Systems Products International Inc. (KWY) Earnings Call Transcript & Summary

Greetings. Welcome to the Kingsway Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, James Carbonara with Hayden IR. You may begin.

Thank you, operator, and welcome once again to Kingsway's conference call to discuss the formation of Vertical Market Solutions, LLC, or VMS, and the acquisition of Systems Products International, or SPI. With me on the call are J.T. Fitzgerald, Chief Executive Officer; Kent Hansen, Chief Financial Officer; and Drew Richard, the incoming CEO of SPI. Before we begin, I want to remind everyone that today's conference call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses and future business outlook. Actual results or trends could differ materially from those contemplated by those forward-looking statements. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see the risk factors detailed in the company's annual report on Form 10-K as well as other reports the company files from time to time with the Securities and Exchange Commission. Please note, too, that today's call may include the use of non-GAAP metrics that management utilizes to analyze the company's performance. A reconciliation of such non-GAAP metrics to the most comparable GAAP metrics is available in our periodic filings with the SEC. Now I'd like to turn the call over to J.T. Fitzgerald, CEO of Kingsway. J.T., please proceed.

Thank you, James, and welcome, everyone. We are pleased to announce today the formation of Vertical Market Solutions and the acquisition of SPI Software. I'm joined on the call today by Kent Hansen, our CFO; and Drew Richard, our most recent Operator-in-Residence turned subsidiary CEO. Holding a shareholder call after an acquisition announcement is a new format for us. We thought it would be a timely and informative way to introduce the transaction and answer any questions you might have about the company. We hope it will also serve as a great way for you to meet Drew. SPI, which is based in Miami, is a preferred partner in the development of software products created exclusively to serve the management needs of all types of shared ownership properties. The SPI platform includes a comprehensive set of modules with software solutions to cover the entire vacation ownership enterprise, sales, property management, loan servicing, receivables management, integrations and mobile applications. As we mentioned in the press release, this is our fourth acquisition in the Kingsway Search Xcelerator Program and our first in the vertical market software sector. SPI meets our criteria of a recurring revenue business model with strong margins and low capital intensity within a large and growing industry. We anticipate an immediate positive impact on earnings. Although smaller in scale compared to our typical acquisitions, we are enthusiastic about SPI, our first addition under VMS, considering its impressive history and future potential under Drew's leadership. I'm sure everyone is eager to hear about the financials, so I'll pass it to Kent to cover that portion now and then turn it over to Drew to share some more details about the opportunity.

Thanks, J.T. From a financial highlights perspective and rationale, in the trailing 12 months, SPI had $2.6 million in recurring revenue and roughly $300,000 in adjusted EBITDA, low customer concentration, extremely low churn and demonstrated resilience through the COVID-19 pandemic and other challenging times, add to our excitement about this acquisition. Valuation represents just over 1x ARR and approximately 9x adjusted EBITDA. We expect the high gross margin business model to help enable realization of our growth plans over the medium term. The purchase was paid in cash. Additional working capital and potential growth funding may be achieved through a future credit facility. Now I'll turn it over to Drew for some industry and company details. Drew?

Thank you, Kent. The fractional ownership and timeshare markets are growing, projected to continue outpacing GDP by a wide margin. This is driven by growth in high net worth individuals, an enduring desire to vacation and secular trends towards services, simplification and consumption through experience. SPI has a 45-year history of serving its customer base in this unique industry. The company has an established, a knowledgeable team and an excellent product. Our top priority in the near term is the study and formulate a plan for growth. There are many exciting opportunities that we will be taking a measured approach to execution. I'm thrilled to be joining the SPI team and legacy at this juncture. The market fits our M&A requirements as it is characterized by fragmentation and it is anticipated that its growth will surpass GDP expansion in the foreseeable future. SPI post promising avenues for expansion through sales and marketing initiatives. Now I'll turn it back to J.T. for closing comments.

