Aaryn (CXZ's CEO) has just bought 5,500,000 units at 1.8c on market with his own cash. In other words, he's just sunk ~A$100K of his own cash into CXZ shares. When you account for tax, that's 75% of a full year's worth of his after-tax CXZ salary. This is a huge vote of confidence in my eyes.

The H&G High Conviction Fund (HCF) has averaged up (on-market buying) and crossed the substantial shareholder threshold (>5%), reaching a 7% holding in CXZ. Highlights strong conviction in the long-term outlook for the business. Good to see the register now anchored with an institutional cornerstone investor.

"We estimate an ARR of US$6.5m (A$9.3m) incorporating the recent product upgrade/price increase, which would see CXZ trading at ~1.7x EV/ARR against an estimated EV/ARR small SaaS peer average of 2.8x (EVS, PRO, UBN, SKF, KNO, 8CO and K2F). A peer average would imply a valuation of $0.027/share. Larger peer Infomedia (ASX:IFM) is trading closer to 3.6x EV/ARR, and would imply a valuation closer to $0.038/share. More importantly, CXZ will be profitable at the EBIT and NPAT line, which none of their small peers can currently claim. Our numbers suggest an FY24 PER (incorporating a full 12-months of the upgrades) of 7.0x and EV/EBIT of 3.0x."

From the $3m USD boost to ARR ($4.35m AUD), the most important task is to now work out what proportion would fall to the bottom line. Aaryn may choose to reinvest these profits for further growth (I think that's a smart play), but investors will look to see what the level of underlying profit is (even if the company does choose to reinvest these new profits). We know that CXZ has a gross margin of ~80%, so they will take circa 80% of the A$4.35m revenue as gross profit, that's $3.48m AUD in GP. From here, CXZ doesn't actually need to expand its sales & marketing (S&M), nor R&D (although it is likely to reinvest in R&D). So this boost to revenue is being serviced from the same cost base as before. We know that there are 3 new customer success managers who are joining. Let's assume they are on $100K AUD each. That's a $300K AUD increase in fixed costs. Other than that, there's no need to increase costs in line with this increase in revenue. This is what I love about SaaS companies - excellent scalability. So we might see around $3.48m AUD - $300K AUD - $180K AUD other costs (just to be conservative) = ~$3m AUD of the $3.48m AUD in GP (and $4.35m AUD in rev) fall to the bottom line as profit before tax (PBT). That's about ~A$2.1m net profit after tax (NPAT). On a 10x multiple of that, we have a market cap of A$21m (2.3c/share). I think a 10x multiple would be fair for minimal future growth. If we bake in some prospects of solid future growth, on a 20x PE, we have a market cap of A$42m (4c+/share).

My rough back-of-the-envelope estimates based on this $3m USD boost to ARR:

Assumptions:

• $1.5m USD boost to rev in 2023e (half of the financial year remaining)
• $3m USD boost to rev in 2024e (versus 2022) (all $3m USD of the ARR boost flowing through)
• NPAT margin expands to 25%
• PE of 15

Leads to a share price estimate of 3c for FY23e and 3.8c for FY24e, versus 1.4c currently.

We're back to all-time highs in performance.

Would love to get other thoughts.

Massive news just announced of an MRR boost of $250K USD, that's an ARR boost of $3m USD!! All for a A$6m EV. CXZ deserves to be back near all-time highs on these numbers (~3c = $24m EV). The next few quarterlies will have some epic numbers and the top line is now at all-time highs, which will flow through to very strong positive cash flow... The buy back was a very smart move... I'm a big fan of the ongoing execution from this team, the relationship with GM continues to strengthen. Really impressed.

Key Metrics:

• Revenue for the half up 10% (on pcp)
• Gross profit for the half up 38% (on pcp)
• Remains NPAT profitable
• Team expansion of 29%

"Whilst the half year is too short a timeframe upon which to place much weight, it likely represents the early emergence of the flywheel concept described in prior Quarterly Updates. Increased internal investment supports increased Gross Profitability which, in turn, supports increased future internal investment."

The main driver of growth was new proprietary features. The team seems to be focused on increased spend with existing customers, as opposed to the expansion of the customer base itself. I like that strategy given the current percentage of software spending that CXZ captures today (from dealerships) is small, albeit I'd like to see the userbase (dealerships) diversify as well.

