I really got a lot out of this analysis. You did a great job of illuminating the financial mechanics of each operation. I have previously spent a lot of time researching this company but you helped me increase my ability to process all the data.
When I look at the financials now it's clear where all the pieces fit and to trace each dollar of revenue, debt, etc as well as how the acquisitions are unfolding.
"While most acquisitions done by ISC made sense on paper, the returns from acquisitions for ISC have been average at best."
Appreciate you reading it so thoroughly. Please feel free to write directly to me at fairwayresearch@gmail.com. Yes, this is a case where they have one terrific business (registries) and now that is not growing. They need to allocate all this cash, so they are buying business, which on a relative basis will always look subpar. Standalone they can decent(ish). Registries is just such as great business that any other business fades in comparison. I will give credit that management is trying to allocate the best they can, but still. I often wonder if they had done buybacks instead of acquisition would it have been better. I don't know, but it is worth thinking about.
May 21, 2023·edited May 21, 2023Liked by Fairway Research
Some thoughts...
1. The changes in the Ontario Business Registry are having a negative impact on ISV. (ISV has long been aware of these changes and has mitigated the effects by creating more services for their clients)
2. They have a 200M shelf prospectus in effect, providing them options for larger acquisitions.
3. The contrast with this company and Dye & Durham provides a lot of insight into how to and how not to run a company. The backstory of ISV and Dye & Durham/Matthew Proud is interesting as well, ISV at one time owned 30% of OneMove, which acquired dye & durham and operated it as a subsidiary. ISV acquired ESC which was part of Dye & Durham, ISV sold its 30% share of OneMove to its shareholders..
(Information Services Corporation (TSX: ISV) has sold its 30% interest in Dye & Durham Corporation (D&D) to the other shareholders of D&D for $25 million in cash.
On September 2, 2015, ISC completed a $3.3 million investment in OneMove Technologies Inc., acquiring 30% of the issued and outstanding voting common shares.
Matthew Proud and brother Tyler Proud, through Plantro Ltd., took OneMove Technologies Inc. in 2013.)
Yes, I agree with you. Do you see Teranet is their biggest competitor? Also, if the company somehow went bankrupt in 10 years, what do you think that could have caused it?
Again great question. Yes Terranet is the biggest competitor because they got Manitoba and Ontario. But I fee there is always be 2 players because of 1) the 30% ownership of gov and 2) comp bureau will go nuts if Terranet gets Saskatchewan as well ( Monopoly across Canada). The registry business will give about 300-350 mn of cash over the next 10 years. So one way to go bankrupt would be bad capital allocation towards horrible transactions at sky high multiples.
Mar 28, 2023·edited Mar 28, 2023Liked by Fairway Research
Agreed, I think you are spot on. I think it is also important they keep the culture of customer satisfaction at hand, which is rare in this industry I would say. That combined with disciplined acquisitions it is very hard to find negatives on the outlook of the company for the coming years.
One risk people have mention is blockchain taking over registries, but in my view government will be the last to move to blockchain. Plus they will never let go of a revenue source. Also rest of the provinces still have gov employees running registries and they are unionized and will not let blockchain take over. Low risk high cash flow business with a moat - available at an undemanding valuation.
Yes I agree, and if it comes there is always the opportunity to work with a blockchain instead of it being a threat. Same as they can use AI to optimize search and their database instead of seeing it as a threat. I'm sure they are aware of it and keep a close eye on potential movements.
Thank you for this great write-up, it is amazing. I was wondering what your thoughts are on the Share-Based compensation plan. When you combine the Performance Share units, Share appreciation rights, deferred share units and stock options you reach around 9,3% of the current market cap. Do you consider this positive as management will get (and basically indirectly already have) skin in the game and will be incentivised or is it simply dilutive to shareholders and considered negative?
Great question. I mean as investors we can’t eat our cake and have it. I like that management is incentivised through ownership, but again those options have high strikes prices. I remember the last CEO waited several years before exercising his options (probably because of tax). So there is incentive to help the share price do well. Yes dilution will happen, but I would rather have that than say a share dilution for making an expensive acquisition.
"I mean as investors we can’t eat our cake and have it."
Funny, I really chewed on that comp package and came to a similar conclusion as "Don't let perfect be the enemy of good"
They had such a nice run of 0 dilution, so that was definitely part of it, as well, a lot of literature really harps on avoiding companies with excessive comp/dilution.
I do not feel that applies in this instance.
OTOH, companies like F5 Networks show how bad it can be..
