Ooofff...this update was a bit of a body blow this morning. 

The good news first (won’t take long). The migration of customers from an upfront sale per use model to an annual platform subscription is progressing well with more than half of what they call their ‘key customers’ now on the SaaS model. They’ve previously called this their ‘green list’. 

Except the numbers have changed. A few months ago Lee said there were 1200 customers on the green list. Now there are 1100, based on extrapolating the figures in the update. So are they bleeding clients? Quite possibly. I’ve heard Lee proudly declare their retention rate is 87%. That doesn’t sound great to me. All else being equal you have to grow your customer base 13% a year just to stand still. In theory, moving customers to a SaaS/platform model should make them stickier but it’s hard to make that case right now. Maybe they redefined the definition of ‘key’, but I don’t love the inconsistency.

There’s other stuff that doesn’t stack up either. According to Lee 271 clients had migrated to SaaS at the end of October, representing $7.6 million of ARR. Now they say 551 clients have migrated (more than double in two months), but ARR is only $10.9 million (only 43% higher). What gives? Ok, you’d likely target your bigger customers first so maybe that accounts for part of the difference, but that’s a big discrepancy. Also, if that’s true what does it say about the remaining clients yet to be targeted? 

But I’m kind of nit-picking and in danger of burying the lead. Revenue of $10 million for H1 was pretty bracing. Last we heard from Lee (November), XRef were billing $0.5 million per week so to come in at $10 million for the half is well below expectations. It may be up slightly on pcp but the comparative doesn’t include XRef Engage, which was acquired in January 2023. Back that out and it looks like revenue is down around 20% versus pcp. That’s reasonably close to Seek’s employment index, which showed a 17.4% decline in national job ads from Dec 22 to Dec 23, but again suggests the customer base isn’t growing.

But all that’s in the price now, right? Afterall it’s at 1x revenue, and if you believe them that revenue is largely recurring. I’m a little more cautious. Job ads have certainly rolled over but they remain well above the historical average. Maybe they don’t go back there (unemployment is still low, growing population etc.) but maybe they do and without a growing customer base to offset it, that’s a big risk.

The other announcement the company was ‘pleased’ to make was a refinancing and extension of their debt facility. Given their burn rate they had little choice other than raising at exactly the wrong time but the terms are not exactly borrower friendly:

By my rough workings, assuming they only use the initially drawn amount, at the end of the interest-only period, the financing cost will be $2.7m a year (compared to a financing charge of $0.6m in FY23). Over the course of the loan they’ll repay $9.6m, plus have a $0.5m bubble at the end of 2027. That all assumes exchange rates stay where they are. Maybe they’ve hedged, maybe they haven’t.

They are cutting other costs and their cash flow is better than the P&L would suggest but the thesis no longer stacks up for me and I've sold both here and IRL. I'll keep an eye on it and if things change I might consider buying back in but I can't imagine that is anytime soon.

[No longer held]