Surge Holdings Inc (SURG) Reports +300% Increase in Revenues; Bolstering new “Buy Status” Upgrade.


Revenue Highlights:

  • September 30, 2019 -3rd Quarter 2019 Revenues Reported Up 21% to $4.9 million for the quarter and $19.6 million on an annualized basis.
  •  November 5, 2019- Surge Completes Acquisition of ECS Network adding $48.7 million in top line revenue and 9800 retail locations bringing top line revenue to $68.3 million on an annualized basis.
  • February 19, 2020- Surge announces that Surge Logic January 2020 revenues were over $1.0 million, double from September and nearly 10X  from January 2019.  Bringing top line revenues to over $74 million on an annualized basis.
  • Expect sharp horizontal and vertical top-line revenue growth as Surge grows their network and sales per location with additional cross sell opportunities

The main gist of our analysis is Surge shares are underappreciate by the market given over a 300% increase in top line revenues and no appreciation in share price since 3rd Quarter CEO Brian Cox, is delivering on promise of accelerated growth in revenue and forecast that all divisions will be cash flow positive near end of 1st Quarter 2020.  Given the steady increase in revenues, recent news cycle and performance rapidly trending to a significant positive monthly cash flow position, we feel there is strong reason to believe that market performance in the stock will soon reflect the consistent positive performance by the company.  Especially in growing top line revenues, kicking off with the completion of the ECS Prepaid Network acquisition in November 2019 as a major growth catalyst for cross-sell opportunities of other Surge products and services into these 9,800 retail location.   Goldman Small Cap Research set a $3.25 target for Surge, over a 900% increase from current levels and coined a “revenue multiplier model” growing revenue with additional stores in the network and with additional products sold into each store.  (link> https://www.goldmanresearch.com/201910311262/Opportunity-Research/new-acquisition-a-national-cbd-distribution-drive-growth.html

Who is Surge?

Surge Holdings operates the SurgePays™ Marketplace, a product sales channel that disrupts the traditional c-store supply chain model by providing independent and local retailers direct access to regional manufacturers from around the country. Surge leverages its wholly owned subsidiaries (value driven prepaid wireless and fintech products) to build relationships with convenience stores, bodegas, tiendas and community markets that serve the underbanked and unbanked – approximately 35% of the US population.

Once a store is onboarded to the SurgePays™ Marketplace, a trusted profit partnership is established and Surge upsells other consumable goods by connecting manufacturers directly to these retail stores.

The SurgePays™ Marketplace provides manufacturers measurable cost savings and offers an efficient platform to access independent retailers to sell products nationwide with improved payment terms

The prepaid wireless and financial services are the profitable “door-opener” to build and add locations to the Surge Network and then Surge offers additional value add products through the SurgePay™ Marketplace to grow sales per store revenue.  Where store owners can order a variety of products through Surge with Alibaba or Amazon simplicity and convenience.  Bringing digital efficiency with fintech services to a distribution model that has not significantly changed in decades.

The CEO has published his vision in detail: “My strategy for business building over the last 18 years has been based on recurring revenue from providing life-enhancing technology products for the underbanked with a focus on “Relationships.” During this time period, the market has grown to over 100 million prepaid wireless users in the USA with approximately 35% of the country now falling into the underbanked category. This is the last digital frontier and Surge is positioned for the land grab.”   Think 100 million prepaid wireless customers overlapping with 68 million in the US underbanked as a start of the addressable market

The CEO continues, “My personal goal is to have 100,000 convenience store locations in our SurgePays network with each store processing an average of $1,500 – $2,500 a month by 2021. We will also explore M&A strategies to own more brands we can input into our distribution channel.”

Growth Catalyst .

