Management Insight: An Interview With Mark Meller, CEO of SilverSun Technologies:
Tom: Hello Mr. Meller, thank you for providing investors and readers with your valuable insight into SilverSun Technologies.
Mr. Meller: Thanks for having me, Tom. It was a pleasure meeting with you recently at our offices. I appreciate the opportunity to speak with your subscribers.
Tom: I see that SilverSun, through its fully owned subsidiary SWK Technologies, has three key business segments. Can you offer a quick overview of each segment, and how much each segment accounts for your revenue?
Mr. Meller: We have three different primary business units. They are:
1. Proprietary Software - We publish 20 different solutions which are sold into the SMB marketplace, both directly and via a network of 100+ business partners. These partners are primarily, but not exclusively, other software VARs. Our largest and most important solution is MAPADOCtm, which is an integrated electronic data interchange ("EDI") solution that enables manufacturers and distributors to trade business documents (sales orders, shipping notices, etc.) digitally with their big-box customers (Walmart, Target, Walgreens, etc.) With approximately 400 active end-user customers, the number of implementations of MAPADOC has doubled over the last 4 years. We also have products for time & billing, warehouse management and a number of verticals where we have a client concentration.
We also publish a SaaS ("Software as a Service") solution for the craft beer brewing industry called BeerRun. In just two short years since the product's introduction, BeerRun is the most widely used industry management software for small and craft breweries. With BeerRun, brewers can plan their batches, view schedules and ingredient forecasts, purchase ingredients, enter bills, sales orders and email invoices, produce and pack, and file their TTB Excise Returns and Brewer's Report of Operations easily and efficiently.
This division provided roughly $4.4 million in revenue in 2013, out of total revenue of $17.4 million.
2. ERP Software - We are a value-added reseller and master developer of ERP software published by Sage, a publicly-traded company listed on the London Stock Exchange. We sell, implement and customize Sage 100 ERP, Sage 500 ERP and SAGE ERP X3. We believe we are the largest reseller of Sage ERP X3 in the U.S. There are in excess of 1,000 total Sage resellers in the U.S., and we believe that we are among the 10 largest.
We also resell ERP solutions published by NetSuite and Acumatica. In addition, we are resellers of business intelligence software published by Qlikview and Tangerine, and we resell warehouse management solutions published by Accellos. We have also integrated the various Sage ERPs with Accellos WMS.
We customize all of the Sage ERPs that we sell and support, creating both a differentiator for the company compared to our competition, AND a way to keep our clients "stickier."
This division provided roughly $11 million in revenue in 2013, out of total revenue of $17.4 million.
3. Managed Service Provider - Our network services group provides 24/7 remote monitoring of our customer's networks, and provides business continuity and disaster recovery services. In addition, we provide data backup, both via an onsite appliance or in the cloud. We also do network configurations, and some break-fix work.
This division was responsible for roughly $2 million in revenue in 2013.
Tom: Within your EDI segment, namely Mapadoc, how are you going about bolstering growth for this segment? Are you approaching and communicating the benefits of your EDI solutions to large retailers and businesses?
Mr. Meller: We have a national footprint where MAPADOC is concerned. We sell directly nationally, and we have a reseller network of over 100 organizations who sell MAPADOC to their clients.
Most importantly, though, we have a partnership with a large NASDAQ company, SPS Commerce, which is rapidly growing. SPS developed a platform that enables highly cost-effective and reliable trading partner collaboration. This platform has enabled SPS to grow to over $100 million in revenue. SPS resells MAPADOC to their customers who are presently running either Sage 100, Sage 500, or ERP X3. As a result, our sales continue to grow as SPS Commerce sales continue to grow.
Tom: I see in your investor presentation and through SilverSun's history that acquisitions play a big role in growing your business. Are these acquisitions related solely to bolstering growth for the second area of your business - as a Sage reseller?
Mr. Meller: Not at all. While most of our acquisitions have been in the Sage reseller space, this is more a function of there being more attractive acquisition candidates in that space than elsewhere. We want to be acquisitive in every area of our business, but we seek reasonably priced deals that are accretive to earnings day one. We look at many deals on a monthly basis to find the deals that are right for our formula.
Tom: How many Sage resellers exist or are potential buyout candidates by SilverSun? Do you have a revenue target for your Sage segment, or a total number of buyouts in mind - is there a ceiling on the revenue you can earn from Sage linked to acquisitions?
