Strong growth YoY but it is slowing significantly QoQ, so expect a bumpy start to trade today:

·       Revenue $8.1m +149% YoY but only +9.5% QoQ

·       Subscribers over 450k, +96% YoY but only +7% QoQ

·       ARR $43.5m +140% YoY but only +12% QoQ

·       Cash $126.7m following $110m cap raise

·       Notiv acquired during the quarter

·       ASX300 inclusion

I was hoping for growth rates QoQ to be stable or grow with the Cisco partnership, so I am disappointed (and I expect the market will be) despite what are very good growth rates in general. I am holding my valuation steady, but it looks unlikely that DUB will hit my expected FY22 revenue at this rate.

Disc: I hold (RL+SM)

DUB has acquired Notiv for A$6.6m ($5.15m cash + 386,277 shares, all upfront) – attached:

·        Notiv is a developer of innovative cloud-native AI-based products that turn meetings into transcribed notes, summaries, signals, actions, and more

·        Key management and employees are to stay with the business

·        With Notiv, Dubber will now have the ability to automatically take notes and create action items on every call.

This acquisition strengthens the AI offering Dubber has and adds to the development team.  It doesn’t sound like it will provide a stand-alone product for additional sales, rather it adds features and further development to Dubbers AI value added offering.

It’s only a small deal, so has little impact on valuation, but helps underpin it’s competitive position and innovative capacity – no change in valuation.

I hold DUB

DUB released a preliminary final report today with an ASIC deadline extension for the audited report stating they do not expect any material difference to the unaudited accounts.  The market didn’t mind with a 9% jump in the share price, nor did they mind that losses increased 70% to A$30m, or that operating cash outflow increased to 41% to -A$17.9m.  The impressive sales increases had previously been announced, so why the jump:

Maybe it was around FY22 revenue guidance:

“The Company’s Annual Recurring Revenue grew from $16m at June 2020 to $39m at June 2021 (+142%). The Company expects to continue its growth trajectory in FY22 and expand its revenue profile in terms of billing for additional AI services as well as new billing models - including consumption models - as the Dubber Platform is deployed more extensively both with new networks and within existing carrier partnerships.”

And likely future Service Providers:

“The Company is actively engaged in discussions with major Service Providers to become Foundation Partners and in June 2021 deployed the first Foundation Partner Program with Cisco for its Cloud calling platforms, Webex Calling and UCM Cloud”

These are extracts from the attached announcement, which is worth a read, with other key extracts below. 

The cash position is solid at A$32m and a key increase in the loss was non-cash employee share based payments of A$13.8m up from A$4.4m.  Service income margins increased in H2 to 49.9% from 48.1% in H1 and are well up at 49.2% for the year Vs 31.6% last year.

I hold DUB in RL and SM, the result looks fine given the stage of growth so no change to valuation or my position as a long-term hold.

Other Announcement Extracts:

The Foundation partner program provides Service Providers with recording as a standard feature and a seamless ability for users to upgrade features and plans. The program provides Dubber with a substantial and accretive revenue stream along with large scale customer reach into end user accounts for jointly upselling additional services, including extended storage, transcription, AI insights and more

Unified Call Recording for Large Enterprise: Dubber has already been successful in a number of deployments of compliant call recording for large enterprise via Microsoft Teams, Cisco Webex Calling and Zoom.

Our core philosophies remain the same; call recording should be available as a ‘switch on’ feature as part of a telecommunications service and that AI capability, including transcription will become a standard feature expectation as part of a communications service.

You ask the most important question @Firedup in your straw:

“A question about the Cisco arrangement. If Cisco decide to leave Dubber is it so easy as to just depart or have Dubber an entanglement with all the Cisco customers that will be difficult to unwind. In other words is Dubber's involvement down the line from Cisco creating a real stickiness?”

The short answer I believe is YES, attached is an announcement that has links to a presentation and 6min video that are worth viewing on it.

The Long Answer:

·         DUB is providing a “Freemium” type model that is distributed via Cisco with a basic free plan available to all “Cisco” customers.  This doesn’t provide the stickiness we want to see.

·         However, when free users becoming paying users they sign up to a DUB subscription, at which time they become “DUB” customers for that service and it’s partner Cisco receives a commission on this (terms and amount unknown).  This provides the stickiness we want.

·         If a customer wants to retain recordings for greater than 30 days and/or wants to switch on the analytics and intelligence functionality then they need to upgrade to a DUB plan.

·         DUB is provider agnostic (ie telco or app indifferent), so provides one place for a customer to house and analyse all their recorded data.  If they change telco’s or app’s they don’t have to worry about loosing access to previously recorded information.  This provides DUB with an advantage over Telco’s and video app providers setting up and offering their own call recording offering (also they would need to replicate the analytics capacity of DUB).

·         DUB is the one that stores the data and the data is where the value is for the customer, so as long as DUB controls that data it owns the customer.

