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.