Mr. Meller: There are literally hundreds of potential buyout candidates in the Sage channel, most of whom are relatively small. Our acquisition model points to companies doing greater than $1 million in sales, and are profitable and sustainable, with management and technical resources in place, and with geography that expands our reach (We currently have offices in Livingston, NJ, Syracuse and Buffalo, NY, Skokie, IL, Costa Mesa, CA, Minneapolis, Dallas, and Phoenix.) There is no limit to the number of buy-outs we would theoretically do, nor is there a ceiling on what we can earn. In addition to intellectual property and skilled technicians, the key asset for us are the customers; if the target acquisition has done their job well, the customers will be extremely "sticky," which will provides us with upsell and cross-sell opportunities for diverse products and services.
Tom: Do you have a greater product discount from Sage over these smaller resellers? Is this why it is accretive to acquire these smaller resellers?
Mr. Meller: Resellers receive a discount from the software publishers based on their sales volume. We are at the highest level of discount from Sage, while most resellers are at significantly lower margins. This alone does not make the acquisitions accretive. Rather, it is our ability to negotiate well and buy right that enables us to do accretive transactions.
Tom: Are you only looking for smaller resellers, or are there any larger targets that SilverSun can go after as potential buy out candidates that will be accretive to your business?
Mr. Meller: We will talk with any acquisition candidate that wants to meet, regardless of size. Our existing infrastructure can handle revenues in excess of $40 million, so we have the existing capacity to do larger transactions.
The acquisition we closed in May 2014 was for a company that did $1.7 million in top-line revenue for 2013. We previously had entered into a letter of intent in November 2012 for a company that did $7 million in top-line revenue. That deal did not close due to the owner deciding to take the company off the market. I raise the issue simply to illustrate the point that we are not just looking at small operations.
Tom: What else do you gain from these acquisitions? Such as human capital and acquiring employees that do not need to be trained or a customer base you can up-sell and cross-sell other products to?
Mr. Meller: The most important thing we gain is customers. We do a very good job of servicing clients, which yields us a very high customer retention rate. We generally know that once they are part of our family, they very rarely leave. As a result, there are numerous and profitable products and services we can cross-sell and upsell to them.
The next important thing we gain is talented resources. Our company has grown at a compound annual growth rate of 32% the last 4 years, and the only limiting factor in our growth is having the right people with the right skill sets on staff. We have grown from less than 50 employees 2 years ago to over 90 today. Recruiting talented and qualified people is difficult. Acquiring them as part of an acquisition is easier. Therefore, the human element is a very important variable in our acquisition.
Tom: What is SilverSun doing to market BeerRun? How big is the market potential for this SAAS solution?
Mr. Meller: We are attending more events and recently hired a new development director for BeerRun. The following shows the growth in the number of customers over the past few years:
As of 12/31/11: we had 2 live BeerRun clients
As of 12/31/12: we had 20 live BeerRun clients
As of 12/31/13: we had 58 live BeerRun clients
As of 08/31/14: we have 87 live BeerRun clients
Tom: Can you share your gross margins for each business segment?
Mr. Meller: While we have never publicly disclosed gross margins by segment, margins across all of our business lines exceed 42%, as reported in our public filings. We continue to work on maximizing operational efficiencies, always seeking to further increase earnings leverage.
Tom: SilverSun is now the largest reseller of Sage software in the U.S. Does this fact help you compete with larger players such as SAP and Oracle? Why will Sage software remain competitive in the face of the much larger players' ERP software solutions?
Mr. Meller: We are among the largest Sage resellers in both the SMB market and the Mid-market. Generally speaking, SAP and Oracle typically don't play much in these spaces, which is our bread and butter.
We do, however, compete with SAP and Oracle on Tier I opportunities, which are significantly larger and more complex. In those situations, we are typically presenting the potential client with Sage ERP X3 as an alternative to SAP and Oracle. We compete on price and functionality, and also on our company's background and experience as a trusted business advisor, and we have won more than our fair share of these opportunities over the last 3 years. In fact, in just the last few weeks, we publicly announced one of those larger wins.
Tom: How lucrative is the consulting and installation side of your business? Does this add a high level of stickiness to your business as business owners do not want to take part in another set up which can take them away from running their businesses?
