PRO is a software provider with two key products: eMite, a cloud based call centre analytics product and Snare, a cyber security monitoring software. @Noddy74 and @Valueinvestor0909 have covered the software in previous Straws so I won't go in-depth here.
FY22 was a foundational year for PRO, winning their largest contracts for both of their products, Humana (US insurer) for eMite and the UK Government for Snare. While the company will likely not be able to match the 70% growth in ARR in FY23, the platform has been set with the business now sustainably established giving management flexibility to further invest in organic growth or perhaps M&A.
2022 was a tough year for tech stocks and the market finally woke up to the various tricks companies can use to make things appear rosier than reality, particularly when the focus was so heavily on ARR and not what was happening beneath that unaudited metric. PRO has been lumped in with these tech peers, but I think it is worth taking a step back and looking at the business and realise that not all software is created equal and the same goes for revenue and cash.
I will focus on eMite with this analysis but most of the points also apply to Snare. eMite is a pure SaaS solution, primarily delivered through channel partner cloud marketplaces Genesys and Amazon Connect. As investors, one of the main reasons software businesses can be so attractive is the fantastic incremental unit economics. However some software products lose a large chunk of this benefit if the software must be heavily customised to individual customers which also comes with long implementation periods. Most companies who suffer from this problem usually disclose contracted ARR to try and show the pipeline of ARR that will come online over time. Further, when software is heavily customised to customers it makes the roll-out of updates and improvements difficult and usually comes with more implementation time.
eMite avoids this problem with an out of the box solution (which can then be highly customisable by the customer themselves) that can be deployed in hours over a customers cloud call centre infrastructure. The lack of a long implementation phase means PRO's ARR is extremely clean. Because the software can be turned on and off so easily, management have also established a disciplined negative working capital model. Management clearly break this out in the annual report (a virtue I wish other software peers would emulate!):
Again, this negative working capital model is another reason why software businesses can be so attractive. However, many software peers have cash collection issues and in 2022 most have been exposed by the market which has focused more closely on cash. The strength of PRO's model can most clearly be seen by FY22 revenue of $16.4m vs $21.5m in cash receipts.
On top of this, management also don't capitalise any R&D so operating cash flow is very clean and the P&L isn't artificially boosted (actually the opposite because some legacy D&A is still rolling off).
The business model gives us clear visibility for FY23, with $18.4m ARR entering the year, another $2-3m in Snare license sales as the business model continues to shift to a subscription service plus further growth through the year. I expect reported revenue to be in the range of $23-24m. Management have flagged a ramp up in costs to chase further growth with the strong tailwinds they have with the shift to cloud based call centre infrastructure and cyber security solutions. I'm not exactly sure how much will be tacked onto the cost base, but given the revenue growth I'd expect the business to be profitable (but definitely cashflow positive given the negative working capital model).