@Valueinvestor0909 gave a good, visual summary of the results that EOL dropped while everyone was at lunch today.
I'll attend the conf call 11am tomorrow and feed back if anything material arises there.
Here's my thoughts while they're fresh / unfiltered...
The good
89% Recurring Revenue, 93% Gross Margins - both stable over the last 3 years.
Revenue Growth 16.5% - all organic.
The not so good
NPAT halved as cost growth outpaced Revenue growth for the third year in a row (by my measure). I look at what I call "Net OpEx". This is effectively EBIT minus Gross Profit, to capture all operating expenses by removing COGS, Interest and Tax).
Tough year including failed (cynical) M&A Approach, Cyber attack, Org Restructure, expensive skilled recruitment.
The context
NPAT down 51% partly due to $1.8m one-off costs, would have been up 10% otherwise, and up 27% if interest rate rises did not increase finance costs by 25% / $0.5m (vs 17% Revenue Growth - there's the Op Leverage).
Built out corporate infrastructure, incl CRM, cyber defences, etc as well as follow the sun support capability to support future growth.
Essentially front loading costs to support bigger scale and generate growth in organic revenue – that may still be augmented by M&A.
As they already have debt (albeit recently restructured so that 85% of it is maturing in 2.5 years), they will probably need another Cap Raise if future M&A opportunities arise.
Having debt for a business of this size (and in tech) is not ideal, however with 90% recurring revenue and 2.2x Interest coverage (down from 3.9x in FY23) and Debt / Equity of 36% (down from 51% in FY23), I’d say it’s manageable but not expandable.
That said, they are likely now becoming a more attractive target for acquisition as they complete their cyber security ISO certification and corporate infrastructure build out – commensurate with their growing size / focus on organic growth / emerging maturity.
This little business is growing up
This is still a small business with a market cap of $135m (at a SP$ of $4.50), revenue of $52m, but has been profitable for a decade, has aligned management with 35% ownership and average Board tenure of 16 years.
Price/Sales of 2.6x is in the bottom quartile (18%) for it’s last 5 years but Statutory PE is 94x. Adjusted for One-Offs PE is 42x so still lots of expectation baked in for a business growing organically at 17%.
That said, it should have stable NPAT Margins of 10%+ over time (got to 13% in FY21 & 1% in FY22). If the perceived long runway for growth can support a PE of 25x (8 year average PE is 32x), a 10% RRR would only need a 5 year Revenue CAGR of 13% and it’s not been that low in the last 8 years at least, albeit aided by M&A in many of those years.
It’s been a wait for this business to show its potential and the wait goes on but it is looking better to my eyes.
There are growing pains for sure and the failed / bounced lowball M&A approach last year highlighted to management where they were lacking from a corporate structure POV which they are remedying. The Cyber attack was not as bad as could have been (dumb luck?) but showed where they need to tighten up.
They are doing the things you would hope in response to these issues and being as proactive as their size and growth profile permit.
Disc: Held – 7% position.
