DTGI, A high tech growth story to keep your eye on.
Digerati Inc: (OTCQB: DTGI)
Digerati has a solid track record of launching successful and award-winning subsidiary operations. Digerati management has used its acquisition strategy to create some very unbelievable opportunities for shareholders in the past. Digerati subsidiaries have included ATSI Communications, Inc., an international telecommunications operator serving emerging markets in Latin America, and GlobalSCAPE, Inc., an Internet software company specializing in secure file transfer. Digerati reached nearly a US$500 million market cap trading on the American Stock Exchange under its former name of ATSI Communications, Inc. (AMEX: AI). Prior to its AMEX listing, the Company spun-off GlobalSCAPE to its shareholders as a separate publicly-traded company that reached a peak market value of US$120 million. Today, GlobalSCAPE trades on the New York Stock Exchange under the symbol GSB. Past successes often lead to positive future results.
-Present Operations:
Currently, Digerati has subsidiary operations in the Unified Communication as a Service (“UCaaS”) - Cloud Communication industry. Through its wholly-owned subsidiaries, Synergy Telecom (“Synergy”) and T3 Communications (T3), the Company is meeting the global need of businesses seeking simple, flexible, efficient, and cost-effective communication solutions, including fully hosted IP/PBX, VoIP transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™ via its global carrier-grade network. Digerati targets the small-to-medium-sized-business (“SMB”) market and is capitalizing on the wave of migration from the traditional telephone network to cloud telephony. Digerati announced the acquisition of Synergy Telecom in December 2017, which doubled its Texas-based revenues by adding a solid base of customers throughout Texas, including the Cities of Rockport, Glenrose, and Lake Worth, as well as Texas Workforce Solutions, Star Shuttle and the McNay Art Museum. This transaction added more than 35-years of combined VoIP experience and an executive sales team with extensive channel experience with the likes of Vonage. Aside from an immediate increase in revenues, cost synergies will also be realized in a relatively brief period of time by combining the two entities. Most importantly, Synergy’s culture of service aligns extremely well with that of Digerati.
Digerati also completed the acquisition of T3 Telecommunications on May 2, 2018 (“T3”). T3 is an established VoIP and cloud communications provider serving a high-growth corridor in Southwest Florida. The business combination with Synergy results in a telephony operator serving nearly 10,000 business users and generating approximately $6.2 million in annual revenue and positive cash flow from operations.
On June 18, 2018 Digerati closed the acquisition of a minority ownership in Itellum Communications Costa Rice S.R.I., A fully-licensed telecommunication and Internet service provider serving the Central American market. Itellum is involved in rapidly growing telecom sectors including 1:1 international fiber optic networks, Cloud and Unified Voice Services and other data centric solutions.
-Opportunity:
With a highly-fragmented market littered with VoIP/cloud communication providers, the recent acquisitions of Synergy and T3 serve as a foundation for Digerati’s future acquisition and “roll up” of other profitable providers generating between $2 and $10 million in annual revenue. The integration of telecommunications infrastructure, back office, and network facilities will result in cost synergies that will produce additional profits and improved returns. Digerati targets regional VoIP providers serving the SMB market that have excelled at sales and customer service with that “local” touch that has displaced national players with high customer attrition like Ring Central, Vonage, and 8x8.
The Digerati Management Team believes that an improved return on investment can be achieved through its publicly-traded currency. The Company’s strategy is to acquire other UCaaS providers at current industry multiples for private companies (3-4 x TTM EBITDA), then realize a premium in the public markets at multiples superior to that of private-company values (4-5 x TTM revenue), In the case of Synergy and T3, smaller VoIP providers with closely held ownership have limited exit strategies, thus making a transaction with Digerati a compelling alternative that provides upside potential and liquidity for stakeholders.
-Market:
Digerati targets SMBs that account for approximately 98% of all businesses in the U.S. and are considered the backbone of the country’s economy. There are an estimated 27 million SMBs in the U.S. that employ almost half of all private sector employees. The U.S. Small Business Administration defines small businesses as those with 500 or fewer employees, but some statistics classify businesses with 500 - 999 employees as the high-end of the SMB market. Most SMBs are lagging in technical capabilities and advancement and seldom reach the economies of scale that their larger counterparts enjoy, due to their achievement of a critical mass and ability to deploy a single solution to a large number of workers. SMBs are typically unable to afford comprehensive enterprise solutions and, therefore, need to integrate a combination of business solutions to meet their needs. Cloud computing has revolutionized the industry and opened the door for businesses of all sizes to gain access to enterprise applications with affordable pricing. This especially holds true for cloud telephony applications, but SMBs are still a higher-touch sale that requires customer support for system integration, network installation, cabling, and troubleshooting. 75% of SMB’s have not migrated to a UCaaS or VoIP solution, which represents a market opportunity in the U.S. valued at approximately $26 billion. The potential replacement market for legacy, on-premise phones systems is roughly $15 billion in North America alone. The recent acquisitions by Digerati creates a cloud communications provider well positioned at the forefront of an industry-wide shift towards cloud and managed services and is geographically well positioned to offer that “local” touch to the SMB market in Southwest Florida and Central and South Texas.
