Felix released their quarterly update today. Below are the highlights and some thoughts:

Contractors

New contractor revenue grew to $800,000 an increase of 32% on the previous quarter, 1/3 of this was made up of new customers with 2/3 from expansion deals with existing customers

Contractor ARR increased 69% on the pcp to $4.8M

Total group ARR increased 47% on the pcp to $6.9M (below)

Contractor net revenue retention was a record 127%

3 new contractors were added for the quarter for a total of 48

No customer churn for the quarter

Vendor Marketplace

Vendors grew 15% to 84,460 compared to the pcp (below)

Felix achieved SOC 2 Type 1 certification and GPDR compliance (international data security certifications for NA and Europe) which they believe will reduce the sales cycle for international customers and expand their addressable market

Number of active projects increased 136% pcp

Request for quotations sent by contractors increased 64% pcp

Total contractor user accounts increased 25% pcp

TTM net operating cash outflow continues to improve (below)

Advertising and marketing costs continue to trend down, $45,000 for the quarter or $180,000 annualised. The previous 2 years’ advertising and marketing cost were $370,000 and $197,000 respectively highlighting a trend in Felix’s ability to grow Contractors and Vendors on the platform at less and less cost.

Felix’s biggest expense is employee related and this was $7.5M last year. Pleasingly, receipts from customers of $2.557M outpaced staff costs of $2.320M for the quarter. Cash outflow from operating activities was down to $575,000 with free cash flow of -$1M.

Following a recent capital raise the company now has $5.5M in cash not including an upcoming $450,000 ATO R&D tax rebate. Felix now has approximately 2 years cash runway with a reasonable chance another capital raise may be required.

Overall, Felix had a strong quarterly update. It will be interesting to see if the company can keep expenses down and continue to grow revenue in order to achieve positive free cash flows and avoid another dilutive capital raise.

Appendix 4D – Half Year Report

Felix recently released their Half-Year Report ending Dec 2021.

Principal Activities & Review of Operations

Felix provides a SaaS solution to its Contractor and Vendor customer base enabling ease of finding, managing and engaging with each other. The platform automates and streamlines a range of critical, procurement-focused business processes.

Contractors are contracted by asset owners to build or maintain capital works projects in the commercial construction and related industries.

Vendors comprise the Contractors suppliers and include subcontractors, equipment providers and service and materials providers.

Throughout H1 FY22 Felix continued to increase the number of Contractors and Vendors on the platform and expanded into new sectors, such as resources and utilities.

The number of contractors on the platform grew 18% from 31 to 38 during the half. Each new contractor embeds Felix into their organisation and mandates usage across their entire third-party supply chain of Vendors on to the platform, effectively building the Vendor Marketplace at no direct cost to Felix.

Average Contractor ARR Retention rate for the Half of 98.8%

Contractor ARR contribution increased from 45 – 56% with total Group Contracted ARR of $4.2M

Average Contractor ARR ~$63,000

Number of Vendors in the Vendor Marketplace grew by 15,138, an increase of 35% on pcp. The footprint of the Vendor Marketplace spans over 50 countries.

Average Vendor ARR ~ $2,800

Felix introduced Procurement Schedule module, connecting critical project planning, scheduling and tracking data with key sourcing processes. The company reports strong demand “with a number of Contractors taking up the new module”.

Felix continue to work on their Essentials module, a ‘lite’ version of their existing module tailored for individual Contractor projects. They expect the sales cycle to be significantly reduced as it will be sold directly to project managers as opposed to enterprise wide.

