RDM Corporation is a global financial technology provider based in Waterloo, Ontario. The company’s flagship product enables banks to allow customers to make remote deposits by taking a picture of a cheque through their phone. Through this remote deposit capture software, RDM processes over $600 billion in payments annually and helps financial institutions increase revenue, expand market share and improve customer service for over 80,000 end users. RDM serves 31 percent of the top 100 Fortune 500 companies including brokerage firms, big-box retailers, healthcare and insurance providers, and government entities. In addition to its remote deposit capture product, RDM also manufactures digital imaging scanners that enable users to scan physical cheques and process payments quickly and easily.
Although RDM is based in Canada, most of its revenues are earned in the United States through American financial institutions as U.S banks process significantly more payments than Canadian banks.
Bridgeport classified RDM as a small capitalization company in the Canadian equity market. In 2015, the company generated approximately $29 million of revenue and $7.5 million in EBITDA and had a market capitalization of $90 million at the time of Bridgeport’s initial investment (September 2015).
Bridgeport began accumulating shares of RDM in September of 2015 and held the shares until RDM was acquired in April 2017.
We invested in RDM based on the following key factors:
Dramatically Improved Business Fundamentals
In the early 2000s, RDM had a strong reputation in the lucrative digital imaging scanner business which was had taken off as a result of legislative changes. In October 2004, the Federal Deposit Insurance Corporation (FDIC) passed the Check Clearing for the 21st Century Act (Check 21) which gave U.S banks the option of creating a substitute electronic cheque from an image of the front and back of an original paper cheque. Check 21 was important because it encouraged banks to leverage technology to improve the overall efficiency of the U.S. payments system. The Act was implemented in response to the September 11, 2001 terrorist attacks that halted virtually all cheque payments and forced the U.S. Federal Reserve banks to rethink how paper cheques were being processed.
RDM’s digital imaging scanners helped facilitate the implementation of Check 21, which led to strong revenue growth and shareholder returns for RDM from 2004 until the financial crisis began in 2007. In the years following the crisis however, RDM’s sales and profitability declined materially as competition in the scanner market increased. Moreover, as smart phone usage grew, banks and their customers began to process more cheques via smartphones as compared to scanners.
In 2011, RDM began to evolve into a software company under the direction of a new CEO and CFO. Instead of focusing on scanners, a low margin and lumpy business with declining prospects, RDM pivoted toward selling remote deposit capture software and image storage databases to clients. This strategic shift enabled RDM to build a higher margin business with more recurring revenue as compared to scanners. The company’s recurring revenue increased from 57% of total revenue in 2011 to over 75% in 2017 and EBITDA margins increased from 3% to over 25% during the same period. Bridgeport was drawn to the revenue visibility and profit generating power that RDM uncovered as a result of its strategic shift.
At the time of our initial investment in late 2015, RDM was a highly profitable company, generating EBITDA of approximately $6 million on annual revenue of over $23 million in its previous fiscal year. We purchased our share position in the company at less than 7x trailing EBITDA which we believed was a very compelling valuation for a software business with strong cash flow generating ability. In addition, RDM held $26 million of net cash on its balance sheet, which represented approximately 40% of the company’s market capitalization. Bridgeport viewed this cash position as a significant source of downside protection.
Underappreciated and Underfollowed
Given RDM’s small market capitalization and its lack of capital markets activity (M&A, debt/equity issuances, etc.), the company did not garner a large following from research analysts at financial institutions/brokerages. As a result, RDM was an “under-the-radar” company of which most investors were unaware, providing Bridgeport with a unique investment opportunity. We also noted that the company’s senior management and the board of directors collectively held over 10% of RDM’s shares, providing a clear alignment of interests between shareholders and management.
Financial and Investment Performance
Over our holding period, RDM’s revenues declined slightly as result of the company’s strategic shift away from its legacy scanner business, although the company’s EBITDA increased modestly from $6 million in 2015 to $6.3 million in the trailing twelve month period before being acquired, as revenues from the higher margin software business grew.
As software continued to become an increasingly larger part of RDM’s overall business, investor interest grew and a leading Canadian independent investment bank initiated research coverage on the stock in October 2016. We believe this increasing awareness of RDM along with company’s strategic shift led to an improvement in RDM’s valuation.
In February 2017, Deluxe Corporation (NYSE:DLX) agreed to acquire RDM for $5.45 per share in cash (Canadian Dollars). Deluxe is one of the largest cheque printing companies in the United States and the acquisition was highly complementary to its business.
RDM delivered strong performance for Bridgeport portfolios, outpacing the cumulative return of the TSX Composite by over 14% during our relatively short 18 month investment period.