ASX Annoucement

$8CO reported their 4C today, together with a separate annoucement that the Executive Chairman has provided a $1.5m loan (6%, unsecured, not convertible) to fund the company, as otherwise cash reserves were down to $0.7m and it would have been tricky answering some of the questions at the end of the 4C!

Their Highlights

▪ Record quarterly transaction and recurring SaaS revenue of $1.1 million, up 20% on the previous corresponding period (PCP)

▪ Cash receipts from operations of $1.7 million, up 44% vs PCP

▪ Total revenue for 1Q FY24 of $1.9 million up 52% on the PCP, but down on the prior quarter as the Company due to timing of revenue recognition for implementation work of Federal GovERP customers

▪ Strong customer demand has resulted in elevated on-boarding activity with concurrent implementation projects being executed across multiple entities including IP Australia, Department of Veteran Affairs, Department of Education, Service Delivery office Uplift (Department of Finance) Department of Climate Change, Energy, the Environment and Water, Department of Employment and Workplace Relations, NSW Museums of History and Amcor New Zealand

▪ The above entities are forecast to go live in the coming quarter, allowing receipt of unrecognised implementation revenue and the commencement of recurring SaaS revenue as over 14k users will be onboarded to our GovERP solution

▪ The Company also accelerated product delivery initiatives to deliver upgraded card application and Gov Protect modules along with a strategic investment to enhance our API capabilities and further uplift infrastructure to prepare for Federal Government “Protected” status

▪ Operational cash outflow of $1.0 million due to timing mismatches between project implementation costs (includes significant third party contractors) being paid faster than the cash receipts linked to client billing milestones. Cash flow has since improved during the end of the September quarter and will continue to normalise in the current quarter given the scheduled customer go-lives.

▪ Annualised Recurring transaction and SaaS Revenue (ARR) of c.$4.6 million as at 30 September 2023 ($3.7 million as at 30 September 2022)

▪ ARPU of $25.26, up 20% vs PCP

▪ Federal Government ARPU of $48.24 for the period, an important indicator of future revenue growth given the increasing number of federal government users to be on-boarded under the GovERP program

▪ Cash balance of $0.7 million at 30 September 2023 (30 June 2023: $1.8 million). Cash as at 27 October had increased to approximately $1.1 million due to billing completions in the month. 

My Analysis

After the blowaway 4Q performance, cash receipts and cost increases bring up back down to earth today. However, CEO Andrew Bond's commentary is very strong. As my analysis shows, I think there is reason to trust his confidence and expect continued progress in future quarters. I'll lay out the analysis in some detail.

First, the my usual cash flow trend report.

Figure 1: Cash Flow Trend Analysis

You can see receipts have come back to earth. However, with a small number of large government departments as major customers and lumping payments in program implementations, we have to expect and have consistently seen noise from Q-to-Q. In the black dotted line I plot the trend in FCF over a 6Q timeframe, and which the slope has dropped significantly since the last report, the trend is still significantly positive.

However, there is no escaping that we are in this Q back in territory not seen for 1-2 years, so while it is OK not to over-react to this individual result, the next couple of Q's need to get back on to trend, otherwise the thesis is in question.

Let's now look at progression of the user "funnel".

Figure 2: GovERP Users by Funnel Stage

On the right of the above table, I've analysed the movements of users in the GovERP Program. The total size of the funnel has stayed constant at 174,000, with 6,000 user moving to "live" status (up 19% q-o-q and up 65% since 2Q,...I'm not taking it back to a y-o-y comparison, because of the reclassification of live users reported previously.)

Go GovERP implementation is continuing to progress,

Now let's looks at key operational metrics

Figure 3 Operational KPIs

Government ARPU was significantly down in the quarter, but it is a volatile measure, and the shortfall is not significant given the overall trend and historical volatility.

SaaS and Transaction Revenue - arguably the most important metric increased above trend - so that's a good result. Unsurprisingly, overall ARPU also increased above trend, which is perhaps a surprise given the softer Gov. ARPU number.

Overall, the operational KPIs appear healthy.

