INS - Intelligent Systems Corp

[Arski]

Intelligent Systems Corp is a high growth small-cap fintech company that develops software and offers services to aid businesses in the management and processing of payment cards. These products are offered through their fully-owned subsidiary, Corecard. INS was written about in 'the making of a multibagger' project by interns with Alta Fox Capital.

 

Over the past 3 years INS have grown revenue at CAGR 60% and are likely to grow at high rates. Right now their don't grow as hard as they did before corona, partly because of the bankruptcy of Wirecard, but that will have no influence on future growth. I think with an EV/EBIT of 25, INS could be a great investment.

 

Takeaways of 'The makings of a multibagger' about INS:

It's a good business

1) High upside potential:

  - INS is a small business that has a lot of upside for growth.

        - HOWEVER, management has stated that they would not have the capacity for another large customer for quite some time.

  - INS is now solely focused on the FinTech industry, allowing them to reinvest their high cash balance in the sector.

2) Focused Future

  - Within the FinTech space, INS is looking to shift its revenue model to invest more heavily into the expansion of their services business.

  - Services provide a more consistent source of revenue than one-off large licensing deals.

        - They have also historically accounted for 85% of their revenue, so it makes sense to focus on the growing cash cow of the business.

3) Strong Industry reputation

  - "If you can't find us, you're probably not a good prospect, and we don't need to be knocking on your doors." - Leland Strange (CEO)

  - Customers seek out INS for their unique ability to solve complex problems and their speed to market. The customers come knocking and INS incurs almost zero marketing expense and have no sales staff.

 

Future outlook:

1) Can INS sustain its moat?

  - Provided INS doesn't grow faster than it can handle, which it doesn't seem to be doing currently, INS prides itself on that speed en uniqueness compared to its competitors.

2) Can INS continue to grow?

  - It seems like so far the Apple card has rolled out successfully, so other companies will likely see this success with Goldman and the fast implementation relative to its competitors. The Goldman deal seems to be the catalyst to much more growth in the future.

3) Is INS poised to continue to outperform?

  - Given the extremely high demand and the fact that INS has to turn away customers, a simple expansion plan should allow the stock to continue to outperform rather comfortably.

 

I don't have a position in INS and hope someone could share some more information about this stock.

[concerto]

Any perspectives on disintermediation? GS represents a majority (65%+) of the company's revenues and this % will only increase over time (with GM rollout, for example). I don't really like technical moats as I think any advanced technology is replicable with enough determination, and GS is a scary beast. Why isn't GS building this software in-house?

[Arski]

Any perspectives on disintermediation? GS represents a majority (65%+) of the company's revenues and this % will only increase over time (with GM rollout, for example). I don't really like technical moats as I think any advanced technology is replicable with enough determination, and GS is a scary beast. Why isn't GS building this software in-house?

I don't know exactly but I would say that not everyone can do everything. I think it isn't easy to create a excellent payment software and being able to customize it as INS does and offer different services for businesses, and GS might be busy with enough other stuff.

 

First of all, in the 6 page write-up/summary they were talking about high switching costs, so GS or some other potential competitor will not be able to get the businesses INS already has easily. GS has made a deal with INS and will thus not switch easily and quickly. In this industry, the strong reputation INS has (because of superior customer service and their speed to market), is quite important and might be hard for competitors to establish too. The customers are coming to INS while normally that's the other way around.

 

The probable risks with INS are: their 2 biggest customers account for 70% of their sales and currently operating at capacity could greatly restrict the ability to capitalize on the inflow of potential businesses.

 

[Jurgis]

  - Given the extremely high demand and the fact that INS has to turn away customers

 

I think this is rather big misrepresentation of the actual situation.

Can you provide any evidence that INS actually turned away customers?

[Arski]

  - Given the extremely high demand and the fact that INS has to turn away customers

 

I think this is rather big misrepresentation of the actual situation.

Can you provide any evidence that INS actually turned away customers?

 

Nope, couldn't find any evidence

[Jurgis]

OKi.

 

Disclosure: I bought INS sometime in September after looking at Alta Fox report. And I sold it pretty immediately for a wash due to Wirecard. Customer concentration is a big issue as Arski noted. Wirecard may have been 2nd or 3rd biggest customer IIRC (please double check  ::) ).

The probability of GS/AppleCard dumping INS is low, but if this happens, it's likely gonna go down 50%+. And since they lost Wirecard, they should have capacity for new customer(s), so there's a bit of a question how capacity constrained they really are. I also think that companies/CEOs that claim "customers are beating on our doors, but we don't grow faster to sustain our quality/brand/virginity" are likely full of s*17.

 

Anyway, this could work out fine. I'm not a bear, I'm just in too-hard-piler for now.

 

Have a great one.

[BG2008]

I think Long Cast Advisers had a sizable position in this one.  You guys may want to look up his letters/presentations.  Avi does pretty good deep dives.

[Arski]

OKi.

 

Disclosure: I bought INS sometime in September after looking at Alta Fox report. And I sold it pretty immediately for a wash due to Wirecard. Customer concentration is a big issue as Arski noted. Wirecard may have been 2nd or 3rd biggest customer IIRC (please double check  ::) ).

The probability of GS/AppleCard dumping INS is low, but if this happens, it's likely gonna go down 50%+. And since they lost Wirecard, they should have capacity for new customer(s), so there's a bit of a question how capacity constrained they really are. I also think that companies/CEOs that claim "customers are beating on our doors, but we don't grow faster to sustain our quality/brand/virginity" are likely full of s*17.

 

Anyway, this could work out fine. I'm not a bear, I'm just in too-hard-piler for now.

 

Have a great one.

 

I think you're totally right. It's difficult to understand how it will eventually play-out with their customer concentration and what the damage is of the Wirecard situation.

 

Management seems indeed also questionable. Maybe someone knows how much shares management owns?

[Arski]

I think Long Cast Advisers had a sizable position in this one.  You guys may want to look up his letters/presentations.  Avi does pretty good deep dives.

 

Thanks for the recommendation. According to Long Cast Advisers, the CEO has been with the company for a long time and should own 25%.

 

Didn't get any valuable information from the presentation, other than what was already mentioned in 'the making of a multibagger'.