30/11/22 AGM Presentation

@Scott Great article and very interesting timing! I attended the 8CO AGM in Sydney, safe to say there was a lot of conversation about CardHero. Management said they were bumping up against the big banks for some large expense management tenders and mentioned the banks were using virtual card providers. No doubt the ANZ/Conferma product represents a huge competitive threat, but it is very positive to see the industry accept that virtual cards is where the future is. It's crazy to me that enterprises are still relying on receipt based reconciliation prone to fraud and not reconciled until pay cycles are run. Virtual cards are better in every way so good to see 8CO trying to establish themselves in the space.

Chatting with management, they are a small team and have to be laser focused so rather than chase the larger but much more competitive market of enterprises, they will focus on the Government and not for profit space where they already have a strong footprint with expense8. Obviously some wins in NDIS already, it has been slower to roll out beyond the initial customers than expected but things continue to move in the right direction.

Overall I came away very positive after attending the AGM. The spectre of the languishing share price did hang a little, but I was impressed after being introduced to the members of the board and executive team I had not met previously. Some notes I jotted down:

• GovERP roll-out is on auto-pilot. Implementation was ~6 months for the first few departments, that is now down to 6-8 weeks. Departments talk to each other so as word has spread about the ease of implementation the resistance to onboard is reducing dramatically. Now doing "Phase 0" as initial consultations before on-board to make it even smoother. Fed Gov ARPU will move towards $60 as all departments shift to the new version which has more features.
• Department of Defence likely when not if. Only department not included in GovERP, they are a beast unto themselves as a standalone department bigger than GovERP in total. Tried to use SAP Concur a few years ago, project was scrapped after huge cost blowouts and went back to legacy software. New GovERP version of expense8 ticks all the boxes, particularly security clearance obviously a big concern for DoD.
• Unfortunately don't benefit from the inflationary pressures in travel right now, they charge fixed $ per trip booked not % of cost.
• As I said before, CardHero has been slower than hoped but not from a lack of confidence in the product. LWB "loves" it, biggest hurdle is good old fashioned resistance to change with certain internal parties. Everyone will eventually come around, it's a win/win for all involved over old system (unless you were someone defrauding the old credit card system of course!)

22/4/22 Appendix 4C and Activity Report

8CO released a weaker than expected quarter, reporting a cash burn of just over $1m, split roughly even between an operating cash outflow and further investment cashflow largely into the CardHero product.

There were some positives from the report, mainly the strong SaaS/transactional revenue which had a record month in March suggesting the run-rate in the seasonally strongest fourth quarter will be solid.

The fourth quarter will also benefit from a large chunk of implementation revenue from the GovERP contract which to date is for $1.4m all originally scheduled for FY22. With only $350k in this quarter it leaves $1m+ to be recognised largely in the fourth quarter (although knowing Governments I always expect at least minor delays).

I spoke with the management team after the result and they conceded that the investment into CardHero had come in above budget which has led to the larger than expected outflows, but the large project development spend is behind them now with products in the market with more sustainable support and maintenance spend taking over. I queried the sales and implementation cycles of CardHero given the long delay with Life Without Barriers and the slow rollout, but was told from a product point of view CardHero can be rolled out to a customer in no more than two weeks. Life Without Barriers has internally chosen to do a staged rollout simply to better manage their internal processes.

I also queried the ARPU which has fallen slightly despite travel now bouncing back to which the reply was it can move around slightly to a number of factors but moving forward they expect a strong uplift in ARPU driven by GovERP. The example provided was that the Department of Industry was an existing user of Expense8 who recently upgraded to the GovERP standard of the product (higher security and some additional functionality) and their ARPU has roughly doubled from $30 to $60. With 110,000 Federal Government users mandated to come onto the platform at that $60 ARPU, I can see where management get the confidence to forecast that growth.

