DSW Capital (LSE:DSW) - Call with James Dow
2nd call with James Dow, Co-Founder of DSW Capital
Hi Everyone,
I spoke to James Dow today and unfortunately, my audio visual skills need work as I was unable to get James's audio but got my own….
Here are my post-call notes, nevertheless.
Personal Vision & Succession
James you are 62 years of age I believe. How long do you believe you have remaining actively involved in the operations in the business, especially given the 2 other founders have already stepped back? What are your biggest goals to achieve prior to your inevitable step back?
He is still committed to staying in the business as long as can be. Alluded to achieving more scale.
Is there anyone within the business that can succeed you in the event that you choose to step back?
Nicole is unofficially lining up to succeed James.
License fees Variation
From what I understand there is differing levels of license revenue share and profit share on a business-by-business basis. Do partners ever find out the license % of other partners and show discontent, it seems like a bit of a recipe for disaster if partners begin to complain about differences in revenue share?
Discussions with potential partners are viewed with the lens of contagion. Will it become a problem if the information about their revenue share is revealed. If so, don't proceed.
Recurring vs non-recurring revenue
You've been on record saying that you believe non-recurring revenue is more valuable than recurring revenue. Could you please elaborate why?
Recurring at highest risk of Automation/AI
James views the DSW license fees as recurring and leans heavily on diversification
Non-recurring revenue is the most valuable, evidenced by significant revenue/FE
International
In the results presentation with PiWorld you mentioned there was interest in potentially exploring international avenues, could you perhaps elaborate how you intend to do this, how the Pangea network plays its role and what geographies make the most sense to you?
Geographies that make sense include Europe etc. but also all english speaking countries. Leverage the Pandea global M&A network.
Central Initiatives
Can you speak to the specifics of the Central initiatives during the year?
What is the DSW appraisal framework?
A program to help map out career development such as 'you should be able to do this as a manager etc.'
What will IT resources be working on?
Not too much to say here, but basically security.
Could you speak more to the recruitment mapping exercise?
Not done previously officially but have been seeing success. Says it is something where they look to engage in downturns when partners are more reserved about recruitment and when in good cycles disengage and rely on partner organic recruitment.
Attrition
Why was attrition so impressive this year at ~8%. What were the drivers of that? 17 in and 8 out
James suspects it was primarily due to market forces and other firms not looking to recruit.
Bridgewood deal
Happy with the direction, offers much needed diversification to the model, despite the group's strength in the M&A area. As James said in the call offers investors more predictable earnings.
130k minimum contracted return. Does this include interest on the loan, license fees or profit share?
Yes this does include interest, return is license fees less interest.
Even assuming 150k/fe in billings, a 130k contracted return only implied a 8.7% license fee?
James says 140k/fe is more applicable to what this business generates. this would put them on 1.4m of revenue. 130k is a 9.3% revenue share.
Loan term - how long do mgmt have to pay principal?
Loan is permanent, therefore effectively like goodwill. James viewed it as a purchase at 6x license fees.
Loan interest rate?
Not asked
What other service lines make sense in the midlands area in particular?
4x Business development managers in the bridgewood business. They basically call accounting firms asking for liquidations. James thinks that they can also ask for their other service lines as well and sees great revenue synergies as a result.
Operational gearing
I understand that the model itself lends itself to limited operational gearing, however at the current size the operational costs of the parent entity change significantly even with single hires, do you expect that the operational team currently is overstaffed or understaffed for the current and future network headcount?
Thinks it is 'correctly' staffed. Went back to saying 10:1 fe/support ratio.
Stock Based compensation.
From what I understand the Pre-IPO shares were issued and are expensed linearly up until 16 December 2023. The PSP expense was 73k in 2022.
correct
As it stands, assuming the share price persists at these levels, will the CFO legacy shares not come due as from what I understand the issue of these to Nicole is dependent on a 26m equity value or 122p share price.
Yes James confirmed this was the case and there is limited time for this to occur.