Cartesian is a US-headquartered business which sells revenue assurance amongst other things. Unlike some vendors Cartesian says there is healthy demand for their RA products and services. However, other parts of their business are struggling, and need to be turned around. As a consequence, the company’s share price is just 25 percent of what it was a year ago; their shares closed at USD 0.66 yesterday, having been worth over USD 4 as recently as February 2015. That serious decline in the value of Cartesian’s market capitalization means they no longer comply with the listing requirements for Nasdaq’s Global Market, the Nasdaq’s mid cap market tier. In fact, the current value of Cartesian is not much more than half of the minimum needed to qualify for the Nasdaq Global Market.
In response to these difficulties Cartesian has requested and received approval for a transfer to the Nasdaq Capital Market, the small cap tier of Nasdaq. Whilst this solves the immediate problem of how investors can continue to buy into or exit their stake in Cartesian, the company is also failing to comply with a different Nasdaq rule stipulating that the share price must be over USD 1. Cartesian have until 13th February 2017 to achieve compliance again. If not, their shares will no longer be traded on any of the Nasdaq markets.
Two ways to keep Cartesian on the Nasdaq were discussed during their Q2 investors call, which was held on August 15th. Cartesian could buy back shares from existing investors, reducing the total number of shares in circulation and thus increasing the value of each share that remains. However, the company is low on cash, which obviously makes it difficult to buy shares from their existing investors. A former founder and CEO of the company suggested an even simpler plan: some of the existing board members should reach into their own wallets and buy more shares in Cartesian, raising demand and lifting the share price. This suggestion was not rejected by current CEO Peter Woodward during the call, and over the course of the following week he spent USD 35,064 on buying Cartesian shares. Chairman Robert Currey has also bought shares since that call, spending USD 13,464 across multiple transactions. The purchases appeared to boost the value of Cartesian for a short while, but the share price has since slipped back down to where it was in August.
The mood of the Q2 call was strangely upbeat, especially with respect to the company’s cash position. Cartesian has been burning cash, and the low remaining levels of cash had become a cause of concern during their Q1 call. Cartesian’s Q2 cash balance rose to USD 4.5mn, up USD 1.4mn compared to the previous quarter. However, this was achieved by the factoring of debts in both North America and EMEA. To my ears, this sounds like the strengthening of a short-term cash position at the cost of degrading the quality of cashflows in the longer run.
Cartesian’s total revenues would have been down were it not for the acquisition of digital TV specialists Farncombe, which is expected to contribute between USD 14mn and USD 15mn to annual revenues.
My reading of the current numbers is that Cartesian will generate revenues of between USD 70mn and USD 80mn per year, whilst incurring losses of roughly USD 10mn. However, I expect these losses are not evenly spread over the business and that some units are profitable whilst others are dragging the firm down. If I were a gambling man, I would wager that Cartesian is being run by gambling men. My guess is that unspectacular but steadily profitable revenue streams like managed solutions are subsidizing the wages paid to consultants who generate much more volatile returns. Margins can be handsome when you can sell consultants at good rates, but the same people represent a hefty cost when they are idle. Demand for consulting services will vary and can be hard to predict. And Cartesian is competing with larger firms who will be able to flex with demand in ways that Cartesian cannot.
I find it especially interesting that Cartesian’s management keep reiterating their desire to chase “higher margin strategy consulting”. As somebody who has worked in the strategy function of a telco, I struggle to see why Cartesian feels they can obtain a sustainable competitive advantage in this arena. The more strategic the consulting, the more lucrative it is, but that is also why strategic consulting is dominated by high-profile players with very slick brands. I struggle to visualize the kind of telco which would prefer Cartesian to be their strategic advisor, not least because I can see little synergy between offering strategic consulting expertise, niche advisory services and the development of revenue assurance software.
There is not enough data to form a reliable conclusion, but a bold buyer might want to acquire Cartesian now, absorbing the parts that complement its business whilst discarding the rest. With a market capitalization of less than USD 6mn, Cartesian is cheap compared to some other RA vendors that have been purchased. The acquisition of Cartesian could potentially augment the revenues of an established RAFM business by between USD 40mn and USD 50mn, without causing them to branch out into radically new fields. Such a deal would allow the RAFM firm to scale back costs in the divisions where there is an overlap with Cartesian’s existing teams. Perhaps USD 20mn of Cartesian’s annual consulting revenues would be jettisoned as a result of the increased focus, after taking the hit of making the consultants redundant or motivating another consulting firm to absorb them. Eliminating the wages paid to the consultants may also neutralize most of Cartesian’s projected annual losses.
The process of buying, restructuring, downsizing and absorbing Cartesian would probably be bloody and unpleasant, requiring a ruthless streak from the management of any acquiring business. It could also be very profitable. Now is a good time for other businesses to do their research on Cartesian. They should determine what price, and under what circumstances, it would be worth taking over a troubled business which is part strategic consultancy, part niche assurance software provider, and a whole lot of confusion of the kind that shareholders struggle to understand.