Well that escalated quickly...
On Jan 22, the company implied they would slow down the pace on TCV and ARR announcements by updating at $20M and then $5M increments after that. Today's announcement demonstrates that RPM have maintained their impressive subscription rate through the new year. Should this continue or even accelerate over the next six months I think we are in for a significant re-rating (I for one would need to reassess my expectations).
Total Contract Value has been accelerating at quite a fast rate as summarised below:
The only potential concern to come out of this is the circa 10% SP gain over the two days prior to the announcement. Some of that could have been Forager buying on market or sheep following them. Nonetheless, a speeding fine for a potential leaky tap may be in the mail.
Original announcement here.
10-Feb-2020: Taylor Collison: RPM Global (RUL): Recent update, accounting changes, review of competition
TC's call on RPM (ASX:RUL) is still "Outperform" with an unchanged valuation of $1.07 based on a blended DCF and EV/Sales (SOP) and EV/EBITDA methodology, but they note further upside is potentially emerging and they will review their valuation upon the 1H20 result release.
"We retain our Outperform. The rationale behind the positive stance includes: -
This note (link above) also reviews RPM Global’s competition in some detail.
RPM (RUL) closed on Friday (Feb 14, 2020) at $1.07 (bang on TC's valuation), being up almost +26% since Jan 9 (just over 5 weeks ago - when they were 85 cents per share) and up a whopping +94.5% since their 55 cps close on August 23 (only 6 months ago).
Steve Johnson's Forager Fund (ASX: FOR, their Australian shares listed investment trust - or LIT) holding RUL as a top-10 holding and highlighting the company in their newsletters and videos hasn't done the RUL share price any harm.
Disclosure: I did hold RUL, but don't now. I don't see the upside from here as being compelling enough to hold them. I think the easy money has probably already been made. However, I do hold FOR shares, so I have exposure to RUL via FOR anyway.
RPMGlobal cut their teeth as an advisory business and still specialise in the complex multi-asset projects (these have the highest margins). However, on 11 Oct 2017, they announced that they will be providing rental options for users of its software as an alternative to their perpetual licensing approach (original announcement here). This was led by CEO and Managing Director, Richard Mathews, who has a history in enterprise-orientated businesses and understands the benefits of ARR.
This benefits RPMGlobal in three key ways:
It allows them to generate recurring revenue rather than lumpy once-off payments from perpetual licenses (key Saas tenet).
Reduces impact to top-line on individual customers (look at 2017 for an example)
Reduces the barrier to entry for mining companies (maybe...hopefully).
Screenshot taken from the FY18 annual report. A sentiment reiterated in the FY19 report. Reducing the initial outlay for a mining company may allow for more “test pilots” to enter and pave the way for others.
Under the old model, a company would have purchsed the desktop software and then paid a maintenance fee each year for its upkeep. Under the new subscription model, companies pay smaller annual amounts with much smaller maintenance fees. After one year, revenue is lagging. After three years, revenue is equal. After ten years (excluding churn), revenue is up 80%.
14-Apr-2020: Software Subscription TCV and ARR Update
Every month, RUL update us with their Total Contracted Value (TCV) derived from software subscriptions sold during the current FY (financial year) as well as their Annual Recurring Revenue (ARR) from software subscriptions. Following these announcements is a good way to see how they are tracking.
The Company’s TCV is now $30.0M, an increase of $4.6M from RPM’s previous announcement on 11 March 2020. RPM’s ARR from software subscriptions is now A$12.8m per annum.
Last few market sensitive announcements:
11-Mar-2020: Software Subscription TCV and ARR Update
06-Mar-2020: New Product - TALPAC-3D
24-Feb-2020: Half Year Investor Presentation
Announcement Update on Total Contracted Value (TCV) derived from Software Subscriptions 11 March 2020 RPMGlobal Holdings Limited (ASX: RUL) [RPM ®] is pleased to provide the following update on the Total Contracted Value (TCV) derived from its software subscriptions. The Company’s TCV is now $25.4M an increase of $3.9M from RPM’s previous announcement on 20 February 2020. As at the date of this announcement, RPM’s Annual Recurring Revenue (ARR) from software subscriptions is now AUD$11.4m per annum. As per its 22 January announcement the Company’s next market update specifically relating to TCV and ARR will occur when the Company’s TCV number is greater than $30M.
R&D expenses for RPMGlobal under Mathews have been consistently high in comparison to industry norms.
FY2020 - $13.3M exp / FY2019 - $13.7M / FY2018 - $14.0M / FY2017 - $12.8M / FY2016 - $10.4M / FY2015 - $7.7M / FY2014 - $7.8M
RPMGlobal made a concerted effort to invest heavily in their software division, nearly doubling the industry norm for R&D over a five year stretch.
