Guidance Update. ID Watchdog, Inc. (Stock Symbol - Other OTC: IDWAF) (Stock Symbol - Toronto SXV: IDW.V)

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Guidance Update. ID Watchdog, Inc. (Stock Symbol - Other OTC: IDWAF) (Stock Symbol - Toronto SXV: IDW.V)"

Transcription

1 Guidance Update Date: 02/26/ month Price Target: $.42 ($USD) Allocation: 5 Closing Stock Price Prior to Initiation on 10/13/16: $.14 ($USD) Stock Close on 02/24/17: $.18 ($USD) ID Watchdog, Inc. (Stock Symbol - Other OTC: IDWAF) (Stock Symbol - Toronto SXV: IDW.V) Prepared By: David L. Lavigne Senior Analyst, Managing Partner Trickle Research

2 ID Watchdog provided some guidance late last week so we thought we would briefly weigh-in on those comments. Generally, the guidance provided no measurable surprises for our model. Below is the context of that guidance/announcement: DENVER, Feb. 23, 2017 /CNW/ -- ID Watchdog, Inc. (TSX VENTURE: IDW) (IDWAF) ("ID Watchdog" or the "Company"), provider of consumer-facing identity theft protection and resolution services, today announced that the Company is updating its revenue, operating income and Adjusted EBITDA guidance for the fourth quarter ending December 31, 2016 and also providing first quarter 2017 guidance. All amounts are in U.S. dollars. Fourth Quarter 2016 Updated Guidance For the fourth quarter, ID Watchdog anticipates revenue from our Employee Benefit Channel and total revenue will be approximately $2,285,000 and $2,604,000, which represents increases increase of approximately 112% and 83%, respectively, compared to the fourth quarter of Also, ID Watchdog anticipates fourth quarter 2016 operating income and Adjusted EBITDA of approximately $181,000 and $300,000, respectively, with our Adjusted EBITDA margin as a percent of total revenues of 11.5%. Mike Greene, CEO of ID Watchdog stated, "In late 2016 we secured a $3.0 million credit facility, which allowed us to substantially reduce our interest expense beginning in the fourth quarter of 2016, and it will also provide us with tremendous financial flexibility to aggressively grow our business going forward. Also, in the second half of 2016, we entered into a settlement agreement with a Tech Support Channel sales affiliate resulting in a dismissal of the lawsuit allowing us to focus our full attention on expanding or business." Mike Greene continued, "We are off to a great start to 2017 and we are estimating first quarter 2017 Employee Benefit Channel revenue growth of between 39% and 41% over the first quarter of Further, a number of our new employers in our Employee Benefit Channel deferred their enrollments from January 1 to the second quarter of 2017 and therefore we anticipate further revenue growth in the second quarter as compared to the levels projected for the first quarter of 2017." 2

3 Greene continued, "In 2017 we will continue to enhance our identity theft protection offerings and expand our customer support, which will modestly increase our cost of service and cause a slight decline in our gross profit margin as compared to Note that our operating income and Adjusted EBITDA margins generally trough in the first quarter of each year due to increased costs associated with securing, onboarding and registering the significant number of new customers we added in January, and subsequently these margins expand as we move through the year. Also, during the first quarter of 2017, we have significantly increased our sales and marketing efforts and anticipate a highly level of professional services expenditures, which put additional pressure on our first quarter operating income and Adjusted EBITDA." "In conclusion, we had a very successful 2016 and we are very excited about our prospects as we enter 2017 with the headwinds of 2016 behind us and the available resources necessary to aggressively expand our sales and marketing efforts and a great product enhancement plan to continue to drive increased market share. Further, over the last twelve months we have developed a number of new opportunities that should drive increased Employee Benefit Channel growth in late 2017 and We are also in the early stages of our January 2018 enrollment selling cycle, which is off to a strong start," Greene concluded. Per the table above, the Company s revenue guidance for both 4Q F2016 and for 1Q F2017 are both right in line with our estimates. Our estimates were for revenues of $2.53 million and $3.52 million respectively. We would add, the company notes Further, a number of our new employers in our Employee Benefit Channel deferred their enrollments from January 1 to the second quarter of 2017 and therefore we anticipate further revenue growth in the second quarter as compared to the levels projected for the first quarter of 2017." That is a new/positive twist to the story. Recall from our initial coverage, we had anticipated revenues to be fairly consistent from Q1 through Q4 given that the enrollments are generally set by January 1 and don t change much throughout the year. In short, this nuance (depending on its magnitude) should provide a little bump in actual revenues versus our estimates for We made a small adjustment to the model to reflect this, but again, it s magnitude is not clear from the guidance. Along with revenues, the Company also provided some margin and EBITDA guidance, which ultimately speaks to earnings. Specifically, they note,, "In 2017 we will continue to enhance our identity theft protection offerings and expand our customer support, which will modestly increase our cost of service and cause a slight decline in our gross profit margin as compared to Here again, referring back to our initiating coverage model, we anticipated some of this increased (marginal) spending for 2017 versus Specifically, our estimate was for 2016 gross margins to be 71.73% and 2017 gross margins to be slightly lower at 70.60%, so again, we feel like the model is in line with the guidance. We submit, their guidance for Q1 F2017 operating income is a bit light with respect to our model. We did however anticipate the Q1 margin trough the Company eluded to, but we actually modeled some of that trough in Q4 F2016. Our thinking was that some of the expenses related to new growth would be built in ahead of enrollments (Q4 versus Q1) so for us, the impact was more of a timing issue. To translate: their guidance provides a better Q4 number than we anticipated at the expense of a lesser subsequent Q1. We view that as essentially a wash. As for the EBITDA guidance, we won t spend a great deal of time on that because we tend to view EBITDA as a tool that is sometimes misused if not considered in context. In short, because the Company s debt service situation has improved significantly through 2016, we would consider their EBITDA today as being of a better quality than the EBITDA of one year ago. Again, their guidance is not far from our estimates so we won t dwell on it, but make no mistake, the Company s general financial health is far better today than it has ever been. That notion dovetails into an additional point. 3