“Late in the fourth quarter of 2022, ISC, through its wholly owned subsidiary, Enterprise Registry Solutions Limited (“ERS”) commenced the implementation of integrated registry platforms for the Government of Cyprus (“Cyprus”), launched the States of Guernsey online Register of Charities and Non-Profit Organisations (“Guernsey”), and completed the development of corporate registry technology for Bonaire, Sint-Eustatius and Saba — all of which run on the RegSys solution.
The Cyprus project will deploy the RegSys platform to a complex and significant government department, the Department of Registrar of Companies and Intellectual Property, and is expected to revolutionize registry operations for the Government of Cyprus, bringing significant productivity increases, regulatory compliance and streamlined user experiences for individuals and companies who interact with the DRCIP registries. The total value of the contract (in partnership with another firm) is €10 million and ISC’s portion of this contract over the life of the project is €5.7 million (approximately $8.4 million).
In late 2022, the States of Guernsey launched the first phase of the online Register of Charities and Non-Profit Organisations to the public, operating on the RegSys solution, and transforming the way charities interact with the States of Guernsey. This first phase of the project is an important milestone for Guernsey, as RegSys will be used by Guernsey to demonstrate compliance during the imminent MONEYVAL evaluation — an examination of measures taken in the financial, regulatory and criminal justice sectors to combat money laundering and terrorist financing in the European Union.
The second phase of the project began in the first quarter of 2023, bringing the Corporate, Beneficial Ownership and Intellectual Property Registers onto the new RegSys platform to provide an integrated solution for the States of Guernsey. The total value of the two-phased project (including implementation and support and maintenance) is expected to be £7.7 million (approximately $12.9 million).”
Thank you for the well written/researched article. I have been an investor in ISV for 1 year. It will be very interesting to see things unfold, I see a lot of potential in this company and managements vision.
Congrats, great work! Do you have any extra information about the January 2023 acquisition of Regulis SA in Luxembourg? I did not say any price information in the news release, I guess small acquistion
Currently the company pays $500K per year to government. It might be higher in 2033. Right now it is too far out to guess. I read that Teranet paid $75 million one time plus $11 million annually for Manitoba 30 year contract. I guess we can take that as a cap? Company should be able to pass out prices to customers in that case
Additional thoughts..
I really got a lot out of this analysis. You did a great job of illuminating the financial mechanics of each operation. I have previously spent a lot of time researching this company but you helped me increase my ability to process all the data.
When I look at the financials now it's clear where all the pieces fit and to trace each dollar of revenue, debt, etc as well as how the acquisitions are unfolding.
"While most acquisitions done by ISC made sense on paper, the returns from acquisitions for ISC have been average at best."
That's the crux right there
Appreciate you reading it so thoroughly. Please feel free to write directly to me at fairwayresearch@gmail.com. Yes, this is a case where they have one terrific business (registries) and now that is not growing. They need to allocate all this cash, so they are buying business, which on a relative basis will always look subpar. Standalone they can decent(ish). Registries is just such as great business that any other business fades in comparison. I will give credit that management is trying to allocate the best they can, but still. I often wonder if they had done buybacks instead of acquisition would it have been better. I don't know, but it is worth thinking about.
Some thoughts...
1. The changes in the Ontario Business Registry are having a negative impact on ISV. (ISV has long been aware of these changes and has mitigated the effects by creating more services for their clients)
https://www.crowe.com/ca/crowesoberman/insights/everything-you-need-to-know-about-the-new-ontario-business-registry
2. They have a 200M shelf prospectus in effect, providing them options for larger acquisitions.
3. The contrast with this company and Dye & Durham provides a lot of insight into how to and how not to run a company. The backstory of ISV and Dye & Durham/Matthew Proud is interesting as well, ISV at one time owned 30% of OneMove, which acquired dye & durham and operated it as a subsidiary. ISV acquired ESC which was part of Dye & Durham, ISV sold its 30% share of OneMove to its shareholders..
(Information Services Corporation (TSX: ISV) has sold its 30% interest in Dye & Durham Corporation (D&D) to the other shareholders of D&D for $25 million in cash.
On September 2, 2015, ISC completed a $3.3 million investment in OneMove Technologies Inc., acquiring 30% of the issued and outstanding voting common shares.
Matthew Proud and brother Tyler Proud, through Plantro Ltd., took OneMove Technologies Inc. in 2013.)
Yes, I agree with you. Do you see Teranet is their biggest competitor? Also, if the company somehow went bankrupt in 10 years, what do you think that could have caused it?
