XRG has exactly what I am looking for in an investment, an imminent and evident unrecognised pivot in performance (well until today maybe). The type of thing that stopped quality SAAS business being recognised in the early days is in play, namely a delayed and hidden profitability from growth investment, high margins and sticky revenue commitments.

Interview of CEO Wayne Jones by Alan Kohler provides a lot of insight (I will try and get a print copy for those who don’t have access): xReality Group: All Geared Up - Intelligent Investor (released Friday so weekend listeners were buying today it seems)

Forbes article for a bit of history: xReality Group going from SAS to SaaS

The business has been investing the profits and cash flows of it’s core business into a new business that is now achieving strong commercial success to the point that it should generate more income than the core business by the end of FY25. The core Entertainment business has performed reasonably well over the last 2 years but the costs to develop the new Enterprise business (6m+) have made XRG unprofitable and unattractive to investors.

In addition, debt has been built up and dilution from capital raises has been needed to fund the development of the Enterprise business. This I expect to see change in the next 4C due to the working capital positive nature of the Enterprise business and quite frankly astonishing growth rate from market acceptance in the US.

Operator XR is the Enterprise product and investment case for XRG. The equipment, licence and systems are sold on a 3 year agreement with payment up front in most cases. So in the first year 1/6^th of revenue is recognised, 1/3^rd in the next two and 1/6^th in the final year on average, but the current high growth rate will sku this as the weight of new contracts in a year occur later. 

To measure success we can look at Revenue Vs Revenue + change in Deferred Revenue as graphed below, which shows a leading indicator for how revenue will move. Looking at FY25 based on YTD information (DoD contract + customer additions), the lead indicator is streaking ahead of revenue as the Enterprise business scales and goes from a rounding error Vs the Entertainment business to the dominant business by the end of FY25.

The DoD contract: US$5.6m over 20 months Development of augmented reality (Vs VR), which is not the final product but XRG will own all the IP at the end of the project.

The upside opportunity is exceptional given it is currently only a $20m cap (EV $28m) company and my expectations that operating cash flows likely to be well over $4m for FY25 (FCF of $2m+) however NPAT is unlikely to be positive due to delayed revenue recognition and cost build to support growth. Profitability I would expect H1 FY26.

LA SWAT is using their equipment + 40 other PD’s

70-75% GM for Enterprise

US$150-200k current deal size average for customers

Expectations for 4C Q2 FY25: I expect positive Operating CF to exceed IP costs to provide positive FCF due to Q2 usually being a strong quarter for Entertainment (Est 2-2.5m up from under 2m) but increasing Enterprise contributions (Est 3-4m up from 2.3m) driving total receipts in the range of 5-6.5m. 

As such I believe Wayne Jones statement in the interview with Alan Kohler that additional capital raise is not likely due to expecting positive CF in Q2 and the additional 500k debt facility to allow for inventory build to provide any required buffer on the $1.5m closing balance from Q1.

I have a lot more analysis to finalise and add, so will publish as complete, but my general conclusion that this is an asymmetric investment with massive upside and clear evidence of likely success is basically locked in!

Disc: I own as of today and looking to buy more.