The latest set of results had a few positives, although the key issue remains -- sluggish revenue growth.

The full year results preso is here, but you're looking at a 2.8% rise in ARR and a 2.6% increase in total revenue.

Still, some positives:

• Slight increase in gross margin
• Adjusted EBITDA (which largely strips out one-offs like restructuring and transaction costs), doubled to $1.1m
• Industrial continues to do well -- New ARR up ~25%
• Americas region a standout, ARR up 7.2%
• Cut off low margin and legacy customers
• Average revenue per site continues to grow -- up 10% for the year (gives some legitimacy to the expand part of land & expand strategy)
• $2.5m in costs removed.

Negatives:

• Removing one-off costs, the business has a positive operating cash flow, but still heavily negative when capitalized dev costs are included.
• Only $3m in cash on hand left
• Big writedown in goodwill (a reflection I believe of their aviation acquisition, which was always a bid move..)

The current market cap of ~$54m compares well against total revenue of $59.4m -- at least, that is, if you think they can actually scale well and finally delivery some accelerated sales growth. And that for me is something I lost conviction on a while back..

I retain a small position, but not tempted to buy again until I see some improvement in growth.

Today's announcement making me glad I've walked back my exposure to Envirosuite. Once again, it just shows how elusive any material growth is for them.

To wit;

• Total ARR up 2.9% over the year (hit by FX, but also downsell and churn.. makes you wonder how recurring this revenue really is)
• New ARR was an improvement on recent quarters at $2.1m, but below what they did in the pcp.
• Churn increased a little to 4.1%

And there was also this:

The company is also consulting to explore a range of 'strategic opportunities' with 3rd parties. Which, I presume, is code for "we are shopping ourselves around to potential acquirers" -- although it may be something else. Possibly an acquisition to help rationalise another raise? (Although given their track record of acquisitions I'd be nervous of that).

EVS is now >2% of my portfolio after I sold down a few months ago, and even after today's drop is just on par with my valuation.

I'll probably look to sell down the remaining holding at some point unless there's a material turn around. But I have lost faith in management.

I caught the first half of Envirosuite's presentation, but had to duck away before the Q&A.

General vibe is that it felt very scripted, and Jason can come across quite salesy.

The numbers themselves were decent, not spectacular. EVS is a business that does seem to be grinding forward, just not at the clip I initially thought might have been achievable. Still, they are tantalisingly close to break even, a milestone that seems to always be just 6 months away...

Good to see gross margins improve, and the focus on better quality revenue seems to be paying off a bit, without sacrificing too much top line growth. (Although more site and revenue growth would be nice)

They are dropping the 'adjusted EBITDA' metric, which excludes share based comp, one-off restructure etc and will be reporting straight EBITDA going forward. This was negative $200k in the half.

The more telling operating cash flow was minus $1.8 million, though there's a sizeable working capital adjustment due to receivables from invoices issued at the end of the half, and an inventory build-up to support expected sales. Normalised for that op CF sits much closer to EBITDA at -$300k.

But if you add back capitalised development costs, which I think is appropriate, and am glad they call this out, cash flows were -$4.5m. And I think the market will be much more concerned with seeing this metric go positive, as opposed to just EBITDA.

ARR growth was (as already reported) pretty ordinary due to a 'strategic rationalisation' of low margin contracts, but the new ARR run rate is at about $9m for the last 12 months. If they add that again this year with minimal churn we would see a good return to growth. Moreover, given the gross margin, it'd essentially put them on a CF+'ve footing. Or at least get pretty close.

According top Jason today: ."we are confident on our ability to achieve a positive Adjusted EBITDA result less Capitalised Development costs on a run rate basis during FY24.”

So we'll see.

The company is reasonably well capitalised, with $5m cash and bunch of undrawn lending capacity. I think a further raise in unlikely, and management know it wouldn't be well-received at present. (But I wouldn't be surprised if they wanted to shore up the balance sheet at some stage if sentiment and share price improves.)

So the big IF here for me is whether they can indeed build up some more revenue momentum and support operations without much change in the fixed cost base. The second half is traditionally their strongest, so will be interesting to see how they go.

You can read up on some of the operational updates in their presentation

Held.

There's probably not much behind today's 13% pop in EVS, but I'll take it!

I did see that the new director Colby Manwaring has been issued 2,000,000 options.. That feels generous, but I take some solace in that the strike price is 20c and they expire in 3 years.

Frankly, if he is ever in the money with these, I don't think current holders will be too upset, and perhaps it reveals something about the board's expectations (although, we'll see whether or not they prove to be realistic).

Envirosuite held a webinar today after their AGM. The recording will be available on their website soon.

Nothing much new really, although Jason did mention they expect to hit $100m in ARR in the not too distant future (they are at $60m at present). I pressed him on this in the Q&A, and he didn't want to commit to a timeframe. He also said that achieving profitability was the primary focus at this stage, but that $100m was "in sight".

Someone asked when they expected to hit positive EPS and he said they didn't want to commit to anything just yet, but that they may make an announcement in the coming year. The intention it seems is "soon", but i'll be happy enough with a decent momentum in positive cash flows.

Overall, the messaging is that they have sustained growth, while transitioning to a more sustainable financial footing, and are experiencing good tailwinds in all geographies and sectors. Aviation, in particular, is showing some good signs of life as customers come out the other side of Covid. Regulation and ESG factors are big drivers, and this is true also for all segments. Water remains the potential "moon shot" within the business -- the target market is certainly massive, but time will tell if we see any sustained traction.

The share price seems insanely low if you put any stock in what management are saying. And, I suppose, given the company is currently valued at $78m, you can infer that the market doesn't currently hold a huge amount of faith.

Frankly, one of my biggest concerns is the lack of any material inside ownership. If the opportunity is so great, you'd think senior management and the board would be tipping in some of their hard earned money.

For better or worse, I remain a bruised but optimistic shareholder. So long as ARR continues to march upwards, ideally with some acceleration, and if they not only sustain positive cash flows but also deliver expanding operating margins, then I'm staying the course.

Not a terrible result from Envirosuite. I missed the first part of the briefing this morning, but my main thoughts are (starting with the negative):

• The team is way too focused on the share price. Yeah, i get it, I bet a lot of investors are asking wtf!?, but stop worrying about it if you truly don't have any near term funding requirements. I messaged the following during the call, but they didn't read it out:
• "Stop worrying about the share price. All you can do is be consistent, candid and clear in your communication and the market will either get it or not. But what it will ALWAYS "get" is a steady improvement in key fundamentals. But if you really did want to send a potent signal to the market in regard to your view on value, buy some shares on market -- and something reasonable! Money speaks louder than words.."
• The level of skin in the game is woeful in my view.
• Jason likes to talk a good game, and I'm sure he's being genuine. But everything always seems to be about to happen. Don't over-egg the pudding!
• Claiming $2m in new ARR as a "strong result" in a typically softer quarter (due to North American holidays) would be fair in comparison to other quarters, but it's still less than the $2.1m in the prior first quarter. Pretty sure holidays would have been a factor in Q1 FY23..
• Anyway, total ARR growth of 10% was reasonable, but not as high as i'd have liked. To be fair, if you exclude the "churn event" in the prior 3rd quarter, which isn't entirely unreasonable, ARR growth would have been 16%.
• Also good to see North America do well -- it accounted for 55% of new ARR -- and the company seems to be winning new clients across all segments.
• We seem to be seeing some traction with Water too, a new enterprise deal with Ion Exchange (an Indian based water treatment company) is encouraging. There's potential to roll out to a lot of additional plants if successful. Not sure of the exact quantum, other than it being "significant"
• Aviation won a significant expansion with a key UK airport customer (they couldn't say which, but seemed to hint it was one of the bigger ones). A rebound in the aviation industry is helping to stimulate more investment from customers and they are especially focused on community engagement.
• Industrial was pretty ordinary, although Jason did stress the lumpy nature of deals here. ARR also impacted by end of life contracts (ie. subscription not renewed because the customer project finished). It was good to see some new and notable customers -- hopefully we can see some of the "expand" phase of the strategy play out here, they certainly seem to have a lot of sites.
• While new ARR was ordinary, project sales were up 31% on the pcp -- and these are a good lead indicator for future revenue (Jason again stressed this in the briefing)
• Perhaps the main thing was the reiteration of the EBITDA +'ve target for FY24 (after rightfully deducting capitalised development spend).
• There was some rumour about a potential takeover of EVS raised by one of the attendees, but Jason batted that off as speculation. Frankly, i'd be annoyed if it was taken out for a low-ball offer.

The company has a market cap that is only 10% above its annual recurring revenue (It's a flawed metric, but you have to work with what you've got!). The near term working capital demands are no longer threatening a raise, we're seeing new customers and a reasonable level of growth in recurring revenues, as well as a large opportunity across the three divisions. It's a super niche area, but one in which EVS is the global leader.