Finally, total users.

Figure 4 Users

Overall, Total Users are continuing to grow, recovering the lost ground of the churn/debooking event reporter previously.

My Key Take Away

$8CO is a small business so quartlies will be volatile, and the softer receipts follow the blowout result from the previous Q.

All the operational metrics are headed positively, albeit Gov. ARPU is one to watch in the next period.

Finally, we are blessed to have an Executive Chairman prepared to fund operations with $1.5m on very reasonable terms, much better than they could get at a commercial bank and better than a dilutive raising. (Good on 'ya)

For now, I am a happy holder. My position is very small and I continue to be cautious, so will not increase my holding today. (I was poised to had receipts been positive with respect to trend.)

Disc: Held in RL and SM.

I've just caught up on the SM meeting recording of $8CO (Thanks @Strawman for asking my complicated question!)

Here I jot down a few simple notes supporting my decision this morning to increase my small RW position from 0.5% to 0.8%.

My detailed notes from the 4C report still largely stand although, thanks to questions from other Strawpeople, I got some further insights to explain the recent progress and outlook for Card Hero.

First of all, it is so refeshing to hear a CEO like Andrew Bond, who is candid and balanced in his answers to questions. It is the mark of a confident and grounded leader that they can speak as candidly about failures as well as successes. An example is the candour with which he spoke about missing out on a 30,000 card deal with Centrelink. So many CEOs would never do that.

I found the discussion very informative about the competitive playing field.

• Customers continue to move away from broad-based ERPs that offer everything, but don't deliver the customer experience through the deep workflow integration of a specialist platform (example. SAP and Tech One (Disc. Held) both big in Government.)
• Concur the major competitor, with DoD a negative reference case with material available in the public doman. They pulled the plug after spending between $3m and 13m (I can find reference to a number of $10m in the ANAO report from a quick search). This negative reference case might give pause for thought, particularly if $8CO can show success in GovERP rollout, which they appear to be able to.
• Still a lot of legacy, on-prem. systems, and paper-based processing going on. (Which is a surprise - I left big corporate land over 10 years ago, and we already had Concur in place.)

I found the following statements relevant to my valuation, in the context of the cash flow trend graph I plotted in the 4C report:

• 110,000 of the Total Potential Users are in mandated departments (62 of 90). Valuable insights on what pre-requisites need to be in place for an Agency to go live. This was a gap in my knowledge.
• Expects Govt ARPU to continue to trend up to "low $60s"
• There is a "strong implementation workload ahead" ..." the pipeline for new work (i.e., implementations) bigger than its ever been" meaning that the recent report of strong receipts from implementations are not one-off with the majority ot mandated entities yet to be on-boarded, and a sense this happens over the next 3 years.
• "We expect cash positivity most Qs"

For me, this is the base business that supports significant growth in revenue over 2-3 years, driven solely off the GovERP mandate. With this apparently progressing well, I ascribe minimal risk that the 3+3 Option will not be exercised.

The good news is that we also have the opportunity to track the GovERP Phase 0 milestones, as each new Deptment getting started will register payments of $40-60k on Austender.gov.au - I've just jumped on and its easy to use (enter "Expense8" in the Keyword field under Contract Notives).

Beyond the base business, there are a number of potential near-to-medium term catalysts, including:

• DoD Contract: (DoD 16k employees and ADF c. 90k - which explains the "100k users" Andrew mentioned)
• Card Hero deals ("when it drops, you'll see big things drop" and "good conversations ongoing with Government, NDIS and Universities")

To be clear, none of these are in the bag, but any one would support a tick up to the valuation.

For example, a typical large Australian University has 6k-12k FTE staff and many more heads given fractional contracts and casuals, split between academics and professional staff. A large proportion incur expenses outside of the campus, so a University rollout would likely bring anywhere from 3-6k by my estimate. Not massive, but think of it equivalent to a medium size governement agency.

Valuation

This "base" business easily supports a valuation of the current 2.5x FY23-FC revenue.

On it's current trend, I estimate that $8CO could get to a FCF of $1.5m in FY25 (runrate $1.0 by YE-FY24 and $2.0 by YE-FY25).