Mr. Meller: Consulting is an indispensable part of our business, and it is quite lucrative. We do not sell "plug and play" software. Rather, once a software license is sold, our consultants will implement, customize and do programming such that the software operates in accordance with the business processes of the client. As a rough rule of thumb, we expect consulting revenues of $1.50-$2.50 for every $1 of software license cost. Therefore, a $100,000 license will generate anywhere from $150,000 - $250,000 in consulting revenue. This will result in a total transaction value between $250,000-$300,000.
Tom: How high is the insider ownership percentage at SilverSun Technologies, or SWK Technologies?
Mr. Meller: My management team and I own approximately 90% of SilverSun. I personally own 51% of the Company. SilverSun is really a total equity play for myself and my management team. Our goals could simply not be more, or better, aligned with those of our shareholders. Our clear vested interest means we are extremely focused on doing those things that lead to the creation of increased and sustainable shareholder value.
Tom: I see that SilverSun has every Nasdaq requirement to up-list except two, share price and net tangible assets. Can you give us a projection on when SilverSun is looking to uplist, or what you are doing to satisfy the remaining two requirements?
Mr. Meller: I am always reluctant to project, but I can say in no uncertain terms that listing on an alternative exchange, such as Nasdaq, is one of management's primary identified goals. While we can make no assurance of if and when, we are keenly aware of the fundamental importance of earning such an opportunity. We fully understand what must occur in order to facilitate such an opportunity and the associated benefits should it be accomplished.
As large shareholders in the company, you may rest assured management has laid out a strategic plan, already in motion, which we believe if successful could help us realize this opportunity, potentially within the next couple of quarters.
Tom: Shares of SilverSun are hard to buy due to the company being illiquid. Should investors pay less attention to the PPS due it being less transparent? Will a future raise to satisfy one of the two remaining Nasdaq requirements increase liquidity?
Mr. Meller: Management's focus over the last year or so has remained on fundamentals. Having successfully delivered consistent revenue growth and profitability, we believe SilverSun now offers investors real long term value appreciation potential. For example, peer public companies generally trade at around 2.4x revenue, while we currently trade at .87x revenue. As a result, some investors may consider SilverSun a good growth investment opportunity at a very reasonable price.
Because of management's considerable vested interest in the company, it was important to us that when we began to be more pro-active in terms of our corporate communications, something we have just recently begun, that our financial results spoke for themselves. We felt the best way to establish credibility with investors was to deliver tangible results that confirm we're doing exactly what we stated we would. I'm proud to say I believe we've done just that.
You'll notice that in recent months, we have turned our attention to trying to better communicate with the marketplace and shareholders. We issued a shareholder letter, launched a new shareholder friendly website, attended an investor conference and issued numerous releases on real and relevant corporate accomplishments. We fully understand that successful corporate communications is a process and not an event, it takes time and consistency. We understand that investor goodwill is something that must be both earned and maintained through proper corporate communications and transparency.
While our shares still could be considered somewhat illiquid by some standards, we have seen a nice increase in interest since we commenced the initiative. Yahoo Finance reports our volume of the last 3 months being approximately 38,000 shares per day. We clearly hope that with continued communications and a possible future up-listing, more investors will become aware of the SilverSun story.
Tom: Can you share your employee turnover rate with us?
Mr. Meller: It is very small. We currently have 90 employees, and I would guesstimate that we turn over 5 employees per year.
Tom: I see that Sage ended support for Sage Pro ERP on March 31, 2014. Is Sage ending this product all together, or simply ending support for an outdated version? I ask since this software is a key portion of your business.
Mr. Meller: We were never resellers for Sage Pro ERP, so the end of life announcement had little impact on our business. We did, however, acquire a former Sage partner's book of business not too long ago and there were approximately 150 Sage Pro ERP customers, all of whom have been targeted to migrate to one of our other solutions. Typically, Sage and other publishers will, from time to time, terminate support for an older product while simultaneously providing a roadmap for the customers to migrate to another, more current solution.
Tom: In modeling, how can we account for "Gain from bargain purchase interest expense, net" and your outstanding share count? The latter applies since I am assuming shares will be generally used in your acquisition of Sage resellers.
Mr. Meller: "Gain from bargain purchase interest expense" refers to our buying assets for less than their fair market value. We were able to do this once back in 2012 when we acquired Hightower, but it is difficult to presume that we will be able to do so again with any regularity. I would suggest that these "gains" not be factored into any model.
