Straws are discrete research notes that relate to a particular aspect of the company. Grouped under #hashtags, they are ranked by votes.
A good Straw offers a clear and concise perspective on the company and its prospects.
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21/07/2023
updating this straw.
It could be that the risk reward proposition is fast approaching an action point. We still have a year or two until FCF +ve and the market is really very unkeen on companies that are unprofitable and developing a SaaS business. Which is great for us if we are looking for long term compounders that haven't been recognised by the market. The days of SaaS bargains seems a long time ago, but FINEOS could well be that rare ASX company.
Just looked at a presentation from Morningstar extolling the virtues of FINEOS. I am not sure if this will work but have tried attaching the presentation.
If it doesn't work let me know as might be behind paywall and I will do some screenshots of the major aspects of the thesis.
----------------------------------------------------------------------------------------------------------------
knife, and put it in your pocket
save it for a rainy day.
Fineos has just fallen off a cliff.
I used to hold but am very glad I don't now.
It is, obviously not alone. It belongs to that category of growth stock that is largely out of favour, particularly it has just guided that revenue will be at the lower end of predictions.
It is also unprofitable and probably won't be FCF+ve for another couple of years.
But
It is a bit of a slow burn, solid sticky SaaS that has a great future ahead of it. (See business model straw) I am not sure when the downward vertical SP graph stops, but I am looking at re-entering at some point in the near future.
Michael Kelly
· 14 April 2023 Direct 101,966 CDIs price ~$1.51 per CDI (~$153,968.66)
· 15 March 2023 Direct 210,000 CDIs Price ~$1.148 per CDI (~$241,080)
· 10 March 2023 Direct 768,591 CDIs price $1.322 per CDI ($1,016,077.30)
Director Buying
Michael Kelly
· 10 March 2023 Direct 768,591 CDIs price $1.322 per CDI ($1,016,077.30)
William Mullaney
· 10 March 2023 Direct 10,000 CDIs price $1.20 per CDI ($12,000)
Fineos offer the mission critical SaaS product that investors like me search for at a decent price.
They are a niche player, providing software solutions to a particular subsegment of the Life insurance industry (Life, accident and Health). These companies, do not want to risk a new offering from a competitor, if their current product works well. And that's why 55% of them are still operating on legacy on-premise systems as opposed to Fineos' cloud based product. Fineos is the lead provider for this particular part of the insurance industry and is investing heavily in sales, marketing, R&D etc to build out an unassailable product suite to create a fortress. The switching costs are very high for this industry and therefore they have a significant moat (see below)
Here is a link to their most recent presentation
What is apparent is that all metrics for growth are solidly positive, and their margin is being maintained at ~65%, but on the P&L statement they are increasing their spend significantly.
I think this is one of those times where this is the correct thing to do, but at a moment in investing psychology where it is the least acceptable thing to do - creating an opportunity to buy a good solid company at a discount.
If one looks at how long their customers have used Fineos products it is quite extraordinary: Its 10 largest customers have been with Fineos for an average of 8 years, with the oldest close to 20 years. This is validated by its mid-90s percentage retention rate, implying the life span of its customers is around 10-20 years.
They do not break out LTV:CAC (or many other metrics for that matter!) but one can safely assume it is going to a big number.
They are also offering an increasing number of modules (developed in house, and a few acquisition related). I believe that they have probably finished much of what is required for a comprehensive product suite, and that the R&D numbers will continue to decline as a percentage of revenue over the coming years, improving profitability. It currently has higher software development costs (as a percentage of revenue) than other industries (eg Xero) but I am hopeful that this should slowly improve.
The runway for growth is huge: they currently have several of the biggest insurance companies operating in this space as customers and should be able to capture a significant percentage of companies coming of legacy systems, using existing customers as references.
As such, it is not unreasonable to see a tripling in revenue over the next 2-3 years, a relatively small increase in costs and consequently a flip into increasing +ve FCF. With time the marketing and sales costs will continue to reduce, depending on how aggressive management wish to be, with a further improvement in FCF.
If they can achieve this, then one can sit back and watch the money roll in, because none of those customers are going anywhere, and any new customers are just gravy.
Not low risk in execution, but very low risk once executed.
Not held but one to watch closely.
Barriers to Entry
AGM Trading Update FCL tracking to achieve FY22 revenue in the range of Euro 125 - 130m. Subscription revenue growing at approx 30%.
FINEOS is a leading vendor of core software to the life, accident & health insurance industry.
FINEOS is headquartered in Dublin, Ireland, where it undertakes product and technology R&D.
FINEOS has clients, as well as sales, service, product development and support offices in Australia, New Zealand, Sweden, the Netherlands, Spain, Poland, Ireland, the United Kingdom (UK), Canada, the United States (US) and Hong Kong.
Fineos’ quarterly update (attached) is strangely silent on previous FY21 sales guidance which leaves questions on a poor cash flow update and notice of escrow release sting in the tail that probably explain’s it being down -5% currently on the release.
Updates:
· Nothing on sales, previous guidance was upper end of €102-105m range that was given at the Macquarie conference in early May. No news is bad news.
· Spraoi acquisition completed in May, this resulted in –€3.1m cash outflow in the qtr.
· Cash €13.3m down from €27.4m last quarter, mostly driven by –€10.5m in FCF the highest quarterly FCF outflow to date driven by lower customer receipts (supposedly timing related with receipts in July) and higher operating and R&D spending.
· 2 new client contract wins in North America signing up to FINEOS New Business and Underwriting, and FINEOS Claims and Payments modules
· Escrow Release: Post results release on 26 August, at total of 85.1m shares held by associates of Michael Kelly, Executive Director and CEO will be released from voluntary escrow. This is 27% of shares (including unquoted) and given the current free float is 126.3m shares according to YahooFinance, this is a 67% increase in free float… Wow, lets hope he doesn’t need cash for a while.
I own FCL and am updating my valuation but will wait for the full year results before completing and publishing it on strawman. In the meantime I am sitting tight and looking through a messy quarterly update for what I hope is long term sustained growth and improved FCF performance as it scales.
For those interested FCL came up on the call yesterday (28Jul) 45min in, Henry Jennings and Andrew Wielandt are on and usually worth listening to.