-Products:
Digerati has developed an extensive portfolio of cloud-based telephony-enabled products and services, including enhanced applications that are not available through the traditional phone network. The companies’ fully-hosted products are feature rich that ultimately translate into efficiency and simplicity for end-users. Unlike legacy phone systems, Digerati are delivered over the Internet, eliminating the need for costly and complex premise-based equipment, while delivering enhanced telephony features at a lower cost to end-users and providing greater deployment flexibility across multiple locations.
Through its subsidiaries, Digerati offers Total Office, an integrated suite of communication tools delivered to end users simply and easily through a hosted and managed platform. The Total Office solution includes hosted PBX, Voice-over-IP telephony, hosted faxing (desktop and device-based faxing), voice and web conferencing, and integrated mobility that is device and location agnostic. The Company also offers enterprise-class data and connectivity solutions through multiple broadband technologies including SD-WAN, DSL, fiber, Ethernet over copper, and fixed wireless. As an end-to-end communications provider, Digerati commonly offers high speed Internet and enriched voice solutions as a bundled solution with its cloud services. Other services include remote network monitoring, data backup and disaster recovery.
-Competitive Landscape:
The market for cloud communication services is competitive, very large, and is highly fragmented. In hosted VoIP services, The Company competes with national firms, including Vonage, 8x8, Inc., and RingCentral. Each of these firms target business customers directly on a nationwide basis but have done a poor job with customer support. Competitors, like RingCentral, have high churn rates due primarily to the inability to provide SMB accounts with satisfactory support in the SMB’s local market. The incumbent carriers, including AT&T, Spectrum (f/k/a Time Warner), and Verizon have each entered the VoIP market by integrating SIP trunking and hosted PBX services with their Internet bandwidth solution. The incumbents, that primarily target much larger enterprise accounts, do not provide adequate support to the small business customer. This results in pain points for SMB customers; slow response times, finger pointing, and a lack of dedicated engineering. Unlike Digerati’s products, the incumbents’ product offerings are “off-the-shelf” solutions that lack end-user customization. In terms of pricing, Digerati’s products are competitively priced with those of the national firms and incumbents.
-Seasoned Team:
The Digerati Management Team is comprised of members with individual strengths that complement and enhance each other, creating solid visionary leadership. Collectively, the Digerati Team has over 150 years of telecommunications industry experience, and over 60 years of public company operations experience. The Team’s diverse set of skills include specialization in sales, business development, engineering, operations, and finance.
-Revenue Growth:
Digerati's revenue growth has been nothing short of amazing.
They disclose in the April 30, 2019 Form 10-Q:
“Cloud-based hosted services revenue increased by $1,289,000, or 658% from the three months ended April 30, 2018 to the three months ended April 30, 2019. The increase in revenue between periods is primarily attributed to the increase in total customers acquired from the acquisitions of T3 Communications, Inc. and Synergy Telecom’s assets. Our total number of customers increased from 145 customers for the three months ended April 30, 2018 to 688 customers for the three months ended April 30, 2019. Additionally, our average monthly revenue per customer increased from $466 for the three months ended April 30, 2018 to $723 for the three months ended April 30, 2019.”
These results are impressive:
-ARPU almost doubled to $723 in Q3 of fiscal 2019, compared to $466 in Q3 of fiscal 2018.
·-Sales growth was up 658%
-Gross margin was also up, and reached 48%
-Future:
Digerati is growing exponentially by exacting balances of proprietary technology, open system components, the cloud-based network, network partnerships and innovative marketing strategies. This has provided Digerati enormous cost advantages over other cloud-based service providers. The strength of their technology and the power of their business model position them for very rapid near-term and long-term growth and resilience when competing against other service providers,
In addition to executing on its organic growth strategy, the Company is continuing its disciplined approach to acquiring cloud communication service providers that have excelled at serving regional markets in the U.S. With a solid operational base in Texas and Florida, Digerati is well positioned to execute on this key strategic initiative and increase its market share in the 2nd and 4th largest state economies in the U.S.
With rapid sales growth comes a substantial market opportunity for investors. Digerati only has a market cap of .5 times next years estimated sales. With the company's top line sales growing at a massive 658% the stock should be trading closer to a market cap of 10 times next years sales as other market participants in this rapid growth cycle typically do. If Digerati traded at ten times annual revenues, its stock would be trading between $2.50 and $2.75 per share offering Digerati investors a huge upside from current market levels. Further, Digerati is working on another acquisition which we believe will demonstrate management's effective, proven strategy of using the DTGI public company vehicle to integrate cloud telecommunications companies that can expand sales growth with minimal dilution. Digerati is quickly becoming a rising star in the telecommunications industry with its thoughtful approach to using disciplined valuation metrics to find hidden value in cloud based assets . Management has been very successful in the past at both up listing their stock and spinning off subsidiary assets at large premiums to acquisition cost and one can clearly see management setting up to do the same again in short order. Management has used this M&A strategy in the past with substantial results. Bright days are ahead for Digerati shareholders as the company continues to demonstrate a huge success at building its assets with their acquisition strategy that we believe will expeditiously create tremendous shareholder asset value resulting in a large share price increase for the stock.
Share structure:
-Outstanding Shares: 22,449,204 shares.
-Float: 6,111,558 shares.
We give DTGI a thumbs up!
