Just to give a slightly different perspective from @Strawman on $DSE. Well, actually a very different perspective as it turns out.

While I agree with the summary, my further analysis leads me to a different conclusion. Utlimately, it is a question of conviction. So, I will go to some lengths here to detail my analysis, partly so that I have a record to come back to at a future time.

I drive my observations off the overall cashflow trends, so I'll put the updated picture first.

My current way of looking at quarterly cashflows is to plot trend lines over the most recent 8 quarters, as that is a balance to smooth out lumpiness, is not too long to recognise that companies evolve significantly over multiple years, and to present longer term data (if available, which it is for $DSE) so that any patterns in seasonality are clear.

In this Q, receipts grew above trend, and payments more so - but only because 1Q is an expensive month. The step up in Cash On Hand was given a boost by interest receipts and FX.

Operating Leverage?

So, what I observe is a pretty solid, steady linear growth trend over the last two years in receipts and payments, with 1Q22 marking the start of an uptick in the trajectory.

Charif is clear that he is reinvesting cash back into the business to drive platform development and expand market breadth and depth, and that he could be profitable at any time. OK, so far so good.

I've also plotted a green line to show that since last raising capital in 3Q21, $DSE has been surely but steadily accumulating cash. Charif has made clear that he is always on the look out for bolt on capability, but so far hasn't found what he's looking for at a price he's willing to pay. OK, also good.

So there are two things on my mind.

First, operating leverage. We've seen the business grow receipts +250% in the 3 years shown. Now because all the growth reinvestment is being expensed, the payments and receipts are almost dead parallel over the last 2 years. The problem with that, is that with linear growth we're not seeing any signs of scaling. Let me be slightly clearer. As cash is generated, its being reinvested to drive growth, but as long as the graph remains linear and there is no operating leverage, then we don't get to see a path to material free cash generation. That trend is yet to appear.

When asked about this, Charif points out that other US companies in the sector show that - "at scale" - they are able to generate 20% EBITDA margin (I think that's what he said). So that implies that, at some point in the journey to scale, the operating leverage starts to kick in and the blue and orange lines in the graph start to diverge.

My position in $DSE is small, and its that divergence I've been looking for as the signal to increase my holding. So, based on today's result, I'm a hold, if the story were to end there.

Churn?

We saw churn increase from less than 3% to less than 5%. This is still a decent number. (Again, all credit to Charif for his candour). However, unlike the increase being due to a "low value legacy customer" (as in the past), this time it is assigned to indirect MSPs in EMEA who are price sensitive and moving to competing offerings. Importantly, Charif has discerned a pattern here and will now allocate resources to support the indirect partners as well as the direct partners.

For me, however, this raises a question. If an increasing level of support is required to retain customers, what is that going to mean for the expense ratio in future? Importantly, it is the first evidence that $DSE might not be so sticky and is vulnerable to competitor offerings and price competition?

Value from Innovation?

A lot of $DSE headcount and spend is on platform innovation, and on the call we got a good update on how that's progressing.

However, does evidence of price competition mean that driving ARPU higher over time with new features is going to face headlines as the many competitors in the market do the same? The field of data security is evolving rapidly, with large industry players investing heavily to stay at the leading edge. So will $DSE see any return on investment from its innovation, or are we seeing early evidence that those returns are being competed away?

Let's look at the ARPU trends over the last 3 years to see if there are any clues:

• 3year CAGR = 15%
• 2year CAGR = 14%
• 1 year growth = 10%

Or to put it more simply:

• 1Q21 to 1Q22 = 16%
• 1Q22 to 1Q23 = 18%
• 1Q23 to 1Q24 = 10%

So, even though inflation has been increasing, and more investment has been put into developing features on the platform, the growth rate in ARPU - which is the return on that investment - may be declining, certainly on a nominal basis and probably more so on a real basis, with likely 4%-6% of the ARPU improvement each year simply recovering cost inflation.

My Bottom Line

This brings me back to the first point. Will $DSE ever turn into a cash generation machine?

How much more will they need to spend to retain existing customers, and prevent increased churn? And will they be able to capture the value of their innovation investment through strong ARPU growth?

My view is that the need for innovation will be perpetual, and there will never come a time that $DSE will be able to dial back innovation spend to increase cash generation. They are a minnow in a global market and I don't consider that they have any competitive advantages. If anything, their lack of scale may put them at a competitive disadvantage.

So, my conviction in $DSE is not growing. More than that, the longer I hold and study the business and the sector, the more unanswered questions I have. And because of that, I have sold my small holding this morning in RL and will follow suit in SM.

$DSE is a very well run business, and Charif was at pains on this morning's call to point out how disciplined they are in their resource allocation. That is indeed admirable and it sets him apart from many of the other firms we have commented on here over recent years. But that is not enough for me. I have to see an economic value-generation engine emerging, or at least hold a thesis that one will emerge. And with all my questions, I no longer do. And because I don't have a thesis, I have to sell. It's as simple as that.

As ever, I accept I could be adding 1 + 1 and getting 3, so I will keep $DSE on my watch list, and follow its progress. I certainly highly rate Charif as a CEO and wouldn't hesitate to jump back in if progress proves me wrong.

Disc: Not held in RL, selling in SM