Yeah, it hasn't executed as well as I'd have liked, and they got over their skis for a time there in terms of cost management and growth initiatives, but they've got a good offering across various sectors that all appear to have some traction.

I'm continuing to hold. I wouldn't call EVS a high quality company (although that potential exists for the future), but the valuation seems compelling.

Our meeting with Envirosuite CEO Jason Cooper this week is well timed; no doubt we'll have some good questions for him and he'll be able to speak much more candidly now their numbers have been published.

(BTW -- please add any questions for Jason here)

First off, the ARR results were known following their 4th quarter results . As mentioned at the time, these were pretty good thanks to a record 4th quarter.

Annual ARR growth in recent years has been:

FY20: (not relevant as the acquisition of EMS distorts things. fwiw ARR in 2019 was $5.6m, which at least points to the substantial growth of the industrials segment)

FY21: 8.1%

FY22: 14.0%

FY23: 12.1%

It's worth noting that the industrial segment ARR growth has been around 22%pa over the last 3 years. With airports no longer (hopefully) acting as a deadweight, we'll see group ARR accelerate a bit.

If EVS simply match the same new ARR in the current year, total group ARR should be up by over 15% for FY24. Which is about what's needed as a minimum for me.

(The water segment is still very nascent -- but a bit of traction here could really help too. I'm really looking at this as a free kick option right now)

This time last year, ARR was reported at $53m, and for the year just ended EVS said it had recorded $49.5m in recurring revenue. There was the loss of those defence sites in the second half, but there was also $4m in new ARR from the first half -- so i'm not exactly sure why there's a small mismatch. A question for Jason, maybe just timing issues?

(It's not a huge difference, but ARR metrics just always seem to be a little fuzzy. Yes, a useful guide for investors and management, but too subjective for my liking)

Finally, it's great to see some really strong ARR growth in the Americas and EMEA. These are big markets, of course, so hopefully they can sustain some momentum in these geographies.

Anyway, moving past ARR.

It was good to see improved gross margins. In fact they've been steadily improving for some time now. Tick.

Adjusted EBITDA was positive $500k, a big improvement from the $3.9m loss in FY22 and ahead of what they had guided for. The big swing factor here is the $1.8m in annualised cost savings due to restructuring efforts (ie redundancies), which is reasonable to strip out, imo. Less so is the exclusion of share based payments, which amounted to $743k -- add that back in and it was a negative adjusted EBITDA.

To be fair, they do breakout a better picture of things with what they call "Management Operating Cash flow":

So not to be negative (I'm certainly not unhappy with the improved trajectory with the financials), but the business is very much asking you to focus on their preferred metrics. Let's not forget that on a statutory basis they lost over $10m this year -- largely due to $9.4m in D&A charges.

In fact, capitalised development costs were up 21.3% to $5.7m. And accounting for this, operating cash flows were negative $3m (even if you add back one-off restructuring costs and the like). Still, they have been working on new modules and there's (hopefully) genuine value being created. And, yes, capitalising dev costs is just par for the course -- even Objective Corp has yielded to the practice! Still, i just make note of it. Those D&A charges may be "non-cash" but they are very real if you hope to maintain competitive software solutions.

There's a little over $8m in cash left. So it'll be a close call with a raise. Prudence suggests it's wise to expect one. Maybe they'll do a Pointerra and issue a big contract win first? (or maybe i'm just getting too cynical with age..)

Elsewhere, operating expenses were up 6.9% over the year to over $40m (see annual report, not the preso, for stat numbers). I'm keen to see what the 'normalised' cost base is like. The truth is, we need to see some operating leverage kick in -- and if they can sustain 16% gross profit growth while holding fixed costs steady (or at least only wear modest fixed cost growth), 'adjusted EBITDA' could really explode higher -- and even, dare i say it,NPAT growth too -- in the coming years.

Anyway -- there's a solid little business somewhere here. Overly aggressive expansion plans (remember the push into China?), ill-disciplined cost control, a global pandemic that knocked the biggest segment for six, a change in management...(have i missed anything?).. have all acted to impede the growth in cash flows and certainly tested shareholder patience. But i'm encouraged with the return of growth in aviation, the continued strong growth in industrial segment and the free kick potential with water (the Chairman has said this segment has the potential to be the "jewel in the crown"), especially in combination with more prudent cost discipline.

If all goes well, I cant see why Envirosuite shouldn't be generating $100m in revenue in 3-4 years. Ideally with at least a 20% operating margin. If achieved, the market cap could easily be $200-250m (around 16-20cps) at that stage, and offer a decent annual return for current investors.

An overly dilutive raise, mediocre top line growth or a failure to manage costs effectively would, of course, undermine any confidence here.

Will continue to ponder and hoping we can get a clearer picture after we chat with Jason this Thursday.

[HELD]

Envirosuite had some decent numbers for the 4th quarter of FY23.

Full announcement here

Highlights:

• Total ARR up 12% on the pcp, and at a new high following the dip in Q3. (That was a result of a "churn event" -- the loss of 3 Aus. Dept. of Defence sites using the aviation product.). Excluding the loss of that client ARR would have been up 20% according to the company.
• A little annoyed at the communication here tbh. Last quarter they really downplayed the loss of that client and said it only impacted ARR by 1.2% and was not material. Now we have a full quarter without those sites, it seems they were worth about $4.2m annually (If ARR would have been up 20% excluding the loss of those sites, as they suggest, we'd be looking at $63.6m in total ARR vs the reported $59.4. Or maybe they stripped out the contract value from the pcp? either way, it seems bigger than was originally suggested). Look, it's not a deal breaker, but I think the communication is lacking here.
• New sales of $6.8m for the quarter, which is up 13% and a company record. $3.1m was new ARR -- a welcome lift from the flat pace in recent quarters, but in line with what they did in the pcp.

• A record quarter for EVS Industrial, thanks to expanding relationship with BHP. Obviously a lot of potential to expand further with this client, which is also a great reference client, so encouraged by this. The industrials segment showed the best growth and for me has always been the best part of the business -- i wish they had simply remained focused on that. This segment represented 55% of ARR growth, and was up 19% on the pcp.

• Churn remains low (excluding the DoD contract) at 1.9%
• A small win in the nascent water segment of $0.2m ARR, the first for a few quarters. Total ARR from this segment is now $1.4m, up 40% from pcp
• Aviation looks to be doing well in the middle east. 7 new airports added in the quarter. The carbon emissions modelling product apparently getting some interest as companies look to improve their ESG credentials.

EVS reiterated its target for "adjusted EBITDA profitability" for FY24. That was negative $500k at the half, at which point they had just under $12m in cash.

Shares are on about 1.9x ARR. If the underlying growth can be sustained anywhere near the quoted 20% level, and if they can realise some decent operating leverage (there's been some tentative progress here), then shares are probably good value.

There's a briefing at 10:30am AEST if anyone's interested (click here)

Disc: held

Noting two on market purchases for Envirosuite directors recently.

CEO Jason Copper and outgoing Chairman David Johnstone picked up $10-12k worth each at about 8c/share.

It's always nice to see insiders buying on-market with their own funds, but if I were cynical i'd say it feels more about market signalling than simply the private investment decisions of Jason and David.

These are tiny transactions. Jason is on a fixed salary of $363k, plus 50% extra under a STI. As far as I know, this is his first on-market purchase (the current 1m shares held were granted as part of his remuneration package). I mean, great to see him buying on-market, but $12k is pretty weak.

David already owns close to 7m shares, so it's not going to move the dial either way. It is a nice sign given his intention to step down later this year, but would have been better if it was a more meaningful swing of the bat.

I'm probably nit picking here, and not suggesting any grand conspiracy at all. But if this were purely about directors buying shares because they consider them cheap, then at least make it worthwhile for your own sake. It's like me picking up an extra $500 worth -- what's the point?

If part of the rationale was to show confidence to investors, which is what it feels like, then such tiny amounts ain't going to do it.

I don't pretend to know their personal financial situations, but had we seen transactions of at least $50k or more, i'd take more notice.

The Chairman David Johnstone is stepping down and the company is planning on renewing the board, although to what extent is not clear.

As of August 2022, the board looked like this:

David has served as the Chair for almost 7 years and has been with the company since 2014. Back then, shares were 7c each and the company was called Pacific Environment. It was a fair bit smaller then, generating $12m in revenues BUT far more profitable with $1.3m in NPAT.

At the time, it was largely an environmental engineering consulting firm and they were still developing the software side of the business. They subsequently sold the consulting arm and focused entirely on the SaaS offering.

Today, it has over $57m in annual revenue and no profit. But at the same time, shares on issue have grown 12x (so sales per share have gone backwards). Retained losses on the balance sheet have also ballooned $50m from 2014 levels.

The market cap has grown from $7m to $110m, but the share price has increased from 7c to 9c since 2014, (passing through 29c along the way when the SaaS growth narrative was running hot).

