A Brooklyn-based asset management firm, Long Cast Advisers recently released its Q1 2019 Investor Letter, which you can track down here. Beside reporting about its quarterly return, the fund also shared its opinions on a few companies in its equity portfolio, including Intelligent Systems Corporation (NYSE:INS).
In 2006 I was promoted from associate to analyst at BMO Capital and assigned to cover transaction processors. I studied that industry for two months before getting reassigned to E&C, but in that short period I awoke to the incredible attractiveness of an industry that acts like a tollway, accruing revenue on someone else’s efforts. (Appended to this letter is my initial one pager on that industry)
I have been told that INS is complicated. The legacy holdco structure definitely contributes to that. But at heart, it is akin to FDC’s the Global Financial Solutions segment, a $1.5B annual revenue business with 40% segment EBITDA margins.
I suggest reading that segment description. You’ll note in the first paragraph that everything within that segment is done “… utilizing our proprietary VisionPLUS solution.” VisionPlus was developed by PaySys, a fintech software company that INS developed, funded and grew through the 1990’s and sold to FDC in 2001 (for a measly $20M).
At the time of the sale, INS retained interests in two development stage companies spun off from PaySys. These are the progenitors of CoreCard, INS’s sole operating business. The pedigree is not irrelevant. INS has been investing in that business over the last 18 years, funded by cash flow from other INS operating businesses that have since been sold.
Now let’s get back to 40% EBITDA margins. The oligopoly upon which rests the backbone of the consumer credit industry has been
screwingservicing its customers for decades. Up until recently, this oligopoly and their high margins were insulated from competition by the high costs of scale. This is changing, I think among other reasons because processing power and costs have both declined and are transitioning from fixed to variable. So market share is up for grabs … and it is an enormous market.
I’ve been told that INS is overvalued and itself susceptible to competition. Now reflect on pedigree. They are not a quirky startup; they are a quirky very experienced. If, as rumored, as rumored, Goldman / Apple really are new licensees, this offers some validation to the value of that pedigree. There is evidence as well that INS is supporting Sallie Mae’s new consumer credit card relaunch.
I’ve been told that INS doesn’t have enough recurring revenues to justify its valuation. To me that speaks to investors who want every SaaS company to look the same. By the time the company completes the transition from a software licensor to a transaction processor, its value will possibly have grown by multiples.
The fact that it’s increased so much so quickly presents another opportunity to “Experiment with Portfolio Management”. But the way I think about it, quite frankly, is that the future cash flows don’t care about my cost basis.
I don’t know the future and I suspect it will not unfold in a straight line, but I think the combination of growth, cash flow, a focus on solving tangible customer problems, a large TAM up for grabs and a company with a long history of efficient capital allocation are all ingredients that support an attractive long-term investment.
Intelligent Systems Corporation offers a plethora of processing services and technology solutions to companies from financial technology and services sectors. Over the past 12 months, the company’s stock gained amazing 571.31%, and on April 15th it was trading at $35.11. INS has a market cap of $318.56 million, and it is trading at a price-to-earnings ratio of 51.42.
In its last financial report for the fourth quarter of 2018, the company disclosed total net revenue of $6,054,000 and diluted EPS of $0.27, compared to revenue of $2,546,000 and diluted loss per share of 0.07.
This article is originally published on Insider Monkey.