GSB - Enhanced File Transfer On Cloud Services

This post is a reminder for myself of why I invested in the above company. I am vested and comments maybe biased.

For future posts, I will be talking about my positions in the Crazy Portfolio.

Numbers/Finance

Increasing Revenue, Net Profit – Over the last 3 years, the total revenue has just been increasing. So does the Net Profit. However, if you look at the TTM (Trailing 12 Months) figures over the last 5 years, it is very clear the company’s top line has been improving every quarter, so does the bottom line.

Data from Seeking Alpha - Annual Revenue

Data from Seeking Alpha - Annual Net Profit

Data from Seeking Alpha - TTM Revenue

Data from Seeking Alpha - TTM Net Profit

Reasonable Balance Sheet, but Great Returns – Balance sheet has been reasonable with very low debt. Its not exactly a NCAV company and it has significant intangible. But it has great returns.

Data from Investing.com

Low Capex, Good FCF – It has consistently generated FCF for the last 5 years.

Data from Seeking Alpha

Piotroski F Score – This is interesting. Based on the chart below, the F Score has improved over the last 3 years. Currently based on TTM figures, there are at 7.

Data from Finbox

Business Model

One of the leaders in Managed File Transfer Industry – It develops and sells managed file transfer software that provides secure information exchange, data transfer, and file sharing capabilities. Its flagship and main product, EFT, is highly reliable, easy to install, and is delivered as on-premise software or through cloud and hybrid deployments. Based googling thru the various review websites, this company is definitely one of the dominate players in the Managed File Transfer Industry.

1 Product, B2B and not B2C, Direct Sales and Partners – The company only has 1 product, or in this case over 97% of the FY2018 revenue comes from 1 product. It operates in the B2B and not B2C industry, since B2B requires less headcounts (B2C will generally requires higher operating expenses since need customer services). It uses direct Sales and partners to sell their products.

Stickiness of Business Model and Recurring Cashflow – As per FY2018, it was stated “when customers purchase our on-premise software, they almost always purchase the first year of M&S. At year two, customers are not required to purchase M&S, but the vast majority renew their subscription.” Remember when did you change your Anti-virus software?

Cataylst

New Product: EFT Arcus – It is a “pay-for-what-you-use” pricing model and a centralized platform to streamline the management of all data transfer activities in the cloud, on-prem and in between. It integrates with Azure and AWS (Read more here).

Focusing on Optimal Capital Allocation – The company has been focused on an optimal capital allocation strategy – doing share buyback and giving our dividend. So far its cash and cash equivalent has remained around US$10 million.

As stated in the FY2018 shareholder letter, “Globalscape embarked on a mission in 2018 to enhance the Company’s performance by improving cash flow per share. To achieve this objective, we focused on three things: revenue, operating expenses, and capital allocation. We are pleased to report that results of this three-part effort are evident in the Company’s superior fourth quarter financial performance. We believe shareholders and customers will be further rewarded as we continue to execute our revised business plan and capital allocation strategy.”

Risk

Side Agreement / Wire Fraud in 2018 – An investigation occurs in Mar 2018. After the investigation ended, there were 40 lay-offs and the CFO changed. There were various excuses used to describe the lay-off, but any layman should be able to see that it was related to the investigation. Although the event has been settled, but this has probably created some negative reputation to the company. 

Furthermore, as stated in the article here, “Most notably, on June 15, 2018 we regained compliance with NYSE American continued listing standards and on August 20, 2018 we announced the settlement of a class action lawsuit for $1.4 million related to our 2016 and 2017 financial restatements. While there continue to be legal matters that present risks, we are pleased to be past the matters that were resolved.” 

1 Product – What happens if the product is no longer required in the market?

Lower Revenue from New Product In Short Term – As highlighted in FY2018 on EFT Arcus, “For the first 24 to 36 months that a customer subscribes to EFT Arcus, we believe that the cumulative cost of ownership will typically be less than the total cost of purchasing an EFT platform perpetual license combined with an M&S contract. Accordingly, we expect the revenue we earn during that period from an EFT Arcus customer will be less than the revenue we would have earned from that same customer during that same period if the customer had purchased a perpetual license with an M&S contract. However, we believe thereafter and over the long term, the cumulative, recurring revenue stream we will earn from an EFT Arcus customer will exceed what we would have otherwise earned from the sale of a perpetual license combined with an M&S contract.” In my opinion, it’s a right direction, but there are short term consequences. 

Outsourced some development to Russia Firm – Not sure if this should be a risk? But will there be future implications?

Management Change – CEO unexpectedly passed away on 1 Apr 2019. He has been the CEO since 2016 and will this cause a change in the way the company is managed?

Competition – There are competition from direct competitors like Axway as well as major companies, like IBM, Citirix Systems and Progress Software, subsidiaries.

Intrinsic Value  

I will based my valuation solely on PE ratio because this company is all on its earnings.

Based on Finbox:

• GlobalSCAPE's latest twelve months P/E Ratio is 16.8x.

• GlobalSCAPE's P/E Ratio hit it's four year low in Dec, 2015 of 18.9x.

• Looking back at the last four years, GlobalSCAPE's P/E Ratio peaked in Dec, 2017 at 55.9x.

• GlobalSCAPE's operated at median P/E Ratio of 22.0x from fiscal years ending Dec, 2014 to 2018.

• GlobalSCAPE's P/E Ratio for fiscal years ending Dec, 2014 to 2018 averaged 27.2x.

With that, if we assumed the company about US$2.4 million (which translate to US$0.14) per quarter, it will make about US$9.6 million (~US$0.56) per year.

Based on last 4 years average PE ratio of 27.2x, it is US$15.232. 

Do note that competitors like Box or Axway has either negative PE or PE in the hundreds. 

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