This is a good example of a company that has gotten a lot bigger, but hasn't delivered much value for long-term shareholders -- at least so far. A great reminder that growth can be very expensive and not always value accretive to shareholders.

Of course, that was then, this is now. While it's taken nearly a decade to transform the business, it does now have much more reliable revenues, top line growth is much stronger, the market opportunity larger and the (potential) economics better.

But given the long and winding journey, why would you be leaving now, just when breakeven is in sight and there's some momentum in sales?

David has about 7m shares (0.5% of the total company) so maybe the larger shareholders have initiated this? The Omerod family still control a stake (i think about 2.5%) but Ellerston Capital is the main shareholder with a 7.9% stake, and have been increasing their stake over the last year or so -- maybe they have been agitating for change? (fwiw, their micro cap fund has outperformed since inception)

I remain of the view that there is a solid little business somewhere here -- but it's also true that the capital management hasn't been great (I've never been a fan of the reverse takeover of the Airports business), and like a lot of tech growth companies, costs could have been better managed. The newish CEO Jason Cooper has been only been on board for about a year, so cant really lay much blame at his feat.

Worth also noting that Tim Ebbeck was only on the board for 6 months before leaving to "focus on other commitments". A very short stint.

Of the other directors, the longest serving is Hugh Robertson who has been there since 2018 and easily holds the most shares out of all board members (22m shares). The others have relatively insignificant holdings and have been there for 1-3 years.

Anyway, today's news could be good or bad depending on how you look at it.

Is this a change that is badly needed to bring in more experienced and capable directors? Ones that will enable EVS to better realise its potential?

Or is it a sign of disunity? Or a lack of conviction in the future from someone who has been on the inside for almost a decade?

It's virtually impossible to know from the outside, but on balance I think it'll be good to see a change. No offense to David, but he's had almost ten years, and the execution hasn't been fantastic.

This was a decent result for Envirosuite.

You can read all the details here, but the main things of note to me were:

• ARR growth more or less on pace (although hoping this starts to accelerate as aviation picks up)
• ARR growth across all geographies, but US especially strong
• ARR growth above customer growth (increased ARPU)
• Gross margin improvement
• Much closer to breakeven, Adjusted EBITDA (adds back capitalised dev costs) positive in final two months of the year. Expect to be so on a sustainable basis going forward this year.
• Plenty of cash at just shy of $12m
• Solid pipeline

Valuation remains undemanding at about 2.6x ARR (not a great measure, but somewhat useful as a benchmark at the current stage). Provided, that is, top line growth can be sustained (or exceeded) in the mid-teens AND the business scales well.

Held.

Seems an ok quarter overall for Envirosuite. ASX announcement here

New ARR grew by 11% from a year ago. And total ARR up 16% to $56.9m, with Aviation recording its strongest quarter ever with air traffic rebounding in the US. The new carbon emissions module is showing some good potential.

That masked a drop in new ARR from Omnis, which added $0.6m in Q2 compared to $1.3m in the pcp. A number of deals were signed during the quarter with revenues expected in the current quarter. Overall Jason Cooper said he expects growth here to be at, or above, the historical growth rate for the rest of the year.

The nascent water business didn't see any new ARR (in total this segment is only at <2% of total ARR), but new features were released, previously signed contracts continued to be rolled out which, it's hoped, will provide useful reference sites and product validation. Combined with a proof of concept trial with a major US based water treatment services company, Jason reckons it provides the business with "an exceptional revenue opportunity"

Still have $12.9m in cash, down from $16.2 at June 30 last year, which implies an annual cash burn of $8.6m (although need to be careful here due to timing effects etc). I'm unable to attend the briefing today (register here for 10:30am), but it'd be good to get an update on how they see their cash burn evolving.

Overall, it seems the general thesis is on track. It's really encouraging to see some life in aviation after the impact of covid. Representing 70% of group revenues, previous sluggishness here has really limited overall growth.

While the level of total recurring revenue has been growing steadily -- the pace of growth hasn't improved for a while. EVS is adding an average of $8m in ARR per year, which represent mid-teen growth. Not bad, but it'd be nice to have all three segments increasing new ARR at the same time.

EVS shares are currently trading on 2.8x ARR

Held.

@Rocket6 has already added excellent comments, so i just wanted to add one point from the investor call (i did miss most of it unfortunately)

They emphasised they would be 'adjusted EBITDA' positive this year and had no need to access the capital markets.

I'll also second the significance of the SGS partnership. Will be watching that with great interest.

@mikebrisy already gave an excellent overview of Envirosuite's recent product demo, but there's a recording available on Youtube if you want to watch:

https://www.youtube.com/watch?v=4Vn-5AuZ0q0

A very decent set of results I thought.

I'll let members read the full ASX presentation here, but a few points to highlight include:

• Cost of revenue was flat, leading to a solid boost in gross profit. This was delivered through improved implementation and right-sizing of the China business (frankly, i'd pull out of China altogether. Yeah, it's a big market, but the work they have won there is ultra low-margin and I think there's significant sovereign risk)
• The Americas is now the biggest geographic segment, following 31% growth in ARR in that region over FY22. Great to see traction in such a large market.
• Omnis remains the growth engine of the business, and saw a 24% lift in ARR
• Seemingly a lot of cross-sell and up-sell opportunity across existing network of customers. EVS have "single digit" penetration of existing customer sites
• Global Air traffic at 68% of pre-pandemic levels. As this continues to normalise it should help underpin growth in the group's aviation segment, especially given new modules and replacement of ageing sensors.
• Foundational investment into water now complete, and with high margins, high revenue per site and a good overlap with Omnis customers, they should be able to flex this new division for solid EBITDA growth
• $16m in cash with no debt, and expectations to be adjusted EBITDA positive in FY23
• Big improvement in operating cash flows, although a jump in capitalised development cost worth noting. Free Cash Flow went from -$12.5m to -$9.7m (excluding last year's acquisition).

Overall, it looks like Envirosuite is finally hitting its straps. With the disruption of covid (hopefully) behind them, a well rounded and more mature product suite, good sales momentum, and apparent good cost control and improved operational efficiencies, they are in a good position to pivot into profitability and press for improved scale.

No outlook was given, but with a ARR base of $53m, and $6m in new sales for the final quarter, i'm hopeful they can deliver top line growth of at least 20% in the current year. And, ideally, sustain at a decent double-digit rate for many years.

disc. held IRL and on SM

Looks like a decent 4th quarter report from Envirosuite.

It was a record final quarter, with $6m in new sales -- a 27.7% lift from the same quarter last year (which had a record $4.7m in new sales). Roughly half of this was new recurring revenue (ARR), the other project sales.

Project sales are a good indicator of future ARR, as clients first buy instrumentation (low margin) and then are invoiced (high margin) subscription fees over the length of the contract.

It was also encouraging to see that half of the new sites added were from existing clients, which helps validate the value prop of the offering and also the "land & expand" strategy.

For the full year, Envirosuite won $8.6m in new ARR, taking the total to $53m, which is a 14% lift. Of the new ARR for FY22, over a third was secured in the final quarter -- so hopefully we're seeing an acceleration in sales growth.

I'll let you read the full announcement for all the details (you can find it here), but it was also great to see growth across all segments (Aviation, Omnis & Water). Indeed, the nascent, but very high margin and large market opportunity Water segment, surpassed $1m in ARR. The amount of new ARR for Q4 in Water is already around 1/3 of what the more mature segments were able to secure. And there's supposedly good cross-sell potential with Omnis customers here too.

Speaking of Omnis, it's really gaining good traction -- over half of new ARR secured for FY22 was from this segment. A new and improved platform and ongoing ESG drivers bode well for this segment.

Finally, Aviation seems to be bouncing back after the Covid set-back. It generates the lion's share of revenue for the business, but is also the slowest growth area..And, for me, the least exciting. Still 7% annual ARR growth (constant currency) isn't terrible.

As far as an outlook, CEO Jason Cooper (who we spoke with in September last year -- see Meetings page) said that "the momentum we have built in FY22 will continue into FY23 and beyond".

At the current price (16cps), and with 1,259m shares on issue, EVS has a market cap of $200m. That's 3.8x ARR, which doesn't seem too onerous at all (if indeed sales momentum can continue). It is of course still a loss making company, but at the half year had $23m in cash and an annualised operating cash and (roughly) negative $7m in free cash flow (annualised).

Will be interested to get more details when the FY results are released.

Hard to find anything really concrete in today's update, which was marked as market sensitive (see here) but also states that the contracts referred to are not financially material.

Ok, so some new customers, and new sites. That's great -- but off such a low base, and with all that was said in the last update, it would be surprising if that wasn't the case. Don't get me wrong, I'm glad to hear it, but it doesn't really seem announcement worthy.

It said revenue per site was ahead of forecast. That's great -- but what was the forecast, how much ahead are we? It potentially shows that company expectations were initially conservative (which is good), but the observation is off a very small sample size and it's probably too early to draw any material conclusions.