We are generally reluctant to issue any shares for acquisitions, since we regard our stock price as grossly undervalued. As a result, we have not issued shares in any of the acquisitions we have done in the last 3 years, although we have issued some options with strike prices in excess of $0.15 per share.
Tom: I see your top line growth has been impressive, with a CAGR of 32% over the past four fiscal years, although your net income only increased around $5K this most recent quarter on a Q/Q basis. What are you doing to bolster bottom line growth?
Mr. Meller: We are currently in the midst of rationalizing our expense structure and headcount so that it more closely aligns with our current level of revenue. I would expect that we will see increased profitability from these efforts over the balance of 2014 and beyond.
Tom: How can investors model your growth moving forward since these acquisitions vary on size and in ability to cross-sell and up-sell other products to their customer base - coupled with the other segments of your business?
Mr. Meller: I would hold us to the 30+% growth figure going forward. We internally target a payback on our acquisitions of 30 months or less, assuming no growth from the time of acquisition. Therefore, we are effectively paying 2.5x EBITDA, or less, on the acquisitions we have already completed.
Tom: Will SilverSun's growth accelerate on an exponential basis rather than an arbitrary rate due to the increase in your ability to up-sell and cross-sell to your acquired companies' customer bases, growth in your recurring revenue?
Mr. Meller: We are growing rapidly, and I see no reason for that to change. I have publicly stated that our goal is for revenue of $50 million by the end of 2015.
Tom: How much of your revenue is from recurring revenue? Do you view SilverSun's recurring revenue as a solid income stream coupled with a lucrative consulting and installation services section linked to your software sales?
Mr. Meller: Recurring revenue exceeded $6 million in 2013, greater than 1/3 of our total revenue, and it is up again in 2014. Every business decision we make is with the notion of increasing our recurring revenue base. Our ultimate goal is to have our recurring revenue equal or exceed our selling, general, and administrative expenses, such that every dollar of gross profit associated with software sales will drop immediately down to net income. While we have a ways to go to accomplish this task, it is clearly front and center in our minds.
Tom: How important are the other areas of your business, such as Cloud/Managed Services or your Professional Services Group? Are these both secondary to EDI and ERP?
Mr. Meller: Cloud and managed services are an integral part of our business, having grown by over 40% in 2013. As more and more SMB companies migrate to the cloud, they will need the expertise we offer in order to maximize their cloud initiatives.
Professional services are a fundamental part of what we do, with almost every sale involving some consulting time. Consulting is inextricably linked with all our products and services, and I don't foresee that changing anytime soon.
Tom: What do you see as the biggest risk to your business and what are you doing to combat it?
Mr. Meller: The greatest potential risk to our business is managing our rapid growth and successfully integrating our acquisitions. However, because of our past experience in doing both, we do believe we have dramatically mitigated such considerations.
Tom: How many acquisitions are you seeking for the rest of 2014? And also in 2015?
Mr. Meller: We have already successfully completed one acquisition in 2014. I think we can comfortably predict that there will be at least two more in 2014. As for 2015, it's difficult to say, but rest assured that acquisitions are an important part of our growth strategy and you can reasonably expect that we will continue to aggressively pursue highly accretive transactions throughout 2015 and beyond. The beauty of being in our position is that the space remains fragmented with no shortage of opportunities, this allows us to be highly selective.
Tom: Can you share your quarterly burn rate with us? Will you have to raise money for operations moving forward or is your robust cash position and profitable business enough to cover your expenses?
Mr. Meller: We are a profitable company, with positive cash flow, and as such, we do not have a "cash-burn." The only reason we would have to raise money would be to facilitate an acquisition or to increase our net worth so that we would be eligible for an uplisting on either NASDAQ or the NYSE MKT. We would view any associated raise under either circumstance as opportunistic and capable of resulting in increased shareholder value.
Tom: What is your personal long term objective for the company and is there anything else you would like to say in conclusion?
Mr. Meller: First, I would simply again like to thank you for this opportunity. Because of our proximity and your ability to always come see us, please know our door is always open to you.
Second, my primary goal remains on the continued execution of our business plan and hitting our stated objectives. I do believe if we continue to do this, it's highly probable that we too may become a very attractive potential acquisition target for a larger player. If and when that happens, we will review and consider any opportunity that was to the benefit of all of our shareholders.
