In keeping with the recent theme of following software related companies, the GeoTeam has begun to track B-Scada, Inc. (PINK: MOBS). We could not help but notice that there will be a software-as-a-service (SaaS) angle intrinsic to the operations of this company. In looking at B-Scada, we feel that it offers attractive software solutions to customers that want to automate certain aspects of their operations. Despite its small size the company continues to build long-term relationships with blue chip names, has developed a scalable platform, and has a proven management team led by an accomplished CEO. And of course, we also have to consider the possibility of a company like this possibly being acquired. We’ve interviewed the company on multiple occasions.
1. Attractive Software Products
B-Scada generates revenues from two sources:
- The licensing of its technology (“on-premise software”)
- The direct sale of its software to end-users.
In addition, the company also provides consulting, customer support and training, as well as integration services for its customers who incorporate MOBS’ platform into their operations.
The bulk of B-Scada’s current revenue stream comes from its licensing arm.
MOBS’ intellectual property (IP) is used by customers and/or software developers who wish to incorporate bits and pieces of MOBS’ IP into their own software platforms. MOBS’ IP can be used for an “endless” variety of applications including, but not limited to, Customer Relations Management (CRM) and online billing solutions.
Why use MOBS IP?
Customers basically use the IP to create or enhance the functionality of their own software, as opposed to spending years on developing a product that may or may not ultimately succeed. These customers are typically large firms who have already established software platforms.
An IP arrangement takes place under the terms of a time-stipulated contractual agreement that includes the use or redistribution of IP to create/enhance existing software applications. A typical technology licensing arrangement runs between $200 and $300 thousand per year, spanning 7 to 10 years and can be renewed on a yearly basis once the agreement expires. This ensures a long-term dependent revenue stream. These relationships ramp up over time, reaching inflection points at around year three (where many of the contracts currently sit) which means quarterly revenue run-rates should begin to improve.
Page 5 of MOBS 2012 annual report states:
“B-Scada now has several long term technology licensing agreements in place with Fortune 1000 companies. The revenue stream from these agreements has begun to mature. Given the terms of the technology agreements we already have in place, our revenue for 2013 should easily surpass that of 2012.”
At least two limitations are associated with the IP business. First, customers need to pay large fees over a lengthy period of time. Second, customers need to shoulder the development of a software product and deal with maintenance issues such as system updates and debugging, which not only require a large internal expense, but also create inefficiency for the software operation. Additionally, from MOBS perspective the price point of the IP arm limits the customers it can target.
These IP model challenges led to the creation of a new “retail” SaaS offering.
MOBS also develops complete software products for the real time data visualization and monitoring, or B-Scada (beyond supervisory control and data acquisition), used in heavy industries, including manufacturing, power and utilities, and automation. The products that MOBS tailors to these fields allows its customers to create and operate user interfaces to remotely monitor and control industrial processes that ensure the safety and efficiency of specific company operations. Not only can companies that use MOBS’ software monitor offsite activities, but personnel can also control processes while they are offsite. A couple of real life applications of MOBS’ tools include:
- Logistics: information about an oil tank that is running on empty that needs to be replenished.
- Safety: recognizing the occurrence of a safety hazard at a plant and hitting the remote “off button.”
With the new SaaS products, MOBS creates tailored software applications that can accommodate the entire operational environment. The related price tag (monthly recurring revenues) is much smaller than a licensing arrangement. At the same time, it is very easy for MOBS to upgrade and provide maintenance to its customers. MOBS generates its retail revenue by selling the software products it has developed to resellers, system integrators who may take MOBS’ products as part of their own (private label), or to the terminal users.
A SaaS model may generate fewer sales per customer when compared to that of the licensing model, but MOBS will be in a better position to expand its customer base to smaller and middle market companies. This issue is a common initial challenge to companies that transition to a SaaS model from a licensing model. This challenge is eventually overcome because the SaaS platform is intended to attract new customers as opposed to replacing licensing revenue. MOBS has a good stream of licensing revenue from current clients and larger potential clients with their own development teams will continue to rely on licensing IP from vendors such as MOBS.
Furthermore, according to MOBS’ most recent 10K and a CEO letter to shareholders, diversification of its customer base has been set in motion.
“In fiscal 2012 three customers generated 64% of our revenues and in fiscal 2011 three customers generated 87% of our revenues.”
“Our retail software sales continue to increase at a steady pace with 2012 sales more than doubling that of 2011. Retail sales are also growing as an overall percentage of revenue.”
Another positive to a SaaS business is that it provides investors with better predictability.
MOBS has utilized the internet to generate the bulk of its sales leads, but also relies upon sales agents to physically visit many potential customers, including vendors and resellers. Thus far, the revenue coming from software licensing accounts for 80% of the total revenue, while the retailing revenue comprises the remaining 20%.
