Potentially some interesting developments going on with 8common.

They have remained a ‘gunna’ company for a long time now, but the last few quarters of demonstrate their cost reductions are likely legit, and their margins may just be permanently higher.  

In Q1 FY25, their gross margin was 58%. We have now had four straight quarters where this figure averaged around 70%.

I have always tracked 8common’s relationship between admin corps and revenue. The two have typically been pretty close to one another (limiting upside and reducing operating leverage), but the last few quarters we have seen clear differences between the two figures. This supports a possible change in their fortunes too and suggests to me the new normal (cost base wise) might be sustainable going forward.

They have also achieved two positive cash flow quarters in a row, only achieved once previously since 2021 (and that totalled a measly 4k!).

The bear case is potentially the number of users being stable around 180k, essentially no growth here in four quarters.

But this business is currently trading on 5x its transaction and recurring SaaS revenue, and just over 1x FY revenue (looking backwards). The risk reward proposition is attractive. Small levels of debt, which they are slowly paying back, and a Chairman loan available to them (which they can dip into as they need) all but avoids a heavily dilutive raise.  

Gross margin of 70% might be the new normal for this business. While thesis creep has been real for years here, at these levels it is a different ball game. This business is undeniably worth more than 6m, with stable government contracts and a cost base that has shown maturity in the last year. What might turn the dial is the winning of a significant govt contract (i.e. defence) or someone sniffing around to take them out given their cheap price.  

I am starting to shift from bear to bull. 

This has been a tough hold. I had a look at my research tonight in an attempt to work out next steps. On a side note, I am a long term holder, but I do think there is potential here for a short term trade too (if you can stomach it). 

I am going to give 8CO another quarter before I call it thesis busted and move on. This is just such a darn’ frustrating company, because they have a strong foothold within government (state and commonwealth -- mainly the latter), which I actively seek as an investor – tough to lock in, but once in, they are sticky and rewarding. Unfortunately, this hasn’t been the case with 8CO, far from.

Q4 is normally their strongest quarter – this has been the case for a few years (as far as my research goes back), with Q4 always delivering the strongest revenue and cash flow generation by some margin. This is the short-term trade opportunity – the market currently hates them, with a market cap of 3.36m, and many have written them off.

The long term outlook is less rosy. Here are some high-level graphics below that tell a story: 

While admin costs have been decreasing, so has revenue – with the last three quarters delivering modest decreases one after the other. 

On the transaction and recurring revenue side, there were three quarters of essentially no growth before the last quarter delivered a worrying decline. No growth was bad enough in itself – declines have quite rightly spooked the market even further. 

They aren’t going broke anytime soon. They have recently taken out a 700k director loan with a reasonable interest rate (6%), with another 800k available to them should they need it. 

The biggest question is whether this is truly a sustainable business, irrespective of what pure junk management spin in their quarterlies. The reason (as above) I was tracking revenue in conjunction with admin costs is because the two have moved closely together for a few years now, with the exception of a few quarters. My justification was, as seen in a few quarters only, we may start to see evidence of scaling during strong revenue quarters. This hasn't really come to fruition. There is now a serious question mark over their survival. The director appears to be reasonably confident, with him putting 1.5m of his own funds on the line to keep the lights on. 

On a positive (and there aren't many!) number of users has resumed on its trajectory upwards, while ARPU remains steady: 

It is time to execute though. We need results. 8CO have onboarded more than 25 federal government agencies; if they cant make a buck now I don’t hold much hope for the future without bringing on Defence – and even then, nothing suggests they will be able to do that sustainably. 

I want to see significant improvement in Q4 – cash flow positive and finishing the quarter with more cash then they started, at the very least. If they don’t achieve this, I will sell. If they do, I will await the annual report and reassess.

Non-executive director, Kok Fui Lau, bought shares on market on 4, 5 and 6 December, totalling 223k shares -- or A$12,384 -- at approximately 0.055 cps.

Relatively small purchase in the scheme of things, but nice to see some topping up by one of few key board members.

8CO is a risky proposition -- one certainly not for the fainthearted -- but man, at a current market cap of 14m, I think there is some real value to be found here. I am guessing Kok Fui Lau is in agreeance.

See @mikebrisy's straw for details. This takes the ERP work to a total of 6.4m, with this figure expected to continue to grow.

With an ARPU of around $50, 8CO now serves 31 commonwealth entities. The bull case is there is a long way to go, with more than 70 agencies associated with ERP. Some key agencies have already been onboarded thus far:

• Department of Vet Affairs
• ASIC
• Department of Climate Change, Energy, the Environment and Water
• Department of Finance
• Services Australia

It is good to see additional contracts being signed in recent months, demonstrating a snowball effect as more agencies start to onboard 8CO’s flagship product as part of their ERP work. I still remain of the opinion that inclusion on this panel has the potential to be company making for 8CO. There is still some way to go here though. Ideally, I want to see wins with the following commonwealth entities:

• Department of Home Affairs
• Department of Defence
• ATO 
• AFP
• DFAT

The top 3 above are 3 of the 4 largest operational entities in commonwealth – large, cumbersome departments that have far more users than other commonwealth entities. The last two -- AFP and DFAT -- are obviously associated with heavy travel requirements and will presumably have higher than average ARPU. 8CO have already onboarded the other of the 'big 4', with Services Australia coming on board a few months ago. Let's hope we see some of the above signed in the coming months.

