I finally caught up with the $EOL meeting. Thanks to @Strawman for asking my questions and to Claude Walker (sorry, don’t know your SM handle) for clarifying my question on cohort revenue reporting. I wasn't able to make the live meeting unfortunately.

In summary, the meeting confirmed my view that $EOL is a company to keep on the watch list. However, it is not one I will invest in at the current price. I’ll explain.

Market Leadership – Outside of Australia I don’t understand where $EOL sits

It is far from clear they will succeed in the transition from “Regional Leader” to “Global Player”. Shaun Ankers gave a clear segmentation of the competitive landscape: Local Heroes, Regional Leaders, and Global Players. What he didn't convey is just how fragmented the market is within this. (I am still searching for a reasonably recent picture.)

Their recent acquisitions provide a solid beach-head in UK & Europe, and it will be interesting to follow their progress here over time. The progress over the next 2-3 years will demonstrate whether they have a competitive advantage as a "Regional Leader". As always with M&A you have to judge this over time.

To be a Global Player, they will need a presence in the US market. My understanding is that several historically Regional Leaders in the USA have become Global Players over the last decade via acquisition of European “Local Heroes” and “Regional Leaders”.

As with many other global markets, the US energy market is very important. This is in part due to its scale, but also its maturity as a place where you can trade and do business. Furthermore, many potentially material energy markets are closed and are likely to remain closed (e.g., China, Russia etc.) Most companies with the aspiration of being a global energy player at some time have a serious tilt at the US market. So, any global player looking to a strategic energy systems software partner would expect a US market capability. If I was on the procurement screening panel, it would be a “must have” criterion.

There are a lot of “Local Heroes” and smaller “Regional Leaders” in the USA, and I have no doubt that $EOL are looking for the right fit: scale, capabilities, culture etc. However, $EOL appear to be conservatively managed, so I don’t expect this to happen any time soon. They will need to be confident that the European acquisitions are integrated and performing well. Furthermore, it is conceivable that more Europe acquisitions may be required to build out the desired market footprint and I would expect the prudent $EOL management not to take on too many frontiers at once. It would be a red flag if they did.

Unlike many firms in the SaaS space on the ASX where we have seen explosive growth lead to the cycle of market exuberance and disappointment (for many), I believe $EOL will be a slower burn - partly because of prudent management and partly because there is little alternative in this space where operational excellence is everything. It is a testament to the capital disciple of $EOL that SOI have only grown from 2007 to today from 20m to 27m, despite multiple acquisitions. Of course, this is a positive for them as a long term investment.

Market Evolution

Shaun confirmed our discussions in the “Deep Dive” that the industry is seeing a burst of new entrants driven by the energy transition. This is something that is going to continue for years, and $EOL is well-positioned to serve new-entrants both in Australia, UK and Europe.

However, Shaun confirmed our discussions that consolidation will take place, and that “1+1=1” means that consolidation will act as a potential headwind when it starts to kick in. (“We’re not there yet.”) Missing form the discussion was the recognition that it is therefore critical to be the provider of solutions to the large and medium-sized market players, as customer acquirers of non-customers will grow existing accounts.

On the question “how do you measure market share?” I have the following observations. Using a “Funds Under Management” analogy is not helpful. In funds management every $ has one manager (as I understand). In energy management, every electron or gas molecule passes through several hands. Consider this thought experiment. Imagine a market of 100GWh with one generator and one retailer. The size of the market is 100GWh. If Company X provides all the software to the generator, can it claim 100% market share – since every electron passes through its systems? No. In this I can only claim 50% share, because the retailer on the other side of the transaction will also have their solution.

But in energy markets it is even more complex. A business I was historically associated with in the USA had traded volumes of gas that were c. 10x the physical flows. In electricity, it is even more complicated, as you have market interactions over different timeframes, you have energy and capacity products, as well as “ancillary services”.

To cut a long story short, I am not convinced with Shaun’s definition of their market share in Australia, and he didn’t even attempt to answer the questions for UK and Europe. One thing I can agree with $EOL, is that their European market is “<10”. (Sorry, I couldn't resist.)

