Rand Worldwide Revisited - RWWI
Back in late 2014 I wrote about Rand Worldwide, a software reseller and training provider of design products like AutoCAD. At the time, the company had just announced it would repurchase more than half its shares outstanding, allowing Peter Kamin's 3K partnership to take control. I was bullish on the company, pointing out Rand's cheap pro forma valuation on both current results and the company's projections. I purchased shares then for clients and continue to hold them. So, how has the company done since?
It's a mixed bag. Rand has failed to live up to the cheerful revenue and profit outlook it put forth in its tender offer documents. Revenues have actually declined somewhat since. But, the company has been extremely successful in defending its excellent margins and generating cash flow. The debt the company used to finance the share repurchase has already been reduced by 40% to $12.6 million.
Rand recently released its results for the quarter ended March 31, 2015. Let's compare those results to the financial projections the company provided during the tender offer. For those projections, I'll be using weighted fiscal 2015 and 2016 projections, since fiscal 2016 has one quarter left to go.
Thus far, Rand has fallen far short of its revenue goals, coming in fully $17 million shy of its target. Much of this shortfall can likely be blamed on the revenue model transition that Rand Worldwide's largest supplier, AutoDesk, is undertaking. AutoDesk is transitioning from a traditional software license sale model to a subscription model. Often, these transitions result in some degree of business interruption for re-sellers and other ecosystem participants. AutoDesk's revenues have fallen during this transitional period, but the changeover is going well and subscription counts are rising steadily. There may be signs that the worst is over for Rand as well. Revenues for the most recent quarter rose year-over-year for the first time since 2014.
Rand has done better on the expense front, managing to post a 52% gross margin and hold down operating expenses during period of slow sales. But so far, the upshot is operating income well below plan.
This lackluster operating performance is likely the reason why Rand's stock has treaded water since 2014. While Rand's operating results may have been lackluster, the company's aggressive deleveraging actually makes it just as attractive today as it was back then. Rand's $9.5 million in EBIT and enterprise value of approximately $75 million yields an EV/EBIT ratio of 7.9. That's fairly cheap for a company that earns pre-tax returns on capital north of 35% and generates gobs of free cash flow, especially if Rand's revenues are returning to a growth path.
In order to get an idea of what Rand's controlling shareholder may decide to do with the company, it's worth looking at some of the other companies that Peter Kamin and Company control, like Calloway's Nursery, Rockford Corporation, and Abatix. In general, 3K likes to increase its ownership over time via open market purchases or tender offers before ultimately purchasing a company outright. In other cases, 3K holds its ownership steady but directs its controlled companies to pay out large special dividends from time to time. In my view, 3K will have eventually utilize Rand's increasing debt capacity to fund another large tender offer.
The initial loan agreement allowed for total debt of up to 2.75 times EBITDA. Using the same assumptions, Rand currently has the capacity to take on an additional $17 million in debt. If Rand were to announce a debt-financed tender offer tomorrow at say, $2.50, then the company could buy back around 6.8 million shares, or about 20% of the outstanding shares. Question is, will 3K act soon, or will they allow the company to pay down debt by a few million more first? That would allow Rand to buy back even more shares, but it also increases the risk that Rand would have to pay substantially more for the shares if business results trend well. Either way, I think current shareholders win.
Alluvial Capital Management, LLC holds shares of Rand Worldwide, Inc. for client accounts. Alluvial may buy or sell shares of Rand Worldwide, Inc. at any time.
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