Greystone capital newletters and YouTubehttps://www.youtube.com/watch?v=NcvoqYCvnRs
12 minutes in worth watching IMO
Greystone Capital
Q1 introduction
New Position
Sylogist Ltd. (SYZLF)
During the quarter we purchased shares of Sylogist Ltd. and setting the stage (or table, if you will) for this
investment are the many cooking shows in my rotation, where I love watching chefs prepare and talk about
food. These shows offer many parallels to investing and portfolio management, one of which is that the greatest
chefs understand that the best recipes are all about the ingredients. I believe Sylogist is following the recipe for
success, with the ingredients consisting of a high-quality business, strong growth prospects, a net cash balance
sheet, good management, and free cash flow generation at a bargain price. Sylogist is a public sector software-
as-a-service (SaaS) business whose stock has been orphaned due to its history of poor corporate governance
along with a recently implemented strategy shift and dividend cut that caught investors off guard but was
executed with the sole focus of driving shareholder value. This, along with the massive selloff in small companies
and software related businesses during 2022 has caused the stock to be left for dead, despite possessing some
characteristics that point to an intrinsic value much higher than where the shares trade today. Over time, and
with proper execution, I believe our shares could be worth multiples of what we paid.
Sylogist is a Canadian listed SaaS business that provides mission-critical software solutions to nearly 2,000
customers worldwide in three public sector verticals of Non-profits/NGOs through their SylogistMission
segment, Government through their SylogistGov segment, and Education through their SylogistEd segment.
Within these verticals, software solutions consist of ERP, CRM, fundraising, education administration, and
payments products. These products carry high value propositions and sticky customer relationships as they serve
a critical need for organizations of all sizes. The areas within the niche that Sylogist occupies have less
competition than enterprise level software businesses, who typically avoid these end markets and are not well
adapted to offer the customized solutions that Sylogist can. One example would be a growing non-profit that
requires more advanced fund accounting and donor management software that integrates with the rest of the
organizations applications, thereby eliminating sometimes manual processes for data input and storage. The
organization could use Sylogist’s ERP product to address those needs. Historically, despite underinvestment in
Greystone Capital Management | adam@greystonevalue.com | www.greystonevalue.com
customer relationships under the previous management team, customer retention has been in the high 90%
range as there is reluctancy to switch providers given the integration into their workflows and systems.
Sylogist has three primary revenue segments made up of Cloud Subscriptions (40% of revenues), Maintenance
and Support (25%) and Professional Services (29%). Approximately 65-70% of revenues are recurring between
Cloud Subscriptions and Maintenance and Support, providing both visibility and resiliency into future revenues,
with software gross margins in excess of 75% and cash flow conversion in the 70-80% range. Several of Sylogist’s
products are built using the Microsoft Dynamics platform, where Sylogist can not only customize products for
specific verticals but can also benefit from the reputation and track record of Microsoft during customer
acquisition and when cross-selling adjacent products and services. Moving forward, management’s strategy is
to grow both organically and via M&A, while focusing on the organic growth of software subscription revenues.
Software businesses, and among those, Sylogist’s peers, can be great businesses, especially when tied to critical
parts of an organization’s operations. They share characteristics such as strong organic growth, high revenue
retention, high margins, and strong cash flow conversion, while providing remarkable durability through all
economic cycles. Publicly traded peers Tyler Technologies, Blackbaud and Sage have long histories of growth
and profitability, while each grew revenues through the financial crisis with no decline in operating margins.
Strong fundamentals and durability means that most of Sylogist’s peers trade at valuations of 20x EBITDA or
more, compared to <9.0x NTM EBITDA for Sylogist.
For the reasons behind the valuation disparity, I’d point you toward the company’s history. The early version of
Sylogist consisted of a low margin, no growth, reseller of software until prior management made some
acquisitions in the early 2000’s to capture more of the customer relationship and to focus on building a public
market software business. Unfortunately, prior management made it a point to focus on tuck-in M&A, manage
acquisitions for cash flow, neglect organic growth, and milk the company for compensation. Poor corporate
governance, a company with no business being public, and a management team with no desire to drive
shareholder value was going nowhere and would never garner a proper public company multiple. Prior to the
former CEO’s retirement in late 2020, Sylogist ran a strategic review (an attempt to sell the business) and
emerged with the Board determining that the best path forward would be to pursue the near-term market
opportunities for growth in order to drive shareholder value. They also went on a search for a new CEO who
would be given an organic growth mandate.