If they can continue to grow gross profit north of 25% p.a., I'll be impressed. Ideally, we want to see the increased investment (and neutral bottom line re-investment strategy) continue to yield strong top-line growth. If not, I'd rather them consider alternative uses for the US$2.5m in net cash and investments (e.g. a special dividend) and optimise for bottom-line profitability instead.

Either way, I think we are OK.

Disclosure: Held.

Sentiment: Buy.

Seems to be trending really well and continuing to chalk up all-time highs in gross profit. I'm happy with this. Running at annualised $3.6m USD in gross profit, which equates to $5.11m AUD GP. They have $2.5m USD in net cash and investments ($3.55m AUD). That's an EV/GP ratio of 1.2x [($9.9m AUD mc - $3.55m AUD cash) / $5.11m AUD GP].

"The Company recognised total revenue during the Quarter of $1,125k, which included a 6-Quarter high of $1,017k of SaaS Revenue. This led to an unaudited Gross Profit of $891k for the Quarter – the highest in Connexion’s history".

"From a financial perspective, we will continue targeting growth in Gross Profit combined with a neutral bottom line. To date, the current Management and Board have successfully demonstrated a disciplined approach to the management of Shareholder capital, and this will continue as the Company invests for growth."

Not long to go before the next quarterly (Q2 FY23) is due (end of the month), hopefully, we see a continuation of the recovery (semiconductor shortage induced) with a further increase in both i) subscription-based SaaS revenue and ii) fixed-dollar SaaS revenue...

Some insights on the size of the prize (the broader market that CXZ plays in, and its growth rate) from the IFM AGM Presentation (slide 26) are presented below:

Currently, CXZ's product (fleet and rental platform) only represents a very small, single-digit % of a typical dealer’s total software spend.

Given the strong gross margins typically of SaaS, if CXZ can grow from, say, 1% of a dealers annual spend to 3%, then that should see CXZ generate multiples of the cashflow that they do today.

1. Firstly, in the last quarterly, CXZ stated "vehicle inventories relevant to Connexion’s operations appear to be stabilising", that's pleasing to see, the key question is do we see this recovery continuing through CY23?
2. Secondly, thinking about the long-term plan that was originally articulated at the AGM when Aaryn took the reins as CEO, if achieved, what do we think is a fair market cap that Connexion could reach at scale?
3. What would it take to reach 3c ($28.65m market cap) (200% upside from the current price)?
4. What sort of multiples do we see CXZ trading at in the future based on comparators?
5. The management team is focused on underlying performance, not the share price (which I appreciate), but I am curious about views of the TAM, ARPU, etc. and what sort of valuations we think this industry/business model could support.
6. I believe this, and customer diversification is the key to unlocking some institutional names entering the shareholder register.

Pleasing results:

1. Another profitable quarter (PBT = $199K USD), with increased R&D (all-time high), and the 2nd highest gross profit result on record ($767K USD)
2. The global vehicle shortage (linked to the semiconductor shortage) finally seems to have bottomed out... (refer to "subscription based SaaS revenue" chart below)

1.0c/share is a $5.49M USD market cap for a company doing run rate revenue of ~$4M USD (1.4x) and run rate PBT of ~$800K USD (6.8x)... with these numbers set to continue increasing as i) the vehicle shortage unwinds further and ii) increasing product investments yield more fixed-dollar SaaS revenue...

I'm personally quite pleased with the progress the company is making in possibly the most challenging macro environment it has experienced since listing. The global semiconductor shortage continues to impact GM and has done so in a very material way. But, I believe that the worst of this crisis is now over and that we may see an impending recovery in revenue (as global vehicle inventories recover)... the market is forward-looking... which is why I believe the share price appears to have bottomed out and is slowly moving up from the $0.008 (0.8c) low...

The next couple of quarters will be telling...

• No debt.
• Profitable.
• Pricing leader.
• Sub $10m market cap.
• Relatively lean cost structure.
• Recurring revenue model (SaaS).

Personally, I'm very happy to continue holding and slowly accumulate. I'd love to see CXZ at a $30m+ market cap in time and I don't see why that's not possible if they can hit A$2m EBIT in time (15x multiple).

