TIO Networks (fka TNC)

[junkHustler]

Even With Raised Expectations, Tio Networks Still Has Room To Appreciate
Jan.13.17 - Dan Stringer

Tio Networks has spent most of 2016 integrating its game-changing acquisition of Softgate Systems.

Tio has achieved significant cost savings during this process, while also beginning to cross-sell its services to its expanded client base.

Tio's business model is beginning to generate a substantial float for its operations.

Please note that due to the higher liquidity of Tio Networks on the TSX exchange via the ticker TNC.V, all amounts in this article are in Canadian dollars. This is consistent with its reporting currency.

In the course of my investing career, I have learned it is worthwhile to go back and revisit the thesis on an investment to ensure it remains valid, whether or not its share value is up or down. Early on, I did this only for companies where the share price had gone down as I wanted to find out where I had gone wrong. I have always struggled with when to sell my winners, even though I do use a trailing stop methodology in most cases to take this decision out of my hands. Small and micro-cap companies can have wild swings, which sometimes are not supported by the trailing stop methodology.

When I first profiled Tio Networks Corp. in July of 2015, its shares were trading at $1.12 CAD; today shares sit at $2.88, a gain of 157.1%. In a subsequent follow-up article in January of 2016 after shares had run up to $2.20, I argued that Tio continued to be a discounted growth stock. A year later, it is time to review the Tio Networks story as to whether it still remains a good value.

As a brief refresher, Tio Networks Corp. is part of the growing FinTech industry. It is a cloud-based provider of bill payment and receivables management services, with focus on telecom, wireless, cable and utility businesses. Its system integrates with these front end providers in order to facilitate payment by those who fall outside the traditional banking system, the so-called "under-banked."

According to a recent FDIC survey, almost 20% of Americans are either un-banked or under-banked in 2015, the same percentage as in 2013. Within this amount, the un-banked percentage fell from 7.7% to 7.0%. This percentage has fallen as companies like Tio Networks have been providing services to people to whom the current banking system doesn't support.

Operations

Over the last year, Tio has been integrating Softgate Systems into its business platform. One of the big benefits of the acquisition to Tio was that Softgate was a licensed money transmitter in 46 states and the District of Columbia. Due to the change in control, all the regulatory filings had to be done to transfer these licenses to Tio in order for it to operate going forward. This was a much easier process than it would have been to go it alone, but it still took time to execute but still took some time in order to get all the approvals in place before the transaction could officially close.

The rationalization of the combined operations took place in parallel, with Tio announcing in October 2016 that the first phase of the integration process was done. Results were positively impacted almost immediately, as we can see in Tio's quarterly results where its adjusted EBITDA has improved for 8 straight quarters:

Source: 2017 Q1 MD&A

In my original analysis, I had estimated their margins going forward at about 40%. This has proven quite low with Q1 2017's gross margin at 48.8%, which even included some one-time costs associated with retention bonuses associated with the Softgate acquisition. The synergies I had anticipated are likely much higher than I had anticipated (management has estimated them at $6m in EBITDA annually). It may also be that we have more clarity on the actual performance of the old Softgate business now that it is publicly reported.

Tio's revenues have not marched up in a linear manner. Even before the integration of the Changesmart and Softgate acquisitions, Tio's revenues varied quarter to quarter, though in an overall uptrend. This can be driven by different billing cycles and the timing of payments with different customers. Based on the company announcement in October, they have spent a lot of time reorganizing the company's business lines as well as rationalizing the business. This has clearly helped the bottom line, but it also looks like some in-roads into cross-selling its products have been taking place as well..

Read more: http://seekingalpha.com/article/4036681-even-raised-expectations-tio-networks-still-room-appreciate