Thanks, Drew. We view the formation of Vertical Market Solutions and the acquisition of SPI as our next compelling platform within our Search Xcelerator segment. If you'll recall, our journey began with the introduction of our business services platform initiated by the acquisition of Ravix and further enriched by the addition of CSuite. Following that, the initiation of our health care services platform took place when we welcomed SNS on board. Today it marks the commencement of the Vertical Market Solutions platform, or VMS, as we finalized the acquisition of SPI. One aspect of any deal at KSX is that we lose a searcher as they transition into their operating role. In this case, Drew. He now graduates to lead SPI forward in its optimization and growth. However, today, we are also pleased to announce the addition of Miles Mamon to the KSX platform as our newest Operator-in-Residence. We're thrilled to welcome Miles to the KSX team. With increased deal flow and an expanding portfolio of KSX companies, having Miles on Board to identify our next promising venture is a valuable addition to our already accomplished team of OIRs. Before joining Kingsway, Miles held the position of Vice President at Morgan Stanley overseeing acquisitions and asset management in the Merchant Banking and Real Estate Investing group. He initiated his career as an air and missile defense officer in the United States Army. Miles holds a JD and an MBA from Northwestern and a BA in Economics and Classics also from Northwestern University. We're really excited to welcome Miles on Board. And with that, I'll conclude by reiterating that today marks a significant milestone for Kingsway with a new platform in VMS and fourth acquisition in SPI. Also, with the addition of Miles and our current searchers, we look forward to having more to share regarding M&A activity in future calls. We'll move into Q&A now. And if there are any questions afterwards, please feel free to reach out to James at Hayden Investor Relations to schedule a call. Operator, please open the phone lines for Q&A.

[Operator Instructions] The first question comes from Michael Demaray with Bard Associates.

Congratulations. Can you expand on the VMS platform and what you envision for it?

Yes, great question. When Drew came on Board, and I'll let Drew speak to this a little bit, too, this is a chance to get his thoughts. But when Drew came on Board, he was very focused on Vertical Market Software as a great place to search for a great acquisition and spent the last 12 months doing just that and with the culmination of this acquisition. And so we feel like we'll use this as a beachhead into Vertical Market Software. We obviously like the attributes of those businesses and hope to, with the learning and getting up the curve of this acquisition, plant the seed for doing future acquisitions of similar type companies. Drew, If you have anything to add?

Yes. Thanks, J.T. And I would add there's tens of thousands of small software companies out there, and many of these companies provide mission-critical products to the customers in their niche markets. One thing all these businesses have in common regardless the end market is great unit economics, high gross margins. In addition, many of them are also foundry lead, which provides a great fit for our Search Xcelerator platform to provide a succession alternative with a partner who's focused on the long term like us. So overall, we think there's quite a bit of opportunity out there, and we look forward to just exploring that potential over time.

The next question comes from Adam Patinkin with David Capital.

Congratulations on acquisition #4. It's really exciting.

Thanks, Adam.

Thanks, Adam.

All right. I have a few questions and they are unrelated to one another. So let me jump in. So the first one, I just want to follow up on the question from Michael. Can you talk about -- and I'm sorry if you guys haven't fully formulated the strategy yet, but how do you envision VMS working? Is this something where Drew is running it and other searchers could make deals as well and that they would end up reporting to Drew and so you kind of see him as leading the unit? Or is this something where Drew will run this business for a while and then maybe make additional acquisitions of other businesses to kind of slot alongside? SPI, I guess, it was just interesting that you formed its own kind of discrete unit underneath the Search Xcelerator to focus on vertical software businesses. And I'm just wondering what your plan is from an org chart perspective for how this entity is going to be run and managed?

Yes. It's a great question, Adam. I think a lot of different ways to answer that. I think that we are broadly open to additional acquisitions in Vertical Market Software regardless of OIR. But with the point of building and creating VMS with the acquisition of SPI is that it is a platform for Drew to get in, learn SPI and then evaluate and hopefully do more software acquisitions down the road as sort of like... And so we'll be flexible, but SPI is a small company, and the goal would be to grow organically and via acquisition under Drew is how we thought about it.

Got it. Okay. That's helpful. Maybe then a couple of questions for Drew. So first, Drew, nice to meet you. Congratulations. Can you maybe share a little bit about how you found SPI and whether it was a marketed deal or not? Just a little bit of color about how you ended up with SPI?

Absolutely. And thanks, Adam, nice to meet you as well. So this was a proprietarily sourced deal came largely through kind of relationships and networking. We first connected with the seller early this year, probably around 7 months ago. So a little bit of a long period of which isn't uncommon necessarily as mutually assessing one and other, making sure it's the right fit, in particular, making sure that I and Kingsway were the right fit for kind of her legacy plan for the founders business. But -- yes, that's what I would say. It was not marketed. And so that was -- we were fortunate there to come across it.