Key Notes:

• FY22 gross profit of $2.7m USD is up 57% on the prior year's gross profit of $1.7m USD.
• Net profit before tax (NPBT) is near neutral (i.e nil) levels as per the company's growth/investment strategy
• Director/management pay remains at very sensible levels

Key Calcs:

• SOI = 875m
• Share price = 1.2c
• Market Cap = $10.5m AUD
• Market Cap = $7.25m USD
• Cash in Hand = $1.2m USD
• EV = $6.05m USD
• EV/GP = 2.2x

Continues to a) remain cheap, b) remain on track (YoY progression) and c) remain trustworthy (management is conservative and doing what they said they would do). Therefore, this remains a long-term hold for me.

Two key things to keep in mind with respect to the share buy-back + employee share loan:

1. It is loan funded. This means that zero value is transferred to employees today. The only value they may receive in the future is their sale proceeds after fully paying back their loan (cash inflow to Connexion).
2. This is focused on long-term retention of key talent. Generally speaking, an employee would need to have been with Connexion for 7 years+ to receive any value at all (1-year eligibility test, 5 years vesting, 6 months to sell within trading windows, and probably another 6 months lost to admin as CXZ are only issuing stock twice a year). So if an employee actually gets to keep their CXZ shares and sell them into the market, CXZ should have already benefitted significantly from the relationship. This contrasts with the high rates of turnover generally observed in the software industry. If the stock trades up from here, CXZ employees will all of a sudden have $$ to lose if they leave Connexion. Alternatively, if the stock trades down (with volume), then CXZ's buyback will add that much more value.

I think this is an excellent strategy at an EV of just < US$3m being an EV/GP multiple of 1x and an “underlying” EV/NPBT of low-mid single digits.

I very much respect that everyone has a different risk profile and time horizon, but my view is as follows.

I'm not worried about Aaryn's long-term mindset. In fact, I would be concerned if he was optimising for short-term share price success. I believe we have a lot to show since Aaryn took the reins as CEO.

Aaryn's long-term mindset is desirable for any investor that thinks like a business owner and not a trader. When playing this (long-term) game, the tool is like the kindling. It is first the distribution (+stickiness) of the tool that is critical, rather than early (or, in some cases, any) optimisation of its profitability. There is always room for optimisation later, particularly if the product is generating revenue for the customer (as CXZ is intending to do with its long-term ambition of being the “Connexion” between Dealers and Consumers).

What has likely contributed to shareholder confusion is that Connexion elected to “optimise” (i.e. decimate) its cost-base over 2017-2020 to repair its balance sheet, rather than raise equity with a depressed share price. This was a short-term (3-year) tactic, not a strategy. So, whereas most investors are familiar with the classic journey of growth phase followed by the optimisation phase. Connexion has had:

• Growth Phase #1 (Inception to 2017 with founding Board),
• Optimisation Phase #1 (2017-2020 with investor-led Board [Mark Karuso et. al]),
• Growth Phase #2 (2021-? with the current Board [Gregory Ross, Simon Scalzo et. al.),
• with Optimisation Phase #2 still in the distance (not before 2024)

Aaryn was appointed acting CEO in August 2020 (following the departure of previous CEO and Managing Director Guy Perkins) and was appointed permanent CEO in February 2021. He has now had circa 1.5 years since being formally appointed as CEO.

In my view, i) the team is the strongest and most aligned it has ever been, ii) the company has just reported the highest quarter of gross profit on record, iii) the company has a healthy cash balance (near the highest level on record), iv) the product features (that GM and other OEMs are benefiting from) are a clear step change above where they were when GM first signed CXZ and v) the company is building out an ecosystem of 3rd party products and integrations. I am not at all troubled about GM's relationship with CXZ or their likelihood of extending the relationship in 2026.

For anyone looking for a quick share price win, this is not the stock for you. But, for someone who wants cheap exposure (0.87x EV/sales, 1.1x EV/GP, 4.9x EV/EBIT) to a small, humble, shareholder-aligned team chipping away at a large, long-term growth opportunity (the automotive telematics market) and focusing on building value for customers, this might be worth investigating.

One's view of progress depends on if they are watching the business or the share price.

In the long term, the share price will take care of itself.