The announcement says it is "nearing its initial commercial objective of achieving $1m in total sales". Again, good news, but how near is near? From what I can see they were at 0.4m in ARR at the end of H1, and at $0.6m at the end of Q3. So if we assume "near" means 0.9m and ARR = sales, that's $300k in added sales in about 2 months. and an acceleration of what we saw from Q2 to Q3. Maybe we could assume an annual run rate of $1.8m?

Again, not saying this is bad news, just very vague. And relative to the current ARR of about $50m not overly significant (well, at least not yet).

Look, it seems like an excellent product. And it's fantastic to see some good early traction -- especially with early adopters seemingly happy to further roll out their use of the product. The addressable market is huge, and as a high margin software product the impact to profitability could be very substantial over time. Indeed, CEO Jason Cooper said that the product "could be a substantial future contributor to group revenues and earnings". So i'm certainly encouraged by the news. It was just too vague for my liking and I find the new CEO to be a lot more promotional than his predecessor, Peter White.

Not surprised the market price hasn't moved in reaction to the news.

A reasonable 3rd quarter for Envirosuite (ASX announcement here), with the business reporting $49m in ARR as of 31 March, 2022. That's a 15.3% lift from the 3rd quarter last year (see here) -- but unchanged from the preceding Q2 (more on that below).

Adjusting for FX movements, the ARR was $50m, and on a year-to-date basis new ARR is more than 23% higher than in the previous year (although that was a period impacted by covid, so it's likely just as much a bit of a catch-up as opposed to a structural acceleration in new sales).

However, i feel the company hasn't been as straightforward as I'd like. The reality is that, on a statutory basis, ARR is unchanged from where it was at the end of Q2 (see below) -- re-framing things on a YTD basis isn't unreasonable, and yes, all the relevant data is presented in their update, but it does stick in my craw a bit when the numbers are always framed in the most favourable light. Just give us the facts in a consistent manner!

It's essentially a story of FX movements -- the AUD has gone from rough 69c to 75c between Dec 31 2021 and Mar 31 2022 -- so please just tell it like it is rather than finding the most attractive comparisons.

Anyway, it's good to see the Water segment accelerating sales, and the contract with PUB Singapore bodes well. North America accounted for 40% of new ARR and it seems there's a bit of traction in that market.

At the current price of 16c, EVS is trading on 4x ARR. or 4.6x on a fully diluted basis. The current run rate based on the most recent quarter represents around 10% annual growth -- that's OK, but frankly if that doesn't accelerate in the year ahead it's going to be difficult to consider shares as good value..

@Slats has already provided the detail of the first half result, so i'll just add a few thoughts.

First, while it's good that most metrics all moved in the right direction, the pace of growth isn't as high as i'd like to see and looked to have slowed a bit in the latest half.

ie:

• ARR was up 15.3% from a year ago, but only 5.3% from the preceding half.
• The number of sites increased 16% from a year ago, but only 4.8% from the preceding half.

To be fair, the first half is usually weaker than the second, and the company said there were supply chain issues that impacted installations.

Growth in statutory revenue was better when comparing halves -- up 7.2% from the preceding half, vs 13.8% from pcp -- although a big chunk of this was non-recurring in nature.

I'm being a bit picky here, but it's worth highlighting. I'm starting to think the acquisition of the aviation business was probably unnecessary, and they would have been better to focus on their core Omnis (and now Water) offerings.

Aviation represents almost 2/3 revenue, and has pretty reliable recurring revenues, but the growth potential here is much more limited. The growth achieved here in this latest half is -- it seems -- largely the roll-off of discounted pricing that they offered customers during covid. Taking a broader view, there's been little growth since they took over (but the timing of covid and its impact on airports may be a reasonable mitigating consideration). There are probably some advantages in being a larger business in terms of putting EVS in play for larger investors and access to capital, but overall it's a drag on growth in my opinion. It just masks what's going on with the other segments.

The attraction for me has always been Omnis, and it's this division that has the best growth. In the latest half, sites increased 25% from pcp, and ARR was up 33.5%. The economics are better for this segment too. And the nascent water business likewise shows some real promise, but it'll take some time before this segment is a meaningful contributor -- especially given its size in relation to aviation.

Still, it's really good to see the gross margin improve and the operating cash flow picture get closer to break even. The performance within the Americas was especially notable with a near 30% lift in sites and a 37% rise in ARR. It's a huge market, so great to see some good momentum.

At the current price of 18.5c, and with 1255m shares on issue, that's a market cap of $232m, which is 4.5x revenue and 4.7x ARR.

I missed the results call this morning, so keen on any observations if anyone was able to attend. But on balance i remain bullish on Envirosuite -- but if we are to see any material market re-rate, they really need to demonstrate some improved growth and a continued and meaningful push to cash flow positive.

Envirosuite has appointed Justin Owen as its new CFO (ASX announcement here).

He was formerly at Whisper (ASX:WSP) where he was their CFO from June 2020, before announcing his departure only 10 months later (see here). That's a very short tenure.

From what i can see, things at Whisper appear to be going ok (at least at a top line level), although it's still very much cash flow negative.

Maybe there just wasn't a good cultural fit, perhaps he wasn't excited about the company's prospects, or maybe just some personal stuff was happening at home -- who knows?

At Whisper he was on a base package of $330k, and took home $450k in FY21 when you include short term incentives. Whisper is comparable in size to Envirosuite, so i wonder if the package is similar? The company hasn't disclosed remuneration details.

EVS's former CFO, Mathew Patterson, was appointed the role in Jun 2020. Another very short stint, although his position was always temporary, being brought on as a secondment from Macquarie to act as CFO for EMS, which Envirosuite acquired in early 2020. His take home pay in FY21 was $440k.

I guess I have no real point to make here -- just adding some details after taking a deeper look at the CFO appointment today.

EVS today reported ARR of $49m, with $1.8m in new ARR for the quarter -- up 64% on the previous corresponding period (but up only slightly from the $1.7m new ARR reported in Q1)

Frankly, it's a little underwhelming given they reported ARR of $48.6m at the end of Q1 (see here). Given the reported new ARR, they must have lost around $1.4m due to some churn (which they say has been stable at 2% over the past 12 months), but also discounts to aviation clients and FX movements.

Total new sales orders were a record $4.6m, of which $2.8m was non-recurring project work, which is up from $4.1m in Q1.

It was encouraging to see a doubling in ARR from the new Water offer -- although that's off a very low base. But with 10% of new ARR coming from this segment, it shows how this could grow to become a far more important generator of company earnings.

Just some initial thoughts.

Envirosuite has entered into a strategic agreement with GHD which will see the group implement and scale EVS's water solution, as well as refer clients to EVS.

GHD is a global engineering and construction services company with 200 offices in 5 continents and over $2b in annual revenue. They already use EVS's Water Plant Designer product as part of their processes and will provide technical support for clients using EVS Water Products where process engineering services are required. GHD will also support R&D efforts to assist with product improvements.

In referring customers to EVS, GHD will assist in delivering key components such as configuring digital twins and reviewing configurations

It adds a valuable new sales channel and allows EVS to scale its water products much more efficiently. It's also a potent validation of the water product set. The agreement is not likely to make a material contribution to EVS for the current financial year, but thereafter should help them better target the $2.8b serviceable addressable market.

Overall, I take this as very good news. You can read the ASX announcement here

The market likes the Q1 results, with shares up nearly 10%. With (so far) >12.5m shares trading hands, it's also one of the highest volume days in the last year.

A few early thoughts:

• The first quarter last year (see image below) was hard hit by covid, so maybe the "42% growth" in ARR year on year, as stated on the ASX update, is less impressive than it seems.
• In fact, $1.7m in new ARR for the quarter is below the $2.2m/qtr average pace seen in the second half of FY21.
• Still, on pace to beat the $6.6m total new ARR for last year -- but not by much. Will need to see better growth from here
• Omnis was the biggest contributor to the growth in ARR -- accounting for 62% of the total
• Total sales were $4m, so there's $2.3m in non-recurring sales. Last year they did $8.1m in non-recurring revenue so they are on track for a 13% annual lift here.
• Encouraging to hear North America doing well, accounting for half of new sales
• EVS Water is at a point where reference customers been secured and "significant new sales in the final stages of negotiation". EVS water is a negligible contributor at present, but I remain hopeful there's a good opportunity here. Will be hoping to hear more from management on this
• A small point, but also encouraged to hear inbound enquiries are apparently increasing. A much easier and more productive sales environment if you can get potential customers reaching out to you.

Overall, the investment thesis for me remains in tact. But i'd like to see a few quarters of >$2.5m in new ARR growth 

Investor briefing notes

Others have highlighted the results, so i'll just add a few notes from the investor call.

