Revenue above guidance, EBIT and cash flows improving, ARR up 14%.

Guiding for 6-9% revenue growth in current year, and positive (normalised) EBIT.

Using a very crude P/S metric, they are on 0.35x (pretty low) and the growth potential in the US remains attractive.

But it's always a bit discomforting when you have consultants brought in (Goldman Sachs in this instance) to help you with your business. The US hasnt been great so far. Great to see costs being cut, but with $10m taken out last year, and another $10m this year, it's pretty aggressive. Either the bloat was massive, or such a cut will have some impact on growth. Even with this they don't expect to be FCF positive until FY26.

No longer held.

ASX announcement here

I can't think of an example where a company's shares did well after management uttered the dreaded phrase "strategic review"

They also don't expect to be cash flow positive until FY26.

Thesis pretty much busted at this stage. Time to sell.

A much needed bounce in eRoad shares this morning (up 7%) after the company signed a new 5-year agreement and tightened its FY23 guidance.

Full details here, and it was also good to see a major client renew.

Previous guidance was for FY23 revenue of NZ$150-170m, but the company now reckons they'll do NZ$154-164. If you just take the midpoint of guidance, it's basically unchanged, but nevertheless represents 39% growth from FY22.

EBIT guidance remains unchanged at -NZ$5m - 0, with cost reduction initiatives offsetting some cost pressures. Inflation is soaring in the US (see below), so probably no surprise.

Also noteworthy that eRoad is speaking of ongoing supply chain disruptions, especially with regard to critical electronic componentry. Their response is to order ahead of time and bulk up inventory -- that'll have implications for cash flows but is very prudent to my mind.

I can see what you mean @endean in terms of how the CEO's comments of a "successful" acquisition and raise may seem insensitive to those that participated in the raise at higher prices. Although, from a cost of capital perspective, it is hard to argue. Whether or not it was fair depends on whether you think the current market price is reasonable or not.

I'd also say it's too early to tell whether or not Coretex was a good purchase. For whatever it's worth, the new CEO seems very bullish on what it means for eRoad.

It was a positive that the Chairman did at least acknowledge the share price performance right at the start:

And, at a high level, I think the business seems to be doing well, at least on the revenue front:

For FY23 they are calling for $150-170m in revenue for the current year (growth of 39% at the midpoint), with a FY2025 target of $250m.

This year they expect to get within $5m of breakeven at the EBIT line. Note that the EBITDA drop (seen above) was largely due to one-off acquisition costs and was only a 5% drop when normalised for this. And the reduced margin is a function of increased investment spend (including R&D and sales & marketing).

It was encouraging to hear the Chairman say:

So, as a thumb suck, if they do get NZ$250m in revenue by FY25 (A$224m), I think A$30m in NPAT is quite doable by FY2025, or about 27cps. If they do that, a PE of >10 at that time will be enough to underpin a 10% CAGR for shareholders. And, you could well argue, that if they did indeed such strong sales growth and a pivot to profitability, the PE would likely be much higher.

Currently, they are on a P/S of 1.5x on a forward basis or 2x on a trailing basis. This ratio can be very limited, but at face value it doesnt seem much for a company with a strong market position, high retention, strong sales growth, ample funding and apparent industry tailwinds.

The loss of the founder/CEO, following a rough patch in North America, has put a lot of investors off. Understandably. But if they can scale well and get anywhere near their growth targets, shares are very cheap at present in my opinion.

Let's see what they say when we catch up with the CEO and CFO next month.

Today's AGM presentation and speeches are here

I cant make this unfortunately, but if anyone would like to meet up with the new eRoad CEO Mark Heine, you can register for a Zoom chat tomorrow, Thursday 21st July 10.30am NZT (which is 8:30am AEST).

click here.

I'll also reach out to see if he'd like to join us for a Strawman meeting.

Wow, a near 20% fall in eRoad shares at present.

What's going on? No news that I can see...

Interesting to note that this fall has been effected by 29 individual trades, totalling $42k. The largest of which was a trade for just under $8k.

I get it, prices are determined at the margin. But literally 0.02% of shares on issue have been traded and that's caused the market value of eRoad to drop by more than $43 million. Amazing stuff.

The company just reported NZ$115m in revenue and is expecting FY23 revenue of NZ$160m (at the midpoint of guidance) and "at least" $250m by FY25. The current ARR is NZ$134m.

