missed that. So you are correct, they used to pay 8% interest on $31m and now will be paying 4% on 43.8m. Apologies to my readers for this mistake! Given the strength of the recent quarter, I have updated my model with lower debt repayment but a higher growth rate in 2022 given Chile ramped up slowly this year. I still see significant upside and remain a holder here. Good catch on your part!