VFX - turning off the lights
Posted: Monday Jan 19 8:28:25AM 2015
With microcaps, I always look for profitable growth companies. One of the dangers for these type of companies is access to capital and the ability to finance growth. Most investors ignore the "costs of growth". They assume sales equal profits. Over time, they do but the length of the sales cycle is crucial. The longer the sales cycle, the more the company will likely need financing for their growth until sales slow and profits can finance the growth rate.
NCI is more in control of their growth rate than VFX was. VFX was selling a commodity service and hoping for maximum usage. They had a razor thin margin and needed huge sales to generate small gross margin to pay overhead and eventually profits. Unfortunately the profits proved elusive and yet the huge sales exposed them to collection risk.
NCI generally has contracts. The software business has much higher margins than VOiP. NCI can manage how many contracts they install at any one time to manage their exposure. Their danger of not collecting on receivables is real but their margins give them some cushion and if they start having trouble collecting, they can stop work on the installation project. Once the project is installed, NCI has very little costs to maintain the software so their liability doesn't grow over time.
Once VFX sold the minutes, their customers could runup a big bill quickly without much control from the VFX end. Obviously VFX let one customer expose them to a bigger risk than either the customer or VFX could afford. NCI has been in their business niche longer than VFX and has been generally profitable. Their business model hasn't undergone the violent changes that VFX went thru and is not as capital intensive.
I used to own VFX but am glad I bailed when the big sales and profits didn't materialize. The more recent sales success caused me to look at it a few times but the low margins and the commodity nature of the business kept me away.
I am still holding NCI.v. I hope the company can continue to increase sales because the good margins should equal more profits. The market doesn't seem to believe they can do that and has assigned them a low p/e. I am hoping the market will revalue NCI.v at some point in time and increase my paper profits on the stock.
Posted: Saturday Jan 17 1:24:49PM 2015
Receivables that could not be received. NTG Clarity also has large receivables from a few large clients, any chance they could have a similar fate ? Comments anyone.