• FY23 $100m revenue target will likely be pushed back due to the impact of covid. But Jason Cooper said that was "very much in their sights still" and they expect to hit and exceed that threshold in the coming years
• ESG (Environmental, Social and Governance) proving to be a big driver -- both from customers and investors
• Water solution is very nascent but has the largest addressable market. Offers clients very big savings in terms of design, electicity, chemicals and water savings. Thetechnology here is best in breed.
• Omnis is the core of EVS and the ARR growth has been very strong and should continue. 
• Airports rather flat, but a strong result when you consider that airports globally have seen a ~64% drop in revenues due to covid.
• 'Adjusted' EBITDA actually adds a lot of expenses normally listed elsewhere (eg finance cashflows etc). I see it as reasonably conservative. Not sure whether they will be EBITDA positive for the full FY24 year, but likely to be close if sales growth continues
• Sales growth is the number one focus as the company tries to capitalise on its first mover advantage.
• Gross margins improving well due to cost out and better product mix.

Also, shares on 3x sales seems pretty conservative for a business that has doubled revenue -- although airports contributed only 6m last year. Nevertheless, core omnis product growing ARR at 20%+ is very strong -- especially with strong sales pipeline, market leadership and large TAM.

Cashburn and sales growth are the key metrics to watch in my opinion. The business seems very well placed, but will need to execute well.

I think the new CEO is a bit more promotional than the last, but overall has a clear vision and stratgey for the business.

4th quarter results from Envirosuite show a record $2.3m in new ARR, taking the total to $46.5m.

Over half of this was from sales to exisiting customers, which helps validate the "land & expand" strategy. The Omnis product (the core product prior to the EMS acquisition, and the one that has been internally developed) saw an encouraging 24% YoY growth in ARR. Also good to see non-recurring revenue at $2.4m -- looks like they will deliver (or slightly exceed) on guidance for ~$8m in non-recurring sales for FY21

Certainly some positive aspects to the announcement, but I have some reservations.

• In their capital raise presentation (pg15) they had a forecast ARR of 2.4m for the quarter. So this result is a slight miss.
• No mention of whether they acheived target of positive adjusted EBITDA for Q4. We'll see this when they release full results on August 18, but any mention of this target was noteably absent. 
• FY ARR growth (ex FX changes) was decent at 11%, especially given the covid disrpution in the first half. But even if we normalise the first half, and adjust H1 new ARR to be in line with H2, ARR growth would have been ~16%. Ok, given the relatively low base and supposed market opportunity, but I would prefer to see a figure north of 20%.
• No apparent new sales for the new EVS Water product, with ARR flat for the quarter 
• Growth in Aviation ARR was in part due to unwinding of previous covid relief to customers, but not sure to what extent discounts have been unwound.

I continue to hold a large position (~10% on Strawman), and think the company has good potential. It's done me very well over the years, despite the recent weakness in price (>50% CAGR). BUT I was not a fan of the timing and discount of recent raise, and am yet to see the strategic benefits of the (very large) EMS acquisition.

The Omnis product and opportunity was always the best part of the business, but the growth that is being achieved there is being diluted by the much larger aviation sector which is displaying much slower growth. Maybe that's just being dampened by covid, but so far the touted benefits of integration are not obvious. And all that we've seen is a delay to the company delivering sustainable +'ve EBITDA and cash flows.

I'd like to see ARR growth get closer to 20%, to see some traction with the new Water product, and for the business to demonstrate sustainable EBITDA. If that happens, shares are very cheap.

That being said, with a Price to ARR of ~2.6 i think there's not too much downside from here provided growth doesnt stall and costs are contained.

BUT, if they miss their EBITDA target and sales growth drops, there's certainly a bit of downside in the near term.

Envirosuite has launched a capital raising, seeking up to $14m via an institutional and non-renounceable rights offer. ($13m after costs)

Investors have the opportunity to buy new shares at 8.5c -- a 19% discount to the last traded price. Existing shareholders can buy 1 new share for every 14.5 shares already owned.

The deal will add an additional 165m new shares, taking the total share count to approx. 1,193m shares. That's a ~16% dilution.

Once complete, EVS cash balance will increase from $9.7m to $22.8m. The funds will be used to accelerate sales in the Omnis and Water products, as well as geographgic expansion.

So... is it a good thing?

Well I think the offer is too generous -- 8.5c per share values the business (pro-forma) at just over $100m, which is just over 2x forecast revenue, or 2.4x Annual Recurring Revenue. 

As such, the dilution impact is greater than it needed to be in my opinion.

That being said, the business has taken a big knock from covid due to delayed project work and discounted pricing to support airport customers. FY21 guidance for $48-49m in revenue represents a big reduction from the $58m in the previous year (pro forma, assuming the EMS business was held for the full year).

Similarly, the company has so far failed to pass EBITDA breakeven (although that's targeted for the final quarter). The move into China hasnt appeared to have delivered much to date, and the business looks to have walked back from earlier targets of $100m in revenue run-rate by FY23. Plus, the CEO left recently.

So perhaps a higher offer price may have been difficult...

At any rate, the business is on track to post a cash spend of ~$10m in FY21, and with $9.7m in cash held before the raise, and supposedly on the verge of breakeven, i'm not convinced there was a great urgency to raise capital -- especially with the depressed share price. If they were confident of a solid 4th quarter, and delivering on their EBITDA positive target, I suspect they could have raised at a much lower discount in a couple months.

But then again, perhaps the timing says something about this...?

I genuinely like the company's offering and potential. There's a very large addressable market and they have a market leading position. I'm convinced there is a strong and growing need for the kind of solutions they offer.

After a painful first half, new ARR sales have essentially doubled in the second, and if you remove the acquired airports business (much more mature), the core EVS product (now called Omnis) has essentially doubled its ARR in the last 2 years.

The massive EMS acquisition and the impact of covid make it hard to cut through to a clearer 'normalised' performance picture, so it's hard to know how much poor execution is to blame for the recent stagnation.

Still, if I don't see signs of improvement in the coming quarters, i'll likely consider my thesis busted and sell out. I want to see sustainable positive EBITDA by the end of Q1 FY22 and a material pick up in new ARR sales. 

For now, there's enough negativity in the price to compensate me for the risks, and the capital raise at least puts them on a much firmer footing. 

You can read the Capital Raise presentation here.

Envirosuite has appointed Alberto Calderon as an advisor to the CEO. This is a guy that used to be CEO of Orica, and prior to that was very senior at BHP and the CEO of Cerrejon (Columbia's largest mining company).

His brief is to assist with strategic development, but for me the real value is the introductions he can fascilitate with some of the world's largest mining and energy operations (he appears to be very well connected).

What's interesting is that his remuneration is in the form of 10m unlisted options. These allow Mr Calderon to buy shares at 20c each (half he can exercise now, with the rest exerciseable in 12 and 18 months).

With the market price currently <13c, these options are effectively worthless at present. So this is potentially indicative of the board's and Mr Calderon's optimism. 

ASX announcement here

disc. held

I'm not thrilled about Peter White stepping down as CEO of envirosuite.

I've met him a few times and he always struck me as honest and capable. He really took the company a long way in his 8 years at the helm.

What's happened behind the scenes could be a falling out with the board, concerns for the future or just simply some benign personal reason that has nothing whatsoever to do with Envirosuite's prospects.

The market seems to have taken a negative view of it, as is it's want.

To be fair, people generally don't step aside from a business when it's poised to see substantial growth, and when you're holding a bunch of performance rights and options (as Peter does). Eg. He was entitled to get a further 500,000 shares after June 30 this year, just as part of a retention incentive. If the share price got above 50c before FY23, he would have got another million shares and had 5m in-the-money options.

Peter will be on the board after he steps down as CEO and still has 9.2m shares in the business. But it was a surprise to see him go, and for better or worse it has raised some questions.

Jason Cooper, Peter's replacement, seems qualified anough, but has only been with the company for 8 months and is a bit of an unknown quantity.

Time will tell I suppose.

On its own, it doesn't materially change my expectations for the business. But it has raised the risk profile for me.

If I don't start to see some good traction from here, I'll consider my investment thesis in need of some harsh adjustments.

For the first half of FY21, Envirosuite reported a 17% lift in revenue over the preceeding half (HY20, which only had a 4month contribution from the EMS acquisition). Normalising for this, revenue would be flat, to slightly down on the preceeding half.

Operating expenses were however down due to savings measures, and gross margins improved significantly from 32% to 41%. So overall the adjusted EBITDA improved from -$6.9m to -$3.5m

Recurring revenue, as a percentage of the total, also increased from 77% to 85%, due to the covid related deferral of project work, which hit non-recurring revenue.

Envirosuite has $9.7m in cash, having burnt through $5.8m in the half (exclduing acqusition related costs), this is expected to reduce in the current half, although they didnt offer more clarity than that.

Importantly, management are forecasting a much improved second half, with new ARR sales orders expected to double in the second half. Recurring revenue is expected to grow 4-8%, the rest will be related to project delivery from new contract wins.