Disclosure: Held in real life and on Strawman

For CXZ, the most important variable is the level of dealer inventory, which has been suffering since Q3 FY21 due to the semi-conductor chip shortage. That appears to be showing signs of recovery now for GM, based on the chart below (subscription-based SaaS revenue). Although, in management's typical conservative style (great) they are not claiming that yet.

In saying that, the main risk that I am watching is that dealer inventory levels may never return to the pre-COVID peak (Q4-FY20). We've now had a couple of years of dealers operating with very very low levels of inventory and they have found ways to work around that. So I don't expect that they would give up those efficiencies -- there should be a recovery, but I personally don't think we're going to go back to pre-COVID dealer inventory levels.

Overall, it looks like the share buy-back has put a floor in the share price for the moment at 1.0c. I think that was a very smart move, particularly given their profitability and high level of cash in hand relative to market cap. It reaffirms the belief of the company that the current share price is undervalued at 1.1x EV/GP [A$8.8m MC, A$3.75m cash and investments, A$5.05m EV, A$4.59m GP, A$1.04m EBIT]*

I think Aaryn is playing a very long-term game here, which I like and I also like the fact that CXZ is not at the mercy of the market (i.e. a capital raise). Fairly cheap on all multiples; revenue [0.87x EV/sales], gross profit [1.1x EV/GP] and EBIT [4.9x EV/EBIT], and the upside opportunity (other than multiples expansion) is the co-sell of other services (ie. the tolling pilot), new OEMs (they finally have a chance now with Ford and Lincoln) and the GM recovery (led by an increase in dealer inventory numbers). As long as they re-sign GM again in 2026 and retain key talent, I am of the belief that we will see a consistent path of steady gross-profit growth.

* For gross profit and EBIT, I've taken Q4-FY22 figures of US$795K and US$180K respectively, converted to AUD at an FX of 1.44x, and annualised (x4). Gross profit has increased quarter on quarter now for 4 consecutive quarters and is now at an all-time high.

Aaryn's Email to Shareholders_June2022.pdf

Great dual set of news today.

Becoming an approved vendor for the Ford & Lincoln CTP is not a guaranteed path to growing revenues and diversifying the customer base but CXZ is now in the ring. It will now come down to the merits of the CXZ solution versus alternatives, notably the existing Ford-approved software and the ability of the CXZ team to convert.

However, given the current macro and business environment, and the changing nature of dealerships across the US and beyond, CXZ is in a favourable position in my opinion by being the lowest-cost provider.

Those who have done their competitor checks will know that Ford Pro Telematics sells for $20/month/vehicle. ARSLoaner, an approved vendor, sells for $18/month/vehicle (equipment lease) [or $12/month/vehicle (+ equipment purchase: $56/device)]. TSD sells for $13/month/vehicle (ex-Connectivity). This is in contrast to CXZ at just $6/month/vehicle (ex-Connectivity). In a world where dealers are increasingly looking for efficiencies, following a lean 2 years of COVID-interrupted (and low-volume) operations, CXZ has a foot in the door.

I'm also confident that CXZ's solution measures up well on metrics of quality.

CXZ's ability to price at this level (lowest relative cost position) is a function of their long history with GM, in which they were paid to customise the product directly for them and, uniquely, retain IP. It is also a function of their small and agile team which had to operate profitably over the past 3 years to improve the balance sheet and avoid a capital raise at very low share price levels. I doubt that CXZ's ethos of running a very lean team of only “do-ers” will change even though their balance sheet is now strong (~$4m+ AUD cash in hand). This is a competitive advantage.

Secondly, I'm really pleased with the news of the on-market share buy-back. One of the biggest risks that I was concerned about was that CXZ may continue to trade at a material discount to intrinsic value to reflect i) the customer concentration risk and ii) a tangled and loose register (with most holders underwater). Today's two announcements are an excellent start to addressing these two concerns.

Let's see if this arrests the share price decline and allows the share price to start a slow and steady rise back to 2c+ levels and beyond. There will be plenty of stale holders who need to be flushed out on each step up. Today was a good start (18m+ volume) and possibly sets a base.

I continue to believe that Aaryn and the team are working hard to set up this company (and importantly its shareholders) for long term success.

Today was a meaningful day for Connexion. I've picked up a little more at 1.0c (~$8m MC, ~$4m EV).

