$WTC held their AGM this morning – online only, to the chagrin of many shareholders. However, in fairness to the Board, it appears that all questions were aired and discussed without grouping or editorialising. Furthermore, the Board has committed to move back to a hybrid mode next year, in response to requests from shareholders. So, that’s a positive.

In this straw, I outline in some detail why I have exited $WTC (again!), and conclude with some reflection on tech valuations.

Update on The Investigation

There was a separate detailed release on the progress to date on the investigation. This involves an external legal firm as well as forensic accountancy services. 21 staff have been interviewed c. 30 interviews. Chair Richard Dammery has said there is no deadline for the conclusion of the review - it will take as long as it needs to take.

So far, there has been no evidence of any wrong-doing or breaches of company policies. It seems to me that RW has exercised judgement in being able to separate his personal life from his work life, and where relationships inextricably overlapped, he appears to have made appropriate disclosures before the fact. Importantly, there is no evidence of any misuse of company funds.

While there is further for the investigations to run, I believe that in due course this chapter will close with RW's professional reputation and standing in his new role intact.

RD spoke about the toll this whole fiasco has taken on RW, and played a recorded statement from RW where he expressed his regret for the impact the entire episode has had on everyone, including employees and shareholders. (He also appeared live later in the meeting to answer a question, restating his unchanged commitment to the company, and his intention to continue to be a major shareholder for the very long term, continuing his gradual sell-down policy.)

Guidance Downgrade

More significantly - and this is what has moved the SP today – there was a material downgrade to FY25 guidance.

• Revenue from $1,300-1,350m (25-30% growth) to $1,200-1,300m (15-25% growth)
• EBITDA from $660-700m (33-41% growth) to $600-660m (21-33% growth)
• EBITDA margin from 51-52% to 50-51%

The reason: Management distraction leading to a delay in the launch of Container Transport Optimisation, one of the three new products being launched this FY. The others being ComplianceWise and CargoWise Next.

The only other quantitative information I could discern was acting CEO Andrew referring to a further $50m (I think) of cost synergies from acquisitions, which will drive continuing EBITDA Margin improvements into FY26, probably towards 54% (my view). (I'd already expected them to get to 54% by FY27, and ultimately all the way to 60% in the long term in my central case!)

My Assessment

As I’ve written here before, the reason I sold in late August and early September after the FY Results, is that I considered the FY25 guidance to be aggressive and with the SP at $130 flying well past my upper valuation limit. I expect this to set-up $WTC for a miss or a downgrade in the FY25 results, or at the HY.

But that was before the "RW circus" erupted. Of course, when given the chance to buy back after the "circus came to town" at $106, I took that chance.

That FY guidance was downgraded today was, therefore, not a surprise to me. But what is a surprise was for management and the Board to lay the blame for this solely at the feet of "circus" distractions, leading to delays in the new product launch. And on further discussions in Q&A, to reveal the pivotal role RW plays in the key decisions around the launch.

That is thesis-challenging for me. I genuinely believed that RW had built a strong bench under him, and that with the amount of planning and investment that has gone into the development of the new products since the acquisition of Envase, Blume and Matchbox, my assumption was that his hand would not be mission-critical for getting the products launched. I was wrong.

Why am I attaching so much weight to this?

Well, we don’t yet know who the new CEO will be. The search will take some time. Evidently, this is an operation that still requires careful direction at the operational level from whoever is in charge. And what that means is that the Founder and Founder CEO will be intimately involved in important operational decisions going forward. Yet this will also be the domain of the new CEO. The organisation has clearly not yet matured to the level where the Executives below the CEO are driving key day-to-day decisions (I consider "Go-No-Go" on a product launch something you might expect to see within the authority of a COO in conjuction with the EVP Sales and Marketing/Customers.)

What is also a concern is to see how much of the guidance change is placed at the feet of the new products. All of it! At face value, taking the mid-points, we’re talking $75m of revenue and $50m of EBITDA, or, in other words over one-quarter of the originally planned growth for FY25 in what would have been less than full year contributions in any event, as new products were progressively rolled out to customers through the year (we know they hadn't started in August/September before the circus came to town).

Don’t get me wrong, $WTC’s updated growth is still impressive. But even with the FY25 guidance, my valuation range was $103 ($92 - $123). I haven’t gone back and looked at what would be reasonable with the new guidance, but its lower.

Now I realise that when you do valuations you can get whatever numbers you like. An increasing gap is opening up between several of the better analysts and me. So maybe my work is flawed. For example, going into today, GS have a 12m TP of $138. (My numbers are a valuation today, not a 12m TP, but even so, that puts GS 35% ahead of me, which is maybe OK given $WTC’s track record of returns over the last 5+ years.)

But given that the SP early today was at $125 (an 18% return in 4-5 weeks for me) and that:

1) it once again exceeds my upper limit on valuation;

2) my valuation will need to be adjusted down to take account of the guidance change – likely in the order of 3-5%;

3) based on what we’ve learned today, I believe that $WTC faces the risk of an ongoing reduction in organisation effectiveness, until a new CEO is established in their role; and

4) while the market seems to be looking past a lot of this today, this company remains very highly rated with a forward P/E of 107x.

I'd rather step aside for a while and see how things pan out, simply based on valuation and because I consider the ingredients remain in place for further operational mis-steps that the valuation cannot bear.

That said, I’m pretty confident $WTC will hit the new guidance. Andrew is the numbers guy, and he’ll understand the importance of NOT missing his first guidance. Importantly, with $WTC’s excellent visibility to the recurring revenues, and now clarity on new product role-outs and a diminishing opportunity for them to contribute to the full year, there is also the small matter that the all important EBITDA guidance range has ACTUALLY WIDENED, despite being 3 months further down the track from when it was first set.

And maybe, just maybe, the original FY25 Guidance was a bit of an over-reach (that was my original hypothesis, after all) and the "circus" provides a nice little smokescreen. After all, it's not the first time $WTC has been overly aggressive on initial FY Guidance!

A Reflection on Tech Valuations

Among many of the topics of conversation around the table at last night's excellent Brisbane Strawman gathering organised by @CanadianAussie, valuations of some techs were discussed, including $XRO, $PME, $WTC and $TNE. (As well as some smaller ones like $CAT, $SPZ etc. which I am not addressing here.)

Perhaps with the exception of $XRO among the larger caps, which has only recently passed through its inflection point (FY24), these other 3 tech darlings all have highly elevated P/Es (and other multiples like EV/EBITDA), both in historical terms, and on a comparitive basis. For these, I don't thingk you can really say "don't look at P/E, after all they're just passing through the inflection". And if, like me, you do DCFs, you have to have significantly long, strong growth runways with good terminal P/Es to support the valuations.

I've long been a tech bull, and for most of the last 8 years have held each of $XRO, $WTC and TNE - sometimes all at the same time. And I admit that my adherence to my valuation methodology has meant I've never owned $PME, which has probably been my costliest decision!

However, tech bull though I am, I am struggling to see value from here in these names. I still want to own them, but only if I can see the returns. I won't follow the herd.

While I still hold $XRO in RL (having re-entered in August around $130), I'm having doubts here again too, given the very pedestrian subscriber growth recently announced.

Maybe, I'm finally becoming a small cap investor after all!

Disc: Not held