MIND CTI Ltd.

MIND CTI (stock symbol MNDO) is an Israel-based microcap that provides:

  • billing services for Tier 2 and 3 cell-phone carriers (80-85% revenues)
  • call accounting for big (multi-national) companies (15-20% revenues)

Its billing services are not targeted at the Verizons and AT&Ts of the world (Tier 1 carriers). I snipped the following graphic showing some of MNDO’s Tier 2 and 3 customers from their latest investor presentation. These are small players operating in some niche markets (ex. rural).

Screenshot from 2016-07-04 11:22:50

Its call accounting customers are more familiar names.

Screenshot from 2016-07-04 11:23:12

But remember that billing services are still MNDO’s bread and butter and drive most of its value.

Profitable But Not Growing

Total revenues have been essentially flat over the past 10 years (around $20M/year). Likewise, cash flow from operations have oscillated between $4M-$6M/year.

MNDO targets an operating margin of 20%. It has been able to hit this target most of the time. The average operating margin in the recent past has been nearly 25%. Net margins and return on equity have also been consistently over 20%.

MNDO has zero debt. Its tax rate has been single-digit for most of the last decade. Therefore most of the operating cash flow has flowed to the bottom line: EBIT = FCF.

In the last two fiscal years the tax rate has increased to 20-25%. I am not sure if this is the new normal.

Its enterprise value/owner’s earnings ratio is about 4-5. It is cheap on an FCF basis.

Strong Balance Sheet

MNDO has about $20M in cash and marketable securities on its balance sheet. This accounts for nearly half its current market cap ($40 M).

Since the company is profitable and not really growing, its earnings don’t have to be retained for “growth” reinvestment. The company pays out most of its FCF as an annual dividend. At the current share price the dividend yield is over 10%.

Possible reasons that the monster dividend hasn’t attracted yield seekers are: (i) small, foreign company, (ii) annual, not quarterly, dividend, and (iii) substantial foreign taxes withheld.

Inside Ownership and Capital Allocation

With so much cash sitting on the balance sheet there is always a risk that CEO throws it away by overpaying for some trophy asset.

MNDO’s ownership structure and past actions suggest reasonable, if not savvy, capital allocation. The company was founded by Monica Iancu who still owns 17% of the company. Since she has so much skin in the game, her incentives are aligned with shareholders. The chance of overpaying for an acquisition are small.

In 2008-2009, the company opportunistically bought back 15% of its shares at $0.88/share. In hindsight, it was brilliant use of its strong balance sheet. I’d rather own a company that has an opportunistic posture towards buybacks than one that DRIPs through thick and thin.

Its dividend policy ensures that cash doesn’t build up unnecessarily on the balance sheet. If MNDO could reinvest my share of earnings at its ROE (>20%), I would have been happy to have them keep it. Since reinvestment opportunities are scarce, I am happy to take the dividend and find better use for that capital.

Currency and Global Events Exposure

While MNDO has a global presence, the majority of its revenues come from North America (over half) and Europe (about a third). It has 350+ employees mostly in Romania and Israel.

It collects its revenues dollars, and incurs costs in local currencies. If the dollar gets stronger relative to these currencies, MNDO should benefit.

There might be geopolitical risks in Israel and Eastern Europe. These could adversely affect MNDO.

Risks

Billing solutions account for most of MNDO’s business. The number of Tier 2 and 3 wireless providers has been shrinking due to consolidation. When two companies merge,  they don’t need two separate billing solutions – which means less potential business for MNDO.

If the consolidation trend continues or accelerates, MNDO as it currently exists, cannot endure for long. So far, the management has been able to broaden and repurpose their offerings to overcome the decline in the number of wireless providers. Their focus on profitability limits their growth options.

My Backstory

Since April 2014, I’ve bought MNDO at prices between $1.88-$2.77 a share. My average price is $2.22. The stock is currently trading at about $2.10.

The stock has already paid back nearly 13% of my total capital outlay in dividends.

As I outline in the next short post on valuation, I think MNDO is worth $3-$4/share, which implies a 50-100% upside.

I am paid more than 10%/year to wait for the market to realize this value. I am happy to wait.

The risk of course is that the business model crumbles. The cash on the balance sheet is about $1/share. The certainty of a slow collapse (if any) due to some long-term contracts, ensures that the downside is cushioned well above cash. Let’s say this downside is $1.50/share.

Thus, the downside is 25%, and the upside is 50-100%. Even if the two outcomes were 50-50 I would take the bet. In my opinion, the upside is more likely than the downside.

I am paid 10% a year to wait for the story to unfold. If I wait for three years, and the downside materializes, then I still end up making money.

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