While frustrating to have another quarter of cash burn (particularly in this current market environment), the longer term investment thesis for 8CO is strong. The confirmation of GovERP ARPU gives me confidence to forecast the company run-rating ~$8-10m ARR in FY24. Profits are a bit harder to gauge given it will be driven by the investment into CardHero but the core Expense8 business is extremely capital light and profitable, especially as growth comes from higher ARPU.

21/1/22 Appendix 4C and Activity Report

An improved quarter from 8CO as we saw the first signs of business travel recovery, GovERP implementation and CardHero roll-out. These three tailwinds will only increase in the coming quarters which should lead to a strong finish to FY22 for 8CO.

It is clear the Fed Gov is keen to implement Expense8 through the GovERP program as quick as possible, with the implementation contract for 14 departments signed a couple of weeks ago. $53k per department is in line with the disclosed $50k minimum per department. This gives a lot of confidence to the GovERP pipeline of minimum $5m implementation revenue and $5m ARR coming over the next couple of years.

For CardHero, with LWB now live and ramping up the natural expansion will be to other NDIS providers given LWB is one of the largest NDIS provider and a foundational member of the Alliance20.

29/10/21 Appendix 4C and Activity Report

An expected weak quarter from 8CO as lockdowns in NSW and VIC impacted revenues before the ramp up of the GovERP contract and CardHero which will start coming through in the current quarter. Recurring and transactional revenue actually held up better than I expected at $683k (down from $721k the previous quarter) but increased investment in the launch of CardHero and GovERP meant the largest cash outflow in years at $666k.

The recently announced GovERP implementation contract of $542k will help with that though, with the cash coming in the current quarter.

29/07/21 8CO subsidiary Expense8 mandated for whole-of-government ERP

Headline speaks for itself, 8CO has won a large tender to be the sole provider of Travel and Expense Management software for the Federal Government, beating out SAP's Concur product for the mandate.

While firm financial forecasts are difficult to put forward as roll-out of the program is variable, management highlighted that roughly 130k Government employees will come onto the platform over time, with a current ARPU of $42 (though $53 pre-Covid and potential to grow further with some additional modules available in the new mandate).

All considered this mandate likely increases ARR $5-7m over the next few years, depending on how ARPU recovers and penetration of new modules.

However beyond the financials I think the validation of the Expense8 platform and the confidence in the ability of 8common to service such a large and important mandate speaks volumes.

13/7/21 June 2021 Quarterly Report and Appendix 4C

8CO released a solid 4Q21 result, headlined by a record $720k in recurring and transaction revenue. User levels on the expense management software grew 33% year on year which provides a better view on underlying growth as Covid travel restrictions impact headline revenue.

Management confirmed the launch of the long-awaited CardHero product with the first client Life Without Barriers who are currently in beta and will go live in the current quarter. Hopefully with a smooth launch the sales process to new potential customers can begin in earnest.

The one orange flag I see is the slowest quarter in the last four years for one-off implementation revenue ($129k vs $313k average). While a single quarter of this revenue can be heavily timing based, it needs to be monitored as implementation and on-boarding new clients feeds into recurring revenue growth.

22/2/21 Appendix 4D and Half Yearly Financial Report

A solid report from 8CO in the context of Covid impacts on business travel and expenses. Subscription and transaction revenue fell 11% to $1.1m, however customers took the opportunity in Covid disruptions to bring forward update and change requests and other revenue increased 60% as a result to $801k. This meant total revenue was largely flat at $2.0m.

Expenses increased modestly by 8% to $2.3m meaning a $359k loss for the half. Cash was a highlight with operating cashflow of $78k.

Management did a great job of breaking out the operating business from the reported financials. Despite Covid impacts, users on the Expense8 platform increased 23% but the revenue decline came from card transactions falling 43% and business trips falling 82%. This meant ARPU fell from $24.26 to $16.94, however management are confident as travel returns ARPU will return to historical levels and provide a strong tailwind to subscription and transaction revenue.

Commentary on CardHero was also positive with management confirming talks with out NDIS providers has begun after landing the inaugural contract with Life Without Barriers.

