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A good Straw offers a clear and concise perspective on the company and its prospects.
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17/11/23 Prophecy Q1 FY24 Business Growth Update
@JPPicardsummed it up well in his straw, this was a poor update from PRO compounded by the fact that management tried to convince us otherwise. One bad quarter is never a problem and should be expected every now and then, but you want to see management acknowledge it, comment on what went wrong and how things are progressing moving forward.
Headline ARR going backwards is not a good look, digging deeper shows Legacy product revenue winding down (previously flagged so not an issue) and a decline in Snare maintenance renewals. That is somewhat expected as the business model shifts to subscription, but the quantum of the fall ($3.4m to $2.5m in one quarter) with only a modest increase in the Snare subscription ARR ($4.2m to $4.6m) was larger than expected. eMite growth was also modest ($14.9m to $15.4m) and couldn't offset the declines in Legacy or Snare maintenance revenues.
Even removing Legacy and Snare maintenance revenues, eMite and Snare subscription revenues only grew 4% quarter on quarter, below historical trends and growth targets of management. Again, quarter to quarter can be lumpy given enterprise deals so no reason to panic, but you would like to see management acknowledge the weakness rather than ignoring it.
There were some positives in the update, the imminent signing of the first non-Genesys or Amazon eMite client is great news and is the first sign PRO can attack the much larger TAM outside of their core platforms. The commentary that they expect to be cashflow positive for the half and full year is interesting and I am keen to find out how that will be achieved. In FY23 there was a big split in 1H and 2H cash collections as large customers are invoiced in the 2H, the point where cashflow was -$3m in the 1H and $2m in the 2H. I would suspect to be positive cashflow there is likely a shift in collections to smooth out the seasonality, because without that a cashflow positive 1H would result in a very strong full year result given the usual strength of the 2H.
Update 18/11/2023
Slight downgrade from $0.81 due to costs in moving to Oracle Cloud and possible increased maintenance and being part of the OPN
See my straw from 18 Nov 23.
10 months ago
Taking the capital raising price completed in Oct-21 as resistance level for share price.
Updating to let everyone know as many may not be aware.
I'm on the fence with Prophecy as in my mind their main product eMite appears to be another business intelligence app that could be developed by other companies in the analytics space (ie: Oracle, Qlik etc)
I wanted to avoid posting on Prophecy and I know this will be a very unpopular low vote post and damage my ranking.
But I can't help myself again!
These slides just screams "Buy Oracle" even if it is $100+ USD and you need to fill in that WB form to receive the quarterly dividends to ensure you are not taxed too much.
There is also a partnership fee when joining the Oracle Partner Network. I know as the company I work for is part of the OPN.
On top of that, there are ongoing certification fees and certification expires after 2 years. - but of course you have a choice to do it once and not do it again.
Then of course there's commissions etc... to Oracle for being a partner which cuts into the margins.
On the move to Oracle Cloud I have a feel this will cost quite a bit and need new hires to maintain emite and Snare on Oracle Clloud Infrastructure. Hence the mention about the hosting cost. Hopefully for shareholders the containers before the move were running latest versions so it would be less labour intensive. Prophecy had no choice because it is obvious that some of their government and NGO clients are making the move to Oracle Cloud. This is why it makes more sense to buy Oracle shares instead.
I could get into more detail on Virtual container image maintenance etc.. on OCI but that will be beyond the scope of this post and will just confuse everyone more. You can do a google search on Patch Hypervisor or Host and Virtualbox for a basic primer of what this could involve but I can assure it is a pain when you patch your Linux system only to find your little Virtual machines and docker stuff suddenly don't work.
Having said that, I think the cycle of moving off deprecated systems in OCI on average is about about 2-3 years.
You are probably aware from the last Sydney meetup about my background in Oracle Cloud so feel free to probe me a bit more on this.
I actually tried to attend the PRO AGM virtually this morning (10:30am Adelaide time) but could not get on.
I got close but nothing came through the registry portal (even after switching browsers, doubles checking time differences, etc) so I think they must have had difficulties broadcasting?
From their IR site, they don't seem to put recordings up, so unless you were in Adelaide this morning it looks like a closed shop.
Did anyone else manage to get on?
Disc: Not held.
At first glance, Prophecy’s Q1 update looks pretty bad.
Why?
I simply can’t get over “Annualised recurring revenue (ARR) grew to $ 22.56M as at 30 September 2023”.
Why? Because ARR actually went down. From full year presentation 3 months ago: "Cash Combined ARR growth of 26% to $23.2M"
So ARR went down by $640K, not a massive deal, sure, but to reach cashflow these guys need to be growing 15%+, not going the other way round.
Looking at their chart, we can see that this happened because “legacy subscriptions” and “Snare maintenance renewals” both went backwards. This is expected as they transition Snare to Saas, but I would have thought stronger growth in eMite could have covered for this.
The cash pile also went backwards, which they claim to be expected, and I’ll grant them that. Especially in light of invoices to the tune of $ 5.96M that went out year to date. So cash should be back to stable after the money is in the bank.
They’ve given us pipeline information for both eMite and Snare, if we add them both up, assume a 9 month sales cycle to end of year, and 20% average conversation rate, then we get an extra $4M of ARR by end of year. This would be good to see honestly.
