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Hello everyone, this is due diligence on a stock that just merged. They are the owner of various web properties including map quest, startpage, how stuff works, and dozens of others. They also own an antivirus software and an ad-blocker generating subscription revenue. At the end of June, Cannae and System1 made a deal to make a business combination. The merge.
At the time, I was pretty enchanted by the fact that management was rolling over 100% of its equity, and that the company would essentially be fully backstopped which is a sign that Bill Foley (Legendary businessman and investor) truly believed in the company. It was also going to be one of the few SPAC mergers where the company was actually profitable.
As it's been under the radar, there has been informational arbitrage. First, the company released first half results, where they not only beat guidance but raised it. You can find the release here.
To give a summation on guidance, they increased adjusted revenue guidance by 5 percent for the full year. They also increased adjusted EBITDA for the full year 11.22%. Finally, they reported Net income of 24M. The stock did not move, as it went unnoticed.
Then, they reported 3rd quarter results where they beat and raised again. You can find the release here.
To give a summation on guidance, they increased revenue guidance for the full year 3.5%. They increased adjusted EBITDA for the full year by 1.8%. Their net income YTD is 45M, and 21M in the third quarter alone which represents an almost 100% increase in net income increase. They also released an analyst presentation.
For some highlights:
This is the latest investor presentation.
The outstanding share count, including sponsor shares and earnout shares but excluding warrants, is 132.4M shares outstanding (Slide 39). You can find warrant count in SEC filings, but I don't want to write a long write up today as I need to go do things today. YTD net income is at 45M, which means YTD EPS is at .3436, which means that over 3 quarters the company has a Price to earnings multiple of 28.98. I'm going to be blunt and say that Q4 will be a beat, and that net income will come in at around 23-26M. This would mean, on the low end, 68M in net income. This translates to projected full year EPS of .5135 cents, and a price to earnings ratio of 19.396 on the low end of guidance.
Now, one of the uses for the cash once the merger happens, will be to pay down 176M worth of existing debt. If you scroll down to the Q3 Earnings release you can see the Adjusted EBITDA reconciliation, and specifically interest expense which sits at 12.4M. Existing debt is currently at 317M (Slide 7), and they intend to reduce that by 176 or 55.52%. This would mean an interest expense decrease of roughly 6.88M. While i expect cash to be deployed for inorganic acquisitions, that's fine.
Furthermore, restructuring and other charges include onetime charges which won't be seen again. Though I expect once the merger goes through, they'll report the onetime expense of 55M.
Look at page 30-33 of the analyst presentation they released Nov 5 which can be found here. They address TAM and potential growth trajectories.
Finally, their FCF (Adjusted EBITDA which is operating profit excluding share-based compensation, D&A, and non-recurring expenses) is very strong as they are in the advertising and subscription-based space. It sits at 90M with YoY growth of 123% and margin at 15.2%. Consider the fact that this is still a company that is growing at break neck speed, and you have a winner winner, chicken dinner here. This is a Peter Lynch GARP approved growth stock.