Pinned straw:
I had been waiting for for the 8CO quarterly as a few warning signs had started to appear over the last few months. In general I was happy with what they produced, not spectacular but solid forward progress. All they key metrics moving upwards, even though progress is far slower than I been expected from a year or two ago. Cardhero was a positive with an 1yr extension and a new contract signed. Still low revenue but not a right off.
They are back to positive cashflow, even if it was only $6K, but this would have been negative if the late payments from Q1 hadn't have fallen in Q2, but then Q1 would have been cashflow negative of $0.5-0.7M. So overall they are still a bit behind where I would like their cash generation relative to expenses to be. They will also get some more implementation revenue from the new entities (Fair work, Commonwealth Ombudsmen and Maurray Darling authority) that have signed up. So I still consider cashflow to be manageable for them. They have $814K cash left and the undrawn $1.5m director loan available, so a cap raise is not on the immediate horizon which is good, but I don't think the market will consider them out of the woods yet.
I still find it incredibly difficult to follow how many active users they have in the GovERP program. The below guide from Q1 and Q2. It looks like they have 3K new live users and 1K additional onboarding to result in a net loss of 4K from users not yet engaged. Seems straightforward but then in the text we have this statement that they have 8K live users- So why aren't these captured as part of the total live users current at 24th Jan 2024.
There has also been no net change in total number of users in there metric table apart from the 2K reduction due to the churn in the state government inactive accounts from a year ago. It seems unlikely that user churn is occurring as they have flagged this previously when it has occurred.
I still think the risk reward profile here is compelling, especially at the current price of 6c. When those 54,000 in progress users become live over the next 6-12 months they will generate an additional $2.5m annual revenue, which should enable positive cashflow to be maintained. At this stage there is no indication that the opening up the ERP program to competitors is having an effect on pipeline but it is still early days.
Is there any update here?
There seems to have been a significant price drop without any news (which perhaps is the bad news?).
Nice one @Slideup, we are on the same page for the most part.
I agree that tracking their pipeline and live users is tricky. I am not sure if they are genuinely making errors in their reporting, but multiple times I have been at a loss trying to follow their reported figures.
The thesis remains on track here, that said I am becoming a little concerned about their admin and corporate costs, which have increased in the last few quarters -- to the extent where they have eaten away at revenue growth. For the record, I am comfortable with staff costs, they have remained reasonably steady for 24 months. This is the first sign I look for in a business that may start to demonstrate operating leverage. What gives for admin costs though? When Andrew Bond chatted with us last year (in July), he noted that server costs (AWS) was a primary cost of theirs in addition to staffing. He also indicated they bring in consultants to assist with implementations, which obviously eats away at their margin. During that same chat, he suggested costs had increased to support CardHero but would come down with most of the upfront investment complete. The same was said about upping their security for government. Skip forward a few months -- in Q1 FY24, they indicated there was a rise in costs (again) due to additional infrastructure investment for the fed govt. That's fine, but costs remained high into the quarter having just gone. The below helps demonstrate the relationship between revenue and admin/corp costs, almost growing together in tandem.
@Wini do you have any thoughts?
Admin costs their Achilles heel at the moment and the reason they aren't cash flow positive. I would have expected implementation revenue to be lumpy but attractive, it is disappointing if that is the case and they are spending most of their margin on consultancy. Also, consultants would denote staff costs -- irrespective of permanency -- at least that is my take, so should this not be reflected in staff costs?
Too many questions! @Strawman what are our chances of speaking to Andrew again noting it has been less than a year in between meets? It has been a pretty significant eight months and some of our members, myself included, would no doubt appreciate the opportunity to fire a few his way. I also note that he suggested he expected to primarily be cash flow positive going forward. We have had six quarters released since this date (if I am counting correctly) -- only two were in the positive range and these were both close calls.
@Slideup in response to your ARR query -- definitely slow and steady as demonstrated below. Like I mentioned above, it is unfortunate that we aren't seeing some operating leverage kick in, but that isn't the case at the moment. The big question is why,
The bull case here is that, when all the implementation is complete and they have signed up a good portion of the federal government, they can run on a shoestring staff budget and spit out ARR with little investment required. Blue sky is winning the defence contact. The bear case is they chase growth that isn't there and/or attempt to create unnecessary modules to compliment their golden egg, and in doing so destroy shareholder returns (CardHero, anyone?). As with a lot of investments on the ASX, there is a lot of execution risk in how management elect to play it.