Looking in the payments space, $TYR is on a EV/FCF-FY25 of 31x ($SPY is on 21x). That would put $8CO on an EV of $46m, discounted back 2 years at 10% gives $38m EV, vs. $19m today.

If I look at a range around the FCF(FY25) of $1.0m to $1.7m that gives a range to the value/share today of $0.12 to $0.20 compared with today's SP of $0.087. So a reasonable margin of safety if you find the FCF multiple too aggressive.

The above's a quick calc - so I need to check it, but I think it hangs together.

Conclusion

$8CO is still very small and illiquid, and it is a high risk proposition. At this stage I could never hold a material positon in RL, partly because it is still not clear to me what the path to a material business could be, and the highway of payments start-ups is littered with wrecks. But there is time for that, as long as it continues to execute and describe clearly the opportunities immediately ahead of it.

However, both on the numbers and the quality of management, it can hold its head high in the smaller cap / higher risk part of my portfolio.

Disc: Held RL and SM

Micro fintech $8CO posted their 4C today. I'll copy their highlights, post my usual charts tracking cashflow progression, make some comments about the GovERP Rollout and conclude with some key takeawayes.

1. Their Highlights

Key financial highlights for 4Q FY23 include:

▪ Record total revenue for 4Q FY23 of $2.9 million, up 87% vs pcp as the Company continues to execute on the implementation works associated with the Federal GovERP program

▪ Record cash receipts from operations of $3 million, up 51.9% vs PCP and positive operational cashflow of $167k.

▪ Large implementation revenues recognised in the quarter are anticipated to lead to increased SaaS revenues, improved margins and cashflow when users go live

▪ Quarterly transaction and recurring SaaS revenue of $935k, up 12% on the previous corresponding period (pcp)

▪ Annualised Recurring transaction and SaaS Revenue (ARR) of c.$3.9 million at 30 June 2023 ($3.5 million at 30 June 2022) ▪ ARPU of $24.29, up 21% vs PCP

▪ Federal Government ARPU of $56.41 for the period, an important indicator of future revenue growth given the increasing number of federal government users to be on-boarded under the GovERP program

▪ Cash balance increased by $156k at 30 June 2023 to $1,811,569 (31 March 2023: $1.7 million) as the Company generated positive operating cashflow for the quarter.

FY23 Highlights

▪ Record FY23 total revenue of $7.5 million, up 68% vs FY22

▪ Cash receipts from operations of $7.7 million and full year operating cash outflow of $961k

▪ Total contracts value won in FY23 of $12.4 million (more than the combination of contracts secured across FY20, FY21 and FY22).

Key operational highlights for 4Q FY23 include:

▪ Implementation agreements signed with Department of Veterans’ Affairs (ref ASX release 26 April 2023), The Department of Finance (ref ASX release 2 May 2023), IP Australia and Museums of History NSW for a combined Total Contract Value (TCV) of $2.3m

▪ One off services engagement for existing client NSW Department of Education for $279k inc GST

▪ User numbers grew 10% QoQ to over 169k

2. Cash Flow Trend Analysis

Below I include my usual cash flow trend graphs for the Q and TTM periods. Importantly, since engaging with the Federal GovERP initiative, 4th Q was cashflow positive. While is appears there were some exceptional implementation fees earned in the period AND 4Q has historically been strong for receipts, this marks good progress. Overall, they are essentially 100% focused on rollout meaning there is minial investment cashflow.

Both the Quarterly and TTM graphs show the positive trend in the direction of FCF, with the quarterly trend calculated over the last 6 quarters.

Figure 1: Cash Flow Q Trend Analysis

Figure 2: Trailing 12 Month(TTM) Cash Flow Analysis

3. Federal GovERP Rollout

The long term driver of revenue is the ultimate number of users who are spending with the card. Within Federal GovERP, over the year, these have increased, as shown in Figure 3. Having been steady over 2Q and 3Q at 23,000, they have increased to 32,000 in the final Q, which should drive revenues in 1QFY24.