In writing all this, I don’t mean to detract from their stated position of being a “Regional Leader” in Australia. Doubtless they are and my industry contacts confirm this. I am just none-the-wiser about the materiality of their UK and European positions.

Conclusions

I did not intend in this straw to be negative about $EOL. There is a lot to like.

First, the track record of revenue growth, eps growth, and stable share count speaks for itself. This distinguishes it from many other SaaS firms we follow on this forum.

Second, management are aligned and appear very capable and prudent.

Third, as it scales it will grow its competitive moat. The capabilities embedded in the highly specialised workforce (energy market professionals; trading software engineers) and the code itself are not easily replicated.

Fourth, as a mission critical software company you need a quality customer list to even be considered for new work. They have a quality customer list in Aus, UK and Europe and this is a great asset.

There is every chance that in 10 years time as investment today in $EOL will be well-rewarded, even if it gets acquired along the way. Energy systems is a very active space for M&A, and $EOL would be a tempting target for a US “Regional Leader” looking to become a “Global player”.

However, I do not believe that the Australian business on its own supports a long term growth investment thesis. OK - obvious statement, as their own strategy clearly agrees. But this means that evidence of progress to develop a Regional Leader position in Europe is a pre-requisite for me taking a stake.

The bar is high. ASX has several global software leaders ($ALU, $PME, $WTC) and challengers big and small ($XRO (big), $NEA and $JIN (medium) and $3DP and $IKE(small)) as well as Regional Leaders looking to expand (e.g., $TNE). I don’t know where $EOL sits on the global leaderboard in its industry. It needs to show market leadership in Europe (a top 3 or 4 position) because this is a highly competitive industry with a highly-fragmented market structure when looked at globally.  

So $EOL is on my watch list.

Because I believe that it is well-managed and has a strong Australia position and because I believe its Europe entry now makes it an attractive M&A target for a North American player, I would acquire shares on significant SP weakness (depending on the reason for the pullback). Beyond that, I will patiently monitor the progress in Europe. As Shaun made clear, the current turmoil in this market is lilely to present a lot of opportuniy.

Disc: Not held.

Footnote: The combination of the Deep Dive and the CEO Meeting has really deepened my understanding of this company. What a great formula!

I really enjoyed listening to the recording of the $EOL Deep Dive. I have been following it for a while (ever since Claude Walker put it on my watch list professing it to be his "Stock to Change Your Life"eary last year.) All things energy are the core of my "wheelhouse", although currently I hold no energy stocks, but have enjoyed great gains over the last 2 years, offsetting some of my other losses visible here to all!

@Strawman opened the deep dive by summarising $EOL from revenue growth 2017 to 2022 and outlook for 2023. He rightly noted that there have been a number of acquisitions. This finally prompted me to attempt an analysis of the impact of the acquisitions, as management have consistently stated how much revenue (and EBITDA) contribution each of the 4 acquired businesses was expected to make in the first full financial year after closing.

In constructing the table below, for each year I taken Revenue and Other Income, and from that listed the contribution of revenue from each acquisition in its first full financial year, as announced on deal completion. Note that I have not made any corrections for the impact of FX movements between announcement and the FY results. So it is a ballpark analysis only.

Furthermore, I have kept the contribution of each acquisition to the 'Acquisition Contribution" total constant in subsequent years. This means that in the second full financial year after acquisition, growth in the acquisition is deemed to contribute to organic growth.

Table: Analysis of Organic and Inorganic Revenu Growth for $EOL (A$000)

I have then in the rightmost two columns calculated the revenue CAGRs. The one I place most significance on is the period 2019 to 2023 (Forecast numbers), as these are the most recent 4 years where Year 1 is purely organic. The reason for doing this is that you often get big CAGRs when you start from a very small revenue base. It is a trick growth company CEOs are adept at doing ... go back far enough and your CAGR is infinite!

