Pinned straw:
SUMMARY
- Headline revenue numbers look good QoQ and YoY but are disappointing against guidance and deployment plan - only 3 units deployed thus far and total units deployed for FY24 is only 9 vs planned 18, a 50% miss
- New contract signed, bring total contracted units to 50
- Continue to be impacted and delayed by site deployment issues but what is positive is (1) the high rate of C79 Factory Acceptance Testing units - 11 are ready for deployment (2) labour costs this quarter have come off 20% QoQ, suggesting that issues are indeed on the customer end which C79 cannot throw labour at to mitigate (3) diversifying of the customer base allows for acceleration of unit deployments in CY25
- Buoyant gold price is expected to drive an increased number of samples
- FY24 guidance updated - revenue has been lowered to $45m but EBITDA of $8.5m remains within guided range - both are impressive YoY growth numbers, but are disappointing against earlier guidance
- As units are already contracted, the delays in deployment is a timing rather than permanent difference - each deployed unit adds ~$20m projected Lifetime revenue - This is perhaps a customer-end reality check as to what is practically deployable in an FY
- Price weakness is an opportunity to top up
GOOD
- Added 3 deployed units, 2 new and 1 redeployment - 1st deployment into Europe (England)
- 1 additional unit contracted, total contracted units now at 50 - MSALABS for deployment of a second unit to Barrick Gold’s Kibali mine
- Topline Revenue of $12.9m continues to grow, 28% QoQ, 92% YoY
- Continued growth of samples processed, sustaining of Additional Assay Charges (AAC) revenue - 29% YoY growth, 3% QoQ, 21st consecutive quarter of PhotonAssay volumes
- Unit costs continue to decrease from hubbing strategy and deeper engagement in maintenance by C79 team members - gross margin 70-80% achieved
- Projected LifeTime return of more than $20m per unit creating an infrastructure-like asset fleet
- Well funded to support unit growth - $70m cash, $95m CBA facility untouched
- Good manufacturing progress which C79 controls - 11 units past Factory Acceptance Testing, pending customer site readiness, 5 units manufactured during quarter
- Employee costs have decreased $1.2m, or 20% QoQ - perhaps reflecting reduced size of flexible labour as deployment obstacles are client site related vs C79 controllable?
- Cash collection back to positive this quarter vs negative in Q2, continues to operate cash-flow positive this FY
NOT GOOD
- Only 3 units deployed in Q3 means that efforts to clawback delays in deployment have not been sufficiently successful to bring the delayed schedule back on track
- Final deployments for FY24 are expected to total 9 new units and 2 redeployments, bringing Chrysos total number of operating units to 29, an increase of 45% on FY23 but vs FY2024 target of 18 units
RISKS
- Risk of deployment challenges at mine sites impacting the overall FY24 deployment plan and delaying deployments into FY25, have clearly manifested
- The 50% miss in deployed units is disappointing - while a miss was clearly telegraphed, the extent of the miss is higher than expected
- Will impact FY25 guidance as 18 deployed units per year appears overly bullish.
GUIDANCE FY24
BETTER FINANCIAL GRANULARITY
- 12M rolling unit revenue is ~$1.8m
- 12M rolling unit cost is ~$450k
jcmleng
@RhinoInvestor , probing points as always!
I hope that this really only has an impact on cash flows and timing of revenue rather than having C79 incurring extra real costs while customers are mucking them about. Your observation about increase in staff costs is interesting (as we’ve discussed the growth in that cost line item previously) … hopefully the increased costs are not for idle staff.
I also can’t remember when the cost of manufacturing hits their books … I can recall some sort of timeline in a previous update. I hope that the buildup in “inventory” caused by deployment delays isn’t having too much of a negative impact.
I do think this is a timing issue on both costs and revenue. From my experience, site costs are usually a customer's responsibility. So challenges at the customer sites should not show up as C79 costs other than potentially idle labour. Product manufacturing costs should also not change solely due to delays in deployment. I am comfortable with this:
- Had a look at the Product Manufacturing and Operating Costs in the Appendix 4C: Q1: 0.53m; Q2: 0.36m; Q3: 0.72m. While lumpy, my read is that this has resulted in the 11 units which have completed Factory Acceptance testing, which will have taken them some time to build up. As they draw down those units and deploy, the Product Manufacturing Costs should logically come down for the next 1-2 Q's until that backlog is cleared. Am actually quite happy they have this backlog of deployable units because this gives them the ability to accelerate parallel deployments once the customers get their acts together
- Labour cost in 3Q is $1.2m or ~20% lower than 2Q - may be due to the reduction of variable contractor labour
- There is mention of units being "redeployed" - this suggests the use of available labour for non-critical path work
The slightly worrying news for me is that while the contracted backlog is still really solid with target for a total of 50 machines leased (11 machines completed factory acceptance test and ready to deploy) that number hasn’t really increased in the last 12 months. So looks like the balance of TAM is going to be harder to achieve (i.e. low hanging fruit has been picked) without some improvements in the sales capability.
Agreed. This is my biggest emerging worry. They added 1 unit this Qtr. Assuming they get to 29 deployed by EOFY 2024, then the backlog will reduce to 21 units, which will take at least 1.5-2 years to clear. It does make sense for them to fully focus on deployment for now, but would like to see greater sales progress towards the back end of CY2025.
All said, while I would really like them to deploy steadily, the operational reality is that site readiness is a constant battle for vendors because it is out of their control and it will not go in a straight line. It will ultimately all be deployed as they are all contracted for, so the overall economics are still very much intact, albeit delayed somewhat.
DISC: Held in SM and IRL and topped up this week IRL
RhinoInvestor
@jcmleng thanks as always for the detailed update and analysis.
Clearly deploying some of these units into deepest darkest Africa (or wherever they are going) is a bit more challenging than low hanging fruit into nice 3rd party testing sites in Australia. I hope that this really only has an impact on cash flows and timing of revenue rather than having C79 incurring extra real costs while customers are mucking them about. Your observation about increase in staff costs is interesting (as we’ve discussed the growth in that cost line item previously) … hopefully the increased costs are not for idle staff.
The slightly worrying news for me is that while the contracted backlog is still really solid with target for a total of 50 machines leased (11 machines completed factory acceptance test and ready to deploy) that number hasn’t really increased in the last 12 months. So looks like the balance of TAM is going to be harder to achieve (i.e. low hanging fruit has been picked) without some improvements in the sales capability. I also can’t remember when the cost of manufacturing hits their books … I can recall some sort of timeline in a previous update. I hope that the buildup in “inventory” caused by deployment delays isn’t having too much of a negative impact.
DISC: Held in SM and IRL … (looking to top up a bit on this dip)