Finally got around to putting a fuller thesis together.
Knosys (KNO) is a new stock I have been working on lately and is an interesting opportunity in the microcap tech space.
KNO sells a knowledge management software platform that can help businesses to better manage staff and information flows. Can be used to link together staff across multiple departments that use different legacy systems. It is suitable for client servicing through to HR and compliance activities. The aim is to improve productivity and provide cost savings across an organisation.
The software was built specifically for ANZ, who is the cornerstone customer. The founders saw it could be standardised thus taken to market. The stock was listed in late 2015 but flailed as expectations of new deals were slower than promoted which is the nature of enterprise deals. Also, the business was very raw and set up poorly to succeed. In addition, it wasn't made clear at the time that ANZ paid annually so CFs were super lumpy and in what shouldn't be a surprise the first quarter being listed was when the receipts come in and its looks "sound" from a CF perspective.
The board conducted a strategic review in 1H CY16 and sort to fix up the issues. The person who did the review was brought on as CEO, with the founding MD kicked out. Sales and R&D was brought back in-house as this was previously outsourced to entities controlled by the founding-MD. Costs were reigned in and traction came back to the sales process with them landing another big whale in Singtel/Optus.
Revenue growth has been strong but lumpy, with most of it recurring. On large enterprise deals they will be paid for set up costs (i.e. Optus). Costs have been steady, and GMs run at ~80%. There are 17 FTEs and they believe this is enough for growing revenue3x to 5x. This includes the planned Sydney and Singapore offices. I speculate that once the latter is live, Singtel would likely take it across their whole business.
At current run-rate, ARR allows the company to almost wash its face. With modest net cash burn, $3.2m in cash and trading at ~3x EV/Sales, KNO essentially offers a call option on further growth. Big ticket names provide a case study for further enterprise deals whilst a new mid-market version of the product has been launched. This focuses on smaller companies thus broadening potential avenues to grow revenues and potentially at a smoother rate. I note that CFs will be lumpy due to mix of annual and quarterly billing contracts (about 50/50 split now) but on track to be CF+ this CY assuming reasonable growth is achieved.
Management believe there is a reasonable chance they can get $20m+ within 5 years. The APAC region is an opportunity of a few hundred mill and with only have 5 to 6 competitors and the market is wide open and this sort of revenue target is not un-achievable (not guaranteed though). If they can achieve growth in this order, the stock would likely trade at valuation multiples more like what we see with more established ASX tech stocks (i.e. north of 5x EV/Sales). Management has been filled out with ex-Signet people. Signet was owned by Kestrel Private Equity and these people grew that business materially over the decade until Kestrel sold it off in bits (i.e. PE trade sales).
The main risk for KNO is sales execution. They have a business structure that can scale with products that work and according to scuttlebutt, achieve the claims made. Should KNO not land any large enterprise deals (or frequently enough) and the SME version flops, the company would continue to burn cash and as happens with microcap tech stocks that can't so a path to FCF, the SP would decay away as it'd always be considered cum-CR.