The business will still report a negative EBITDA for FY21, although will be improved in H2 on an adjusted basis. But the company reiterated that it still expects to report a positive EBITDA in Q4 (although will be dependent on timing of non-recurring revenue).

All in all, the business has been pretty resilient during covid, but it's definitely been impacted by it in terms of non-recurring project work and some discounts to airports. Project work in China also took a big step back (although this was associated with lower margin equipment sales), and the business says it is looking to focus more on higher margin subscription contracts there. There was a lot of potential promised when they first moved into China -- but there's not really much to show for it as yet...

Outside of airports, recurring revenues were 18% higher, so the original part of the business seems to be still doing well. This was always the part i liked the most.

The EMS integration and Covid make an effective comparison against earlier expectations more difficult. But when trying to normalise for this, I still see a business that should deliver lower double digit revenue growth in the coming years, and sustainably move past breakeven. (Hopefully another capital raise isnt needed, but it is a definite possibility).

Some good contract wins and achieving their target for psoitive EBITDA by Q4 is essential to drive the price materially higher from here in my opinion. 

Disc. Held

Envirosuite's sales update for Q2 2021 isnt as clear as I would like, and requires a bit of detective work to see how it aligns with earlier expectations.

In the groups FY20 Results presentation (August 2020), the company provides a chart (pg 13) that shows targeted ARR growing by approximately $11m per annum, or about $2.75m/qtr.

In Q1 ARR grew by $1.2m, and then $1.1m in the quarter just reported. That's well below pace.

The company didnt provide total sales figures in the recent two quaters (only new ARR, renewed contracts and non-recurring), so it's hard to know how likely they are to achieve their targeted $65m in sales.

But with at least 2/3rds of income generated offshore in FY20, and likely more in the current year, i suspect the strengthening AUD will provide some headwinds.

It was encouraging that management still expect the business to be EBITDA positive on a run rate basis by the end of the current quarter. That will be an important milestone if that can be achieved sustainably.

Similarly, encouraged that Churn was very low (<0.2%), and that the airport sector appears to be holding up well despite covid.

Will be awaiting the half year results before making any further judgements -- but really hoping to see the pace of ARR growth accelerate, and to see if the expected cost reductions materialise.

Envirosuite has provided a sales update for the start of Q2.

In the first week of the quarter, the company has secured over $1 million in new contracts.

These include the first sale of EVS's Smart Water Product, which was developed following the acquisition of AqMB last year.

Another win was a new 6 year odour management agreement with Veolia France -- which already is a customer of EVS. And the final contract mentioned is a 5 year noise management contract for Istanbul Airport.

In total, these three contracts will contribute around $200k in annual recurring revenue.

A good start -- let's see if they can continue the sales momentum!

ASX announcement here

Envirosuite CEO Peter White has entered into a new remuneration agreement.

While the base salary of $300k remains unchanged, Peter will be eligible for an additional 30% of this as a Short Term Incentive (STI) "based on a broad number of financial and non-financial performance measures" including EBITDA (although no figures were detailed).

Personally, I really dislike vague and subjective performance measures. More than happy for management to receive big rewards when they deliver for shareholders -- but these kinds of STIs just leave too much to the board's discretion.

Anyway, without getting into a debate on executive remuneration, I did find the Long Term Incentive (LTI) component very interesting.

If EVS shares hit 50c by June 2023 -- and remain above that level for at least 30 consecutive days --  the CEO will get 1m shares for free. He'll get a further million if shares hit 75c and another million if they hit $1.

This may seem very generous, but I doubt shareholders would be upset if these thresholds were met. After all, the lower tier represents approx. 50% compound annual growth rate in the share price over 3 years!

Again, we can debate how reasonable these levels may or may not be, but I note that if EVS hits its target of $100m in revenue by 2023, a share price of 50c would put the business on a Price/Sales ratio of ~5x. Not too unreasonable at all given the required growth rates.

A cynic would argue that boards do not set targets that they think are unreasonable -- if it's about feathering the nests of insiders, you want to set a very low bar.

Of course, none of this guarantees anything, but i find it very telling in relation to the board's optimism.

[updated to fix incorrect P/s ratio]

[I own EVS shares]  

Envirosuite released its presentation to the Bell Potter Emerging Leaders Conference, marked as market sensitive.

I couldn't really see much new info, although there was a bit more detail on the newly combined business.

Key points:

• $2.3b addressable market
• Forecasting 20%pa revenue growth, hitting $100m by FY23 with a 15-20% EBITDA margin
• Contribution margin (gross margin) ~82%
• 75% of revenue is recurring with 98% retention
• Combined sales force has been in place since May, with customer leads growing from 300 in July to almost 1200 by August.
• Current pipeline is $30m in recurring revenue opportunities 
• Overhead costs expected to drop around 15% or so and then stablise.  

The company's financial goals are certainly ambitious and there is, of course, no guarantee they will be achieved. However, I think there's genunine scincerity in management's expectations given the structuire of the Long Term Incentives. These grant a lot of shares to the CEO if the market price is above 50c in 3 years time -- with an increasing allocation if shares get above 75c and $1. Boards are usually accused of setting performance hurdles too low so I find this encouraging.

Envirosuite has good organic sales momentum, a genuinely best in breed product, and ongoing regulatory tailwinds. Super high retention speaks volumes about how customers perceive the product, and Envirosuite has an increasing array of big name reference sites (this helps open doors and achieve conversion better than most things in my opinion)

The company has almost $12m in cash available to support operations, and with further planned cost-outs post the EMS acquisition I think they are quite likely to hit their +'ve EBITDA target in the next 6 months. From there, the nature of the business should allow for accelrated profit growth past this important inflection point. Barring a major acquisition, i don't see them needing to raise capital anytime soon.

I've held EVS in varying weightings since 2018, and hope to continue doing so for many more years.

Full presentation is here

Envirosuite has provided an edited transcript of analyst and investor questions following the FY20 result.

Key points:

• big sales pipeline and on track to hit breakeven and revenue targets
• 65% of revenue is exposed to airports, but churn has been very low (1.5%) as airports mandated to have noise/vibration monitoring. 
• Organic growth for the seperate businesses were 100% and 8-10% (pro-forma) for EVS and EMS, respectively.
• Management incentives only become meaningful if share price exceeds 50c
• 82% contribution margin
• Sufficient cash to make it through to breakeven
• $11m in costs to be removed due to duplications and synergies with EMS

Announcement can be seen here

It was a very busy year for Envirosuite, with the (massive) acquisition of EMS and the move into China the most significant events.

It makes a comparison with prior years difficult, but in relation to FY19 revenue was 209% higher while EBITDA (adjusted) loss doubled to -$12m.

Envirosuite reckons it can take a further $11m in costs out of the business due to duplicated roles and systems, and still expects to be EBITDA +'ve by March 2021. Forecasts provided suggest expectations for a fairly stable cost base going forward.

It is targeting revenue growth of around 170% this year (the first full year with EMS on board), with ~20% top line growth per year through to FY23. Around 3/4 of all revenue will be subscription based. And the company expects operating margins to grow rapidly as the business scales -- they're calling for a 15% EBITDA margin in FY23.

Where is all this growth going to come from?

Well, the company now has a far deeper and richer offering, a broader geographic presence and a strengthened sales team that is targeting a $2.3b global market opportunity.

There's a big structural shift in the gathering and reporting of "environmental intelligence", and most companies that have these considerations will inevitably shift to a digital solution in time. It's simply far cheaper and more effective than previous methods. Moreover, there are very real regulatory drivers here that will require companies to focus more on these issues.

That doesn't mean that EVS will be the winner, but they are very well positioned as a genuine market leader, have a solid existing customer base that offer some cross-sell/up-sell opportunities, and they have a good first mover advantage thanks to years of R&D.

With the acquisition of EMS out of the way, the next few quarters will be critical in determining if the company can deliever to its ambitous targets.

The early growth in China, which has already contributed $3m in revenue to FY20 and has announcved $5m of new deals is encouraging. And it's good to see the resiliance of revenues from airport customers (which have a regulatory requirement to montir noise levels).

The SaaS caharacteristics of the business -- low churn, high revenue visibility, strong operating leverage -- remain very attractive, and should really come to the fore if EVS can drive strong top-line growth.

Envirosuite has around $24m in the bank, with around $12m available to fund operations. Given their cash flow trajectory, this should be enough to sustain them through to breakeven.

It ticks a lot of boxes for me, and I think there is a good deal of upside if they can deliever anything close to their long term targets.

That being said, I see this as a higher risk investment and expect plenty of voliatility. EMS was a big mouthful to swallow, and although airport revenues have held up so far there are some real risks if covid has a sustained impact on travel. We're also yet to see if the necessary organic sales growth, post merger, will eventuate.

Disc: held

Results presentation here

Envirosuite has announced $14.5m in sales since March (since the acquisition of EMS).

$8m was for new business, with $6.5m in renewal contracts. 

