Thanks to Wini for the excellent information on 8Common. I've had a couple of looks at it and decided to add it to the scorecard. Reasons.
- 3 consecutive quarters of cash flow positive
- excellent customers with federal and NSW state governments. Some have been using the product for 16 years.. Federal Govt depts tend to be like sheep for a solution that works. The first sale is the hardest, but there is a good chance that many will follow. Add to this Scomo's recent govt dept shake up and his statements about cross-agency efficiencies and removing ineffectual, duplicate IT systems. Dept Finance will be at thte heart of this I reckon. 8Common also ticks the boxes of being a small, Australian, cloud IT provider which govt has said they want to procure more from. Additionally, 8Common provides software for a corporate, backoffice function and these are exactly the types of functions that govt tries to adopt common solutions for.
- announcement on 18 Dec that "The Company is in preliminary and non-binding discussions (which may or may not result in any agreement or transaction) with:i. existing Federal Government agency clients to provide both new services and enhancements to existing services; ii. existing NSW Government agency clients to provide enhancements to existing services; andiii. existing clients for both renewal of existing services and the provision of new services. " This reinforces view that organic growth can continue.
- subsequent announcements of sales have not been to any of the clients listed in that announcement
- The CardHero product in only new and hasn't contributed yet, but it has the potential to make a material contribution for quite different customer requirements.
Noted that this is in the past and it could be argued that the companu has turned this issue into a strength. They left unsecured credit card transactions for Dept Social Services from 2004-2015 inclusive. The Minister got involved. They didn't configure an Amazon S3 bucket correctly which hosted all the historical transactions they were migrating across after they won the work. There was an issue with S3 buckets a few years ago where people were forgetting to secure them with a password or other protection.
The fact that they have won further work after this perhaps points to a strength.
31/01/20 December 2019 Quarterly Report and Appendix 4C
Solid quarterly from 8CO though the market disagreed with a sharp sell-off. The highlight was the continuation of the high growth in ARR to $685k for the quarter well above my estimate of $630k.
The negative for the quarter was total revenue being flat on the previous quarter indicating a slowdown in implementation revenue. While this isn't a thesis breaker as implementation revenue can be lumpy, as highlighted in other Straws there is a correlation between implementation revenue and future ARR meaning it can be a negative if it continues.
That said, management commentary suggests they have already seen a pick-up in implementation revenue in the new calendar year, with the additional positive of the few contracts highlighted including the new travel modules which is the thesis for ARPU growing into the future.
Additionally, the commentary on the CardHERO trial seems positive and continues to represent blue sky potential for growth.
I think it is very hard for anyone to accurately predict on a macro level how long the current downturn lasts for and the long term effects of it. What we can and should do though is look at individual businesses and assess the impacts to them from the coronavirus, positive or negative.
For 8CO I emailed CEO Andrew Bond who subsequently released an announcement to the market last week. As I expected the company's travel module has taken a hit, but it was pleasing to see confirmation that it is only 7% of revenues at this stage with the vast majority of revenue (73%) recurring subscription revenue from Federal and State Government clients. The remainder is made up of implementation and project based revenue which may slow down but commentary in the announcement suggests that work is continuing with two Government departments still onboarding and change requests are flowing as normal so far.
While there will be a small short term impact, the company is expecting to be a big beneficiary of the increased Government spending over the next few months with various stimulus packages. Cash of $1.9m also provides a good buffer for operations and continuation of the development of the CardHERO product.
SaaS provider of travel expense management software aimed at government and enterprise. After a chequered history since listing, business has re-focused completely on it's core product and key NSW and Federal Government wins has seen the inflection point of cashflow and EBITDA breakeven. Federal Government shared services program creates a promising pipeline of future work for the business to win over the next few years.
21-Apr-2020: March 2020 Quarterly Report and Appendix 4C
Record quarterly revenue of $1.1m with a 48% increase in SaaS revenue. Federal Government footprint grows.
March 2020 Quarterly Report and Appendix 4C
Fintech company 8common Limited (8CO), a leader in expense management software and card application management, is pleased to release its consolidated quarterly cashflow and business update for the quarter ended 31 March 2020 (3Q FY20).
Key financial highlights include:
Key operating highlights
8common CEO, Andrew Bond said, “The Company continues to strengthen and diversify our client base with the addition of several new entities during the period and the DTA contract post quarter end. The Federal Shared Services platform provides the opportunity for over 50 entities to be onboarded to our platforms in the coming years and we are actively engaged with several entities. Despite the broader macro-economic conditions, the Company continues to operate on a business as usual basis, and we are immensely pleased to report record revenues in March demonstrating our ability to continue to deliver for our customers.”
--- click on link above for more ---
17-Apr-2020: 1:01pm: A lot of fund managers have to stay away from smaller companies because of the lack of liquidity - not enough buyers and sellers, not enough volume, and particularly when there are gaps between the bids and offers. Some refer to them as "Lobster Pot Stocks" because they're easy enough to get into, particularly if you're patient (or hungry), but hard to get out of when you're in a hurry. The gaps are not just between the highest bid and the lowest offer (the spread) but are also often between the individual bids and the individual offers. This can cause some massive price spikes - and drops - on no news at all. Case in point - 8CO is up +34% as I type this straw - on no news. Why?
Well, there are some mitigating reasons:
What can we learn from this? Well, for one thing, that there are often great opportunities to buy shares in these sort of companies at very low prices when sentiment is very bad. However, the flip-side of that is that it can be very expensive if you need to get out of one of these companies in a hurry. In summary, there's often money to be made in low liquidity companies, but they are really only suitable for private retail investors who tend to take smaller positions (than fundies) and they are also really only suitable for money (investable capital) that won't need to be called on rapidly - so money that can be parked in the stock for a considerable period of time.