RPM recently completed two 6-year projects, and have now started to build their own mine-build software as open source software were having integration-teething issues. Very soon, RPMGlobal will start to look like a one-stop-shop for your mining software needs.
Since the move to an enterprise model, RPM have repurposed 10 desktop products to be available on the cloud. This has resulted in a 77% increase in their sales in FY19 of these specific products. On the surface, this looks like great asset allocation - build it and they will come.
"Financial Year 2019 was again a year of above industry average investment in software development as the Companu rounded out its scheduling product suite and completed the development program for its financial product suite. We expect to see our new software development investment decrease to a level more consistent with industry norms over the next two years". 2019 Annual Report
Extrapolating the $13-14M R&D spend over another 2-years with continual ~70% adoption rate for new products will result in a meaningful increase in ARR.
RungePinockMinarco (RPM) develops and provides mining software solutions in Aus, Asia, the Americas, Africa and Europe. RPMGlobal is the world’s largest publicly listed independent group of mining technical experts, with a history stretching back to 1968. RPM is a global leader in the provision of advisory consulting, technology and professional development solutions to the mining industry. They have three distinct revenue verticals:
Specialise in complex multi-asset projects whilst being ‘competitive on a pricing scale for low to medium projects’.
“Clear leader in coal space”
“One of the top suppliers in metals”
Conduct coal gas tests for compliance and exploration
Heavily linked to coal prices and thus margins vary - wouldn’t be upset if they sold this aspect of the business over the next few years. Too heavily dependent on a single comodity for mine.
Undergone a strategic move away from desktop service into enterprise offering built around a subscription model
Four further verticals; support, consulting, perpetual sales and subscription
First bought into this Company in Q2-19, attracted by their leading role in Mining Consultancy, the high development spend and their decision to pursue subscription sales opposed to perpetual licence sales. The cyclicality of mining fortunes would always yield lumpy outcomes, even for a value-adding capital item. Capex approval no longer an issue.
Whilst the latest updates on TCV are highly encouraging, believe the benefits of higher adoption on their new design software is still to come. This is sophisticated software and will deliver invaluable efficiency and cost benefits to engineers, all in real time. Powerful tool for sensitivity analysis.
Beneficial that outside of the havoc in the oil & gas sector, rest of resources holding up pretty well during early stages of Covid-19. So expect minimal impact to RPM’s results this FY.
A cashed up, debt free momentum stock in my book. Contract terms on avg. 3 years so d TCV of AUD 30 m this FY establishes a strong financial platform.
Valuation for CY2020 at AUD1.56
Our View: We are retaining our Outperform recommendation. RPM is well positioned to deal with the tougher economic conditions; given $24.6m net cash on the balance sheet (and at late February 2020 c$32.9m) and the movement towards subscription software model. RPM is helped by the mission critical nature of the software that RPM provides to its diversified mining clients (who are generally the larger miners that are in production). RPM’s software is used in improving mining productivity and digitalizing the mine site and this also provides insultation from the current economic environment.
[click on link above for more]
Forager Fund (FOR) increases its stake in RPMGLOBAL HOLDINGS LIMITED (RUL) from 12,299,223 shares (5.64%) to 14,679,404 (6.70%)
27-Oct-2019: Taylor Collison: RPM Global (RUL) - Initiating coverage: 5 reasons to buy
TC's call on RPM (ASX:RUL) is "Outperform" with a valuation of $1.07 based on a blended DCF and EV/Sales (SOP) and EV/EBITDA methodology. They believe earnings are set to grow from a low base. The net cash balance sheet is also appealing. RPM has made the astute and tough decision to heavily reinvest in its products and transition towards a subscription model. This set of patient and disciplined decisions is now bearing fruit.
RPM (RUL) closed on Friday at 83.5c ($0.835).
Forager bought a chunk of these a couple of days back (see my earlier post)
I bought in October for 79.5c (along with PPH for $3.03 - both following recommendations from Owen Raskiewicz) for my children (both under 5) with the intent of keeping until they are 18. Interesting times ahead!
A few years of high software development spending and a push into subscription software is paying off for RPM. By late November recurring subscription revenue had doubled from June and reached $8m. In late January, having signed new contracts worth another $7m, annual recurring revenue rose to $10m. TOP 5 HOLDINGS (as % of NAV) Macmahon Holdings Limited (ASX:MAH) 9.7% RPMGlobal Holdings Limited (ASX:RUL) 9.3% Thorn Group Limited (ASX:TGA) 7.0% CSG Limited (ASX:CSV) 7.0% Enero Group Limited (ASX:EGG) 6.8% Cash 6.7% This is only one source of the high quality recurring revenue that the company produces. Maintenance revenue for software sold on perpetual licenses was $22m last year. And unlike many growing software companies, RPM is generating cash. About 5% of the current market cap (after adjusting for cash holdings) will be generated in free cash flow this year.