If you annualise the past 5 and a bit months, that's a yearly run rate of ~$32m in total revenue.

The pro-forma revenue for the combined group was about $55m in FY19 -- though a direct comparison is difficult due to factors like seasonality, timing of sales/renewals and the fact we extrapolating a period which includes the worst of the COVID disruption.

EVS said that it had seen resiliance across all sectors and geographies, as well as new sales in its key markets.

Over half of renewals came from the airport sector and EVS has retained all of its customers in this segment (one that is amongst the hardest hit due to the virus). As CEO Peter White stated "noise monitoring is required as a license condition for all contracted airports, regardless of flight volumes".

So i think it's generally an encouraging update, but EVS will certainly need to see an accleration in sales over the coming year. The company reckons it has a $30m sales pipeline, so if they can convert even half of that this year they should achieve low double digit revenue growth.

Importantly, EVS reiterated guidance for positive EBITDA in Q3 this year, and the $100m revenue target for FY23 was mainatined.

[disc. held]

ASX announcement here

My heart skipped a beat when i first saw "acquisition" -- something that could drain cash, prolongue breakeven, or worse require a capital raise.

But the purchase of AqMB IP looks really smart, and at just $1.35m seems to have little downside (EVS had $24m in cash at the bank prior to the this).

AqMB IP offers a "neural network-based machine learning tool that models chemical and biological processes at water treatment plants". This helps optimise plant operations and can lead to significant cost savings. In a trial, it supposedly saw a 35% reduction in annual chemical and electricity costs.

EVS reckons there's a very big market for anything that can offer a 25% saving or more -- around 25,000 sites globally -- and of course they already have a lot of wastewater customers. Over the coming six months, EVS will be working to integrate AqMB IP into a "smart water" product, in combination with their SeweX technology.

Envirosuite has a good history of smart, low cost strategic acquisitions, so I'm hopeful this is another example of that. The deal offers:

• A broader and more compelling offering
• Upsell opportunities
• Accelerated product development (it would likely take a few years and loads of R&D costs to develop this internally)
• A negligible hit to earnings resulting from the purchase and integration.

There are always risks in terms of execution, and perhaps in misreading the potential market demand. But the risk/reward to me seems very attractive.

I don't expect this to materially move the dial in the short term in terms of per share earnings, especially given the much broader customer base post the EMS acquisition. So i'm not inclined to alter my valuation as yet. But the return on this investment could prove very satisfactory. 

{disc. held}

ASX announcemenet here

Envirosuite has brought forward its target for EBITDA breakeven, saying they expect to reach this target by the end of March 2021 -- 3 months earlier than previously advised.

This is a result of ongoing cost reductions and new projections for one-off and recurring sales.

It will be an important milestone if achieved, and i suspect will help bring about a re-rate of the company's shares.

ASX announcement here

Envirosuite will enter the S&P ASX All Ordinaries Index on June 22.

Doesn't alter the buy thesis, but in the short run it should help support the price as index funds are forced to buy. Longer term it may help with liquidity too.

Envirosuite has announced that it expects the recent (massive) acquisition of EMS to be fully integrated at the end of May -- on buget and on schedule.

This process has identified $8m in cost synergies and a further $3m in budgeted savings. These are expected to be realised by the end of FY21. 

If realised, that's quite material. I estimate it reduces cash costs by ~19% (and will boost pro-forma operating margins).

EVS also believs it will boost revenue growth potential, will see a restructure of senior exectuve team from the 2 businesses, and a consolidated product road-map.

Importantly, EVS reiterated its goal of being EBITDA positive on a monthly run-rate basis by the end of FY21.

A group presentation that more thoroughly outlines the new business will be released at the end of May.

Full announcement is here  

23/3/20

Envirosuite has announced a material contract win valued at $2.8m for the first phase of regional water quality project.

EVS will supply 375 third party water analysers at 11 treatment plants and is expected to lead to the provision of software solutions.

This sale was not in the previously disclosed sales pipeline.

The value of the deal includes the cost of the equipment, and EVS said it could not disclose its margin due to commercial sensitivity (but i doubt it would be better than 40% at best)

What's most interesting, is that this deal was fast-tracked due to increased regulatory requirements following the coronavirus outbreak. Indeed, Envirosuite said it had experienced an accelerated demand in the China market.

All in all, for a company targeting $100m in sales in the coming years, this isnt a massive win, BUT it is very encouraging in that it shows an ability to continue generating sales in these unusual times AND that the demand for their product is increasing due to increased regulary standards. It's also encouraging to see more traction in the China market.

You can read the full ASX announcement here. 

.

Envirosuite has announced a binding agreement to initiate its launch into the Chinese market.

The deal is with Mr Zhigang Zhang, the GM of Beijing BHZQ Environmental Engineering Solutions, a person envirosuite described as "a prominent leader in the environmental protection sector". He'll also be offerred a board seat.

Mr Zhang will purchase 50m shares at 8c each ($4m worth). He'll also get 25m options to acquire shares at 15c each, which expire in March 2022 and vest on the condition that a minimum of A$10m in cumulative revenues are received by Envirosuits Chinese subsidiaries before the end of calendar 2021. (for context, EVS is targetting $12m in recurring revnues by the end of FY2020)

Another 15m of options will be allocated to China employees under the same terms.

Much of this is subject to shareholder approval at the upcoming AGM.

The $4m raised is before costs, which include 1.25m options (under the same terms as above) for the executing broker. As a percentage of funds raised, seems like the broker will do pretty well out of this...

Envirosuite said that the $10m revenue threshold was NOT a target or forecast -- rather just a performance hurdle. 

Still, the market opportunity in China is obviously vast and the Government there has a clear focus to address air and water issues. Definitely an exciting prospect.

But is it a good deal?

Well, the issue price (8c) seems overly generous to me -- although the strategic value of this deal clearly has big potential. It's hard to do business in China without the right partner...

The deal, in its entirety, will also be reasonably dilutive to existing shareholders. Accounting for all options, there'll be a further ~24% increase in the share count.

Further, the new China subsidiary will undoubtedly extend the cost base. It's entirely possible that any additional revenue earned in the medium term is more than offset by the increased costs.

I expect the market will react favourably to the news when trade resumes, and not without some justification. It's just worth keeping in mind that execution is everything -- and far from gauranteed. 

I'll likely adjust my valuation in the coming days, once more is known.

Read full ASX announcement here

Envirosuite provides environmental monitoring, management and reporting software. With data fed through a network of sensors, the platform allows clients to monitor environmental outcomes (such as odours, pollutants, emissions, noise etc) and assets (pipes, vents and other plant & equipment) in real time. This enables clients to more effectively manage operations, investigate incidents, predict outcomes, manage complaints and meet regulatory and reporting requirements. 

Clients come from a wide array of industries, including regulatory bodies, wastewater, mining, oil & gas, ports, power plants, hospitals and more. The company has around 30 FT employees and is based in Brisbane. It also has offices in San Francisco and Madrid.

The technology is genuinely world leading, and the business has a huge addressable market, a significant first mover advantage and minimal competition. 

Since divesting itself of the old consulting business, the company has managed to grow Annual Recurring revenues at a very strong pace, albeit off a low base.  Having doubled ARR last year, they are on track to more than double it again in FY19, and are targeting a further 100% growth in FY20.

Although still cash flow negative, they appear to be scaling well and should be able to fund themselves until cash flow breakeven -- provided they maintain cost discipline and achieve sales goals.

Envirosuite is an early stage business, and certainly represents a higher than average risk investment. Nevertheless, if sales growth comes in as expected, the upside is sigificant.

18/02/2020

Envirosuite provided an update on its China venture since it established operations last year.

EVS China now has 10 people, including a local general manager. The previously announced strategic agreements with local partners has supposedly contributed "substantially" to the sales pipeline, the qualified portion of which represents around $12m.

EVS reported a maiden sale of $270k to a wastewater plant, and more sales are expected in the coming months. With the SaaS model still unfavoured in China, new sales are expected to involve a large upfront capital component, followed by a few years of smaller maintainance and software fees.

The recent takeover of EMS gives Envirosuite 4 existing contracts in China for the related solution, and there's potential for further expansion here.

This news is not material from a financial perspective, but at face value it seems as though the move into China has started well.

Management certainly have a lot going on -- ingesting the much larger EMS while simultaneously expanding into a new (and often challenging) geography and overseeing product integration and development is no easy task!  

You can read the full announcement here

There's a lot of detail related to this acquisition, and others have already summarised the main points.