94% customer retention, with 91% of revenue SaaS subscription based.

It's true that the business is still loss making as it ramps up R&D, sales & Marketing and other growth initiatives. But even with these added costs, the company is right on the cusp of break even.

These are interesting times :)

The market continues to shun eRoad shares. No doubt there's still some concern over the CEO stepping down.

I did take some solace in the fact that Steven made some positive comments in the update and said that he and the outgoing CFO remain "committed and confident significant shareholders". Not that that guarantees anything, but I'll take it :)

The quarterly update today (see here) was actually pretty decent I thought, with the addition of 5258 units being the strongest since the company listed (normalising for the Coretex acquisition).

A picture is worth a thousand words:

(To normalise for Coretex, i just removed the 66,889 units they inherited in the Dec 21 quarter)

On an annualised basis, the number of contracted units grew by 10.3%. Not massive, but far from terrible. And with a number of pilot programs underway -- accounting for almost 26,000 units in the US and 2000 in Aus -- the sales pipeline looks pretty solid.

I'm assuming the business will deliver around A$33m in EBITDA for FY22, which puts them on a EV/EBITDA ratio of about 9x. Not too demanding at all.

Disc. Held.

The 3 months through to the end of December 2021 saw eRoad increase the number of units contracted by over 53%. That's huge, but mainly the result of the Coretex acquisition in November last year.

Stripping that out, contracted units grew 2.9% for the quarter. That was driven by a strong result from NZ (up 3.8%) and AU (up 16.8% due to Ventia roll out) segments, with North America again going backwards (down 1.6%).

But Coretex does need to be considered. It really changes the group's American market position and boosts units in this segment from 25% to 42% of the total. Coretex associated units increased by 1.3% in December alone for North America. Overall, that's a 1.1% increase across all geographies, which is around 13.5% on an annualised basis (ignoring any seasonality).

Coretex has also signed contracts for a further 2,600 units to be deployed in the 4th quarter and is presently progressing through enterprise client opportunities which are at a pilot stage and represent a further 23,000 units.

The Clarity Dashcam performance is especially pleasing, with 1,106 new units sold in the quarter -- a 26% lift, albeit off a low base. (note that device numbers here are included in the total contracted units figures).

One area of concern is that although the US saw a organic sales of 2,091 for the quarter, there was a net loss of 574 units (excluding Coretex) due to the loss of another enterprise customer (accounting for 650 units), where the two parties were unable to reach "mutually agreeable renewal terms". The result was also impacted by driver shortages, fleet reductions and the broader macro conditions in the US.

All told, i think this was a decent update, although it'd be really nice to see a sustained organic improvement (ex Coretex) in North America.

ASX announcement is here

eRoad's second quarter, ending Sep 30, revealed a 1.8% increase in contracted units -- which, let's face it, wasn't huge.

Drilling down into the detail, this was largely a reflection of the loss of a US customer (which was reported back in July) who aligned to a competing system after being taken over. If you exclude this, total unit growth would have been around 3.1%. Still, not massive.

This was driven by NZ which added 2892 units (about the same as Q1) and Australia which added 1291 units (30% more than in Q1).

But, even ignoring the loss of a US customer, it wasnt a great quarter for the North American segment. eRoad sold 845 new units, but had 929 returns. The company said this was largely due to on going covid impacts of driver shortages and customers lossing contracts -- but 30% of the returns are due to customers switching to a competitor.

That isnt encouraging.

The company also spoke of challenges in attracting employees (especially devlopers) and the impact this is having on costs.

The company reckons it still has a "solid pipeline" of North American prospects, and expects increased sales momentum following the release of its Android based platform and the cross-sell / up-sell opportunities resulting from the Coretex acquisition. 

On a stand alone basis, ignoring the coretex acquisition which should complete this year, the company is calling for 10-13% revenue growth and steady EBITDA margins. Covid delays in all geographies have dampened things, but eRoad said it expects increased sales momentum in FY23.

I still see shares as about 'fair' but am somewhat concerned by the lack of traction in the US. Conditions there are no doubt tough due to the ongoing supply chain issues, and i'm happy to cut them some slack on that front. But if we dont see some sustained sales growth there soon I might have to consider the original thesis busted.

Lots to digest with eRoad this monring.

