What We're Looking At

December 2024: LSPD, ZDGE, DSW, HAVAS

Dec 19, 2024

This publication is an overview of a few interesting companies that we found while turning over many rocks. Please keep in mind that we have not yet finished to do the works. As such, we don’t hold a material position, or we might hold a small starter position. This overview does not constitute advice; always do your own due diligence.

Lightspeed Commerce (LSPD US - $2.5bn)

Lightspeed Commerce is a company that provides cloud-based POS solutions for businesses in the retail and hospitality sectors. In simple terms, they offer software and tools that help stores and restaurants manage their operations more efficiently. This includes things like handling sales transactions, managing inventory, and selling products both in physical locations and online.

One of their key strengths is their focus on complex businesses that need more than just a simple POS system. These are businesses with multiple locations or those that handle a high volume of transactions.

Lightspeed caught my attention because of a few things.

First of all, the company keeps growing well at impressive rates. Recently, Lightspeed reached a $1bn revenue run rate (this was <$100m in 2019) and the company is confident it will be able to continue to grow strongly.

Operating leverage is doing its thing and it seems that they can (finally) become profitable next year. The ytd results bode well, with ~24% revenue growth but roughly stable opex. This is what we want to see.

The company also has a very comfortable net cash position, at 25% of the current market cap. They raised cash a few times but are very close to not needing it anymore. Indeed, Lightspeed switched to buying back shares since the beginning of this year.

Another interesting dynamic is that the company is working with bankers (JP Morgan) to conduct a strategic review of its business and operations. The company mentioned it is engaged in discussions relating to 'a range of potential strategic alternatives'.

Lightspeeds recently announced a reorganization, planning to cut 200 jobs, and the shares dropped as the market might think that the strategic review will not result in a sale. This could however just be an action to make the company more ‘pretty’.

We’re still doing the works, but taking Bloomberg consensus for the moment, Lightspeeds is trading at ~21x FY26 ev/ebitda (FY March) for >40% ebitda growth pa over the medium term and a very solid b/s.

This is enough for us to keep this one assessed.

(And yes I know, SBC is horrible).

Zedge (ZDGE US - $27m)

This is an interesting, fairly liquid micro-cap (~$200k daily average turnover) that we’ve been eyeing for some time. We have yet to pull the trigger, but we’re getting close, particularly given the recent correction.

Zedge is a company that provides platforms for personalizing your mobile phone. They offer a variety of content like wallpapers, ringtones and sounds that you can use to customize the look and sound of your phone. Not exactly your high-tech software company, but there’s a market for these things.

Zedge had a glorious few years thanks to covid tailwinds, where earnings went from basically zero to ~$8m in a year, with the share price skyrocketing 13x. The company made a healthy amount of cash, and all was good for a moment. But then came the hangover of course, and the share price returned to earth.

In the meantime, like many others in their field, they decided to ‘invest’ their excess cash in diversifying its revenue stream. The company bought GuruShots in 2022, an app designed as a photography game that allows users to participate in photo challenges and competitions. It is often described as a blend of a game and a social network for photographers.

But let’s forget about this because it’s not (yet) relevant. The point is that GuruShots – for which they paid $35m in cash and stock, $18m upfront and the rest in earnouts – has been a complete dog.

Just one year after the acquisition Zedge had to impair the thing as growth never took off. In FY24, 88% of our revenues were still generated from its legacy Zedge Marketplace business (o/w the majority is selling advertising inventory).

So what is there to like about Zedge?

Quite a bit actually.

Despite GuruShots being a total loser, the company’s topline has continued to grow, from roughly $10m in FY20 to $30m in FY24 (FY ending July), most of it stemming from the company’s legacy business. That is not a bad achievement and indicates resilience.

More interesting, while ebitda margins are still pretty healthy (9.1% in FY24) they have been extremely pressured by strong increase in sg&a, mostly a result of the integration of GuruShots; the company’s FTE base almost doubled between 2021 (51) and 2023 (94).

So why is this all interesting?

First of all, Zedge is taking big steps towards improving its offering, with the company moving beyond just offering these personalization options into the ‘Creator Economy’. In short, Zedge also intends to offer tools for those who want to create and share their own digital content, instead of just providing wallpapers and sounds.

But the story is also interesting because Zedge didn’t restructure after the GuruShots fiasco. They never cut costs.

Management is still seeing potential to leverage this enhanced cost base. GuruShots remains a work-in-progress – and as such a drag to growth – but Zedge is taking decisive steps to improve its growth trajectory.

Who knows if they’ll be able to turn it around, but the main point is that if this all fails there’s significant fat on the bones here, and Zedge could triple ebitda just by cutting its FTE base (even a bit) should GuruShots’ growth remain lackluster. I mean, gross margins are >90%!

My interest is compounded given the recent correction after Q1 25 earnings, which showed slowing advertising growth as a result of some temporary challenges that now have been resolved. Q2 should show a return to growth with the CEO anticipating “significant improvements”.

Bottom line, all the ingredients are there for Zedge to return back to growth. And if it doesn’t, there’s still plenty to gain (in theory – if management is smart).