24/12/20 Significant CardHero contract for $1.6m signed with Life Without Barriers

8CO announced their inaugural client for the CardHero product, Life Without Barriers who are one of the largest NDIS providers in the country. The contract is worth ~$500k ARR but for only 15% of LWB's employee and client base. Speaking with management in the past, they believe upwards of 50% of NDIS disbursements could be appropriate for CardHero so there is significant potential to land and expand within LWB.

However, the real upside from this contract is LWB is a member of the Alliance20 (http://alliance20.com/) an industry group of NDIS providers. The problem that CardHero solves is common across all large NDIS providers and this contract with LWB could act as a stepping stone to winning contracts with other providers.

27/8/20 8common Announces CardHero Launch Following the Signing of EML Agreement

After many months of product development and customer trials, 8CO has now launched the CardHero program formally and partnered with EML to power the backend Mastercard payment processing.

The partnership makes a lot of strategic sense as EML's expertise in payment processing can be combined with 8CO's expense management software and existing Government and corporate relationships to provide a product to better track and manage payments.

While no firm details on pricing were released, management did state there will be a standard platform fee to access CardHero, supplemented with either a % of dollars loaded onto cards or a per card fee depending on how customers are more likely to use the product.

My research suggests similar products generate around 1% of transaction values however it remains to be seen how revenue will be split between EML and 8CO and how the % of dollars loaded vs per card fee changes the equation. Nonetheless, it represents an opportunity to significantly grow ARR for 8CO over the next few years.

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.

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.

31/01/20 December 2019 Quarterly Report and Appendix 4C

Solid quarterly from 8CO though the market disagreed with a sharp sell-off. The highlight was the continuation of the high growth in ARR to $685k for the quarter well above my estimate of $630k.

The negative for the quarter was total revenue being flat on the previous quarter indicating a slowdown in implementation revenue. While this isn't a thesis breaker as implementation revenue can be lumpy, as highlighted in other Straws there is a correlation between implementation revenue and future ARR meaning it can be a negative if it continues. 

That said, management commentary suggests they have already seen a pick-up in implementation revenue in the new calendar year, with the additional positive of the few contracts highlighted including the new travel modules which is the thesis for ARPU growing into the future.

Additionally, the commentary on the CardHERO trial seems positive and continues to represent blue sky potential for growth.

I'll probably do a deeper dive into the 8CO financials at the next quarterly/half yearly, but here are some scattered thoughts:

• Despite reporting an operating cash loss of $130k for FY19, there was a big skew in the result as the business ramped up in 2H19. 1H19 operating cash loss of $583k was nearly offset by the 2H19 cash gain of $453k (note R&D tax credit was also received in the 1H19). While some of this is seasonality, the vast majority comes from growth as seen by the fact 1Q19 had an outflow of $600k compared to 1Q20's outflow of $225k. Assuming growth rates can be maintained FY20 will easily be cash flow positive.
• Reported NPAT is masked by a high amortisation rate due to the writedown of IP from the acquired software companies back in 2014 and a large capitalised R&D balance from the transition of the software to a SaaS model back in 2015. The IP has now been fully amortised, but the capitalised software has another four years at roughly $200k a year. Importantly, re-investment through the balance sheet has been low, only $112k over FY18 and FY19.
• 8CO holds roughly $4m shares of a Malaysian listed business named Cloudaron. 8CO sold their Realtors8 business to Cloudaron in FY18 and received the shares in exchange. Current board member Larry Gan is also Chairman of Cloudaron. While it is an interesting "hidden asset" it is worth noting the shares are EXTREMELY illiquid and exiting the position if required would be difficult. Also I believe the $4m valuation on the balance sheet is based on a 0.30 MYR share price, while last trade (from a few weeks ago) is 0.18 MYR. That gives an example of how illiquid this asset is, and for that reason I haven't really factored it into my valuations.

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.

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.