Got it. And then kind of a second question on that. So then as you look at the company, maybe can you speak to why you think your skill set or coming in to run this business, why do you think this business can be better in a year or 2 versus where it is today? Maybe another way to ask the question is, what are the steps that you're thinking of taking to help improve this business?

Yes, absolutely. So very fortunate to have had diverse leadership opportunities from pretty early on in my career. I started off in the Armed Services, continued on through the corporate world. And so I've been exposed to lots of different settings with industries and roles and companies, I have been a bit fortunate there. I think if you look at kind of any lower middle market type of business in particularly with software, you could have successful operators that are technicians. You can also have successful operators that are industry specialists. But eventually, with kind of options, the way we look at it, you'll need an integrate or a person who can really kind of bring the pieces together. And often that can be someone who is not an industry or technical expert. So the way we're looking at this is come in and really take our time to learn and build our credibility in the industry. And then from there, kind of bring in what we've learned from working in other context to make this company better.

Got it. That makes sense. So then, I guess, my last question is kind of building on that a little bit. So during the -- during your script or your intro to the business, you mentioned that you saw a lot of growth opportunities. And I'm wondering if you could put a little bit more meat on the bone there in terms of, look, just helping us understand like what are the growth opportunities that you see? Is it product innovation? Is it more properties? Is it deeper penetration with existing properties or upselling them? Is it taking pricing? Is it something else? Like what are the growth opportunities or at least what are the 2 or 3 biggest growth opportunities you see to maybe improve this business and invest in it and take it to the next level?

Yes, certainly. So I think if you step back and just kind of look at the key characteristics of really what we liked about SPI as a target and then an acquisition, very low customer churn and just a strong demonstrated resilience of profitability. It's truly a mission-critical product. And you made the question, how is the small company fulfill such a value add in this industry? If we step back further and look at the timeshare industry, it's a unique subset of the broader travel and hospitality industry. So that kind of gets a characteristic of what we like about vertical market software, not just for this acquisition, but for potential future acquisitions. But you're looking at a small corner that is underserved by kind of the broader enterprise-grade solutions. And typically, there's some unique characteristics. And in the timeshare world, there's -- that's no different. So I think we look first to serving our existing customers, getting to know them. It's an experienced team at SPI. Many of the senior managers have been there for decades. And so the idea is to just really make sure we're understanding and leveraging those relationships to meet the current customers. Certainly, low-hanging fruit could be priced that would be something we'd have to explore. But I think kind of the more exciting growth opportunities will come hopefully in a month or 2 after we can really sink our teeth in and learn more.

Got it. And is part -- is the idea that this software only serves the timeshare industry? Or is this the kind of thing that can serve Airbnb and VRBO or other verticals alongside that? Or is it really a timeshare specific solution?

It's a great question. That exact question is something we're considering to see kind of where -- where the vertical markets would be close fits, if not exact fits, but that's just something we're going to have to really assess. The idea isn't to quickly start building new products to address new markets from day 1. But certainly, if there are characteristics where we can see those types of synergy and overlap, then that would be something we'd look at.

Got it. Okay. That makes a lot of sense. So basically, you're coming in, going to learn the business. You think that there's a lot of different opportunities and you're just going to work it through and figure out what the best ones are, and it will probably be a number of those different levers that you pull, but you see a lot of different places you can take this, including potentially to expand it beyond the timeshare into something with a larger TAM.

Yes, I think that's a fair summary.

Yes. Adam, this is J.T. I'll just sort of pile on here. That's a great summary. As you know, every time we do one of these acquisitions, we go into it with preformed thesis about what we can do, but recognizing that it's a new CEO in a new company in a new industry. So the marching orders for the first at least 100 days are get in, meet with your employees and learn the business from them. They are the ones that built it, learn the business from get out and talk to your customers, find out what we're doing great, what we could be doing better and then work on developing a plan to go and execute that. And so hard from starting at time 0 to articulate any growth thesis because we're really here to learn. We buy a very great business with a long stable history of revenues and profitability, get in, learn the business and then formulate your strategy to go execute.

Got it. That makes a lot of sense. I appreciate it J.T. Really nice to meet you, Drew. I'll hop off so that other questioners can participate as well.

[Operator Instructions] We have a follow-up question coming from Michael Demaray with Bard Associates.

It's just going to be me and Adam for like 40 minutes asking questions, I think. Drew, nice to meet you. I do want to follow up. What -- obviously, in your search, you looked at a lot of companies, what made SPI special as a business? And why do customers choose SPI versus competitors? And then who are the competitors for SPI?