Engagement Metrics

•Number of active projects up 554% pcp

•Total active Vendor Compliance Documents up 327%

•Requests for Quotations sent by Contractors up 158% pcp

•Total Contractor user accounts up 61% pcp

Financials

•Total revenue down 21%; however, excluding Other income (Job Keeper etc) sales revenue was flat

•Contractor revenue up 28%

•Operating expenses down 32% predominately due to IPO costs in the pcp

•Marketing & advertising expense increased 32% to $136,533

•Loss of $3.7M down from $7.5M pcp

•Cash and cash equivalents of $6M

•Net assets of $4.1M

•Cash outflow from operating activities of $2.5M

Felix has 38 Enterprise Contractor Customers with an average ARR of $63,000 versus 59,000 Vendors on the platform with an average ARR of $2,800. I suspect the latter refers to paying Vendors only as the company offers a Freemium model.

What to Monitor

The company’s success relies on their ability to grow Contractor Customers. Contractor Customers mandate their Vendors adopt the Felix platform, essentially building Felix’s marketplace at no cost to the company. Consider realestate.com.au, no one is going to use the website when looking to buy a property if there are no houses listed. Similarly, with few Contractors (house listings) on the Felix platform (realestate.com.au) no Vendors (house buyers) will be attracted to the offering and Contractors will see no value.

With cash of $6M and an operating outflow of $2.5M there's a strong possibility of a capital raise in the next 6-12 months.

•Talented, aligned BOD with relevant experience, strong track record in construction & software & 22% ownership

                -In addition, previous director David Williams (Oct 2020) owns 14.5%

-Robert Phillpot co-founded Aconex, acquired by Oracle for $1.6 billion in 2017

•2x Founder led with 6.5% ownership

                -33% total insider ownership

•First movers with potential for strong network effects*

•Possess strong economies of scale with low/zero customer acquisition cost

•Posted first positive operating cashflow for the half of $194,799**

•Strong balance sheet with $10M cash & no debt

                -Strong probability they can self-fund growth from here

•Possibly misunderstood/unknown

                -Recently listed Jan 2021

                -Financials before H1 FY21 report were not pretty (~$7M loss & -$7M FCF)

•Strong growth trajectory

•Large addressable market

•Disruptive construction technology platform

•Moderate tailwinds

                -Shift from paper to digital

                -Aus gov $110 billion Federal land transport infrastructure program over next 10 years

•Valuation: currently on a reasonable 9x price to sales

•Provides portfolio exposure to infrastructure through a higher gross margin tech play

Minor Concerns & Why I Would Sell

Construction & mining & resources industries are cyclical. This could be offset by expansion into other non-cyclical markets, including government, utilities & facilities management. Monthly recurring revenue from vendor subscription could mitigate this risk as well as the value of the platform to Enterprise customers (e.g. $75,000 cost for multiple 10 – 100’s of million dollar projects)

•Inability to onboard more meaningful Enterprise customers

•Inability to convert existing & new marketplace vendors from freemium model to paid subscription

•Inability to improve free cash flow

•Expenses outpacing revenue growth

•Founders selling a significant stake while not executing on growth strategy

To Monitor

•Ensure performance based LTI plan to be implemented July 2021 is reasonable. Provides for 25% cash bonus on base salary, made up of 50% for EBITDA target & 50% role specific performance measures. Applicable to CEO, CFO, CTO, COO.

* Continued innovation of new modules as well as conversion of vendors (currently 2.5%) to a paying subscription will be key

** Since writing this, the most recent quarterly saw an operating cash outflow of ~$1M excluding IPO related costs. Refer to my App 4C straw.

Thanks to Bear77 for his excellent write-up on Felix. https://strawman.com/reports/FLX/Bear77

I’ve included my notes to test my understanding of the company, rather than just relying on the work of others.

Company Overview

Felix was founded in 2012 by CEO Mike Davis and non-executive director Michael Trusler.

A construction technology company, Felix offers an online SaaS marketplace for contractors to source vendors and vendors to source new business leads. This enables both contractors and vendors to find, manage and engage with each other more effortlessly.

Contractors, such as Monadelphous or CIMIC, are contracted by asset owners (e.g. government bodies, property developers) to build or maintain capital works projects. Contractors adopting the Felix platform typically mandate it’s use by their vendors. This network effect drives down or even eliminates customer acquisition costs.