We also discussed the advantage of a SaaS model over a licensing model in our Selectica (SLTC) article published on January 3, 2013
MOBS annual sales have grown steadily since 2009.
|Revenue in Millions||2012||2011||2010||2009|
The transition to a SaaS model should begin to smooth-out quarterly sales performance.
Another thing worth mentioning is MOBS’ business scalability. B-Scada claims it has built a cookie-cutter platform that can be easily expanded to serve industries that the company is not currently servicing. If this strategy works, chances are that more and more prospects from un-served industries would utilize its platform.
2. Small Can Be Beautiful
Despite its current size in terms of sales, the company has been conducting business with large “partners” in the US, Canada, and even Asia. MOBS has developed good business relationships with fortune 500 companies. For example, the company’s past and current relationships include the likes of General Electric Company (NYSE:GE), Microsoft Corporation (NASDAQ:MSFT), Intel Corporation (NASDAQ:INTC), Siemen (NYSE:SI). In February 2012 MOBS signed a seven year agreement with muliti-dollar billion Schneider Electric Sa (NBB:SBGSF). In addition, as reported by MOBS on February 12, 2013, it has recently entered into a significant multi-year licensing agreement with another Fortune 500 company for more than $2 million in licensing and support fees for the use of B-scada technology.
As far as Asia goes, on January 29, 2013 MOBS announced that it has started to provide web solutions to a government council in Taiwan. In addition, since November 2012 MOBS has been providing web-monitoring solutions for Perusahaan Gas Negara (PGN) in Indonesia, who specializes in natural gas transportation and distribution across that country. MOBS also stepped into the gas manufacturing and oil industry in Kuwait, a country with one of highest gas and oil manufacturing production volumes on an annual basis around the world.
MOBS’ annual report mentions that it takes 9 months to 2 years for company engineers to work with its potential clients’ staffs before an agreement is finalized. During that time period the prospects have already devoted a tremendous amount of time and overhead expense into the potential business partnership. This reality can provide long-term loyalty from its customers. Even though MOBS is still small, it has been able to remain profitable over the past 2 years and is cash-flow-positive.
3. Increase in Wallet Share Opportunity
Considering the prospective long-term business partnerships, chances are good that customers may need other products/services related to the existing products that they use along the way, and that MOBS will have an opportunity to attain more revenues by providing additional services to its clients. Being entrenched within its customers’ operations should enable MOBS to cross-sell its products to other customer divisions. The affordability and focus of a SaaS product offering compared to a broader licensing offering should make this task easier, especially for divisions with limited budgets.
4. Potential Acquisition Target
The willingness of companies to spend time and money during the pre-agreement cooperation period validates MOBS’ products. As mentioned earlier, MOBS has been working with large multi-national companies for years, and prior to its licensing agreements with these multi-nationals, MOBS has already worked with its customers for a fairly long time. Certainly, the products of MOBS have been well integrated into its customers’ systems, which may make MOBS’ products uniquely important to its clients. Making MOBS further attractive to an acquisition suitor is that it is cash flow and net income positive at such a small revenue base. Overall, that fact that fortune 500 and 1000 companies (as disclosed in the latest annual report) are even willing to establish long-term engagements with MOBS adds a “special” credence to the business the company is building. As a matter of fact, our acquisition assumption has been validated by company statements in its recent 10K that:
“The products developed using B-Scada technology include industrial automation solutions, medical applications for use in hospitals, smart grid, HVAC and line of business applications. The relationships established through licensing are very strategic and may lead to acquisitions to prevent competitive companies from having the same strategic benefits.”
The CEO of MOBS, Mr. Ron DeSerranno, has extensive professional experience in both the automation/information and software development fields, and joined the company in 2003. He has been a Microsoft Certified Trainer specialized in software development since 1991. From 1997 to 2000, he worked for Rockwell Automation Inc (NYSE:ROK) and participated in developing Rockwell’s flagship industrial automation product RSView, serving as the development head. The product RSView has been used in different industries, including globally scaled companies such as Kraft and General Motors.
Afterwards, he served as the CTO for Motivus Software Inc., a company with a focus on providing mobile and remote access solutions for mobile devices and workers. Citrix Systems, Inc. (NASDAQ:CTXS), a multi-billion dollar company, acquired Motivus in early 2000 when it was smaller than the current size of MOBS. His other entrepreneurial experience includes the establishment of BoardMaster Software, a firm focusing on film and animation products. Mr. DeSerranno is also considered one of the leading authorities on XML-based graphics technologies and has been designing and developing world-class software for many years.
Mr. DeSerranno has a clear view about MOBS’ road map. His good business connections within the industry should help the company build more business partnerships, grow to new levels and reward shareholders.
Disclosure: Long MOBS; Keep in mind that this stock is illiquid and can have a wide bid/ask spread at times.
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