Zaio Corporation (
TSX: V.ZAO,
Stock Forum) is a vertically integrated financial technology company and a Cinderella story long in the making. When the company sprang to life in 2004, it opened with a lofty dream of revolutionizing the real estate appraisal and valuation market in the United States with an innovative state-of-the-art patented approach to valuation automation that to this day, no other company has been able to provide.
The dream involved the generation of a massive database of intimately relevant real estate valuation parameters put together by 1100-strong army of qualified real estate appraisers. This horde travelled the country adding human derived information to an ever-growing database that by 2009 hadn’t made it to market. That was when the real estate bubble burst and the whole industry collapsed sending many companies into bankruptcy.
Zaio Corporation escaped execution but teetered on the brink as the little enterprise with the big dream re-tooled itself to weather the economic storm. Company CEO, David King, illustrated further, “So we had a human powered database with something like 1100 appraisers across the country. Old Zaio, which is how I describe this period in our business, was selling franchise rights for regions and these appraisers would pay for the right to gather data in those regions and then sell Zaio technology products once the database was complete.”
“Fast forward to 2009 with the real estate blow-up, Zaio was mortally wounded and ended up almost going bankrupt. So a deal was struck with all these appraisers that had bought licensing franchises where they created a company called Zone Data Systems which then affiliated with us as our friends because Zaio was so wounded we didn’t have the resources or the personnel to go forward in the United States. So Zaio hunkered down, survived and became a software company. This is the beginning of the period I like to call Zaio 2.0.”
The new incarnation of Zaio really took root in 2011 and the company focused on rebuilding and completing this incredible database that was expected to take the real estate valuation and appraisal space by storm. With new management, new capital and a renewed vision, the company pushed through, and in 2013, made a strategic acquisition of Valuation Vision, a provider of innovative valuation products and technology solutions for the mortgage and investment industries.
The approximately US$4.5 million transaction saw Zaio grow its portfolio with the addition of BPOLite™, BPOPro™ and BPOMerge™ product suite, a set of proprietary technology and analytics platforms. The acquisition also deepened Zaio’s position in the American real estate market enabling it to offer products that could perform in all 50 states through a network of over 75,000 real estate agents and licensed appraisers.
By 2013, it became clear that Zone Data Systems was unable to take Zaio’s technology offering national. So management made a decision that would significantly shape the company’s future. King explained it this way, “In short, we bought out the contract. So instead of having a group of appraisers, who are our friends and continue to be our friends, in charge of our revenue streams and all those other things, we brought all of that back in house. Now we manage and sell products directly ourselves. We bought out that relationship because with the Zone Data Systems national license agreement, ZDS had the actual technology rights and Zaio could not book the revenue, it could only book a profit share, which is not optimal going forward.”
Zaio’s efforts from 2011 onward has resulted in a massive 32-plus billion point database which King states isn’t quite Google size and still requires work to include complex territories like New York City, but there is a collection of unbelievably large data sets that can valuate real estate right down to the home level, so if your neighbour sells their house, Zaio’s products will take all of those sales details into account when valuing your home. The database also continues to grow as Zaio seeks out agreements to access MLS data in real time as well.
Now a database is just a mountain of information which doesn’t become useful without a set of well-written algorithms and workflows that allow appraisers to do their jobs faster and more accurately. Zaio’s proprietary technological solutions take an appraisers job from hours to minutes with a finer accuracy than ever before with automated valuation systems. Still this is not enough as King pointed out, “Zaio’s offerings alone still leave holes in the food chain that is necessary to get the product out to clients. We need distribution, we need customers and we need human resources and operating prowess to actually distribute this. In the appraisal market, appraisals involve licensed appraisers, or valuations that are done by realtors involve a human.”
“This is obviously a necessary requirement as banks need people to go out and check to see if these properties are still there. So you can’t just have a computer look at this stuff. If a bank is interested in how much that house is worth to write a mortgage against it, they want someone to walk up to that house and check it out yesterday with some fresh pictures to make sure it hasn’t been burned down. They need to make sure it’s a safe mortgage; it’s as simple as that. So, we’ve added to the family with Valuation Vision which among other things a vitally important order management system. That order management system allows us to accept orders, literally thousands at a time and deploy the human resources required to get the job done. This is where BPOMerge really shines, it uses three realtors; sends one out to the house while two others look at the file electronically. Those three values are merged together using advanced analytics to create a highly accurate valuation.”
“This of course means we’re handling three human beings for every order and you need a crack operations team and software to track that workflow and Bill Mohler, one of the co-founders of Valuation Vision, and his team have built just that. In short, Valuation Vision custom software provides the plumbing to run this thing and dispatch the human element required in this marketplace, and has helped build product that is now adopted by giants in the industry. This is leading-edge valuation technology opens up the unregulated market.”
Zaio can also tap into the regulated market due to its recent acquisition of Axis Appraisal Management, of San Francisco, which is a licensed appraisal management company. This allows Zaio to grow its product line from mid-market appraisals to the traditional appraisals of Axis while adding the unregulated reach of Valuation Vision. This diversification of pricing and product gives Zaio the ability to service practically any company and any needs that they may have. So what is the final result of Zaio 2.0?
King answered this way, “We’re a vertically integrated technology company that has a massive patented database. We have a sophisticated order management system to dispatch people in the field and we have a proprietary product line broader, better and deeper than anybody in the industry today.”
In an American real estate valuation and appraisal industry that sees annual revenues of $7.0 billion and oversees a $21 trillion asset class, the biggest in the world, Zaio is pushing to disrupt the market, so what can investors expect in the next 24 months?
“The transition that you’ll see Zaio, as a public company, go through over the coming 24 months, is that it will start being a lot more American. We’re still going to be a Canadian company, that’s not going to change, but 100% of our customers and revenue are going to come from south of the border. So we’re going to continue to morph the company into that position. You will also see a new structure as we continue to close these recent acquisitions of Axis and Valuation Vision, in the coming months that will see 90% of the management team living in the United States.”
So in 2015, you can expect the acquisitions to close as the company has been able to raise the funds through financing necessary to adhere to public company requirements to complete them. This will allow Zaio to consolidate and bring everyone into the corporate family under one roof, giving Zaio the ability to report its consolidated revenue in formal reporting statements rather monthly pro forma announcements. Also, Zaio is experiencing a great time in the market and its management team sees 2015 as a tremendous opportunity for high growth in both revenue and earnings through to the back half of 2015 as well.
Long term blue sky potential is also limitless as there are multiple opportunities for sale of data to third parties, such as large institutional and government contracts and an offering that has yet to be copied. The largest challenge facing the company at the moment is its execution and one might ask why they should put their hard-earned dollars down on a company that took so long to bring itself around and get its product to market.
My answer would be timing. Apple is well familiar with that concept as it failed with the Newton and Lisa because the markets weren’t ready, pricing was too high and technology hadn’t hit that sweet spot of innovation, but years later they succeeded wildly with the iPad and the iMac. Zaio fell victim for almost the same reasons. It was a little company with a big dream far before its time. But the company has taken that initial handicap and built an infrastructure capable of handling its lofty goals.
Now that the real estate market is recovering and technology has caught up with Zaio’s vision in both pricing and capability, the company has the perfect window for success. Execution in 2015 will be crucial for management to bring about Zaio 3.0, but I was impressed with the depth, expertise and forth-rightness of its management and fully expect it will achieve its goals. Smart investors would do themselves a favour by checking out this venture.
FULL DISCLOSURE: Zaio Corporation is a Stockhouse Publishing client.