Enter current CEO Bill Wood, an industry veteran who was a founding member of Blackbaud, one of Sylogist’s
direct competitors, also previously serving as President and CEO of two software businesses during a 17-year
span that culminated in both businesses being acquired, one by Constellation Software and the other by a private
equity firm. Shortly into his tenure, Bill cut the dividend (a 9% yield), freeing up nearly $12mm in annual cash
flow, and formally announced the company’s strategic shift toward growing organically and via M&A. As part of
the strategy shift, EBITDA margins would be taken down from the low-mid 50% range to 30%, while maintaining
a Rule of 40 posture, with the excess cash flow being reinvested into product development, sales and marketing,
and M&A. The company’s credit facility was also increased by 65% to $125mm, providing additional firepower
for acquisitions, while a share buyback program was put in place that would allow the company to repurchase
up to 10% of shares outstanding. The market, along with yield focused investors, did not like this news. I,
however, am thrilled with these decisions, as I tend to seek out management teams willing to endure short-term
discomfort in exchange for potential long-term value.
The strategy is working, and investors have been slow to recognize the shift, despite what I believe to be an
important inflection point. In just three short years, Sylogist has made tremendous progress toward building a
software platform by strengthening the management team, launching and acquiring in-demand products,
repairing customer relationships, improving the NPS score, and returning the business to organic revenue
growth. To date, efforts to accelerate sales, marketing and product development have been and should continue
Greystone Capital Management | adam@greystonevalue.com | www.greystonevalue.com
to prove successful as the sticky products that Sylogist offers, and the collegial nature of their end markets means
that a continued organic growth profile shouldn’t be too difficult a hurdle to overcome. In fact, Sylogist is firing
on all cylinders, growing bookings, revenues and cash flows effectively, and as of the most recent quarter,
reported positive sequential growth in organic software subscription revenue. During the most recent earnings
call, management highlighted an attractive sales pipeline and new bookings matriculating at a higher rate than
at any point since the current management team was brought on. This, along with the hiring of an experienced
Chief Revenue Officer and the continued flexing of marketing muscle bodes well for future organic growth. A
recent upgrade to the CFO position should also come with improved communication and disclosures, helping
investors better understand the story and strong fundamentals.
Sylogist’s strategy shift will be bolstered by significant tailwinds including the large addressable market among
their customer base, low digital penetration among the same customer base, the acceleration of software tools
post-COVID, and a fragmented market for products and services that Sylogist can tap into for M&A. Since their
hiring, management has completed four acquisitions, all largely accretive and providing both the opportunity
for continued organic revenue growth and the opportunity to add valuable products and services to their
platform. According to management, the deal pipeline remains incredibly full, with hundreds of potential targets
on their list. As private market valuations continue to come down, we should see additional transactions take
place that help grow the top and bottom lines over time. Sylogist could also find themselves on the receiving
end of an acquisition offer, as the government software space is incredibly acquisitive due to the fragmented
nature of these businesses, value to both strategic and financial acquirers, and durability of the business models.
In a macro environment where two of the biggest worries are inflation and a recession, the combination of non-
discretionary recurring revenue and pricing power makes for an attractive setup. Even share-losing Blackbaud,
who has consistently underinvested in the business to the point of declining revenues and margins, finds itself
in the midst of a take-private offer from a PE firm.
Sylogist remains a ‘show me’ story but I believe the right ingredients are in place. The company is small. Publicly
traded float is minimal. Shares trade over the counter in the US and have zero US analyst coverage. Management
is non-promotional and IR efforts could improve. The potential for mispricing here is significant and I believe
shares could be worth multiples of what we paid looking out a few years. I like the setup and look forward to
discussing Sylogist in future letters
Q2
Sylogist (SYZLF)
The investment case for Sylogist can be found in last quarter’s letter, and not much has changed since
then, aside from the company hosting their first ever Investor Day which I attended in Toronto during the
month of June. The event was very well done and gave the company a chance to highlight their
competitive strengths, growth runway, and recap how far they’ve come since the current management
team was brought on board. Investors got to hear from key members of the management team, each of
whom outlined their respective roles and strategic visions, revealing a company that has become much
more streamlined, data driven and incentivized to drive shareholder value.
In both my and management’s view, this is a completely different company relative to pre-2020, and there
is a tremendous opportunity to grow the earnings power of the business moving forward. The market has
been slow to appreciate this. I’m excited to be invested alongside a very high-quality management team
that has executed the playbook of organic growth + M&A at previous roles. This is not a group that thinks,
acts, or operates like a sub-$150mm business. Furthermore, I believe management remains conservative
in terms of their financial outlook, as organic growth could accelerate if additional verticals start to
contribute, margins could expand more than expected over time, and if they get the M&A engine revving,
they will grow FCF per share at a considerable rate. These are all free options as the current IRR in terms
of the FCF yield + growth is attractive on its own. But as an example of the embedded optionality, the
opportunity set in the Education vertical alone could come to represent a revenue run rate that exceeds
the entire revenue profile of the business today.
There was an exciting buzz among investors in attendance regarding this business and the market’s lack
of appreciation for the current state of affairs. Management agrees as the company is buying back stock
as we speak. I believe our shares remain significantly undervalued, and of all the businesses we own, I
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Greystone Capital Management | adam@greystonevalue.com | www.greystonevalue.com
think I’m most excited about the opportunity set in front of the company, as well as our potential upside.
I added to our position during the quarter