Stock Price: $1.50 (Deal Price $1)
Shares Outstanding (Assuming Conversion): 37.2mm
Market Cap: $56mm
Cash: $14.7mm + $5.5mm for Media Biz
EV: $38mm (includes $5.5mm for the sales of the media business and no allocation for Q4 and Q1 cash burn)
Sales: About $62mm on a TTM basis. $46 mm not including media business.
Stock price down about 90% in about 18 months.
Impressive customer list including 70 of the Fortune 100 and about half of the S&P500.
New, experienced, motivated CEO.
Earnings Power = 15% EBITDA margin
Debt significantly reduced due to recent equity financing.
RMG Networks (RMGN) operates in two distinct segments, Media and Enterprise Software . In Media, they focus on the airline seatback content delivery space. In Enterprise Software, RMG provides video tools for production analytics and internal communications for corporate uses in 5 distinct sectors. RMG’s impressive Enterprise Software customer list includes 70 of the Fortune 100 companies, and about half of the S&P 500.
Roth Capital Partners recently introduced us to Bob Michelson, the President and CEO of RMG Networks. Michelson took over as CEO in the summer of 2014. He has a background in operations and strategy for Sterling Capital Partners, and came on board to return the company to profitability and growth. As an aside, we know Sterling from a previous investment in Select Comfort (SCSS) in 2009. We rode SCSS from $.90 to $24 in just a few years (Article). Needless to say, we are impressed by how Sterling transformed SCSS. Michelson could transform RMGN into a real winner for us.
Michelson quickly identified several issues that he believes contributed to the company’s losses. For each, he devised a solution that could be implemented quickly.
First, he feels the Enterprise Software division lacks focus. He identified 3 of the 5 operating sectors to focus on, and essentially eliminated the remaining 2 non-core sectors. Michelson will focus on 1) Supply Chain, 2) Call Centers, and 3) Internal Communications. He eliminated the Retail and Hospitality sectors, although he plans to continue to service existing customers in these areas.
Second, Michelson felt RMG had not delivered innovation to its customers which degraded the salesforce narrative. Specifically, RMG had introduced zero new products to the market in 3 years. He challenged the company to roll out 6 new products in 6 months, by generalizing some of their best one-time customer solutions. To date he has rolled out 3 products in 3 months, including software to facilitate office hoteling.
His other turnaround solutions included rethinking the global expansion strategy, developing a new marketing strategy focusing on the value proposition of the key products, and improving the sales leadership structure. In addition, on March 19th, RMG disclosed that it signed a non-binding letter of intent to sell its media business for $5.5mm.
Strategically, RMG is moving Enterprise Software more towards a Software-As-A-Service (SAAS) model and away from the traditional licence purchase model. While revenues may experience a decline during the transition, we feel the move will improve the sales experience and provide more smooth, consistent revenues for RMG.
In 2014, the company recorded total revenues of $61.8mm (including $14.8mm from the media business). RMG plans to be cashflow positive by the third quarter of 2015 through implementation of the turnaround initiatives. According to Michelson, the supply chain business has the most near-term opportunity for revenue growth. That business line generated less than $1mm of the total 2014 revenue, but the current pipeline in this channel is $8mm and the potential for this market is in the range of $50mm / year medium-term.
If Michelson and team can successfully execute on his turnaround initiatives, a rough income statement looks something like this on an annual basis, medium-term (2-3 years out):
Revenue: $100mm ($50mm current from call centers + $50mm potential from supply chain)
EBITDA: $15mm (15% margin) (source: management)
EV @ 10x EBITDA: $150mm
NOL’s Valued at: $10mm ($30mm of NOL’s valued conservatively at $10mm)
Total Value: $160mm
Shares Out: 37.2mm
Share Price: $4.30
If Michelson and team can increase call center revenues beyond the 2014 numbers, there is additional upside in our projections.
On March 9, RMG announced that it expects sequential adjusted revenue growth to exceed 30% in the fourth quarter with stable adjusted gross margin and improved adjusted EBITDA. Michelson is already making a big impact.
On March 25, the company announced a new financing which goes a long way in shoring up RMG’s balance sheet and eliminating its debt. We are happy to participate in the deal.
Overall, we are very excited about the opportunity to invest in a cheap company with an impressive client list including 70% of the Fortune 100. We think there is tremendous upside potential. While there is downside risk, we think the stock price is at a level where the risk / reward analysis is quite favorable.
Disclaimer: Bigger Capital and Bachelier, LLC are participating in the preferred shares transaction. RMGN is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. In other words, the probability of losing all your investment in this situation is very high.