4 As an extension of our better financial health notion, we think the Company s reference to having the available resources necessary to aggressively expand our sales and marketing efforts and a great product enhancement plan to continue to drive increased market share is telling. We suspect some of the margin compression in 1Q F2017 is related to investment in growth that they were able to make because of improved cash flow and improved access to cheaper capital. Put another way, we think their improved financial position has enabled them to make some investments that will augment growth; growth that may not have occurred without that benefit. Our sense is that their ability and willingness to make those investments may lead to even more robust growth than we are modeling. As we have said before and we think their recent narrative supports, there are some open-ended elements to this story that could produce valuations beyond our current targets. Lastly, while the stock has moved up a bit since our initiation and has done so on better volume, our sense is that there seems to be a seller in the stock. That is a condition that we often see when companies transition to better results and those better results lead to better trading volume. Sometimes legacy shareholders get tired and they become more interested in renewed liquidity than they do the improving story. That is just our sense here watching the stock trade. If that is the case, we would view that scenario as an opportunity to accumulate a position in the stock at attractive prices in the face of improving fundamentals. Again, that is just our speculation, and if we are correct we certainly can t tell you how much longer the seller may (or may not) be around. We just think it is worth noting. We reiterate or price target and our allocation. 4

5 Rating System Overview There are no letters in the rating system (Buy, Sell Hold), only numbers. The numbers range from 1 to 10, with 1 representing 1 investment unit (for my performance purposes, 1 "investment unit" equals $250) and 10 representing 10 investment units or $2,500. Obviously, a rating of 10 would suggest that I favor the stock (at respective/current levels) more than a stock with a rating of 1. As a guideline, here is a suggestion on how to use the allocation system. Our belief at Trickle is that the best way to participate in the micro-cap/small cap space is by employing a diversified strategy. In simple terms, that means you are generally best off owning a number of issues rather than just two or three. To that point, our goal is to have at least 20 companies under coverage at any point in time, so let s use that as a guideline. Hypothetically, if you think you would like to commit $25,000 to buying micro-cap stocks, that would assume an investment of $1000 per stock (using the diversification approach we just mentioned, and the 20 stock coverage list we suggested and leaving some room to perhaps add another 5 of the names from our profiles). We generally start initial coverage stocks with an allocation of 4. Thus, at $1000 invested per stock and a typical starting allocation of 4, your investment unit would be the same $250 we used in the example above. Thus, if we initiate a stock at a 4, you might consider putting $1000 into the position ($250 * 4). If we later raise the allocation to 6, you might consider adding two additional units or $500 to the position. If we then reduce the allocation from 6 to 4 you might consider selling whatever number of shares you purchased with 2 of the original 4 investment units. Again, this is just a suggestion as to how you might be able to use the allocation system to manage your portfolio. For those hung up on the tradition of more typical rating systems (Buy, Sell, Hold) we would submit the following guidelines. A Trickle rating of 1 thru 3 would best correspond to a "Speculative Buy" although we would caution that a rating in that range should not assume that the stock is necessarily riskier than a stock with a higher rating. It may carry a lower rating because the stock is trading closer to a price target we are unwilling to raise at that point. This by the way applies to all of our ratings. A Trickle rating of 4 thru 6 might best (although not perfectly) correspond to a standard "Buy" rating. A Trickle rating of 7 thru 10 would best correspond to a Strong Buy" however, ratings at the higher end of that range would indicate something that we deem as quite extraordinary... an "Extreme Buy" if you will. You will not see a lot of these. General Disclaimer: Trickle Research LLC produces and publishes independent research, due diligence and analysis for the benefit of it investor base. Our publications are for information purposes only. Readers should review all available information on any company mentioned in our reports or updates, including, but not limited to, the company s annual report, quarterly report, press releases, as well as other regulatory filings. Trickle Research is not registered as a securities broker-dealer or an investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Readers should consult with their own independent tax, business and financial advisors with respect to any reported company. Trickle Research and/or its officers and employees, and/or members of their families may have a long/short positions in the securities mentioned in our research and analysis and may make purchases and/or sales for their own account of those securities. Trickle Research has not been compensated directly by I.D. Watchdog, Inc. for the publication of this report. Trickle Research has an exclusive content licensing agreement with SMM.Global whereby SMM.Global pays Trickle Research a fee for any Trickle labeled content displayed, hosted or distributed on its site: Per that agreement, SMM.Global may charge issuers to host and distribute Trickle licensed research. Trickle Research does not accept payment from the subject issuers of its research, it may however be paid fees for the exclusive licensing of research by SMM.Global provided SMM.Global chooses to distribute Trickle s publication(s). Reproduction of any portion of Trickle Research s reports, updates or other publications without written permission of Trickle Research is prohibited. All rights reserved. Portions of this publication excerpted from company filings or other sources are noted in italics and referenced throughout the report. 5