11/5/23 Xref Product Development Update

Well, what an annus horribilis for XF1 (or I guess more specifically, the share price). While the business definitely missed the lofty expectations that were set in 2021, it has been one of the worst victims of the massive de-rating for micro cap tech/growth businesses as best highlighted by the great work of @JPPicard in a recent Substack article showing XF1 suffering a multiple de-rate worse than any of it's peers: https://goforgrowthco.substack.com/p/todays-growth-multiples

So where are we today? Financially, the business reported mediocre results at the half year with total revenue growth of 8% through a mix of 15% growth in the core Xref segment and a -17% decline in the Rapid ID segment. It is worth noting that half on half Rapid ID has returned to growth so that headwind will ease moving forward. NPAT fell from roughly breakeven to a $1.5m loss as a higher cost base was put in place to bring forward product development of new modules for the release of their Enterprise subscription model. That said, even accounting for the higher cost base the business still generated over $1m in operating cash flow and breakeven free cash flow due to the working capital model. The business also has net cash of $7m.

The recent Product Development Update was positive, with management confirming they have completed the development of their Pulse Surveys module and it will become the third pillar of the Enterprise offering alongside Reference and Exit Surveys. The Enterprise solutions will also be complemented by the Trust Marketplace (Rapid ID) and Engage (Voice Project).

XF1 began selling the Enterprise platform back in October last year and the migration of existing clients from the transaction based model to the subscription model will ramp up with platform development complete. Currently only 7% of customers are on the subscription pricing however the $300k MRR is roughly 17% of total revenue. This is likely due to migrating large customers first, but the shift to subscription is expected to drive a bigger ARPU as customers can access more modules. Extrapolating the numbers from the update, ARR is $3-4m (depending on whether $0.3m MRR is rounded up from $250k or down from $350k) and implies total Xref revenue of $18-25m (ARR being 17% of total).

Looking forward, the commentary at the first half was for the second half to return to a small net profit which I expect is achievable if the cost base stays relatively flat from the first half. I expect this is likely achieved with $12.5m revenue broken down as $9m from Xref, $1.5m from Trust Marketplace and $2m from Engage with $12m in total expenses up from $10.5m at the half with the contribution from the acquisition of Voice Project.

Long story short, I feel like the multiple de-rate for XF1 has been wildly overdone. The heady days of 8x sales are behind us but XF1 is languishing with cash burning peers who appear reliant on the kindness of capital markets at a time when the markets are taking businesses like that behind the barn like Old Yeller. With XF1 being free cash breakeven and the prospect of growth returning with Enterprise upsell, Voice Project acquisition and easing of crypto-related Rapid ID headwinds I think XF1 deserves a premium to those peers.

29/11/22 Xref 2022 AGM Presentation and Address

@Noddy74 has already done a great job covering the AGM in a prior straw so I will just tack on a few notes:

• Update on the new financial year was the first four months overall sales are "in line" with the corresponding period last year. At face value this is weak but it should be noted they are cycling a tough comp from 1Q22. I was actually expecting sales to go slightly backwards just based on the comp.
• More concerning for me is the guidance for the first half is also forecast to be in line. Given the comp in 2Q22 is much easier I would expect some growth after matching the first quarter, but commentary from management is that macro is starting to bite. XF1's sales model is tied to recruitment which is slowing, but also customers are more cautious on pre-purchasing lumps of credits up front.
• Commentary was that sales activity is high with strong lead flow. On the call Lee did say that December was shaping up to be a strong month but the team needs to execute prior to Christmas/New Year breaks. Perhaps management have learned a lesson and are being conservative with 1H sales guidance but let's wait and see.
• I've updated my historical sales graph below with 1Q23 and 2Q23 on rough numbers provided by management:

• The main positive is that even with flat sales growth the business will remain cash flow positive and likely profitable as revenue (based on usage) continues to grow. The Voice Project will help on that front and the little overlap between the client bases is a big positive for cross sell.

EDIT: My graph titled XF1 Sales ex-RapidID didn't exclude RapidID in 2Q22. Wouldn't have thought it would be that difficult given it's in the title, but here we are...

24/8/22 Xref Limited - Annual Report - Year Ended 30 June 2022

XF1 is pretty well covered on Strawman after @Noddy74's stock pitch a while back (although it's a bit of a "syphilis" stock otherwise, doesn't get much chatter elsewhere!) and I'll let others re-hash the headline numbers which looked solid.

On a standalone basis this is another great set of results from XF1, all key numbers going the right way, the business is scaling like you would expect a software company to do and after shifting to sustainable cash flow generation excess profits are being invested in new business opportunities (exit surveys, pulse checks, new geographies, etc.). But it is also a case study in expectations management as the numbers have come in below the indicative guidance management had provided in the past, as recently as the 3Q investor call. Combine that with fears the employment cycle is now about to become a headwind rather than tailwind and there is a big mismatch between sentiment and reality. Over time that gap can close with fundamental performance, but I understand why the gap is there (and hopefully XF1 management does too).

Other than that XF1 always presents a very clean set of numbers with no gremlins in the closet. It's also interesting to see how capital light the business, almost running completely on working capital. Equity at the end of FY22 totalled $1.5m (not a typo!) with an additional $5m in debt (offset by $11.6m in cash). The balance sheet is very healthy, I am not sure whether M&A or capital returns are on the card right now, but they soon will be.

I won't re-hash the great work @Noddy74 did at the Stock Pitch night on XF1 so encourage people to go back and watch that for an overview of the business.

In the 1Q21 report, XF1 broke out a cohort analysis for the first time. This is helpful but admittedly the data could be presented in a better way (I prefer the line graph used by WSP in their presentations). Nonetheless, compiling this data shows why I am so bullish on XF1 in the short/medium term:

Hopefully the table is easy enough to understand, and it shows how well XF1 is scaling up within their existing customer base. I believe this is largely due to the land and expand strategy of winning a multinational enterprise customer in one region and over time rolling out the Xref to other geographies.

FY19 and FY20 customers are the key customers in my opinion because the business/product has improved since the early years and you are getting clean analysis across the 1Q21/1Q22 comparison (all the customers for those years transacted in both periods). Even if 1Q21 was Covid affected, 100%+ growth from these clients is fantastic. If that momentum can continue I think it is possible that XF1 can probably do 30-40% organic growth in FY22 simply from growing sales through their existing client base.

The other thing this analysis highlights is XF1's pricing model does allow for large fluctuations in sales. Be wary annualising any one quarter, analysis like this above is necessary to remove the lumpiness (which 4Q21 may have been, it's the main thing I am watching).