Key considerations for me:

• An extremely large takeover (technically, a reverse takeover) that radically changes the business mix. EVS is now essentially a noise monitoring business that has a relatively small odour and wastewater segment. That being said, they'll be looking to provide a more holistic solution to customers going forward.
• Very dilutive. When accounting for options, there are around 1,127m shares. That gives the company a market cap of ~$225m
• The combined entity will still be loss making, although it is targeting a doubling in revenue over the next 3 years to ~$100m, with EBITDA margin of 15-20%.
• With $15m in cash, post transaction, it should have enough cash to make it to profitability (if projections are indeed realised)
• Cross sell opportunity is significant -- but this is often touted as an acquisition rationalisation, and not always realised..
• EMS has a history of growth, and is expected to see a 9% lift in sales for the current year.
• Macquarie will retain an 8% holding (14% if all options are exercised) and will be the largest single shareholder. It will refer potential clients.
• Big potential, but similarly big risks in terms of integration and realsing cross sell potential.

I've updated my valuation (see my company report)

Envirosuite has acquired the exclusive global license agreement with University of Queensland technology transfer company UniQuest. It enables them to use a mathematical modelling tool "SeweX" that provides better prediction and asset management in the waste water sector. 

It will be integrated into the Envirosuite platform and new sales are expected in the first half of 2020. The company expects this to broaden and more tightly bind the client base, while also increasing average revenue per subscription.

The 'cost' pf the license is that EVS will pay a "nominal" upfront fee and then 12% of gross sales that relate to the use of the license after 2 years. The license goes for 20 years, but to maintain the license EVS must hot at least $1.9m in gross sales within 5 years.

EVS said it "intends to well exceed" this and that the associated revenues would "materially" add to the group total.

To my mind, it looks like a smart deal with very little downside. Potentially, there is a lot of upside longer term. But the value will take years to fully realise (if at all), and so I'm not inclined to lift my valuation on this news alone.

Read the full ASX announcement here

Envirosuite has today signed a "cooperation agreement" with BHZQ.

This follows on from the "binding agreement" announced in September.

Frankly, I'm not too clear on the difference, but it appears the recent announcement relates to a more formal agreement that makes EVS the preferred supplier for associated solutions. 

(EDIT: Looks like i wasnt the only one who was a bit confused -- EVS released a supplemental clarification on the relevance of the agreement on the 19th Oct. You can read here. Essentially, this agreement was an essential step, profit sharing will be determined on a project by project basis, and that projects will likely require joint input from both parties)

There were no financials or forecasts provided, other than a reiteration of the $10m aspirational target for options conversions, which require $10m in cummulative income from China by the end of calendar 2021.

Still, this appears to be an inevitable contractual step from what was already in train and the initial ~7% jump in shares seemed a bit of a knee jerk reaction.

Good to see progress being made, but I wont be raising my valuation until we see some tangible progress.

Tata Steel -- one of the worlds largest steel producers -- has adopted the Envirosuite platform for its UK Port Talbot operations to manage air quality.

This is a big win. Not necessarily on a financial basis (no details were revealed), but strategically it represents the first step into the Steel manufacturing sector, and the first manufacturing contract win in Europe. 

Moreover, according to management, there is "significant potential for further contracts in the sector", and having such a high profile reference client will greatly facilitate further sales.

Shares have reacted very favourably, and given the strong rise the day before the announcement, it seems like there could have been a leak. Not a good look, and hopefully the board will tighten things up here.

Full announcement here

RISKS

• The business may not scale well, absorbing higher revenues through increased cost base. EG. Increased development spend, significant increase in sales force (without concurrent lift in sales), more expensive office space, new offices in other geographies etc)

• Founders and insiders may extract capital through generous options/equity grants or increased remuneration packages.

• Fail to focus on existing opportunities and instead broaden the offering -- moving too fast. 
• Another tech company could develop a better mousetrap.
• Technology failure leading to reputational damage. Especially if failure results in fines/penalties for a client.
• Counterparty risks. If consultancy partners do a poor implementation, for example.
• Liquidity risks -- shares are very thinly traded. Will be difficult to build or exit large positions. Shares will likely be especially volatile.
• Business runs out of cash and needs to raise capital in a highly dilutive share issue

Envirosuite has raised $10m from sophisticated investors issuing a further 35m shares. 

The cash will be used to help fund the expansion in China, continue R&D, marketing and potentially acquisition opportunities.

Total number of shares is now at ~500m (includes an additional 25m to Chine Partner, to be approved at AGM, plus all outstanding options)

The company now has around $20m in net cash (also accounting for China partner buy in). As of the latest report, EVS was buring through ~5m in free cash flow last year , although company targeting to be monthly EBITDA positive by end of current financial year.

Annoying how ordinary shareholders not invited, who have been diluted by a further 8.5% or so. But it makes sense to take advantage of the elevated share price to raise more capital.

Whether or not this was a good move depends, as always, on how well they invest this capital.

There's certainly an attractive addressable market, and these guys have a great offering. But plenty of companies grow sales without any growth in profit due to poor cost control mis-allocation of resources.

We'll see.

Envirosuite did not meet their stated target of $6m in ARR by the end of FY19, due to greater than expected attrition in the third quarter (which was previously reported).

Nevertheless, ARR growth of 86% was achieved and now stands at $5.6m.

Importantly, the group said it had a $14m sales pipeline and reiterated guidance for $12m in ARR at the end of FY20.

Beyond the specific accuracy of aspirational targets -- which were always going to be roughly right, at best -- the general pace of growth and opportunity seems very much on track. As stated by the company, the nature of big contracts will always mean that the timing and quantum of growth within specific quarters is going to be very difficult to accurately anticipate. But so long as the general trajectory is maitained, and costs well managed, EVS very much appears to be executing well.

We'll need to see the full audited accounts to get a better sense of the financials, but the company is certainly still loss making with a fast dwindling cash balance. Increased sales and marketing costs, while necessary, will put further pressure on the business.

Nevertheless, although i have previously reduced my exposure (in large part on valuation grounds), i'm still a believer in the long term potential of the business.

See full sales update here.

Envirosuite has updated its Annual Recurring Revenue metrics for the March quarter 2019.

In the 3 months to the end of March, EVS added $780k in ARR. That's 250% up on the prior corresponding period. On a run rate basis, that's sufficiemt to hit their stated goal of an additional $3m per year in ARR -- BUT, that rate has slowed significantly from the prior quarter (in which $1.3m was added in ARR).

Further, that $780k addition nets out at just $330k when you account for a $450k loss due to customer attrition.

What's happened?

• Regulatory clients in California did not renew as they were seemingly not using the real-time capabilities of the product, preferring supposedly to confirm data through quality assurance prior to release. This accounted for half of the total attrition. The key thing here is that real-time data monitoring does not seem to be an important factor for regulatory bodies and EVS appears to be backing away from this sector -- certainly disappointing given all the fanfare that was originally made here.
• Another quarter of the loss in ARR comes due to the completion or halting of three client projects. This isnt assocaited with the value of the EVS platform, and is to do with other factors relating to the clients themselves, so is less concerning. This will happen occassionally. 
• The final quarter of client loss was not specifically explained, other than EVS saying it was a factor of rapid growth and the testing of the platform in new verticles. Read as -- some clients just didnt find the platform that useful and were not inclined to continue their subscriptions.

Due to the attrition, ARR essentialy is actualy a little below where it was in early February, at just under $5m (The charts that EVS have provided are misleading. In the February sales update they were showing ARR on a bi-monthly basis. This time they are showing it on a quarterly basis. The reason, presumably, as if they continued plotting every two months, the drop from the february high-water mark would be apparant. I've fixed this and attached image below. I made my thoughts on this known to them here).

So that is disappointing, however the company reiterated its guidance for $6m in ARR by year's end and $12m the year after. That's going to be tough in my opinion, and management have acknowledged this. Although they didnt provide the current ARR, it seems likely they will need to lock in ~$1m in ARR in the next two months. (a solid jump from their *gross* ARR growth in the March quarter).

Stepping back from this, and today's substantial share price drop, I'm actually not (yet) overly concerned.

The market tends to freak out whenever a company experiences inevitable bumps, failing to accept that business is almost never smooth and linear. The real question, as always, is whether or not this quarterly slump is indeed one of those bumps and that the longer term outlook remains on track, OR whether the pace of ARR growth is permanently dented and therefore company targets unrealistic.

One swallow does not a summer make, in my view. And, as you'll see from my Strawman valuation, shares were overvalued anyway. If EVS gets anywhere near their 2020 target, and if a solid pace of growth is mainatined, shares are reasonably priced in my view. 

As I say in my valuation (above) -- this was always going to be a very bumpy ride. Expect lots of big moves like this along the way.

A few other thoughts:

CEO Peter White spoke of additional hires in operations, support and sales, as well as new offices. No figures were provided, but these resources do not come for free and no doubt will impact the cash burn. Something to watch for a company that is still not breakeven.

The business is also producing hardware in the form of "e-noses", which has been previously disclosed. There's good reason for that, as clients are demanding a full solution service, but the economics are quite different to what you would expect from a pure software company.

The big thing to watch out for will be the current quarter's ARR growth. We need to see a solid improvement from the March pace, and a big improvement in customer attrition. If these are not forthcoming, without good explanation, it would materially impact my investment thesis.

Stay tuned...