By Ken Nagy, CFA
DecisionPoint (OTC BB:DPSI) designs, sells, installs and services voice and data communications products and systems for private networks and wireless broadband systems to a wide range of enterprise markets, including retail, transportation and logistics, manufacturing, wholesale and distribution. The combination of its blue chip portfolio of customers as well as the Transformation of the business model has the firm projecting the top-line to nearly double to $100 million and for margins to surge.
Transformation of the Business Model
DecisionPoint has two primary business lines; Hardware and Software and Professional Services.
The firm has completed three acquisitions over the last 19 months (CMAC, Apex and Illume Mobile) which allow the Company to offer the full range of mobile solutions to meet the requirements of any enterprise mobility strategy as well as generate higher margins than other divisions in the Company, which in turn should lead to improved corporate gross margins.
CMAC is a logistics consulting and systems integration provider headquartered in Alpharetta, Georgia. The purchase price of $3.15 million was paid 70% in cash and 30% in stock. Management feels CMAC offers complementary services to similar end markets and is a good fit with DecisionPoint. Combining with CMAC will shift DecisionPoint's revenue mix more in favor of services and software, resulting in expected incremental gross margin expansion of 100 to 200 basis points. Further CMAC's strong presence in the Southeast complements geographic service presence in the U.S. to that important and fast growing region.
On June 5, 2012 DecisionPoint announced a deal with APEX Systems Integrators. The purchase price was $5.0 million in cash at closing. In addition, there is an earnout and bonus capped at an additional $8.5 million, which is dependent upon future performance through July 31, 2015. The transaction is expected to be accretive to DecisionPoint’s fiscal year 2012 earnings by $0.15 per share on an annualized basis. Servicing clients in the consumer packaged goods, retail, B2B and service sector, Apex has enjoyed an approximately 55 percent per annum growth over the past five years, growing normalized EBITDA from roughly CAD $0.5 million in 2007 to approximately CAD $1.8 million during the full year ended July 31, 2010. The Company's APEXWare™ suite of products provides mobile productivity solutions in the areas of merchandizing, sales and delivery, field service, logistics and transportation, and warehouse management. Furthermore, Apex’s software product set is anticipated to fit directly with DecisionPoint’s own retail, field force mobility, warehousing, logistics and transportation markets and to provide opportunities for cross selling by both companies’ teams.
On July 31, 2012, DecisionPoint acquired Illume Mobile Software, a division of MacroSolve, Inc., based in Tulsa, OK for approximately $1.0 million in cash and stock. Illume Mobile has patent protected domain expertise in developing Enterprise mobile software for Android and Apple (iOS) mobile devices.
After acquiring and building the business lines, the firm receives revenue four different ways,
Ø Software Licenses.
Ø Custom Software.
The Transformation of the business model from the majority of sales coming from Hardware to Software and Professional Services should transform the company’s margin and growth characteristics to that of a high margin/ high growth profile. Management has targeted a 60-40 mix with 60% coming from Services. Services enjoys significantly higher margins, stickier revenues, and longer contracts.
Looking at the past quarter gross margin increased by 330 basis points to 24.2 percent in the second quarter 2013, from 20.9 percent in the comparable period of 2012. Sequentially, gross margin improved from 20.5 percent for the three months ended March 31, 2013.
The year over year improvement was primarily due to continued implementation of increased cost control for the products and services which the company resells, and its professional service costs were positively impacted by better utilization associated with greater recognized revenue from these services in the quarter.
Furthermore, management anticipates that as higher-margin software and service revenue continues to grow, margins will continue to improve. Software and service revenue composed 40 percent of consolidated revenues for the first time during the second quarter 2013.
In January 2013, DecisionPoint announced that it launched a new sales and marketing initiative and dedicated a team to accelerate the Company's expansion into enterprise mobile software, software subscriptions and professional services.
The newly created Enterprise Solutions Group will lead the new effort by expanding the sales and marketing of APEXWare™ software throughout the United States.
With premium mobile data applications estimated to have generated carrier revenues of over $2.3 billion in 2008 and expected to grow at a CAGR of 35 percent or to as much as $10.3 billion in 2013, Apex’s presence in this important growing market will help DecisionPoint grow its revenues and margins and to drive increasing shareholder value.
Similarly, the company has now added Android Operating Systems to the family of APEXWare software compatibility, which vastly expands the addressable market.
Management expects sales to be robust, and margins to continue to climb based on what has been seen in the third quarter to date. As a result, management anticipates revenues in the third quarter 2013 to be up by more than 20 percent over revenues reported for the second quarter.
A copy of the full research report can be downloaded here >> DecisionPoint Report
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