June 2022 Quarterly Report and Appendix 4C

Highlights

• Record quarterly transaction and recurring SaaS revenue of $832k, up 15% on PCP. This figure includes a monthly all-time high of 297k in June.
• Total revenue for Q4 FY22 of $1.6 million—an increase of 44% versus Q3 FY22, mainly due to the roll out of the GovERP work package
• ARPU of $19.54, the highest level seen since pre-pandemic levels.
• The return of travel activity continues with a record of over 15,000 trips in the quarter, significantly higher than the 6,236 trips in Q3 FY22
• Net cash outflow from operations for Q4 FY22 of $124k
• Cash balance at 30 June 2022 was $3.25m (31 March 2022: $3.76m)

A tidy update from 8common. All key metrics continue to move in the right direction, with revenue increase QoQ (44%) particularly impressive.

This suggests we are starting to see some traction from GovERP benefitting top line growth. Similar to my recent update re: EVS, this announcement also reflects increasing confidence for air travel. Trips in the quarter were nearly 3x that of Q3.

My investment thesis remains intact – 8common continues to increase its number of users while slowly increasing ARPU.

The latter will only continue to increase provided travel activity remains high – as it is a high revenue per user event i.e., its where 8common make their cash! The below supports the assertion that individuals and businesses are starting to travel again.  

The main negative I can see relates to cash flow. We have essentially witnessed a doubling in customers customer QoQ (or very close to it). Advertising and marketing remained flat (17k) while staff costs decreased from 527k to 458k. The real negative relates to admin and corp costs…increasing from just over 1m to 1.6m. This offsets a lot of the revenue gain. Consequently, cash used in operating activities was -124k (vs -551k in Q3). Despite revenue essentially doubling, less than half of that impacted the company's bottom line. Its not great evidence of scaling (yet).

Management again tells us they continue to focus on costs and expenses. Yet each quarter in FY22 we have seen admin and corporate costs increase – Q1 800k, Q2 872k, Q3 1.03m, Q4 1.6m. Again, we are told this relates to the increase in investment in CardHero and the GovERP rollout (amongst other things). I am OK with continued investment to increase market share and benefit the company years down the track, provided management can reign in the costs when/if required. We haven’t seen evidence that they can do this, nor scale effectively, hence my concern.

@Wini, do you have any additional insights from management? If not, I would be interesting in hearing from them. They might have a very simple explanation.

I don’t want to end this on a bad note; this update is probably the best update they have released in at least a year. But at the moment, the main scaling benefits I want to see are being hampered due to increasing admin/corp costs.

Disc: held 

Significant $542k contract commences Federal GovERP rollout

Highlights:

• Initial $542k (inc-GST) contract from the Australian Government under the recently signed GovERP program (refer ASX report 29 July 2021).
• The contract commences the work packages under the GovERP and is for the initial design and delivery phases of the roll out of the program, with work to be carried out though to the end of March 2022.
• Revenue from the contract will be recognised in Q2 and Q3 FY22
• Expense8 was selected as the exclusive travel and expense management solution for GovERP which will provide a common corporate platform for all non-corporate Commonwealth entities (NCCEs) and those corporate Commonwealth entities (CCEs) that have opted in (over 90 agencies with over 130K employees)
• The contract work will deliver a GovERP version of the Expense8 platform and will allow the fast track of Commonwealth entities on to the platform from mid CY22 onwards delivering an increase in ongoing transaction and SaaS recuring revenue
• 8CO, through Expense8, currently generate a Federal Government ARPU of $42 ($53 precovid) servicing approximately 20,000 employees across 27 agencies

Thoughts

So, is this material? You betcha - 8common's revenue last year was 3.5m - so a 542k contract is obviously a solid win for the company. A few of the members on here, myself included, forecasted that 8common's addition to the GovERP program was a significant win for the company (perhaps more so than the market currently thinks).

But here is where this morning's announcement gets really interesting - I have taken the following quote from the announcement: 'Expense8 will be the exclusive provider under the Travel and Expense Management Value Stream for the Shared Services Program, which includes over 130k employees across 90 government entities'.

There are a few Straws that touch on this in months gone by, I won't repeat these - but being the exclusive provider on the panel basically secures 8common a stack of sticky government contracts. Most of the government entities will be strongly encouraged to use the panel providers, to justify the panel's existence. This was suspected, and @Wini touched on this too, but official confirmation from the company in the public domain might see another market re-rating.

DISC - HELD

On 29 July 2021, 8common announced that Expense8 had been selected as the solution provider of Travel and Expense Management (TEM) for the Australian Government’s GovERP Complementary (edge) capabilities panel.

I emailed 8common’s investor relations after the announcement, requesting that they confirm if there are any other TEM providers on the GovERP capabilities panel. I received the following response within a few hours:

‘Hi ****,

Thanks for reaching out. Here is a link to the Gov ERP panel which should address you question - https://www.finance.gov.au/government/procurement/whole-australian-government-procurement/goverp-complementary-edge-capabilities-panel

Cheers,

****’

Firstly, seriously impressive response time by their IR team. Secondly, the website lists the following panellists:

‘Contract Management System Capability

Capgemini Australia Pty Limited (based on the SAP Fieldglass solution)

Ernst & Young (based on the SAP Fieldglass solution)

Travel and Expense Management System Capability

Expense8 Pty Limited

Additional capabilities are expected to be added to this panel over the coming weeks.’

Provided Expense8 remain the only TEM provider on the panel, they are in a good position to penetrate government – a customer that is typically sticky, resistant to change and won't play hard ball with finances. The last sentence in particular suggests further additions are coming - will these be TEM providers? 

I am keeping a close eye on 8common. Their future looks a bright one, provided they continue to bring government clients onboard.