Forum Topics 8CO 8CO Strawman Meeting - Notes

Pinned straw:

Added one year ago

I've just caught up on the SM meeting recording of $8CO (Thanks @Strawman for asking my complicated question!)

Here I jot down a few simple notes supporting my decision this morning to increase my small RW position from 0.5% to 0.8%.

My detailed notes from the 4C report still largely stand although, thanks to questions from other Strawpeople, I got some further insights to explain the recent progress and outlook for Card Hero.

First of all, it is so refeshing to hear a CEO like Andrew Bond, who is candid and balanced in his answers to questions. It is the mark of a confident and grounded leader that they can speak as candidly about failures as well as successes. An example is the candour with which he spoke about missing out on a 30,000 card deal with Centrelink. So many CEOs would never do that.

I found the discussion very informative about the competitive playing field.

  • Customers continue to move away from broad-based ERPs that offer everything, but don't deliver the customer experience through the deep workflow integration of a specialist platform (example. SAP and Tech One (Disc. Held) both big in Government.)
  • Concur the major competitor, with DoD a negative reference case with material available in the public doman. They pulled the plug after spending between $3m and 13m (I can find reference to a number of $10m in the ANAO report from a quick search). This negative reference case might give pause for thought, particularly if $8CO can show success in GovERP rollout, which they appear to be able to.
  • Still a lot of legacy, on-prem. systems, and paper-based processing going on. (Which is a surprise - I left big corporate land over 10 years ago, and we already had Concur in place.)


I found the following statements relevant to my valuation, in the context of the cash flow trend graph I plotted in the 4C report:

  • 110,000 of the Total Potential Users are in mandated departments (62 of 90). Valuable insights on what pre-requisites need to be in place for an Agency to go live. This was a gap in my knowledge.
  • Expects Govt ARPU to continue to trend up to "low $60s"
  • There is a "strong implementation workload ahead" ..." the pipeline for new work (i.e., implementations) bigger than its ever been" meaning that the recent report of strong receipts from implementations are not one-off with the majority ot mandated entities yet to be on-boarded, and a sense this happens over the next 3 years.
  • "We expect cash positivity most Qs"


For me, this is the base business that supports significant growth in revenue over 2-3 years, driven solely off the GovERP mandate. With this apparently progressing well, I ascribe minimal risk that the 3+3 Option will not be exercised.

The good news is that we also have the opportunity to track the GovERP Phase 0 milestones, as each new Deptment getting started will register payments of $40-60k on Austender.gov.au - I've just jumped on and its easy to use (enter "Expense8" in the Keyword field under Contract Notives).

Beyond the base business, there are a number of potential near-to-medium term catalysts, including:

  • DoD Contract: (DoD 16k employees and ADF c. 90k - which explains the "100k users" Andrew mentioned)
  • Card Hero deals ("when it drops, you'll see big things drop" and "good conversations ongoing with Government, NDIS and Universities")


To be clear, none of these are in the bag, but any one would support a tick up to the valuation.

For example, a typical large Australian University has 6k-12k FTE staff and many more heads given fractional contracts and casuals, split between academics and professional staff. A large proportion incur expenses outside of the campus, so a University rollout would likely bring anywhere from 3-6k by my estimate. Not massive, but think of it equivalent to a medium size governement agency.


Valuation

This "base" business easily supports a valuation of the current 2.5x FY23-FC revenue.

On it's current trend, I estimate that $8CO could get to a FCF of $1.5m in FY25 (runrate $1.0 by YE-FY24 and $2.0 by YE-FY25).

Looking in the payments space, $TYR is on a EV/FCF-FY25 of 31x ($SPY is on 21x). That would put $8CO on an EV of $46m, discounted back 2 years at 10% gives $38m EV, vs. $19m today.

If I look at a range around the FCF(FY25) of $1.0m to $1.7m that gives a range to the value/share today of $0.12 to $0.20 compared with today's SP of $0.087. So a reasonable margin of safety if you find the FCF multiple too aggressive.

The above's a quick calc - so I need to check it, but I think it hangs together.


Conclusion

$8CO is still very small and illiquid, and it is a high risk proposition. At this stage I could never hold a material positon in RL, partly because it is still not clear to me what the path to a material business could be, and the highway of payments start-ups is littered with wrecks. But there is time for that, as long as it continues to execute and describe clearly the opportunities immediately ahead of it.

However, both on the numbers and the quality of management, it can hold its head high in the smaller cap / higher risk part of my portfolio.

Disc: Held RL and SM

Wini
Added one year ago

@mikebrisy For reference here is the original tender won by Concur for Defence back in 2018: https://www.tenders.gov.au/Cn/Show/7c4afd5e-afec-004e-1977-2309b8d4d123

$9.6m, no split given for implementation v subscription but as Andrew said implementation became a disaster anyway with this article suggesting $7m was wasted: https://www.canberratimes.com.au/story/6457124/good-bit-of-7m-project-it-reminds-us-of-the-complexity-of-our-administration/

On rough numbers, Defence would basically double the GovERP contribution overnight (well, over a long implementation period but still).

Andrew was very quick to answer that a Defence deal is the next big opportunity for the business. I don't see it happening in the short term, but as more Gov departments successfully roll onto Expense8 I think the argument to have Defence included will start to gain traction. Especially when 8CO can prove the software works smoothly for some of the larger departments Andrew mentioned (Centrelink, ATO, Home Affairs, DFAT).

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mikebrisy
Added one year ago

@Wini Thanks!

