As expected, on March 10, 2017, Presidio (NAS: PSDO) completed its initial public offering on the NASDAQ stock exchange at a price of $14 per share, raising $233.3 million with a post-deal valuation of $1.24 billion.
This is a great accomplishment for the leading North American IT solutions firm that delivers digital infrastructure and Cloud and security solutions to middle-market companies. To go public in the first place is commendable when the market window opening and closing is out of a company’s and underwriter’s control. Presidio had to pull a previous attempt at an IPO in 2014.
There are many positive aspects of this tremendous accomplishment:
- Access to capital. The company (if it performs) can use stock as an acquisition currency, raise additional capital in the future through “follow on” or secondary offerings, and perhaps improve its banking relationship further given its liquidity.
- Share plan. The company can choose to implement a stock option plan. This gives them an advantage in recruiting and retaining key personnel. These plans can also be used to incentivize key people to stay in the event of an acquisition. We did this very effectively at Pomeroy, completing 24 acquisitions. We called it the “mini golden hand cuffs.” Presidio currently has around 2,700 employees, and this will become very useful. On the acquisition front, sellers want to be part of stable and liquid companies and those with a strong “We are growing” message.
- Growing interest. Presidio currently has eight research analysts covering the story with seven “buy” recommendations. Also, numerous global firms were involved in the underwriting such as Barclays, Goldman Sachs, RCM, Credit Suisse, JP Morgan, and Citigroup. Obviously, they believed in the story to get behind it and make it happen.
- Key metrics. Financial highlights post IPO include:
- Long Term Debt (LTD) declined approximately $259.3 millon for the third quarter reported
- Debt/EBITDA ratio declined to 5:1
- Overall Financial Leverage declined from 7.5 to 4.3
- Market Cap/Revenue = .5x
- Market Cap/EBITDA = 8.8x
- Market Cap/EBIT = 22.2x
- Price/Book = 2.4x
On May 11, 2017, Presidio announced its third quarter results coming in at $.27 per share, missing Wall Street’s estimates of $.29 per share. Revenue for the quarter came in at $629 million, missing the estimates. Here are a few comments regarding the quarter:
- While it is not a great start, it is not a disaster with a $.02 miss. The stock is still trading above the IPO price of $14 per share with a target of $18. I am sure they understand a second consecutive miss would not be good. Still, being active in this space, my sense from other IT solutions providers is that the first few months of this year were soft for many and in the future it is expected to pick up.
- S, G, & A (selling, general, and administrative) expenses have increased for five consecutive quarters. I suspect this could be of concern for shareholders and the company and would anticipate some changes going forward.
- The company’s blended gross margins are approximately 20%, and they currently do not break out services revenue. I expect this to come up in the future with shareholders. At some point, if the services business is large enough and performing, the company could do a “subsidiary IPO carve out” with the services business unlocking more value for the company and its shareholders.
In summary, there are many positives to point out despite a slight miss in the quarter. I expect the company to ramp up its acquisition efforts especially on the services front and perhaps reduce some expenses in the interim given the slow start for many companies in the space. Employees and management should be proud and excited about this great accomplishment, and potential sellers should be listening if they come calling.
To learn more about the implications and potential of taking your company public, contact Big Change Advisors.
Steve Pomeroy is the founder of Big Change Advisors, a Los Angeles M&A advisory firm of business advisors and capital sourcing advisors for startups and middle-market companies. Since 1992, Big Change leaders have completed over 38 transactions including M&A, Capital Sourcing, and Public Offerings representing over $800 million in total transaction value. Big Change Advisors donates a percentage of all fees to help serve the homeless through the Los Angeles Mission. To request a free consultant, contact us.