$EOL has over the period by my estimation delivered an organic revenue CAGR of c. 10%. I will be looking for evidence that they can leverage the acquisitions to drive higher revenue growthin future. For all the talk of industry tailwinds, their organic growth by my estimation is modest.

One reason I do not hold $EOL is that it is unclear to me whether they will achieve strong growth. My understanding is that the market for energy management software solutions in competitive. It was 10+ years ago when I was a "buyer" and I have no reason to believe that has changed. Claiming "15%" (UK) and "less than 10%" (Europe) market shares does not in my mind demonstrate a strong starting position. (Question for managment meeting: How are they measuring market share?)

I will expand on some of these points further, connecting to the discussion and questions from the "Deep Dive".

Big Customers v. Small Customers

The Deep Dive discussion debated $EOL's customer mix, and the role of large and small customers in the future. As discussed, existing customers in a market are one criterion considered by prospective new clients. In Australia, $EOL has strong credentials with AGL, Energy Australia and Alinta Energy among the client base. The European acquisitions have also brought some big customers into the portfolio: Centrica and SSE in the UK and EON (Europe or UK?) as at early 2021. There will be more as a result of the eZ-Energy and Egssis acquisitions. We don't know how many of these customers have multiple products - this is important.

For me, success is all about the ability to acquire new large customers organically. I would see newsflow on this as a positive BUY signal, and I am waiting for it.

What is my obsession with big customers? Simple - to win in energy you have to win these. True, during the energy transition, many smaller players and new market entrants are going to build A LOT of standalone energy assets (wind farms, solar farms, battery installations, pumped hydro, peaker plants etc. etc.) and we will continue to see the entry and exit of suppliers/retailers as market fortunes ebb and flow. But energy is a scale game. This is because medium and large players in any market will over time acquire businesses and individual assets of the new entrants and developers. This is how competitive (i.e. open) energy markets have evolved. You need medium and large customers in your customer base because they will do the lion's share of acqusition and owns the lion's share of the addressible market.

If the acquirer is a new market entrant, then they might adopt the systems used by the target, otherwise they are likely to impose their systems. For example, Shell recently acquired ERM to enter the Australia electricity supply market as part of its global strategy to transition from hydrocarbons to electricity. As this was one of the early moves by Shell of this kind, it will be unteresting to know whether they adopted $ERM's electricity trading systems. I expect they will have for some, but of course Shell has existing and developed systems for its gas, LNG and oil trading. I've never seen the $EOL promotions use Shell or ERM badges, so that's a key one to win in Australia and globally! Shell will in time become a big global electricity generator, distributor, trader and supplier.

Pricing is clearly also a scale game. I expect $EOL's pricing will be driven by numbers of products (x-of-12), number of seats (licences) per product, and potentially even number/scale of assets managed perhaps measured by MWh, (Question for Management Meeting - What is the Contracted Revenue Model?). If you go into the trading room of one of the large utilities, you'll find a large open plan space with traders and analysts, including the operation team that works shifts, 24/7/365. One large utility with have 10 to 20 or more times the revenue opportunity of a smaller asset developer. Furthermore, asset developers will often contract all the offtake to one of the integrated players via a PPA (power purchase agreement), in which case they are unlikely to use any/many systems at all. So tracking the number of new energy projects, while an indicator or market growth, perhaps overstates the market opportunity for $EOL.

If we think of $EOL as an early stage player aspiring to be the $WTC of the energy industry, then we just have to look to the kinds of metrics that $WTC touts: e.g. 41 out of 50 of the world's largest logistics firms are customers.

So for me, big customers are what it is all about.

(Note: this contrasts to other enterprise software providers like $XRO and $ELO, where the market for SME enterprises is huge and measured in millions. Industry structure in energy is different.)

One area that I'd like to understand better is the contract energy trading services model. This is a niche which probably only makes sense for small and medium size customers, as big customers are likely to do the work in-house because it is a core capability. It will be interesting to see what growth the CQ Energy acquisition can drive in Australia. I am unclear how material this can be.