FY22 Q1 Update

Starting with the quarterly results for the 3 months to June 30, eRoad reported a 3.3% lift in contracted units from the preceeding quarter. Asset retention remained strong at >95%.

Australia was the clear standout, with unit growth of 31% from the March quarter (albeit off a low base, AU represents just 3% of all contracted units). Really good to see.

NZ, the largest segment by far, grew units by around 3%, while the US was pretty much flat -- quite disappointing. The company said it had a couple of enterprise prospects in trial phase which represents 1,500 units (about 4% of the current installed base in America), with a number of mid-tier pilots also underway.

Unfortunately, a good part of these (if converted) will be offset by the upcoming loss of a US enterprise customer which currently has 1700 units. The reason being they were acquired by another company and will be aligning their tech with that of their acquirer. 

The Clarity Dashcam product -- launched in October last year -- has seen strong growth,growing from ~1000 units to ~3000 units over the quarter. That's encouraging.

On a stand alone basis, the previous guidance for FY22 remains unchanged. That is, 13% top line growth.

BUT, the other big bit of news is the acquisition of Coretex...

Coretex Acquisition

Coretex is a "telematics vertical specialist provider" also founded in New Zealand (basically, they do a range of vehicle tech solutions, ranging from telematics for cement trucks, cold storage transport, watse collection vehicles as well as the same sort of offering as eRoad for general fleet management. You can learn more on their website here).

They also operate in NZ, Australia and the US, and have a total of 64,000 units (about half of what eRoad presently has). The company is expected to deliver NZ$50-53m in Annualised Monthly Recurring Revenue (AMRR) in FY22, up from NZ$42.7 in FY21 (~20% growth) which compares to NZ$88.4m for eRoad in FY21.

Acclerates eRoads growth by 2 years, expanding into new verticles, expanding customer base and boosting tech development. The biggest gains will be seen in the Australian and US segments, which will see revenue boosted by 6x and 2x respectively. After the transaction, eRoad's US customer base will grow from 28% to 43% of the total, with Australia going from 2% to 6%. 

The proposed transaction will cost NZ$127.7m and a further NZ$30.6m if certain performance hurdles are met. At current FX rates, that converts to AUD$148m, or about 31% of eRoad's market cap. 

This will be funded by the issue of NZ$96m worth of new shares to Coretex at NZ$6 each (compared to last closing price of AUD$5.78), NZ$64.4m institution raise at NZ$5.58, NZ$16m as a share purchase plan for existing shareholders, with the rest from existing cash balance.

Really great to see very small discount to the market price (only around 7% at current FX rates for the insto raise, and no discount for the share issue to Coretex).

The price doesnt seem too onerous, assuming synergies can be realised and growth maintained. Assuming the conditional component is paid out, you're looking at a total cost of NZ$188.3m, which represents a 3.7x EV/AMRR multiple, or a 11.7x EBITDA multiple, or 4x revenue -- not terrible given the expected 20%-odd growth in AMRR for Coretex, as well as touted integration benefits. Still, revenue growth has been about 10%, and a big lift in R&D and covid related impacts do suggest lower levels of growth between FY20 and FY22

Summary

This is a big acquisition, and will certainly take time to properly digest. It wont be until FY23 that they expect to see an accretive impact to earnings. If growth stalls, the price paid will be seen as rather expensive.

The US is a huge market, but growth has taken a real knock from covid -- far more than the other segments. If growth doesnt return, and soon, it'll be a big blow to the investment thesis.

At the same time, this is a sector that is expected to grow significantly in the years ahead and the combined entity appears to have great products, good penetration and (exlcuding recent US performance, which is ostensibly covid related) good sales momentum. The economics are also attractive, and customer lock-in is meaningful. Both companies appear to be led by capable, experienced and aligned people and both have been investing heavily in new products and growth.

I remain bullish and am a happy shareholder. But will be keen to see the realisation of integration benefits and a return to growth in the US.

You can read the investor presentation here

E-Road's investor presentation released today included some targets for unit growth in the coming 18 months.

Specifically, over the coming 18 months, they are looking to grow NZ units to 100,000 (~14% growth), US units to 50,000 (41% growth) and Australian units to 10,000 units (247% growth, off a small base).