While the $48.7 million of top line revenue from the ECS acquisition is powerful the more significant value in our eyes is the addition of 9,800 new retail locations to the SurgePays™ Network with approximately 165 Independent Sales Organizations or ISO’s already in place that service these stores doing over 20,000 transaction a day.  Surge see’s all the data of other wireless providers to know best selling programs and maintains a competitive advantage owning the payment rails for payment acceptance of “Top-Up” wireless payments.  Its no coincidence that shortly after the ECS acquisition Surge announced a new $30 Unlimited wireless plan (Jan. 9th), then a new national sales director (Jan. 22) and soon thereafter the integration of Surge Wireless into the ECS Network (Jan 30th).

In the Jan. 30th Press, the CEO stated that he felt ECS would lead to over $50 million in additional Surge Wireless Revenues. Lets break that down to better understand what’s really needed to achieve that revenue. $50 million annualized is about $4.2 million a month in Surge Wireless revenue.  Looking only at $30 plans you would need 140,000 Surge Wireless customers.  ECS is currently processing over 20,000 transactions a day or 600,000 transactions a month.  This can be achieved in one year converting just 2% of the transactions or 1.5 customers per month in each store. Seems attainable.

In a recent interview the Surge CEO, stated that the next integration will be the SurgePays™ marketplace, where he hopes to 2x or 3x existing ECS revenues, adding another $50 to $100 million. The CEO has called this the Last Digital Frontier, redefining a distribution pipeline that has not changed significantly in decades.

Take a moment and watch a recent interview with CEO on ECS acquisition.

https://www.proactiveinvestors.com/companies/news/911903/surge-holdings-reveals-successful-surgephone-wireless-and-ecs-integration-911903.html

Summary

  • SURG shares are underappreciated because the story is unconventional.
  • Management has been stamping down on the gas pedal over the past several quarters, ramping investments in the core business and M&A, and growth is accelerating.  Strong news cycle of milestone achievements.
  • The company’s recent acquisition of ECS will add 9,800 stores to the Surge Network and allow for compounding vertical and horizontal expansion – something the market may be missing.
  • The December 31, 2019 10-K should be published by end of March,  reflecting the significant increase in top-line revenue in audited financials.
  • Surge Logics new Intake Logistics created a nearly 10x Increase in revenues for Surge Logics since January 2019.
  • The Company has completed its development cycle and is aggressively ramping revenues from both internal growth and strategic acquisitions increasing top line revenue form $15.2 million in 2018 to now over $70 million annualized with recent ECS acquisition and Surge Logic perforamce.
  • Recently named by Deloitte Fast 500 Technology 2019 list as one of the fastest 500 growing technology companies.
  • Goldman Small Cap research reported potential of $3.25 share price or over 900% growth.
  • 2020 poised for horizontal growth as they further increase their independent retail store network and vertical growth increasing sales per store.  Key Product Indicators to track in 2020.

A major point here that adds a great deal of weight to the topline growth narrative for Surge is the company’s recently completed acquisition of ECS is not yet reflected in the Company financials.  Something to look forward in the 4th Quarter 2019 year End filings.

This acquisition represents an enormous amount of potential growth as well as some certain growth.  Trailing revenues of $4.9 million for 3rd Qrt or $19.6 million on an annualized basis are a strong foundation to build upon.

By adding  the ECS post-acquisition, the Company is potentially now trading on a forward annualized top-line of $68 million, which is 4,600% growth in two years from a base that was already well into 7 figures!

Conclusion

While there are plenty of questions still in place for Surge Holdings –  we are very happy seeing the consistent increase in top line revenues within all divisions and some recent markers of strong execution, particularly in terms of an expanding the retail network footprint as well as recently accelerating topline performance.  With shares trading near the levels established in September of 2019 and the dramatic increase in revenues it seems only a matter of time for the market to reflect this increase.  Again we believe the next 10-K filing will go a long way in narrowing this gap.

Given Surge’s recent ECS acquisition and cross-sell opportunities to additional core products , continued consolidated revenue growth acceleration seems to be a solid prediction. We suspect that the hurdle of “unfamiliarity” that seems to be weighing on shares in the face of recent growth will subside over time if the company continues on its current path in proving its model.

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