It would also be good to understand the extent to which existing customers grow revenue over time. I wonder if we could persuade $EOL to adopt cohort revenue reporting, as many of our favourite SaaS companies do?

Conclusion

$EOL is a small player in a big global pool. The portfolio of products is impressive and should position them well to compete. But at the moment, I don't see a compelling growth investment proposition at the current valuation.

I am closely monitoring:

• Organic wins of new large customers, particularly in Europe
• Evidence that revenue synergies from acquisitions lead to an uptick in revenue growth. Organic growth of 15% p.a.+ up from 10% CAGR estimated would be a good start
• Better understanding of the potential of the contract operations service opportunity, so will tune in to future results calls when I can
• Evidence of better capital management. Given their global aspiration, paying a dividend now is just plain dumb, when you have to go cap in hand for more capital. (If they have advisors on this, they should change them!)

I am minded to agree with @PinchOfSalt 's bear case valuation of $3.00 ballpark. I'll add mine when and if I get to it.

Disc: Not held in RL and SM, but watching closely.

While I haven't focused much or any time on $EOL, I note that it is now using M&A to expand internationally (Is the next one another EU position or a North American entry?) However, I haven't seen much written about the competitive landscape in these new markets.

True, it has built a very strong position in Australia and customers are indeed very sticky. However, I think there are a lot of established players out there. Over a decade ago I had senior global responsibility in markets for an international energy firm, active on several continents and involved in procurement of systems. There were several, with deep capabilities.

From an analysis perspective I've put this in the "too hard" basket. Each market operates according to its own rules, so there is a fair amount of tailoring to be done in system implementation. Albeit, many code modules may well be portable. Integrating acquisitions from a technical perspective could potentially also be challenging.

I think it is a very different proposition to the successful M&A strategy of $WTC, where bolt-ons ("tuck-ins") were specifically aimed at acquiring new functionality, new market footprint. staff and customer lists and into which the broader platform would be rolled out.

So my contribution to the SM "deep dive" on $EOL is to encourage propsective investors to pay some attention to the competitive landscape.

My eyes almost popped out of my head last year when Claude Walker put it forward on The Call "Stocks to Change Your Life". The rationale was i) leading Aus position, ii) sticky customers and iii) global energy transition (new entrants, change, investment, carbon trading etc.). There was nothing about competitive advantage or recognition of the almost unique nature of each energy market.

To be clear, I am NOT bearish on $EOL, I just think the competitive analysis is important to underpin any conviction, and it is not high enough on my priority list to do it.

Disc: Not held in RL or SM.

EOL Presentation Recording

If you missed the live presentation on Coffee Microcaps as posted by OUTSIDEcapital (thanks!), you can get the recording here. It is well worth viewing if you are unfamiliar with the business.

Skip ahead to 31:12 to the start of the presentation.

EOL presents on Coffee Microcaps

I am a bit surprised at the low Strawman EOL Consensus valuation for this one. According to marketscreener.com it is covered by two brokers who both have a TP of $7.16.

Brokers have only 10-15% revenue growth over next two years, so I think there is significant short term upside, particularly as Europe opens facilitating marketing to new enterprise accounts.

Have a look at some of the SaaS metrics in the presentation and decide whether this is an argument that it is undervalued.

When Claude Walker nominated EOL as his "stock to change your life" on Ausbiz recently, Rudi FvD was a bit puzzled as he argued EOL did  nothave a big enough TAM to qualify (my words, not his). However, with a strong position in the Australian energy market ("50% of Australian traded energy goes through the software") but a much small foothold in the more material UK/EU markets, and what appear to be two successful recent acquisitions, EOL has a lot of room to run.

Near term catalysts are upsells and new customers in Australia due to implementation of the 5 minute market in the NEM. Longer term, broader product offering cross-sell in Europe and growth of activity in carbon and environmental traded markets.

I wonder if they would ever consider a US acquisition to enter that market? (Strong incumbents however.)

[Disc. Held on SM and IRL - a small position]