Add to this all that Zedge is a profitable and cash flow generating company, with 74% of the market cap in net cash. The company is currently trading at less than 3x ev/ebitda on arguably depressed FY24 ebitda. Just a bit of growth could already double operating profits, if not more.

Lastly, Zedge completed a $3m share buyback in July and approved a new $5m buyback in September – almost 20% of the current market cap.

DSW Capital (DSW UK – £16m)

I’ll keep this one shorter as its another micro-cap but much more illiquid compared to Zedge (roughly $14k DVT), and we’re still very early innings on the works.

If you follow our Toffcap Monday Monitor, our event-driven trade and special sits monitor, you’ll know that one of the things we screen for is insider purchases. (And if you’re not yet subscribed to the TMM, shame on you! It’s free and massively valuable. Go get some, now.)

But we don’t care about every acquisition from insiders. We’re looking for insider purchases that stand out – very large purchases, new buys after a long time with no action, open market purchases when the shares hit new highs, etc. Purchases that might indicate that something interesting is happening.

This seems to be the case at DSW Capital, with some VERY large purchases in the open market recently by the founder / CEO (and largest shareholder) as well as a few other major shareholders. Every time I see this happening at a profitable micro-cap, I stop and check it out.

In short, DSW is a professional services firm that operates through a network of licensee businesses. They do corporate finance advisory, financial due diligence, provide tax services, etc. The main focus is SME m&a activities (67% of H1 24 revenues).

DSW doesn’t offer these services directly. Instead, they license their brand and back-office support to independent businesses (licensees) that perform these services. The licensees pay DSW a fee based on their revenue (average fee in the mid-teens%, new licenses around 22%), allowing DSW to earn income without directly handling client projects. This model helps them leverage their brand and expertise across a broader network without the overhead of managing all operations themselves.

Looking at the recent H1 24 results and the progression over the past few years, the growth does not exactly scream excitement. This should not be a surprise given the state of end-markets over the past few years (2022 was a good year in terms of deals, but deal flow over the past few years has been relatively subdued).

What makes DSW interesting is the recent acquisition of DR Solicitors, a law firm specializing in legal services for primary care. DR was acquired for £6.1m and thus represents a significant acquisition compared to DSW’s size.

DR Solicitors will serve as a new legal services division within DSW and will significantly diversify their portfolio, reducing dependence on m&a activities. DR is also expected to enhance DSW's earnings; the company generated £3.1m revenues in FY24 and £1.2m ebitda, quite the step up from what DSW generated over the past few years.

This acquisition drastically changes the earnings profile of the company, creating more stability and bringing the consolidated DSW back on a profitable and cash flow generating growth path. This should warrant a higher valuation. And this all excludes DSW’s legacy business returning back to growth at some point – which it will.

Lastly, who knows how many of these interesting acquisitions are in the pipeline…

Havas (HAVAS Netherlands – €1.5bn)

The last company we’re currently looking at is good old Havas. We’ve known Havas for a long time. As the sixth-largest advertising agency globally, it ranks below Publicis, Omnicom, WPP, Interpublic, and Dentsu, making it the smallest among the ‘big 6’ .

As highlighted in our TMM, we expected quite some volatility around the split; all four business are pretty different and have to trade accordingly. And so far we’ve seen a lot of selling pressure, particularly on Havas.

Havas has long been a ‘meh’ kind of business, with plenty of competition, both in people and end-markets. The company operates in three main segments: Creative, which makes up 39% of their 2023 net revenue and covers everything from ad creation to customer experience; Media, at 36%, where they're pretty dominant in places like France and Spain, but not so much in the US; and Health, which brings in 25% with specialized health advertising.

The Bolloré group holds a controlling interest of 31.05%, with the potential for increased voting rights in the future, which could influence strategic decisions.

I can be short and simple on the thesis with Havas as we’re not looking for fireworks here.

The company should grow revenues in the low single digit% organically over the next few years, increasing their operating profit margin (roughly 12% in FY23) given a bit of operating leverage. Even with this growth, they'll keep facing some restructuring costs as they adapt. Cash flow is expected to stay strong, with an aim to give back 40% of their net profit to shareholders as dividends.

For FY25, the company is looking for ~2% revenue growth and a 13% adj. ebit margin (mid-range). Call it €360m. WPP is trading at 8.6x ev/ebit, Publicis at 11.3x. Let’s take 7.5x; that’ll be €2.7bn enterprise value.
Now assuming a FY24e net cash position of €150m, give or take €850m in lease liabilities, pensions, earn-outs and minorities, and €250m in FY25e FCF (some very back-of-the-envelope numbers), we get €2.25bn equity – that’s ~55% higher than today (with the discount still growing).

This is not bad for a one-year horizon. Of course there are higher return opportunities elsewhere, but please keep the prior discussion in mind: this should be a very simple, easy to follow story – thus relatively easy for the market to assess once the dust settles.

As a last point: to compare, in the period 2012-2016 (before Vivendi took Havas private), Havas traded in an ev/ebit range of roughly 8.5-11.5x.

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