$CXZ. Difficult to model out the potential upside scenarios. But, as a starting point, here's what I believe the bear case $CXZ.AX valuation to be: assuming a) zero OEM expansion, b) no partnership revenue and c) the loss of the GM contract in 2026 (all reasonably far-fetched).

Still holding my full position here; I will continue to until a) the investment thesis breaks, b) the stock is no longer undervalued or c) I find a considerably more compelling idea elsewhere.

The global semiconductor shortage is obviously continuing to have a material impact on the business with a further decrease in dealer inventory this past quarter due to the global semiconductor shortage. All evidence suggests the world will see a gradual recovery (from a very low base) in inventory levels at some point in 2022.

Given that macro/industry context, CXZ's performance continues to be very solid. Gross profit of $605k USD (Q2 FY22) increased 13% on the prior quarter and is the second-highest in the history of the company. The quarter was again cash flow positive.

Moreover, net cash (& investments) is now at an all-time high at $2.6m USD ($3.72m AUD). The cash balance is so strong that CXZ is launching a cash strategy of investing in a selection of AUD denominated managed funds. I don't mind this approach to cash management in the manner they are attempting it.

I fully expect the semiconductor shortage to ease in time, which should improve dealer inventory levels and subsequently return CXZ's subscription-based SaaS revenue to more normal levels (OnTRAC). That will, in turn, allow CXZ to reach a new all-time new high in revenue and gross profit (boosted by recent CXZTRAC revenue, which has been offsetting some of the rev declines).

Potential risks to my investment thesis include the decline of CXZTRAC revenue once OnTrac revenue returns, ongoing delays in the ability of CXZ to find an additional OEM partner, and/or a non-renewal of the GM contract in 2026, which I consider highly unlikely (as I did in 2021).

CXZ remains among the cheapest profitable stocks on the ASX ($10.56m MC, $6.86m EV at 1.2c) as a result of a sloppy shareholder register, a lack of interest from institutional funds and customer concentration risks.

If I am perfectly honest, I would also add that while Aaryn is an impressive operator, he is not the archetypal outgoing and relationships driven individual, which makes it hard to drum up investor interest. I think Aaryn would agree with my assessment and I by no means mean to be critical of him: every person on this planet has a unique set of strengths, and we must play to what we are best at. I believe in his ability to generate shareholder value here.

I'd like to see Board Director Greg Ross take skin in the game with an on-market purchase (the other board directors already do) and CXZ to commence a share buy-back programme while these c.$10m market cap valuation levels last. I've communicated both ideas to Aaryn Nania.

My CXZ average entry price (aep) is well under 2c in real life, and I would be accumulating at current prices if it weren't for my outsized position here already. I can't accumulate on Strawman due to the 2c rule.

I continue to wait.

As do the number 1 and number 2 shareholders, Nick Kephala and Tom Kent, who collectively own 15% of this company.

"[There] is the need for patience if big profits are to be made from an investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens." Phil Fisher

A good quarter in challenging circumstances. I for one really appreciate the transparent breakdown of the drivers of performance via the waterfall chart that is shown.

CXZ has actually added $744k p.a. in organic top-line growth in the past 15 months (see the second waterfall chart), plus pipeline. So far, that has simply been outpaced by external headwinds (FX, COVID, and the semiconductor chip shortage).

Headwinds and tailwinds come and go... but Connexion's strong underlying progress should become apparent before too long. Until then, management's focus remains on executing against the strategy presented to shareholders.

With $2.6m in gross profit for FY21, at a share price of 1.7c (MC of $15m), the company is trading on circa 5.8x GP. Personally, I think the downside risk is minimal from here. CXZ's financial performance will rebound as the global semi-conductor shortage unwinds over the next 12 months (and beyond). And importantly, GM is locked in for a minimum of 5 more years.

If we conservatively assume that CXZ rebounds to pre-pandemic levels of $800K GP per quarter for $3.2m GP per annum and assume that the GP multiple increases to a conservative 10x (on the back of CXZ showing promising signs of growth), that equates to a market cap of $32 million (excluding potential upside from other commercial deals). With circa 880m SOI, that leads to a short-term fair-price target of 3.6 cents.

The company is building a shareholder base of committed long-term investors who understand the medium-term nature of this investment and the scale of the upside on offer if the company commercialises its strategic asset with GM. CXZ investors are also increasingly aligned with Aaryn and his leadership style (transparent, no bluff, and hard-working).