$8CO has a lot to digest over the next 2-3 years with the already mandated GovERP departments. In that respect, a longer timeframe for DoD would be a good thing. $8CO is a small business, so no need to bite everything off at once. So, I guess DoD is more of a medium term, than a short term catalyst. Thanks for clarifying and your comments make total sense.

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Noddy74
Added one year ago

@mikebrisy great write up as always.

In terms of a substantial move away from using ERPs to specialist platforms like 8common, it happens but I would say its equally likely to happen the other way. I worked for a couple of years on a $20+ million Workday Financials implementation (at a university ironically enough) and I think the biggest question faced by the powers that be was whether they would take the opportunity to move from their existing Travel and Expenses (T&E) tool - Concur - to Workday's offering i.e. the ERP. It was a bigger decision than going from on premise to cloud. It was a bigger decision than choosing Workday in the first place (they had been an Oracle 'house' - Financials and HR - and Workday hadn't implemented at a university in Australia). It was bigger even than choosing to bin the old Chart of Accounts and start from scratch, which for anyone who has been through it at a big corporate would know is less fun than going on holidays with your mother-in-law.

The reason it was such a laboured decision was because it affects so many people. Most of the system is just going to be used by beancounters. A decent number of non-finance people will use purchasing, but almost everyone will use T&E at some point. The risk was that if T&E was perceived as a failure than it didn't matter how good the rest of the implementation went - this $20 million+ implementation project would be seen as a dud. We were probably 2/3rds of the way into the implementation before the T&E decision got made, so they waited to the last minute, but in the end they decided to ditch Concur and go with Workday.

It probably didn't hurt that Concur was less than loved but what was interesting in seeing that decision play out was they just wanted to know that Workday's T&E functionality/UX was 'good enough'. It didn't have to be perfect because the advantages of having one integrated platform were just too compelling. These include at least one less integration, maintenance of a single delegation and approval matrix, fewer systems specialists, live updating of commitments/actuals, budget checking and probably most importantly lower overall cost.

I'm always a little wary of companies that bolt on functionality to ERPs that either the ERP can do 'good enough' or that could be disrupted by the ERP company putting it on their roadmap. That goes for a whole load of companies, including XRef, which I do own. Having said that I do have 8CO on my watchlist and have been close to pulling the trigger a couple of times, but my thesis (and I think I'm right in saying your central thesis) is around the rollout of the mandated government work. Anything else would at this point be gravy.

One final point in relation to universities given you addressed them specifically. That university may have been the first to implement Workday in Australia but others have quickly followed. Just as TechOne has been optimised for local council use and has an effective monopoly in that space, overseas Workday has been optimised for education and higher ed in particular. It will be interesting to see the extent to which they successfully tender for future university implementations. If that plays out as it might, with reference sites using Workday T&E already, it may become increasingly difficult for companies like Concur and 8common to win university work.

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mikebrisy
Added one year ago

Great points @Noddy74. Over the years I have been a user of SAP, SAP Concur, PeopleSoft T&E and (today) WorkDay (in a Uni environment where I do casual gigs from time to time). The last 3 were all "good enough" to get the job done - and from my perspective all were fine, even if I don't love any.

Only with SAP did I find the U/X so horrible, it became a job for my PA (when I used to have one). Of course, the reason that the SAP U/X was so bad was actually because the Corporate ERP Implementation was focused on the needs of the central finance department (CFO), that business user modules, customisations, and training were cut from the rollout. Getting these scopes added in further down the track proved to be hideously expensive, and so the door opened for the niche solutions.

I think this is a common experience with big ERP implementations - they are left ragged around the edges, even when they are implemented successfully for their core purpose.

A whole industry for Robotic Process Automation (RPA) has sprung up over the last decade to "patch" the interfaces between the ERPs and the user (spreadsheets, emails, etc.), to take admin labour out of the equation. Globally it is a huge industry. Its so big that some of the big Business Process Outsourcing providers are implementing RPA solutions in their offshore processing centres. This is a different issue altogether that niche solutions like $8CO, but it stems from the same root cause - poor and incomplete ERP implementations, with flawed or absent integrations to users and related systems.

So while niche SaaS solutions and RPA can both be cast as "A New Hope", your question asks will "The E(RP)mpire Strike Back"? Clearly they are trying.

Like you, I have been suspicious of "bolt-ons" that seek to address perceived problems with "core platforms", and have always believed the core solution would get improved to render the "bolt-on" redundant. But I am now counting 25 years of observations in different situations, and it often doesn't appear to happen.

But your point is well made. How sustainable is a niche solution predicated on meeting an unmet need in a bigger platform that is capable (or can be made capable)? Is it simply a matter of time until "your feature" is added, removing the need for "my product"? I don't know the answer to the question, but it is one to be alert to.

Looking at my own portfolio I see $ALC (for things that EPIC and Cerner aren't great at), $DSE (for gaps in MS-365, and Quickbooks etc.). You can even argue that $VHT and $M7T address different scopes that you'd think $PME could mop up. Although that's more of a stretch as none of those solutions can yet claim to be a complete platform.

This is quite different to the truly new platforms that have created or are in the process of creating new integrated workflow solutions like $XRO for SME accounting, $ALU for integrated circuit design, and $WTC for integrated logistics and supply chain. And indeed, as you say, $TNE has provided integrated solutions for Local Government and, less completely, for Universities.

Finally, what I am reminded of, however, is that when I did my deep dive earlier this year on $WTC, is how vast the software ecosystems are in any industry vertical and function across the world. Many industry structures are quite fragemented, indicating there is room for mulitple winners. One good case study to following is $TNE in the UK, where it is late to the party both for academia and local government. I'm watching that one closely.

It is good to challenge our own portfolio allocations and never be complacement.

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