Figure 3:

Earlier in the year there were some issues with how users were being accounted for, hence the progression in numbers is not smooth as a result of some "de-bookings" at 2Q which made the 30-Nov appear inflated. However, at the headline level live users have increased from 23,000 to 32,000 in 6 months, and the total potential Federal user base has expanded from 161,000 to 174,000. This does beg the question: how long does a "potential user" in a government department that has signed up hang around for to still be considered a meaningul driver of future value? This is something to track over the coming periods. A positive indicator would be that "Phase 0" users are replenished and in fact you'd expect them to increase significantly. So this is what I'll be looking out for at the next report.

4. Other Observations

Other good news is that ARPU is increasing steadily and, given that the weight of future prospects lies in the signed-up but not yet implemented Federal Goverment Departments, the increase in Government ARPU by 20% to $56.41 is particularly pleasing.

Card Hero rollout continues at two clients and its contribution is not yet material. I agree with the company's focus on successfully rolling out the Federal Government program, so I don't think we are going to get a view any time soon as to whether CardHero can be a significant business line or not.

My Key Take Aways

A good result, boosted by some strong (one-off) receipts in the quarter. The question for the next period is whether the growth in subscription and transaction revenues from new users is enough to maintain positive cash flow in what is historically a weaker 1Q for receipts. There is a bit of a cash buffer remaining, so provided costs continue to be controlled, then $8CO might well be able to deliver against not having to raise further capital.

I maintain a tiny holding in SM and RL. I'd like to see continued momentum in onboarding of new Fed Government users, so I hope they continue to regularly report the onboarding "funnel".

Liquidity is an issue for 8CO. No shares traded so far today, with the only sellers sitting stubbournly at $0.10, with small buy offers up to $0.086 and the last trade at $0.075 yesterday. Welcome to illiquid microcaps!

On a valuation basis, with a market cap of $16.7m, and FY23 revenue of $7.5m, the last trade was at a revenue multiple of 2.22.

Assuming they next trade at $0.10, that would be an Market Cap/Revenue of 3.0.

Of course, FY24 revenues are likely to be signfiicantly more that $7.5m, so there is definitely a valuation upside if you can pick up shares cheaply enough.

Disc: Held in RL and SM

Yet another Federal Government Department contracted - Service Delivery Office, Department of Finance.

Contract value $872k taking TCV under the GovERP program to $6.4m

1260 users taking total potential users under GovERP to 161k.

(Pacman continues to advance and more expected!)

Disc: Held IRL and SM

$8CO announced their 2Q FY23 results this morning.

https://newswire.iguana2.com/af5f4d73c1a54a33/8co.asx/2A1426909/8CO_Appendix_4C_and_Activity_Report

Their key financial highlights for 2Q FY23 include: 

• Record quarterly transaction and recurring SaaS revenue of $920k, up 32% on the previous corresponding period (pcp)
• Total revenue for 2Q FY23 of $1.7 million, up 68% vs pcp, was a record quarter driven by implementation revenue from the GovERP program
• ARPU of $21.20, up 30% vs PCP
• Federal Government ARPU of $53.88 for the period, an important indicator given the growing number of federal government users to be on-boarded under the GovERP program
• Annualised Recurring transaction and SaaS Revenue (ARR) of c.$3.7 million as at 31 December 2022 
• Net cash outflow from operations for 2Q FY23 of $399k, an improvement on 1Q FY23, as the company continues to invest into technology to drive scale and enhance user experience 
• Cash balance as at 31 December 2022 of $1.9 million (31 September 2022: $2.5 million) providing sufficient capital for 8CO to continue capturing growth opportunities 

Their key operational highlights include: 

• Multiple implementation contracts, with a TCV of $2.1 million (inc-GST), signed with the Australian Government under the GovERP program 
• Number of users exceeds 175k, up on the pcp, but down on the prior quarter due to a one-off re-alignment of users within a State Government entity. 
• User numbers are expected to grow materially in coming quarters as a number of GovERP entities go live 
• Federal Government entities representing over 61k users under the GovERP program have commenced or completed Phase 0 Discovery workshops which are a key pre onboarding phase for agencies on their path to adopting the GovERP template 
• The roll-out of CardHero with Life Without Barriers and Westhaven continues to progress. CardHero continues to receive inbound enquiries from not-for-profits, corporates and government agencies seeking a solution for their fund distribution requirements. 

