Felix (FLX) secures key customer in real estate sector

FLX is pleased to announce that it has secured a 3-year contract with GPT Group (ASX GPT) for its enterprise procurement management platform.

The contract will generate $300k of ARR, equivalent to approximately 7% of total contracted ARR, with a total contract of 900k over three years.

Key points

• First cornerstone customer in real estate sector, representing expansion into new verticals.
• Another significant company (9b market cap) to acquire FLX’s services, which provides continued endorsement for FLX’s product.
• GPT is one of Australia’s largest diversified property groups with a portfolio of 25b across 79 Australian office, logistics and retail assets. GPT has significant pipeline of developments with over 4.8b currently underway or planned, provided FLX with further organic growth opportunities.

A solid win for FLX before the release of their upcoming Q2 report.

DISC: hold a small position 

Insider Alexander Waislitz (Thorney Technologies) purchased 360k worth of shares at .22c per share on 21 October. This upped their stake in Felix from 7m to 12m shares (voting power now 9%).

The company also recently presented at the Hidden Gems Webinar on 22 October, alongside TNG, FME and CBL.

Bullish signs following a promising quarterly update in Q1.

DISC: Held

Q1 FY22

@Chagsy, nice summary mate. As I indicated recently, I was going to strongly consider selling if this quarterly was a poor one. Like you, I have been pleasantly surprised reading the update. Key metrics are solid, but you hit the nail on the head - contractor growth is fundamental for the platform to attract vendors (and subsequently enable network effect to slowly do its thing). While a record six contractors were onboarded in Q1, I was perhaps most impressed at the size of some of those players, as you allude to. It is one thing to onboard a small business, but another to onboard a business worth around 2b.

Vendors in the marketplace continue to gradually increase too, albeit just under 7% in Q1 which is nothing to write home about - but my thesis was also based on gradual increases. The report mentions that the six new contractors are expected to onboard their vendors once implementation is completed in Q2, resulting in an additional 7000 vendors to marketplace. This bodes well for Q2 reporting.

Cash burn a little concerning, but with >7m in the bank they should have enough cash to sustain growth/operations for at least a few more quarters. 

DISC: Held - I think there is enough in these figures to justify me continuing to hold my small position, noting I am paying close attention to the industry in which FLX has a number of competitors.

Proptech startup ProcurePro raises $2.6 million seed round

Article is here. ProcurePro launched in Brisbane in 2020, and are targeting the same sort of market as Felix. Bear in mind, there is strong competition in this field, with iseekplant.com.au (Australia's largest online construction marketplace) and VendorPanel, to name a few. 

I bought a small parcel of Felix's shares a number of months ago. I wouldn't call their performance in that time outstanding, but they appear to be slowly ticking along. There are real and valid concerns about Felix successfully monetising their platform. I initially provided them with a bit of leeway here, given they are recording impressive growth to their suite of products/offerings - the idea is that they will eventually start to monopolise this when the network effect starts hopefully starts to do its thing. This is OK if they are market leaders with leading disruptive technology; the risk here is the market is slowly becoming more congested, which might create some real problems for Felix down the track. A reluctance to pay for a product will only become more extreme if there are other avenues for a particular business to seek that service. 

With competition growing, the risk/reward ratio is starting to become a little murky. As per my thesis, I want to see gradual growth to both contractors and vendors - the idea being that this will create value for both as it continues to scale. That said, I want to see some ARR growth in Q1 FY22 due to less-than-ideal figures posted in Q4 FY21. I will be keeping a close eye on this in the coming weeks. 

If there isn't any meaningful change/improvement to Q1 FY22 figures, I will consider selling and sitting on the sidelines with this one while Felix continues to develop and mature as a company. 

EDIT: Spelling 

Key Highlights

• Expansion of enterprise platform with new Procurement Schedule module undergoing final testing and validation with cornerstone customer
• Early discussions across customer base indicates strong demand for the new module that drives operational efficiencies and greater transparency
• 52,234 Vendors in Marketplace increasing 53% pcp, significantly increasing the scale and value of future monetisation opportunities of the Marketplace
• Enterprise SaaS Contracted ARR¹of $1.9m as at 30 June 2021, up 25% pcp with a number of new contract discussions well progressed
• Three new Enterprise SaaS contracts won and one contract expansion across target sectors, highlighting the broad applicability of Felix’s enterprise platform
• Strong cash position of A$9.0m, as at 30 June 2021, providing funding flexibility to execute strategic initiatives and execute platform expansion