As an example, don't invest your kids' university education fund money into stocks like 8CO when they're in high school. Although, it might be OK if they're pre-school age.
The other issue is there's often a higher risk of permanent loss of capital with such companies, because they tend to be at the higher end of the risk spectrum anyway, so you might be better off putting the education fund money into something a lot more solid (perhaps a high quality LIC or ETF) and using your own play money for companies like 8CO. The biggest gains - the multi-baggers - usually come from this end of the market (the very small end), but so do most of the 100% losses. Invest in them by all means, but know what you're getting into - it might be a lobster pot.
Disclosure: I don't currently hold 8CO, but I do hold a number of companies that have very similar liquidity profiles (i.e. very low liquidity).
8CO is on my Strawman.com scorecard.
8CO has done a great job of growing their ARR over the last two quarters as they ramp up the integration of Federal Government contracts. Note that 8CO records transactional revenue as ARR which creates some seasonality as government/corporate travel slows down over the Christmas/New Year period.
ARR has increased sharply recently on the back of key Federal Government contracts. At the end of FY19 ARR was $2m, at the end of 1Q20 it was $2.3m and then most impressively in a Marketeye update in early November management announced that ARR had grown to $2.5m in October alone. October recurring revenue was $210k which if can be maintained through November and December (which may be difficult as travel slows down into Christmas) it is likely 8CO will report another quarter on quarter ARR growth of ~10%.
While it is not a perfect leading indicator of ARR growth, implementation revenue does feed into ARR as customers are onboarded. Given the average onboarding is between 10-14 weeks, you can see the correlation between higher implementation revenue in a quarter and jump in ARR in the subsequent quarter. See the image I have attached for the example of this in 4Q19 and 1Q20.
1Q20 had lower implementation revenue but was expected as government clients in particular rush to complete projects before the end of financial year. Although no specifics were provided, management did comment at the FY19 report that "implementation revenue lifted in FY19 and expected to move higher in FY20". Hopefully this is the case and it is worthwhile tracking implementation revenues quarter to quarter.
Comsec has a value of 0.18c. With the new contract extensions have your opinions changed?
My wife works in the finance department and looked at receipt bank. She didn't actually tell her bosses yet as it'll potentially do her out of a job. This means it's gonna be the way forward though.
The success of 8co may well depend on the aggessive nature of the sales team to keep up with any American competitor. Add this to an innovative development department and they stand a chance of success. I'm considering buying!
Great writing from both!!
As discussed in the History straw, 8CO was founded by Nic Lim in 2014 with the business plan of acquiring a number of niche software businesses. Nic is a tech entrepreneur/investor who co-founded the Catcha Group before working in investment banks (MS, UBS and CS) for five years. Nic is currently Executive Chairman of 8CO continues to own 15% of the business.
Larry Gan is the other director with a substantial shareholding (8%) who brings the experience of a 26 year career at Accenture to the board.
Current CEO is Andrew Bond who was recently appointed to the role. Andrew has been with 8CO for about five years, working his way up through the business after starting in their Customer Success team and working the last year as their COO. Andrew has a small shareholding, but was provided with 2.1m performance rights that have an exercise price of 17c.
Importantly, KMP are paid extremely reasonably with total KMP remuneration only $670k for FY19. Additionally, there are no related party transactions which is a positive.
One of 8CO's key levers to drive revenue growth is increasing their ARPU over time by upselling clients with other verticals attached to their core TEMS. As per the attached graphic, management believe ARPU could grow to $42 (from $20) over time if they can also win clients onto their card maintenance and travel management modules.
This strategy has worked so far, with first reported ARPU in 4Q18 being $13, increasing to $18 in 2Q19 and finally $20 in 1Q20. The majority of this growth has come from 8CO being able to sell their full suite to Federal Government clients with an ARPU of $46 for those clients (compared to $13 for NSW Government clients).
A key reason for this is simply because a lot of larger NSW Government clients are older and pre-date the introduction of the card and travel modules and management believe as their contracts come up for renewal they are confident of migrating them across to the full suite as well.
Nonetheless, given the short term customer pipeline is essentially all Federal Government clients due to the shares services program, ARPU is almost guaranteed to continue to rise further from $20.
8CO floated back in August 2014 with the business model of amalgamating a number of different software products in the one parent organisation with shared corporate overheads. Founder Nic Lim is a successful tech entrepreneur/investor and potentially saw the success of Constellation Software in Canada with acquiring niche software businesses.
In 2016 these software products included Expense8, Perform8 and Realtors8 (hence the name 8Common). While Perform8 began to have issued in FY16, the Expense8 business started to kick goals particularly when it won the contract to provide services to the NSW Department of Education which is the largest organisation in Australia (public or private).
This foothold in NSW Government led to a number of new contracts and in 2017 it was decided to wind back investment in Perform8 which continued to perform poorly and look to spin off Realtors8 which was profitable but slow growth.
Realtors8 was sold to a Malaysian company associated with 8CO director Larry Gan in 2018 and in early 2019 Expense8 gained more key foothold contracts, this time in Federal Government with the Department of Finance and Department of Industry, Innovation and Science.
Expense8 has been able to upsell their full range of verticals to Federal Government clients which has significantly boosted ARPU and led to the inflection point of cashflow and EBITDA breakeven in 2019. Future growth with more Federal Government departments is essentially guaranteed as the Department of Finance and Department of Industry, Innovation and Science are shared services hubs which have been put in place to standardise back office software and processes across similar Federal Government departments.