I was looking at R Systems International this week, and decided to put some thoughts together…
• The price to sales and price to earnings multiples seem fair, and there is the potential for a re-rating
• What will drive this re-rating will be a sustained increase in revenue growth, EBITDA margin improvement, more of a shift to ER&D versus traditional IT services, and consistently showcasing client wins in emerging technologies (cloud, data, automation, and AI/GenAI)
• Regarding the AI bit, the collaboration with IIT Delhi, announced in Feb 2024, is a promising sign of things to come
• Management is trying hard to convince investors that the company is more of an ER&D or digital product engineering company
• It’s good to note that the company does not pursue very low-level IT services work like infrastructure support, basic IT support or ERP implementations
• Management keeps emphasizing how the company wants to focus primarily on handling client products, enhancing them, building/rebuilding them, developing and releasing new features, etc., as opposed to low level IT services
• Cost will continue to remain a focus for the company, and it will focus on cost-led value propositions. A clear indicator that the company is operating in a crowded space
• In my view, this company is still more of at IT services company, versus an ER&D player
• It’s good to see how the company has appointed a chief customer officer, who will be responsible for developing deeper ties with existing customers, and also growing channel sales and partnerships
• I like how the company manages its investor relations related communications. For example, in their Q4CY2023 investor presentation, the q-o-q EBITDA bridge and the 8-quarter revenue and EBITDA margin snapshots are helpful
• Additionally, I noticed a slow and steady upward trend in their utilization numbers from around 75% to 79% over the last two years
• This company being a Blackstone portfolio company can really open doors when the sales team tries to pitch to other Blackstone portfolio companies. Would be interesting to see how the company takes advantage of this opportunity
• I wonder whether Blackstone (or another entity) will try to take this company private again. If this company is already vetted by Blackstone, other institutional investors or even an HNI would be ready to pounce.
• If the company consistently demonstrates big client wins in emerging technologies (cloud, data, automation, and AI/GenAI), along with a lowering interest rate environment, the number of interested investors could really increase
• A customer testimonial would be a nice to have to get a better sense of whether/how R Systems stands out from the crowd in the fairly crowded IT services space
Disclosure: Not invested, but tracking. I personally like to invest in companies that have unique capabilities, with limited competition. At this point, in my view, R Systems International is caught in the crowded IT services space
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