That is my take on it, DUB don’t exactly spell out who “owns” the customer, as it is a partner approach, but I think DUB owns the customers voice data service, while the Cisco owns the customers phone or webex service

Given DUB is now worth $1b and is trading about 40% above my previous valuation of $2.54 it’s time to understand what the current price implies. My comments about the company in the original valuation from 8/2/21 still hold, but added a Like/Loath list. The DCF assumptions that are needed for the current value (a reverse DCF) are detailed below and valuation summary attached:

IV = $3.48 (current market value justification)

Like: Skin in the game and Founder lead (3% CEO, 19.6% insiders per YahooFinance), rapid growth of subscribers, ARR and contracted service providers; global opportunity; go to market partner approach lowers risk, offers land and expand options but retains high net profit margin opportunity at scale; capital light business model; low friction scalable and sticky product offering; cloud leader with value added AI offerings, perfect for Covid and post Covid world providing functionality to existing demand and expanding demand with accessibility for online recording and analytics.

Loath: FCF negative and need to raise capital; sub-scale leaves it vulnerable to competition; yet to crack the US market (Cisco agreement addressing this); loss of margin through partner go to market; risk of poor M&A outcomes; continuous need to invest in R&D to remain competitive; Risks around cybersecurity and IP protection have significant downside potential; Glassdoor 56% but only 10 reviews; 20p remuneration report (long but not complex).

Reverse DCF Valuation Assumptions:

·         TAM: Jonathon Higgins at Shaw and Partners has a total addressable market of about 100m potential users with current pricing around $100 per user per year, this would put the TAM at A$10b.  DUB is the leader in the market which is growing so it is clear there is little in the way of TAM limits to growth over the next decade.

·         Revenue/ARR: The company has targeted A$100m in ARR by 2023, I accept this as achievable and expect 1m Subscribers are needed with ARR per subscriber increasing to over $100 ($92.86 FY21).  I expect strong growth to continue with A$400 ARR and 2.8m subscribers my 2030 target if they continue to lead and the market grows.

·         Margin: Ignoring other revenue like grants, H1 FY21 gross margin was 48.1% up from 31.6% for FY20.  I expect this to grow to mid-60% by 2030 with scale and upsell opportunities.  Note this is much lower than most SaaS businesses because they operate through partners who are resellers and clip the ticked on the way through which impacts gross margin, but it reduces marketing and sales spend requirements to grow because the partners dive most of this, so still leaves a strong net profit % at scale.

·         Op Cost: will grow with product investment but much slower than the rate sales, so Opex% will drop rapidly and I estimate 50% of sales by 2023 is possible and sub 20% by 2030. 

·         EBITDA:  The operating leverage of the business with improving gross margins and low sales and marketing cost requirements to fund growth should result in high EBITDA% opportunities, as high as 50% by 2032 I think is possible.

·         Capital spend: With R&D product development costs being expensed, there is very little capital spend required.  I have conservatively used 500k for FY22 increasing by 10% pa.

·         Share Count: Taken as post current raise then rising at 2% growth going forward to allow for dilutive issues, but I assume raises for further acquisitions will be EPS accretive.  To take into account growth opportunity from acquisition I have allowed at 10% premium.

·         Discount:  I am using a long-term market return rate of 10% as my discount rate and EV/EBITDA multiple of 10 in the terminal year which equates to a P/E of 14 and perpetual growth rate of 3%.  Note I am ignoring amortisation of acquisition goodwill which supress earnings but should be ignored.

Is the current price justified?

Well it’s possible, given it assumes DUB only gets around 3% of the TAM by 2030.  It is also possible that growth will be faster and revenue much higher given there are very few speed limits on growth with partners selling to customer and upsell opportunities with product expansion.

It’s a good business model and a leader in a rapidly growing market, so I am happy holding my position pending full year results at current prices.  I will be looking at how operating costs have moved when the annual report is out at the end of the month, which were not disclosed in the recent update.  I am expect a loss in line with last year and on track for break even by FY23.

DUB has completed both tranche's of it's $110m placement.  I had thought the second tranche was for retail shareholders but am disappointed to find out that it isn't...

Not good form to leave retail shareholders out in the cold, I will be registering my thoughts on this with them.  I understand the need to quickly land a large portion of a capital raise with insto's but a later dated SPP should be on the table.

Dubber is capitalising, literally on a good Q4 update to build an M&A war chest and cash reserves for organic growth.  4C is attached and I have added a table I have summarising key metrics over the last 2 years and key extract to the top.  Summary below of update and placement:

Q4 Update:

·         Revenue: $7.4m (+12%) for the quarter, $21.5m (+82%) for the year

·         Users: 420k, up +10.5% QoQ, +118% YoY

·         ARR: $39.0m, up +14.7% QoQ, +142% YoY

·         Cash: $32m on hand, but capital raise for additional $110m

·         Dubber is now a standard feature of every subscription for Cisco’s Global cloud telephony platforms Webex Calling and UCM Cloud.

·         Dubber has successfully integrated the acquisitions of Speik and Calln

Placement Summary:

·         $110m fully underwritten placement for 37.3m shares at $2.95 (7.8% discount to close)

·         Initial placement of 33.1m shares to insto’s will settle by 30 July, not subject to shareholder approval.

·         Conditional placement of 4.2m shares to everyone else will settle by 3 September subject to shareholder approval.

I hold DUB, the capital raising was a bit of a surprise but provided they spend well it’s the right time for them to accelerate growth beyond what they can do organically.  The current price is now well over my $2.54 valuation done back in February, there was upside opportunity in my valuation so I am happy to continue to hold and update once full year results are out