I have taken their latest reported Average Monthly Revenue Per Unit (ARPU) in each market, converted to NZ dollars and annualised, and then multiplied by the target units to come up with an estimate for recurring revenue.

(Of course, this wont account for shifts in the product mix and pricing, or changes to FX rates, but hopefully gives some sense of the quantum of growth.) 

I get about $108m NZD, which is 25% growth from the current level. They have said previously they expect the EBITDA margin to be maintained in FY22 and improve slightly in the following year (even though they are ramping up R&D). So if we assume 35% that's a figure of roughly NZ$38m (compared to NZ$30m last year).

I think this is quite acheivable and in line with my prior expectations. There's a good runway for growth here, and attractive unit economics at play (especially for a business that isnt pure software). 

If the business can attract even a 5x ARR multiple in 18 months time, shares are probably about fair value. But I think there's certainly more upside if they scale well and achieve good penetration of the Australian market.

eRoad's latest quarterly update was quite encouraging, especially with signs of a recovery in the all important US market.

Although only 182 contracted units were added in North America for the 4th quarter (a 0.5% lift), the group has 2 enterpirse customer prospects in a pilot trial which cover around 1,500 units. And as @mushroompanda has pointed out, their dashcam product has good traction and potential in this market.

The more nascent Australian segment continues to grow well, with the recent Ventia deal set to double the Australian installed base.

The NZ segment -- the company's largest -- still has a lot of scope for growth. Indeed, the company is expecting growth rates to be similar to those experienced in the previous 4 years (~20%). 

The guidance for FY21 and Fy22 is unchanged; investors should expect around $27m in EBIT this year (adjusting for AUD/NZD FX) which is about ~12% growth in constant currency and ~AUD$32m in EBIT in FY22.

Given the traction and runway, as well as improving margins following a period of heavy investment, I expect eRoad to sustain 15-20% growth in operating profit in the coming years.

disc. held

The financials for eRoad are pretty impressive.

Contracted units (the tech that sits inside a truck) have grown from ~10,000 in 2014 to over 120,000 as of the latest half. Unsurprisingly then, revenue growth has been similarly impressive, almost all of which is SaaS based recurring subscription revenue.

In the last full year (ending 31 March 2020 as with most kiwi companies), revenue growth was 32% off the back of a 21% lift in contracted units growth -- that's thanks to an increasing ARPU. 

Operting leverage saw EBITDA grow 73% and deliver NZ$1.4m in pre-tax profit.

The business enjoys a 33% EBITDA margin, is profitable and well capitalised.

Covid seemed to have impacted new sales in the US and Australia, and for the first half of 2021 eRoad saw 'only' a 19% lift in revenue from the previous first half, while EBITDA grew 29% as the business stepped up its R&D program.

For the full year (ending 31 March) eRoad is expected to deliver ~NZ$90m in revenue and ~NZ$30m in EBITDA. This is about 10% growth, which is certainly down a bit from previous years.

Still, i see no structural issues -- this was all covid related.

At any rate, it's seen shares sold off following the latest results, erasing all of last year's huge rally. They now sit below the ASX listing price -- and i think this could be an opportunity for longer term focused investors.

Eroad (ASX:ERD) is a kiwi technology company that provides compliance and telematics software to the road transport sector in Australia, NZ and the US.

There's a raft of products, but in general they connect GPS,  dashcam and other sensor data to proprietary cloud based software that helps manage truck fleets, improve driver compliance, safety and efficiency and a whole lot more. You can see the full raft of services on their website.

It listed on the NZX in 2014 and then on the ASX in September 2020.

Over 120,000 vehicles use it's software and it is looking to double this in the coming years.

It dominates the NZ market, and the size of the market is set to grow as transport fleets continue move away from inefficient paper based log-books and systems. But the real growth engine is the geographic expansion into the USA and more recently Australia.

eRoad already have some demonstrated traction in the US. Close to a third of all its units are in this market and the business is generating double digit revenue growth here.

Importantly, the business is now profitable and demonstrates high retention (95%) and steadily increasing ARPU as existing clients expand their use of eRoad products.

The business enjoys a 33% EBITDA margin, generates free cash flow and has been investing heavily into new products and offerings. It has around $12m in net cash.

There's a good indutsry tailwind, attractive economics, a strong competitive position and capable management. You'll get a good sense of things reading their investor presentation from their ASX listing last year.

I think there's a lot to like here.