T11 Capital Management has taken a long position in ARI Network Services, Inc. (ARIS) during Q3 2016.
ARI Network Services, Inc. provides software-as-a-service, data-as-a-service, and other solutions to equipment manufacturers, distributors, and dealers. Its solutions enable selling and servicing of new and used inventory, and parts, garments, and accessories (PG&A) for customers in the automotive tire and wheel aftermarket, automotive aftermarket parts and service, power sports, outdoor power equipment, marine, home medical equipment, recreational vehicles, and appliance industries.
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The company offers eCommerce-enabled Websites that provide consumers with information about a dealership and its product lines, and allow consumers to obtain information on whole goods and purchase PG&A through the dealers website, as well as provides mobile inventory management applications, third-party inventory integrations, and business management integrations. It also offers eCatalog platform solutions, such as PartSmart Web, which offers streamlined user experience, dynamic diagram thumbnail previews, and fast moving parts tracking and display; DataSmart that provides product data extract access and on-demand application programming interface access, which offer flexibility for implementation with various eCommerce software and search engine optimization (SEO) customization capabilities; AccessoryStream, which helps in the search engine ranking of parts, garments, and apparel products on Website; and OEM parts authoring software.
In addition, the company provides business management software solutions; digital marketing services, including SEO, email marketing, social media management, search engine marketing, online reputation management, and online directory management through a suite of data-driven software tools; and a suite of complementary solutions that comprise software, Website customization services, professional services, and hosting services.
ARI Network Services, Inc. was founded in 1981 and is headquartered in Milwaukee, Wisconsin.
Why T11 Invested In Ari Network Services
ARI Network Services is in the high margin SaaS space within a dealer niche that has proven difficult for competitors to penetrate. This is due to the breadth in offering that ARIS serves up to its customers within a total solution that has numerous sticky components, leading to recurring revenues that constitute more than 90% of total revenues over the past several years.
Management has shown a definitive, sharp aptitude for the difficult process of acquiring smaller companies, successfully integrating them into the corporate structure to further drive growth and innovation at the company. They continue seeking acquisitions that will be beneficial to the company as a component of their overall growth strategy with a recently enhanced balance sheet to aide in their ambitions.
Dilutive acquisitions fueled by stock is something that management has done in the past. However, that practice seems to be in the rear view mirror for management as they have tuned up the balance sheet to be able to drive further acquisitions through debt (Q2 Conference Call 3/10/16):
CFO Bill Nurthen I think just in the interim, we continue to want to be in the best position we can to finance any deals through the use of debt. And so, as I pointed out on the script and in the press release that’s really why we continue to drive as much as we can to both increase that cash balance and reduce the net debt balance. So, we just have to leverage we need available to us to do with the right deal when it comes along.
Skillful capital allocators paired with a business model that has a definitive, tangible moat make for a company that thrives, with the eventuality of the company being acquired by either a competitor or a private equity firm once revenues exceed a certain level.
- #1 & #2 in all core markets served. Those core markets include powersports, marine, tire & wheel, outdoor power equipment, home medical equipment, appliances and recreational vehicles.
- Total available market opportunity is $1.5 billion.
- Primarily serves North America, with Europe and Asia largely untapped.
- 22% revenue CAGR over the past three years.
- Over 90% of current revenue is recurring.
- More than 22,000 total customers, with no customer representing greater than 3% of revenue.
- Free cash flow up 36% year over year for the most recent quarter to $1.9 million.
- Revenues up 16% year over year for the most recent quarter to $12 million.
- Total debt has fallen by 15% year over year for the most recent quarter to $10 million.
- Total cash on the balance sheet has increased by 100% year over year for the most recent quarter to $4.4 million.
Diving Into The Business
The Right Business At The Right Time
“The forecast model demonstrates that despite strong new vehicle sales, moderating gas prices and improved miles driven are conditions conducive to continued steady growth,” said Bill Hanvey, Auto Care Association president and CEO. “Why? The average age of light vehicles, now up to 11.6 years is the oldest ever, and the age mix of vehicles continues to favor older vehicles, creating a robust sweet spot for service and repair.”
Total average gain of 1,461% among the big three auto parts suppliers over the past 15 years. Stated growth areas for ARIS going forward are tire & wheel, aftermarket auto service and home medical equipment.
- Tire & Wheel - 20,000 dealers nationwide.
- Aftermarket Auto Service – By 2020 ,there will be about 76 million units of vehicles aged 16+ years. A majority of the aftermarket auto service market continues to move online.
- Home Medical Equipment - 25,000 service providers in the U.S. Target market for ARIS is 15,000 to 18,000 of those prospects.
Direct Publicly Listed Competitors
The primary advantage for ARIS is that it integrates all facets of management, marketing, websites and catalogs. This creates a business proposition that is extremely difficult to replicate and even more difficult to pry ARIS customers away from, once they sign up. The recurring revenue rate here exceeds 90% for that reason.
ARIS Provides a TOTAL Solution For Its Customers
Let's take an auto repair shop as a simple example. ARIS software perform the following functions:
- Point of Sale
- Customer Information
- Customer History
- Recent Activity
- Customer Statements
- Credit Card Processing
- Tire Database
- Pricing Solutions
- Supports Major Partners
- License Plate Lookup
- Parts & Labor Guide
- Marketing Integration
- Web Design
- Coupon Module
The eCatalog guide provides a significant barrier to entry for competitors, in addition to the total solution ARIS provides. ARIS has 14.3 million active part numbers and SKUs from 1,400 different manufacturers in their database, providing a simple, effective way for customers to search their proprietary database. Additionally, the database becomes integrated into the customer's website, making switching websites a difficult and time consuming process.
Substantial Room For Organic Growth
- Growth by increasing market share
- Growth through operational efficiency and capacity
Q3 Conference call 6/9/16 ROY OLIVIER – CEO: As we discussed in the last call, one of those initiatives resulted in opening an office in New Delhi, India. Almost a year ago we assigned a senior operation resource to investigate building additional capacity in India, we conducted a comprehensive review of the options and hired a VP General Manager in November and have continued to add staff. We now have an operations team up and running in India, the leader of that team was trained in our Duluth office for three weeks and one of our senior US resources is in New Delhi now completing that team’s training. We expect this team to start working on our backlog in the next few weeks.
I do want to remind everyone that this will not have a large impact short-term given the time it takes to fill vacancies in India. So we are confident that this will help us build out a cost-effective way to accelerate our development and operational velocity in the future. Long-term, we are very excited about the efficiency and scale this office will bring to our business.
- Growth through accretive, strategic acquisitions
Q2 Conference call 3/10/16 ROY OLIVIER – CEO: That said we’re not operating on a timeline, we're operating on what’s a good valuation, what’s a good business, what lines up for our strategy and what make sense if that were to come available in Q4, great, if it comes available in Q2 of next year. That’s fine too.
Q2 Conference call 3/10/16 BILL NURTHEN – CFO: Yeah. I think just in the interim, we continue to want to be in the best position we can to finance any deals through the use of debt. And so, as I pointed out on the script and in the press release that’s really why we continue to drive as much as we can to both increase that cash balance and reduce the net debt balance. So, we just have to leverage we need available to us to do with the right deal when it comes along.
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