14/7/20 Appendix 4C and Activity Report
8CO reported their 4Q20 cash result which all things considered was pretty good in the face of the Covid slowdown.
SAAS and transactional revenue was $545k, up 5% on the prior year but a 17% fall on the previous quarter and a 20% fall from the record high of $685k in 2Q20. This is due to a sharp fall in the 30% of these revenues associated with travel and transactional expenses (stable SAAS fees make up the other 70%).
Total revenue was $923k as 8CO were still able to perform implementations and change requests for customers. The jump in this revenue meant the company was able to eke out a small cashflow positive result for the quarter of $46k (which also included some pre-payments for cloud hosting and annual director fees). Importantly, there were no outflows below the operating line and cash balance remains healthy at $1.8m.
Management commentary suggested they are already seeing business activity pick-up in the first weeks of FY21 and have a pipeline of implementation work ready to go. Activity levels at the end of June were three times higher than the low point in April. If NSW can avoid returning to a lockdown, we should see the steady recovery here continue.
The company enters FY21 in a good position with the core business roughly breakeven but with several growth opportunities available with on-going Federal Government wins expected and the launch of the CardHERO product after a successful trial with an NDIS provider.
Had about a half n hour conversation with management earlier this week involving both the Chairman and CEO.
Management seemed confident on the prospects of the deal with the NDIS provider. Said they are working very niche with a number of these companies, leveraging off their existing customers in the gov and corporate area. They are essentially taking this opportunity away from the banks by providing a better solution with their strong existing relationships
They mentioned the Department of Finance Shared Service Delivery Office is providing a gateaway into the government entities, so they do not need to invest heavily on manpower to sell. Their technology is also quite advanced which reduces the need for additional employees, a very capital light structure
They were talking about transitioning into the payment space, they mentioned they know the EML team very well when I brought them up as an example. Management said they thought about applying for a banking license or acquiring a company that has one, but said it's not the right time as it would be too expensive.
8Common (ASX:$8CO) Current share price: 0.06c Market Cap: ~11m -
Cash flow positive SaaS company selling to Government entities
-Very sticky flagship product, Expense8 with an extra product 'cardhero' to contribute materially in the short term.
-Defensive, with high upside compared to downside.
8Common is a company which floated in 2014. Since then they have slowly grown their business under the radar ~4x from 1.15m to 4.15m, achieving cash flow positive along the way in FY20. The company sits in the payment space, providing expense management solutions of issued pre-loaded cards such as claims and travel for employees and monitoring of expenses and reporting to employer side. Their customers at this are 28% fed gov, 41% state gov and 31% corporate.
Upcoming product: CardHero Their upcoming product is called CardHero, which is a digital pre-paid fund disbursement card.
Here's why I like their upcoming product CardHero. This product is currently in trial with one of the largest NDIS providers , which if given the go ahead, can potentially increase ARR significantly, capturing 0.5-1% of all disbursements. From my conversation with a few holders, It seems like the trial was successful and it’s just a matter of time now of nailing the final details. I think as COVID-19 accelerates the move to digital payments, there is a need for funding programs to continue for NDIS providers where Banks and ATMs access is not available, merchants are not accepting cash. NDIS providers are often required the create multiple bank accounts for users, with little ability to monitor the disbursement usage and ability to use this information for reporting. This will act in favour of the product acceptance rate, speeding up the adoption of CardHero. With this deal being done in the near future, it will validate the product further, which we have already been informed as per the company’s recent announcement stating they’ve been approached by a number of other NDIS providers. The NDIS disbursement opportunity is 4.8Billion, which is huge.
Q3 FY20 recorded a 10% revenue growth vs pcp (pre-covid), while for Q4 FY20 has recorded a decrease of 11% on pcp (during-covid). Q3 2020 SaaS ARR was up 48% vs pcp, while Q4 FY20 was up 5% vs pcp. The reduction in revenue growth was due to challenging economic conditions represented for new integrations of the software. Although this occurred, it is evident that ARR continued to grow. With management stating that work in FY21 has started to return to normal, the core business breaking even, more federal government wins expected and the CardHero launch, this company has a huge upside to grow in my opinion.
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.
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.
A cash positive quarter with SaaS now representing 70%~ of ongoing Revenue. SaaS revenue was a 30% increase on FY19 meaning it was the implementations that lagged behind which is expected given COVID.
The Federal Digital Transformation Agency implementing expense8 is a big win in my opinion given that their Agency exists to improve peoples interaction with Government services (you would hope internally as well as externally). I work in SaaS implementatons and having an agency like this act as a "Champion of Change" in the broader Government may allow expense8 to have a much wider audience with some customer success stories to go with it.
20-May-2020: Market Eye Virtual Conference Presentation
That link takes you to the Presso that 8CO gave as part of the Market Eye Virtual Conference (Tech companies innovating during COVID-19) last week. Useful if you want to get your head around what 8common do, their major customers, etc.
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.
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.
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.
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.