Thesis check / thoughts

• Contracted ARR graphic (figure 2) shows an increase of $1.9 million from $1.8 million. This is a little misleading for my liking – with the quarterly increase reported at 0.2million. Receipts from customers recorded a minor increase of almost 2% ($742,000 to $755,000).
  • This is disappointing to be honest. I am hoping to see improvement to this metric in Q1 and Q2 FY22.    
• In better news, the onboarding of 3 new SaaS contractors (and a contract extension) is encouraging. The customers are:
  • Macmahon Holdings Limited (ASX: MAH) – this looks to be the most impressive customer added. MAH has an annual revenue of around $1.3 billion. It is also encouraging to see FLX onboarding a mining-related contractor.
  • a joint venture between two major contractors, responsible for road maintenance and construction in Sydney
  • a leading provider of civil engineering
• Retention rate was 100%, which is great to see.
• The number of vendors in marketplace increased to 52,234, up from 49,402 in the previous quarter.
  • This is in line with my thesis – gradual growth of vendors in marketplace as more contractors/customers are onboarded. The latter makes Felix a more attractive proposition for vendors and should result in increased vendor subscriptions (also increasing the network effect over time).
• Cash burn rate steadied (due to the reduction in one-off IPO costs), with just over $1 million spent (in contrast to 3Q, where over $2 million was burnt). Cash position is strong at $9 million.
• Good to see ongoing improvement/investment to the Felix (platform), with the new offering of a Procurement Schedule.

All in all, I am bullish on the quarter, noting that ARR didn't increase as much I would have hoped. Even still, the onboarding of 3 new contractors, 100% retention rate and steady increase in marketplace vendors are all encouraging. 

DISC: HELD 

Overview

Felix Group Holdings Ltd (FLX) develops and operates a cloud-based enterprise SaaS and marketplace platform for the commercial construction and related industries in Australia and internationally. Its platform connects contractors and third-party vendors, automating and streamlining a range of critical procurement-related business processes in the sector. FLX monetises both contractors and vendors through SaaS subscriptions.

Vendor Marketplace

The company launched its online Vendor Marketplace in 2013, which has grown to become a leading marketplace for the Australian commercial construction sector. It is used by contractors to source vendors, and vendors to source new business leads.

Felix (platform)

In 2015, the company developed its enterprise solution, Felix – a solution used by asset owners, builders and managers to connect organisations and their supply chains. It centralises and streamlines vendor management and ‘source to contract’ processes.

For those interested in gaining a basic understanding of Felix’s procurement platform, I strongly suggest watching this video.

Thesis

• Founded-led, with a healthy 28% of the company owned by insiders.
• Sticky customers and a ‘trap door moat’ – once Felix is adopted, the platform typically becomes a core part of the business’s operations, making it difficult to replace. This results in high retention rates and low churn.
• ‘Network effect’ – as Felix grows, it will create increasing value for both contractors and vendors as it continues to scale. Contractor growth is important for this to occur as this will naturally attract vendors.
  • My partner’s friend works in the construction industry as a project manager. I took the opportunity to ask him about Felix – had he heard of it, used it etc. In short, he had. He uses Felix in his day job and encourages others in the industry to do the same. A lame point, I know, but real-world application is encouraging.  
• Growth – contractor (ARR) revenue is growing, albeit off a low base. It had a total of 8 customers at the end of FY 2018, H1 FY21 reporting suggests this figure is now at 21 (there are some sizeable companies among the mix, eg. CIMIC and Veolia). Vendor growth is also impressive, with over 40 thousand ‘vendors in marketplace’ spanning across 42 countries (up from 24,832 in HY20). Much of this growth has happened organically through contractors using Felix on international projects.
• Global total addressable market estimated to be worth $7.2 billion.

Monitor

• Contracted ARR – continued expansion confirms ongoing value in the Felix product. Ideally, I want to see this metric grow at a rate of 20% and over (YoY). Of note, contracted ARR did not increase from H1 to Q3 FY21. Keep an eye on this (slow quarters are expected, particularly in this current climate, this is why I will judge this metric YoY).
• Customer churn – continued adoption of Felix with high rates of retention and low customer churn for the thesis to remain intact. FLX reported no churn in H1 FY21, with one customer churning in 4C Q3 FY21. This was reportedly a ‘change in business circumstance’ and not financially material).
• Ability to monetise vendors – to date, FLX has not succeeded in growing revenue from vendors. In H1 FY21, FLX reported 43,865 vendors were using the marketplace, but only 1359 had subscribed. More vendors will begin to subscribe as more contractors adopt the platform – increasing the prospects of the vendor finding work. This will in turn increase vendor revenue and strengthen the network effect. This is expected to occur over several years, not instantly, making FLX a long-term hold for me. I want to see gradual increase in ‘vendors in marketplace’, but also the % of those venders that subscribe. I won’t put a % goal on this yet and will revisit in 6-12 months.
• FLX is debt free, with a reported cash balance of $10.1 million (as of 31 March 2021). As a newly listed company, it is difficult to judge the company’s track record and their ability to effectively use capital to grow. Keep an eye on this and their cash burn rate.

DISC: Recently added to RL portfolio ($0.26) and Strawman portfolio.