My takeaways

• Good progress on cash flows, ARPU and revenue
• No sure what "The number of users ... up on the pcp, but down on the prior quarter due to a one-off re-alignment of users within a State Government entity."  What does a "re-alignment of users" mean? Were accounts prematurely tallied, or did a department take away a bunch of cards from users? Surely a clearer description is possible? Never mind, the following statement reinforces confidence in continuing growth as government departments roll out, and the graphic showing the Government customer pipeline indicates the runway ahead.
• Looking at cashflows, receipt grew 31% Q-o-Q with operating costs only growing 18% - good.
• Per my usual cashflow analysis, the trend for FCF over the last 6Qs is positive indicating good expense control, leverage of prior investments in the platform leading to operating leverage. (dotted green line is thelast 6Q FCF trend line)
• If this trend continues $8CO could be CF positive in 5-6 Q, so there is still a possibility of a further capital raise
• Card Hero making progress but still not material, and no newsflow of other adoptions not a good sign. One to watch.

Conclusion

• I will continue to hold my small position, as I still see this as high risk, and it remains unclear how material or profitable the firm will ultimately become.

Disc: Held in RL and SM

Another great CEO meeting today with Andrew Bond. 8CO is quite well-known here, so I will limit my comments to a few big takeaways with other insights I have gleaned external to the meeting.

The wins in the Public Sector and Non For Profit for Expense8 and CardHero (EML backend) are not to be underestimated. As was discussed on the call, these organisations are very conservative in their procurement practices. So, once you have won customers and have references sites, the ongoing marketing effort is a lot easier than normal B2B.

Just to underscore this point, in the Australian government sector (Commonwealth, State and Local) there are over 2 million employees. $8CO has a total of 182k users, but this includes some big corporates (e.g., $WOW, $AMC), so I am not sure how many Federal users there are (need to dig through annual reports and 4Cs). It sounds like there is a long runway ahead.

Over the short term, we will see 3 growth drivers that are almost certainly locked in with little to no development cost (beyond client implementation) nor much increased overhead:

• Increased activity by existing cardholders. (latest ARPU is $18.60 compared with $24.33 pre-COVID peak. ARPUs are higher for Federal Governement users ($43.3) compared with overall average ($18.60)
• Continued adoption to more staff within current customer departments and agencies
• Adoption by new Department and Agencies (snowball effect)

These alone are going to play out against a set of numbers in FY22 that were COVID-impacted. So there should be some very positive PCP comparisons in the next 6-12 months, which de-risks an investment, which we scruitinise growth and operating leverage unfolding.

Of course, the big prize is the large State Governments, where 1.7m of employees work. So, the ability to translate Commonwealth wins into State wins will be key.

Next is the NDIS, which is a potentially massive opportunity for CardHero. Total NDIS spending is heading north to $40bn and beyond. Control of spending in a way which works for agencies, service providers and customers could be the perfect opportunity. There is also a good chance that findings from the ongoing Disability Royal Commission will provide a tailwind. So watch this space.

In any event, the Not For Profit sector is a big opportunity, with the reference case for Card Hero at Life Without Barriers a marquee client in another sector that is not a sophisticated procurer and where organisations will readily adopt a proven reference cases.

The total NFP sector in Australia involves 600,000 organisations, have a total income of $134bn and are estimated to contribute over $40bn to GDP . These won't all be attractive clients for $8CO, but the largest 0.4% (2000+) have turnover of greater than $100m, and these will be.

Then, on the call, we spoke about universities. Andrew said they already have two uni clients with Expense8 and clearly, unis are a potential major CardHero client for grant management - a major pain point for academics and administrators alike.

So, with a Fintech focused on the public sector, is $8CO the next startup version of $TNE? (Actually, it sounds like it could be a good acquisition target for $TNE, although there might be market power issues?)

