Pinned straw:
Potentially some interesting developments going on with 8common.
They have remained a ‘gunna’ company for a long time now, but the last few quarters of demonstrate their cost reductions are likely legit, and their margins may just be permanently higher.
In Q1 FY25, their gross margin was 58%. We have now had four straight quarters where this figure averaged around 70%.
I have always tracked 8common’s relationship between admin corps and revenue. The two have typically been pretty close to one another (limiting upside and reducing operating leverage), but the last few quarters we have seen clear differences between the two figures. This supports a possible change in their fortunes too and suggests to me the new normal (cost base wise) might be sustainable going forward.
They have also achieved two positive cash flow quarters in a row, only achieved once previously since 2021 (and that totalled a measly 4k!).
The bear case is potentially the number of users being stable around 180k, essentially no growth here in four quarters.
But this business is currently trading on 5x its transaction and recurring SaaS revenue, and just over 1x FY revenue (looking backwards). The risk reward proposition is attractive. Small levels of debt, which they are slowly paying back, and a Chairman loan available to them (which they can dip into as they need) all but avoids a heavily dilutive raise.
Gross margin of 70% might be the new normal for this business. While thesis creep has been real for years here, at these levels it is a different ball game. This business is undeniably worth more than 6m, with stable government contracts and a cost base that has shown maturity in the last year. What might turn the dial is the winning of a significant govt contract (i.e. defence) or someone sniffing around to take them out given their cheap price.
I am starting to shift from bear to bull.
Thanks for the analysis of 8Common @Rocket6, crossing my figures that we do see an improved trend on margin and cash generation. Even better if they start growing users as was my initial thesis and view this would lead to significant operating leverage.
The cost control has been impressive and the loan from the Chair shows great commitment to the company by the leadership, probably the reason I hang on with this one.
However, I am concerned that if revenues start to rise in a sustainable way then the operating leverage will not come for a long time as the company restores its cost base. It has boot strapped the last few years at great credit to leadership who have run lean (right sized to survive). It would only be natural that management pay was restored once they were able to afford it and they may turn back on some quality-of-life costs for running the company that they have had to do without.
Hence, I can see the company sitting at a small cash and P&L profit for a while even if revenue and margins increase. It would take a rapid increase (aka DoD added) in sales for it to break out into strong operating leverage.
Let's hope they can also grow the customer base, or they make something of CardHero (something meaningful that is).