Vendors consist of the contractors’ suppliers, including subcontractors, equipment providers and service and materials providers. An increase in vendors should drive more contractors to the platform, strengthening network effects.

In addition to facilitating contact between contractors and vendors, Felix’s platform streamlines the procurement process.

Felix has seen it’s vendor customer base grow from 10,036 to 49,400 in 3.5 years. As a result of vendors using Felix on international projects, 800 of these vendors are spread across 42 countries with zero marketing spend in these geographies.

What problem does it solve?

For Contractors

Typically the process of contractors engaging vendors has been managed with paper-based forms and everyone working in spreadsheets. This is a labour intensive, manual process lacking transparency.

As a result, Felix was alerted by tier 1 contractors of the need for an enterprise solution to improve vendor management & procurement.

A digitised vendor management solution was created enabling contractors to engage their 3rd party supply chain (e.g. subcontractors, suppliers, consultants). This specific module enables contractors to manage their vendors from prequalification through to performance evaluation and ongoing compliance.

Felix’s sourcing module enables project teams to manage sourcing activities while storing all documentation in a central location. It also customises and enables numerous rapid purchasing and end-to-end request for quote processes.

Felix’s contracts module stores all contracts and contract summaries in a secure centrally searchable repository.

Vendor marketplace enables contractors to discover new vendors outside of their existing supply chain, ensuring competitive pricing from bidding vendors.

For Vendors

Pre-qualification to contractors is burdensome. For each bid vendors need to answer up to 300 questions, upload, send and scan 20 documents. The Felix marketplace allows them to pre-qualify to an internationally recognised standard.

Imagine a $1Bn project with 1,000 packages of work and the friction the Felix platform removes through centrally located, transparent documentation, ease of sourcing, ease of quote requests, efficient compliance and contract management as well as all the paperwork removed.

Revenue Model

The company’s recurring revenue accounts for 62% of all revenue, up from 37% in the previous corresponding period.

Felix monetises both contractors and vendors.

Enterprise customer (i.e. Contractor) ARR has grown from $36,000 in 2018 to $75,000 as of Nov 2020. Felix expects continued growth as they release more modules solving additional enterprise customer problems. Average contract length is 2-3 years.

Average Vendor ARR, through marketplace subscriptions, is $2,100. This is offered through a freemium model on annual or monthly contracts. Felix expects growth of vendor revenue to accelerate as Marketplace scales, providing a significant monetisation opportunity.

Highlights

Continued strong growth with

•Enterprise SaaS ARR up 37% YoY to $1.8M

•Enterprise user accounts up 56% pcp

•Requests for Quotations (RFQ) sent by Enterprise customers up 123% pcp

•Number of active projects up 890% pcp

•Vendor approvals up 164%

•Total active vendor compliance documents up 345% pcp

•Vendor evaluations up 70% pcp

•Vendors in Marketplace up 66% YoY to 49,400

This puts them on pace to comfortably outpace Vendor growth from the previous half.

•One customer churn but contract was not financially material. Previous half had zero churn.

While this level of growth is high it’s important to consider much of it is off a low-moderate base. Compliance documents growth could indicate vendors looking for more work. Could this lead to a higher number of paying vendors down the track? Most are currently on a freemium model. Growth in active projects suggests customers are finding value in Felix’s offering.

The market reacted with a minor selldown. My guess would be the operating cash outflow of $2.2M scared some investors. $1.2M of this was from the IPO, a one-off, and in addition due to “timing profile of recurring Enterprise licence fees”. My understanding is Enterprise fees are paid for the year upfront.

In the previous half, operating cashflow was +$194,799. Even if FLX continues to burn $1M Q, with $10M cash, this leaves them with over 2 years of cash runway.

I’m still new to the Felix story so it’s possible I’ve missed or misunderstood something.