I'll conclude with a few key analyses.

The first is from the 2022 Annual Report: showing the growth in users (blue, LHS) and ARPU (organe RHS),

The second show the growth in monthly trips going through Expense8 - this is going to be the driver of strong PCP cycling over the next 4 quarterly reports (I know that is short term, and irrelevant for the long-term investment thesis, but I think it de-risks the investment case in the current climate).

Cash Flow

Next, my usual 4C cashflow analysis.

What's postive about the 4Cs is that they are very clean. This indicates a business that is tightly run. On that note, Andrew is quite understated compared to many small cap CEOs. There is an almost complete absence of flashy investor presentations. That a big green flag for me.

While $8CO is still burning cash and only has about $3.2m left at last report (a level similar to the point at which they last raised capital), we specifically asked Andrew what capital he thought would be required over the next 5 years. He sounded quite confident in responding that there were no plans. (I expect he has been asked this a lot over recent months!)

This makes sense given the following information:

1) Development spend is being reined back, with the big push over the last year on CardHero now complete.

2) As more customers are onboarded, high margin SaaS revenues will continue to grow, which will improve operating leverage

3) Sales and Marketing spend is very low, given the nature of the clients and reliance on "reference sites"

4) While the team has built up to 50 over the last year (c. 50% in development; 30% in customer success and a small number in sales and marketing and management), Andrew doesn't see the need for much to be added.

Thinking further about 4, you would expect to see growth in the Customer Success team, as more customer groups onboard, however, perhaps a flattish profile can be managed in the medium term if there is a lower focus on development.

In conclusion, as @Strawman said at the start of the call, this one appears to be approaching an inflection point, even if there is no clear trend in OpCF below, due to the staff build in development to build up CardHero.

Competition

The big competitors are the large ERP players (SAP, PeopleSoft etc), the Public Sector specialists (TechOne) and the SaaS disruptors (PlanDay). In a comment on competition which was clearly well-rehearsed, Andrew said his favourite customers were the one that already had Travel and Expense management systems from the big players. This was because generally, their "modules" were themselves poorly integrated acquisitions into the ERP, and lacked the flexibility of Expense8.

Make no mistake, it is a competitive space, and so we should not get over-excited by the TAMs in fron the $8CO in Australia. However, they have won marquee Government and NotForProfit clients, they are a local company with a total focus on Australia. They have growth locked in and appear to be well run.

Valuation

This Straw is clearly a Bull Case and it is incredibly hard to value a stock like this.

Revenue is clearly on an upward trajectory, and with $1.585m in 4Q 2022 and with momentum on its side, they have to be looking at $6-9m in FY23, 222m SOI and SP of $0.087, Market Cap is $19.3m.

This gives a revenue multiple for 2023 of 2.1 - 3.2, with the potential for generating EBITDA and P/E multiples within a year or two.

Ownership and Liquidity

While the CEO has a very small holding, and is a professional manager rather than a founder, there appears to be strong insider holdings ov 30%. Andrew has reasonable incentives for the company to perform well, with 3.5m options. He joined in 2017 and has held a number of management positions with $8CO, becoming CEO in 2019, so it is good to see a CEO who has been promoted from within.

The Board are largely unknown to me, so I need to trawl the other straws and do some research here.

Investment Decision

I like $8CO. It is a much smaller firm than I would normally buy. I have taken a very small stake IRL (0.5%) and a larger one on SM (2%). I intend to hold long term, so the very low liquidity doesn't bother me.

If the investment thesis is correct, we should see strong quarterly reports over the next 12 months. If this does not materialise (and I mean above and beyond postive Covid-impacted PCP cycling) then I will consider exiting. If results play out as expected, then I will increase my holding, reviewing progress at each 4C.

I have jettisoned a few of my specy losers IRL recently, and so I am adding a spec buys at time when the market it weak.

Thanks to the other StrawPeople who have written up $8CO and for @Strawman for getting Andrew to today's meeting.

DiscL Held IRL and Buying on SM.