Again great question. Yes Terranet is the biggest competitor because they got Manitoba and Ontario. But I fee there is always be 2 players because of 1) the 30% ownership of gov and 2) comp bureau will go nuts if Terranet gets Saskatchewan as well ( Monopoly across Canada). The registry business will give about 300-350 mn of cash over the next 10 years. So one way to go bankrupt would be bad capital allocation towards horrible transactions at sky high multiples.
Agreed, I think you are spot on. I think it is also important they keep the culture of customer satisfaction at hand, which is rare in this industry I would say. That combined with disciplined acquisitions it is very hard to find negatives on the outlook of the company for the coming years.
One risk people have mention is blockchain taking over registries, but in my view government will be the last to move to blockchain. Plus they will never let go of a revenue source. Also rest of the provinces still have gov employees running registries and they are unionized and will not let blockchain take over. Low risk high cash flow business with a moat - available at an undemanding valuation.
Yes I agree, and if it comes there is always the opportunity to work with a blockchain instead of it being a threat. Same as they can use AI to optimize search and their database instead of seeing it as a threat. I'm sure they are aware of it and keep a close eye on potential movements.
Thank you for this great write-up, it is amazing. I was wondering what your thoughts are on the Share-Based compensation plan. When you combine the Performance Share units, Share appreciation rights, deferred share units and stock options you reach around 9,3% of the current market cap. Do you consider this positive as management will get (and basically indirectly already have) skin in the game and will be incentivised or is it simply dilutive to shareholders and considered negative?
Great question. I mean as investors we can’t eat our cake and have it. I like that management is incentivised through ownership, but again those options have high strikes prices. I remember the last CEO waited several years before exercising his options (probably because of tax). So there is incentive to help the share price do well. Yes dilution will happen, but I would rather have that than say a share dilution for making an expensive acquisition.
"I mean as investors we can’t eat our cake and have it."
Funny, I really chewed on that comp package and came to a similar conclusion as "Don't let perfect be the enemy of good"
They had such a nice run of 0 dilution, so that was definitely part of it, as well, a lot of literature really harps on avoiding companies with excessive comp/dilution.
I do not feel that applies in this instance.
OTOH, companies like F5 Networks show how bad it can be..
“Late in the fourth quarter of 2022, ISC, through its wholly owned subsidiary, Enterprise Registry Solutions Limited (“ERS”) commenced the implementation of integrated registry platforms for the Government of Cyprus (“Cyprus”), launched the States of Guernsey online Register of Charities and Non-Profit Organisations (“Guernsey”), and completed the development of corporate registry technology for Bonaire, Sint-Eustatius and Saba — all of which run on the RegSys solution.
The Cyprus project will deploy the RegSys platform to a complex and significant government department, the Department of Registrar of Companies and Intellectual Property, and is expected to revolutionize registry operations for the Government of Cyprus, bringing significant productivity increases, regulatory compliance and streamlined user experiences for individuals and companies who interact with the DRCIP registries. The total value of the contract (in partnership with another firm) is €10 million and ISC’s portion of this contract over the life of the project is €5.7 million (approximately $8.4 million).
In late 2022, the States of Guernsey launched the first phase of the online Register of Charities and Non-Profit Organisations to the public, operating on the RegSys solution, and transforming the way charities interact with the States of Guernsey. This first phase of the project is an important milestone for Guernsey, as RegSys will be used by Guernsey to demonstrate compliance during the imminent MONEYVAL evaluation — an examination of measures taken in the financial, regulatory and criminal justice sectors to combat money laundering and terrorist financing in the European Union.
The second phase of the project began in the first quarter of 2023, bringing the Corporate, Beneficial Ownership and Intellectual Property Registers onto the new RegSys platform to provide an integrated solution for the States of Guernsey. The total value of the two-phased project (including implementation and support and maintenance) is expected to be £7.7 million (approximately $12.9 million).”
https://financialpost.com/globe-newswire/isc-reports-2023-first-quarter-financial-results
Thank you for the well written/researched article. I have been an investor in ISV for 1 year. It will be very interesting to see things unfold, I see a lot of potential in this company and managements vision.
Congrats, great work! Do you have any extra information about the January 2023 acquisition of Regulis SA in Luxembourg? I did not say any price information in the news release, I guess small acquistion
Thanks! Barely anything out there. Will need to wait until Q1 is reported.
Regulis was acquired for 652K
Excellent stuff! How much did your DCF factor in as the cash outflow relates to the MSA renewal?
Currently the company pays $500K per year to government. It might be higher in 2033. Right now it is too far out to guess. I read that Teranet paid $75 million one time plus $11 million annually for Manitoba 30 year contract. I guess we can take that as a cap? Company should be able to pass out prices to customers in that case