The register is slowly improving and flushing out those who are misaligned. That's exactly what I want to see. I'd rather this be a gradual share price climb from here rather than a volatile and trading-fueled share price ride.

Investor registers with committed, knowledgeable, and long-term hands often result in the best share price journeys. There's likely still a bit of turnover we need to get through because the scale of the register flush at 3c last year was extreme (evidenced by the large upper wicks on the candle bar chart from Aug 2020 and high volume), but everything is moving in the right direction.

Between the 21st of May 2021 and the 28th of July 2021, the collective holding of the Top 20 shareholders has increased by 88.9 million units, with 6 entities across the Top 20 buying over this period and only 2 selling.

Entities/individuals ranked between #21 and #100 on the shareholder register increased their holding by a collective ~24m units across this period with 23 entities buying and 8 selling. The Top 100 shareholders of CXZ are strengthening; buying from investors ranked #101 to #500+.

Whilst not guaranteed of course, I'm confident of doubling my money in this investment from these levels over the next 12 months or so. The semiconductor shortage might take a further 12 months from here to resolve itself, but it is likely that the forward-looking market will react prior and "climb a wall of worry" as it often does.

Any additional, unexpected commercial deals, and watch out...

Independent Investment Research, “IIR”, an independent investment research house based in Australia and the United States, has initiated coverage on CXZ with a 4.7c DCF valuation.

"Our base case scenario for the Company provides a price target of $0.047 per share. This represents a 213.3% upside to the share price at 27 January 2021. The valuation is based on a DCF model over a five-year period."

"The Bullish Case expands on the Base Case and assumes the company expands its product offering to non-CTP vehicles through lot management for the GM dealership network. The bullish case derives a valuation of $0.066 per share."

"The Bearish Case assumes the status quo for the company. This case assumes the renewal of the GM contract under the same terms as the current contract with no other CTP contracts secured nor expansion into non-CTP vehicles. Under the bearish case our model assigns a value of $0.024 per share"

"CXZ is trading at very low multiples compared to the median of the peer group. As at 27 January 2021, CXZ was trading at a P/E multiple of 4.1x, well below the median of 68.4x. From an EV/EBITDA perspective, CXZ was trading at 4.2x compared to the peer group median of 28.9x. We view the market to be valuing CXZ at a discount due to the single major customer risk and the upcoming renewal of its major contract. We expect the market to rerate the company in the event the contract is renewed."

You can view the report here, I highly encourage investors to have a read, it is a very detailed report and well balanced with consideration of the risks involved and a deep dive into the competitive landscape and the future of the telematics industry: https://connexionltd.com/wp-content/uploads/2021/02/CXZ_Inititation-of-Coverage_February-2021_Final.pdf

Anything under 2.4c is a bargain in my opinion given the very high likelihood of GM contract renewal. I'm glad I've been backing up the truck at these levels (1.5c)... the next chapter of this story is starting to get very interesting...

If the team executes, which I have confidence they will, particularly with the newly strengthened team, the current share price will soon look like ancient history.

T.E.P.

Back of the Envelope Valuation:

• 863m shares on issue
• Thus, at 3c, we are looking at a circa $25M MC
• 3c is a PE of 8 on the FY20 result (a high growth tech company should be trading way higher than a PE of 8)
• 3c is a recurring revenue multiple of 3x (a recurring revenue multiple of 3x is way too low for a company growing revenue at >100% p.a.)

Fair Valuation Using the PEG Method:

• NPAT was up more than 500% to $3.2m
• For a PEG=0.2, a fair valuation would be ~500 / 20 x $3.2m = $80m MC
• An $80m MC is a share price of 9.2c

Alternatively on a revenue multiple approach:

• Total revenue was up 130% to $8.2m
• Using the 1PSR per 10% rule of thumb
• The fair value revenue multiple is 130% / 10% = 13x
• Noting customer concentration risk, we apply a 50% risk-adjustment factor
• 13x x 0.5 x $8.2m equals a market cap of $53m
• A $53m MC is a share price of 6.2c

The fair-value back of the envelope range is estimated to lie somewhere between 6c and 9c (a market cap between $50M and $80M).