Silversun Technologies, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Silversun Technologies, Inc., is a specialized business, technology, and consulting company providing strategy and solutions to medium-size companies. Primarily focused on IT services for finance, supply chain, inventory and retail.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview & Competitive Landscape Silversun Technologies operates primarily as a business consulting firm that offers a suite of business applications, IT infrastructure management, cybersecurity, and digital and cloud solutions, and is split into three segments: software product, professional consulting and auxiliary services. SilverSun serves small and mid sized businesses. The company positions itself as a provider of niche solutions for enterprises seeking to streamline operations, improve efficiency, or generate profits. Their financial statements reflect a mix of revenue streams, with software product revenue generating significant revenue. However, it is crucial to note that professional consulting and service revenue is still the major part of the revenue. Despite this, The company’s long-term focus has been on its higher-margin SaaS and recurring revenues. They are also working to expand their presence in the United States.

The market is competitive, with many players offering technology solutions, though some more established firms are dominant players in the space. However, The company’s focus on small and medium-sized businesses, and specializing in solutions in the ERP and cybersecurity domain, provides a specific customer niche.

Recent Developments and Concerns SilverSun’s recent results for the fiscal year ending December 31, 2022 show a YoY increase in revenues to $44.0 million, as compared to $41.2 million for the fiscal year ending December 31, 2021. Their gross profit also saw a jump to $16.8 million, from $15.0 million in 2021. However, the company’s net loss widened considerably in 2022, coming in at $28.2 million compared to $351 thousand in 2021. This loss reflects significant operating costs. The company also finalized a merger transaction in September 2022 with a company in a similar space, Rhodium Enterprise Inc. The long term impact of this is yet to be seen on profitability.

SilverSun also continues to focus on growing recurring revenue streams, especially through its new product offerings, the transition has been slower than expected due to some operational hurdles and inefficiencies. The management has indicated that they plan to scale up operating efficiency and leverage this to improve overall profits. Finally, the company faces a risk related to its dependence on a few specific customers for a large portion of its revenues, making it vulnerable if these clients move to competing firms.

Moat Assessment Based on my analysis, Silversun Technologies has a Narrow Moat. The company’s focus on providing specialized solutions, as well as a strong recurring revenue model are positive points. However, the competitive landscape and the company’s ability to quickly establish new business lines make for a limited moat. The following are my key observations:

  • Intangible Assets: Silversun has no visible intangible assets, such as valuable patents or brands, that can contribute to a wide moat. Their main intangible asset is the team of qualified engineers and consultants who are experts in what they do. As such, they cannot be treated as a sustainable source of wide advantage.
  • Switching Costs: The company has been aiming to increase the switching costs by creating stickiness with the customer through integrated solutions. They are making strides in this area, but their progress is yet to be completed, and such a moat is not very wide or defensible at this time.
  • Network Effects: This type of moat does not apply to SilverSun’s current business model.
  • Cost Advantages: SilverSun does not seem to be a low-cost provider, rather their competitive advantage comes from offering niche and high-end specialized solutions.

Given these factors, a rating of a 2/5 for economic moat is appropriate.

Legitimate Risks & Business Resilience Several risks could potentially undermine SilverSun’s business and its ability to maintain an economic moat. These include:

  • Competition: The high level of competition in IT services, cloud, and cybersecurity is a major risk, as competitors both big and small, compete aggressively for market share.
  • Technological Obsolescence: As technology changes rapidly, the company’s solutions may become less effective over time, requiring a substantial investment to keep pace and maintain a leading edge.
  • Dependence on Key Clients: The company has a concentration of revenues in a small group of clients. If any of these large clients move away to another competitor, the company will feel a large impact to their revenues.
  • Merger Risks: Integrating the acquired company into the current business would be a major challenge that would require additional time, resources, and would also involve additional execution risk.
  • Financial Instability: The company’s lack of consistent profitability is concerning and they need to improve their financial performance to have higher returns. This lack of consistency increases the risk that they might not be able to reinvest and increase long term value creation.
  • Economic Downturn: The company’s business may face reduced demand as a whole in times of economic downturn. These events reduce demand for their services.

The company’s business model does have some elements of resilience, as their focus on niche sectors, and especially the higher-margin subscription revenues should support the firm during harder times. Overall their resilience level is 3/5.

In-Depth Financials The company had the following financials for the full year ended December 31, 2022:

  • Revenues: $44.0M
  • Cost of Revenues: $27.2M
  • Gross Profit: $16.8M
  • Total Operating Expenses: $43.5M
  • Income From Operations: $(26.7M)
  • Net Loss: $(28.2M)

Key observations here include:

  • Revenue Growth: The revenue growth is a decent increase of 6.8% YoY, due to expanded operations.
  • Gross Profit: The gross margin is pretty solid at 38%, however, it is not very high for software/service companies.
  • Operating Expenses: The operating expenses have been far higher than gross profits and have driven their earnings into a negative direction. They have almost doubled.
  • Net Loss: Due to higher operating expenses, the company has a loss of $28.2M compared to profits in 2021 which has a lot of concern for sustainability of their model.

The company’s balance sheet is a cause for great concern:

  • Assets: The total assets of the company stood at $20.3 million as of December 31, 2022. This is largely in the form of intangible assets, and current assets.
  • Liabilities and Equity: The company’s equity balance has a substantial deficit, at -$7.2 million, indicating that the firm needs to improve its profitability quickly. The main components of total liabilities ($17.9 million) are related to leases and long-term debts.
  • Cash and Liquidity: Cash and cash equivalents are at $3.5 million, which means the company does not have a strong level of liquidity and flexibility to weather financial problems.

Overall, the company’s financials reflect a very concerning situation that needs to be changed fast. This is a huge risk.

Understandability Rating: 3/5 The company’s business model of offering various IT-focused solutions is not too difficult to grasp, however understanding their business and all their revenue streams is complex.

  • Their software suite is somewhat understandable. However, it’s not the type of product every investor will know about and have first hand experience with.
  • Their reliance on professional service and the integration of acquired businesses adds to complexity.
  • The numerous types of services they offer adds complexity when trying to analyze where they are making the most profits.

Balance Sheet Health Rating: 2/5 Based on my analysis, SilverSun Technologies’ balance sheet is Very Unhealthy. My reasons are as follows:

  • The company has a very poor debt to equity ratio which shows high levels of long-term debt on its balance sheet compared to the equity of the company.
  • The company’s cash on hand is relatively limited, giving little room to maneuver during downturns.
  • The negative equity balance indicates an unsustainable trend that needs to be reversed as soon as possible to avoid bankruptcy or a need for large equity offering which will negatively affect shareholders.
  • Even after adjustments related to intangibles the company has no real profits to show. This increases the risk that the company may need to dilute current share holders.

All of the above reasons means that the company’s balance sheet is concerning. The financial health of the company needs drastic improvement immediately.