If you own a smartphone you are probably familiar with automated notifications. From convenient reminders that you’ve used up almost all of your data for the month, to messages asking you to verify an account, to alerts from health apps, these notifications help make everyday life easier. 

Not only is this issue’s Project Alpha pick the secret behind these communications services, but it also dominates this niche market despite its small market cap.

West Corporation (Nasdaq: WSTC)is a global telecommunications provider with a broad portfolio of product offerings ranging from 9-1-1 call processing to enterprise conferencing services to notification systems in healthcare facilities. 

West operates in five main segments generating sales of more than $2.2 billion, with its conferencing and collaboration services segment contributing to roughly half of the firm’s revenue. As the largest provider of conferencing and collaboration solutions in the world, West managed over 65 billion telephony minutes and facilitated over 167 million conference calls in 2015 for prominent clients such as IBM (NYSE: IBM), Alphabet (Nasdaq: GOOGL), Microsoft (Nasdaq: MSFT), and Cisco (Nasdaq: CSCO). 

In 2015, the unified communications segment generated $1.5 billion in revenues and contributed to 82.9% of the firm’s operating income. With operating margins at 25.8% in unified communications services, this segment provides West with a solid foundation for future growth because of its ability to serve as a consistent money generator and steady stream of free cash flow. 

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For companies of all sizes, gaining market share is a major challenge and constant battle. Toss in the fact that small-cap firms, like West, typically don’t have the resources to compete with their larger peers, setting up the classic David vs. Goliath analogy. But West Corporation, with a market cap of less than $2 billion has managed to leverage its cutting edge safety services to become the leading provider of 9-1-1 services in the United States, processing over 290 million calls in the past year.

This past quarter, the firm announced two partnerships that will help drive revenues in its safety services segment. First, West landed a new contract with AT&T. The goal of the partnership is to improve and standardize 9-1-1 calls, which should allow West to process more than twice the current 9-1-1 call volume. Not to mention the new streamlined structure should help those seeking emergency attention to receive faster responses. 

Next, the firm partnered with Airbus where it aims to improve the integration of text-to-911 services and is predicted to be available to approximately 85% of PSAP desktops in the US by 2020.

Even more impressive is West’s domination of the K-12 communication solutions market. Remember those phone calls you’d get from the school district on severe weather days? West’s interactive services segment is behind the software that generates those messages. With its recent acquisition of Synrevoice, West will now operate 60% of K-12 notification systems in the United States and Canada. The company’s guidance expects high single-digit growth in revenue in this segment this upcoming year. 

While maintaining its diverse portfolio of services, West Corporation has taken steps to evolve its business away from labor intensive services to predominately tech based solutions. 

In 2015, the company divested several lower-margin, agent based businesses, including its account services, receivables management and consumer sales and lifecycle management services. These cuts freed up $275 million in cash for the firm and reduced employee count from around 35,000 to a little over 10,000. 

Despite the dramatic downsize, revenue grew by 2.7% from 2014 to 2015 and net income increased by 53% to $242 million. Additionally, West continues to pay a consistent dividend yield of 3.83%, a rare feat for a small-cap company. With gross margin at 58% and EBITDA margin at 28% and growing, these recent divestitures seem to put West Corporation on the path of continued financial success. 

West is currently well positioned to capitalize on trends in telecommunications and emerging technologies. According to the national research institute, Garner, the number of conference calls originating from collaboration applications is projected to rise from 30% to more than 90% by 2020. 

As the primary player in conference collaboration services, West will likely see high growth in its Unified Communications segment as a result of this trend. Furthermore, Cisco estimates that more than 50 billion devices will partake in the Internet of Things by 2020, which could be a logical application for West’s inter-device communication systems. 

Trends in healthcare indicate that consumers are beginning to take a more active role in managing their own health. With the help of West’s notification systems and data analytics services, consumers can monitor their own healthcare experience while maintaining critical communications with medical facilities. 

In 2015, West Corporation made a number of acquisitions to profit from these trends and offer state-of-the-art solutions for its clients. In addition to the earlier mentioned acquisition of Synrevoice, the firm also acquired Magnetic North and ClientTell in 2015. The UK based Magnetic North is expected to further West’s initiatives in developing multi-channel and cloud-based solutions while expanding the company’s presence in Europe, Africa and the Middle East. ClientTell will help advance West’s portfolio of lab reporting services and automated notifications systems in healthcare. 

Risks to consider:To fund its acquisitions, West has taken on approximately $3.4 billion in debt. However, the bulk of this debt is not due until 2021 and the firm has been paying down its debt with its proceeds from divestitures and consistent free cash flows.​

Action to Take: West Corporation has accomplished what few small-caps have managed to do — become the dominant player in their market. With a solid plan to leverage its position and capitalize on trends in the telecommunications industry — all while consistently generating positive free cash flow — West’s future looks bright. Buy under the price of $24.50 per share. 

Editor’s Note: Everyone knows that dividend payers crush other stocks. It’s not a matter of opinion. You can just look at the stats. But what’s really interesting is why they do so much better. We’ve found the answer here.