Small Cap Values

PNI Digital Media reported the strongest quarter in the company’s history last week, however it was a little below my expectations.  The weakening US Dollar had an impact, but even backing that out transactions came in a little light.  Here’s the overview:

• Record revenues of $7.8 million, up 8% year over year and 14% from the prior quarter.
• Record transactional revenue of $6.2 million, up 7% year over year.
• Net profit for the quarter increased 32% to $1.2 million compared to $0.9 million in the first quarter of Fiscal 2009.
• Cash expenses fell 1% to $5.0 million for the quarter.
• Non-GAAP adjusted EBITDA of $2.7 million, an increase of 28% year over year.
• Non-GAAP adjusted EBITDA margin of 35.4% vs 29.8% year over year.
• Repaid the $937,548 short-term loan outstanding.

So while all that is good, I was expecting a little better.  Transactions were only up 16% to about 61.5k per day, I had been expecting closer to 64k or 65k per day.  Organic growth has slowed, and while they still are targeting 20% growth from existing partners, I think that may be a little aggressive.

Management is trying to monetize their network, but adding new “on ramps.”  They have 3 planned for the next 12 months, those being Mobile, Business Printing, and Social Stationary.  On Mobile, they have a contract signed, but can’t disclose it (this never sits well).  Business Printing “needs to be better than the initial pilot” with Walmart Canada which did not meet expectations.  And they are still working on a strategy for social stationary.

The good news is that management is keeping a handle on expenses, so while revenue may not be as strong as I had hoped, they should still have positive EBITDA.  Analysts are expecting $9m in EBITDA for 2010 and $12m for 2011, my estimates are not that far off.  The current market value is about $55m, they’ve got net cash of between $3m and $5m after adjusting for working capital needs, leaving an EV of about $51m.  Assuming they generate about $9m in EBITDA in Calendar 2010, it’s trading at a forward EV/EBITDA of only 5.5x (and only 7.6x trailing).  At this time next year, if the stock price doesn’t change, the forward EV/EBITDA will fall to 3.5x.

Clearly the stock is cheap, and management agrees.  They announced an intent for a share repurchase agreement, stating on the conference call:

We continue to be frustrated by our share price as it relates to the fundamentals of our company.  We believe the robust platform that we have built and the additions we are adding to it merit a higher consideration than we are currently seeing.  We are demonstrating our ability to scale and to generate greater revenues and profits, but our stock price has not moved accordingly.  With PNI now working capital positive, and starting to put a decent buffer of cash in the bank, we believe one of the best investments in the market are our own shares.

I couldn’t agree more.

Disclosure: Long PNDMF.

PNI Digital Media reported Q409 Earnings today after the market close.  And like most earnings reports, it was filled with both positives and negatives.  The conference call was very short with only 2 analysts asking questions, perhaps because the press release didn’t hit the wires until after the call had started!

The main negative to me was that average orders per day came in at only 38,000, compared to the 42,000 I had been expecting.  However, counteracting this decline was an increase in transactional revenue per order, from $1.26 last year and $1.27 last quarter to $1.43.  As a result, transactional revenue was up 26.6% to $4.95m and represented 72.6% of total revenue.

Other revenues also increased nicely, as installation, membership, archive, and professional fees all came in higher than I expected.

Gross margin (after deducting network delivery costs) increased to 80.1% from 77.7% last quarter and 62.9% last year.  The company started to leverage other costs as well, as sales and marketing declined, however G&A and R&D increased more than I had expected.

The end result was a profitable quarter, with EPS of $0.02 (taking everything, including foreign currency, into account) and EBITDA of just over $2m or $0.06 per share. EBITDA margin came in at 30.4%, a record high quarterly level.

For the full year the company saw $6.1m in EBITDA on $24.8m in revenue, an 24.7% margin.  This is about $0.18 in EBITDA per share, which means the company is trading at about 10x EBITDA, while I expect EBITDA to grow at a faster rate.

For the current quarter, while the company didn’t give any guidance, they did say that on the peak day they processed 150k orders, with over 2m prints, 5m photo uploads, and 2.5m greeting cards.  As a comparison, the peak day last quarter saw 150k orders.

They did warn that that recent decline in the US Dollar could hurt future results as revenue would have been only $23m had the exchange rate been where it is today for the full year.  Expenses, however, are in Canadian dollars so margins could suffer.

Doing some quick numbers, for Q1 I expect 65k orders per day on average leading to $7m in transactional revenue.  I expect total revenue to come in just shy of $9m, expenses just over $7.65m, for $1.3m in earnings, or $0.04 per share.  EBITDA should be around $3.2m, which comes out to about $0.094 per share, so we’ll see if they manage to round that up to $0.10.  My estimates could be high with the currency issue, but this is about 50% higher than last year on a 24% increase in revenue, the beauty of operational leverage.

That’s it for now, I’ll likely have more after reviewing the results more.  This quarter seemed much “cleaner” than the last quarter, however, as there wasn’t the strange marketing expense hurting revenue growth.  We’ll see how the market responds tomorrow.

Disclosure: long pndmf.ob.