Saturday, June 21, 2014

MAM Software - Driving Performance

MAM Software (MAMS $5.00) is a leading software provider for auto part, auto repair, and tire retailers.  MAM also provides similar products for wholesaler distributors in those industries.  The company is based in England.  It controls approximately 70% of the U.K. and Irish markets, which remain under penetrated.  The technology is easy to implement for small and mid-sized operations that formerly used spreadsheets and generic retail management programs.  MAM Software's products are specifically designed for the automotive industry, providing far superior performance at similar costs.  The company recently completed an acquisition to facilitate entry into the U.S. market.  That move led to a joint venture with a major U.S. company that promises to accelerate gains while reducing risk.  Business in the U.K. is being converted from on-site software to cloud based delivery.  That promises to raise profitability and customer retention over the long haul.  The technology is being emphasized in the U.S., as well.  New international markets are being addressed.  Demand is surging among smaller auto parts, auto repair, and tire retailers because the technology allows them to compete with the Big Boys at an affordable cost.  Competition consists primarily of generic retail software providers that don't have the specific industry knowledge that MAM Software delivers.

MAM's software modernizes auto shop operations.  Counter personnel can see different pricing options right away, alerting customers to promotions, discounts, combination deals, and lower cost alternatives from other vendors.  Cross selling opportunities are highlighted.  Inventory management and re-ordering are streamlined.  A complete accounting system is provided for managerial, financial reporting, and tax purposes.  The software helps improve margins, expand revenue, and enhance customer retention.  E-commerce modules are included to facilitate sales on the Internet.  The technology is a complete package that is structured for auto shop operations, which can be fine tuned pretty easily for individual requirements.  MAM provides a range of data services in addition to the store level software.  The key products are part catalogs that help store personnel identify the exact item required to meet each customer's need.  Every model year has different specifications.  Not every part is compatible.

The company is shifting to a cloud based delivery format.  MAM Software has been operating in the U.K. and Ireland for more than a decade.  Most of those customers run the software on-site, creating a fair amount of complication when updates are released and other changes occur.  Those systems are sold for a single lump sum payment.  The new cloud based system is priced on a recurring month to month basis and is maintained by MAM at a central location.  Updates are automatic and don't require the customers' involvement.  Financial performance has slowed in the current fiscal year (June) due to the transition.  But real business momentum has continued at a fast pace.  Instead of upfront payments the revenue is being spread out into future periods.

A recent joint marketing relationship with a unit of Autozone promises to accelerate performance.  The giant retailer's Alldata subsidiary is the leading U.S. provider of data for auto repair shops, spanning approximately 80,000 locations.  For every repair job Alldata generates a full bill of materials and estimates for how much time each task will take.  Alldata originally planned to develop its own shop management software to complement the data service.  Instead, last January it joined forces with MAM.  Alldata is handling all of the marketing and customer relations.  MAM is managing the software component, which will be delivered in a cloud based manner.  Revenue will be split in an undisclosed manner but MAM indicates its contribution margin will be attractive due to the lack of selling expense.  The initial response among potential customers reportedly has been positive.  Significant leverage could be realized in fiscal 2015 (June) as the program builds steam.

Meantime, sales growth remains vibrant in the company's established markets.  Competition is forcing retailers and wholesalers to consolidate and modernize.  The company's American unit, obtained via acquisition in 2012, is making inroads in the auto part and tire segments.  The U.K. and Irish business is continuing to thrive, as well.  And MAM is making plans to enter additional European markets.  The company also is eyeing new vertical segments like plumbing, building materials, and electrical supplies.

We estimate sales will come in around $31 million in fiscal 2014 (June).  Earnings appear on track to reach $.22 a share.  Next year $36 million and $.35 a share represent realistic targets.  A stronger showing is possible if the Alldata relationship yields significant impetus right away.  Our estimates assume it will take some time for the market to develop.  Financial results will benefit gradually, moreover, since revenue will be recognized on a monthly basis.

The build up of cloud based recurring revenue promises to lift profitability over the long haul.  In 2-3 years sales could reach $45-$55 million to yield income of $.55-$.75 a share.  Applying a P/E multiple of 23x to the midpoint of the range suggests a target price of $15 a share, potential appreciation of 200% from the current quote.  Limits are advised.

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