Still have lots of trust in Brad and the team, so hopefully they increase the momentum from this point.
Would love comments from anyone attending the AGM.
AEF Building their position.
Could be due to the company's impressive 26% ARR growth, a stable bottom line, a substantial $12M cash reserve, and zero debt.
Seems like a decent proposition to me.
Disclosure: I hold.
FY23 updates highlight
In first half, operationally they were outflow of $2.8m ( which means for full year operational cash outflow will be ~$0.8m)
I think management set expectations of full year cash flow neutral or positive in past few presentations.
Although, the thesis is working nicely ( However, I like management not to set high expectation). Since last five years, ARR has grown significantly and now it is at inflection point of achieving cashflow positive in near future.
ARR Growth:
FY18 : $4m
FY19 : $5.9m
FY20 : $7.8m
FY21: $10.7m
FY22: $18.3m
FY23 : $23.1m
For those intersted and maybe missed it, PRO has a show and tell next wednesday 26/7 4.15pm on Snare and emite. i dont hold this one but they are making progress. obviously critical that these prodcuts have strong posioting in their markets.
have we hosted the CEO on sm? worth a chat i think @Strawman
Prophecy has delivered a substantial turn around in cashflow in Q3, with a $3.0m increase in its cash position since the end of 2022. That compares to a $3.2m outflow in the first half. Larger subscriptions were flagged as being weighted to H2 and management had indicated that cashflow would be positive for the full year. This was evidenced by invoicing, which was almost as high in Q3 as it was for all of 1H.
Annual Recurring Revenue continues to grind higher, up $0.7m to $21.3 since they last reported, although government agencies are continuing to opt for perpetual licenses. The combined sales pipeline for eMite and Snare is roughly equivalent to their last report. Management expect cashflow to remain positive for the remainder of FY23.
At an EV of about $28 million the valuation doesn't look stretched for a company that is growing at the rate it is and can pay it's own way. However the market reaction has been 'meh'. Like many of the companies I own the buy/sell spread is daunting.
[Holding]
@Solvetheriddle The GM% is 100% according to Yahoo Finance since Gross Profit = Total Revenue (ie: Cost of Goods/Services =0).
This is typical of most SAS firms where they set the cost of goods/services to zero and then bundling the expenses under "Other expense". Personally I find that confusing as it would be good if the cost of spent maintaining the codebase of eMite and Snare such as fixing bugs and adding new features is made clearer in the income statement.
Maybe this expense is here?
When investor relations can't reply to a simple question like what you asked it is not a good look. Or they can at least point you to Yahoo Finance
I did used to hold at over a dollar but sold around the 70s/80s out when I got sick of the share price trending down. I think that was a good move after studying their eMite and Snare products a bit further (perhaps there is something cyclical about the products esp eMite but can't quite pinpoint it yet) so I'm not as bullish as the others here but time will tell.
PRO is a software provider with two key products: eMite, a cloud based call centre analytics product and Snare, a cyber security monitoring software. @Noddy74 and @Valueinvestor0909 have covered the software in previous Straws so I won't go in-depth here.
FY22 was a foundational year for PRO, winning their largest contracts for both of their products, Humana (US insurer) for eMite and the UK Government for Snare. While the company will likely not be able to match the 70% growth in ARR in FY23, the platform has been set with the business now sustainably established giving management flexibility to further invest in organic growth or perhaps M&A.
2022 was a tough year for tech stocks and the market finally woke up to the various tricks companies can use to make things appear rosier than reality, particularly when the focus was so heavily on ARR and not what was happening beneath that unaudited metric. PRO has been lumped in with these tech peers, but I think it is worth taking a step back and looking at the business and realise that not all software is created equal and the same goes for revenue and cash.
I will focus on eMite with this analysis but most of the points also apply to Snare. eMite is a pure SaaS solution, primarily delivered through channel partner cloud marketplaces Genesys and Amazon Connect. As investors, one of the main reasons software businesses can be so attractive is the fantastic incremental unit economics. However some software products lose a large chunk of this benefit if the software must be heavily customised to individual customers which also comes with long implementation periods. Most companies who suffer from this problem usually disclose contracted ARR to try and show the pipeline of ARR that will come online over time. Further, when software is heavily customised to customers it makes the roll-out of updates and improvements difficult and usually comes with more implementation time.
eMite avoids this problem with an out of the box solution (which can then be highly customisable by the customer themselves) that can be deployed in hours over a customers cloud call centre infrastructure. The lack of a long implementation phase means PRO's ARR is extremely clean. Because the software can be turned on and off so easily, management have also established a disciplined negative working capital model. Management clearly break this out in the annual report (a virtue I wish other software peers would emulate!):
Again, this negative working capital model is another reason why software businesses can be so attractive. However, many software peers have cash collection issues and in 2022 most have been exposed by the market which has focused more closely on cash. The strength of PRO's model can most clearly be seen by FY22 revenue of $16.4m vs $21.5m in cash receipts.
On top of this, management also don't capitalise any R&D so operating cash flow is very clean and the P&L isn't artificially boosted (actually the opposite because some legacy D&A is still rolling off).
The business model gives us clear visibility for FY23, with $18.4m ARR entering the year, another $2-3m in Snare license sales as the business model continues to shift to a subscription service plus further growth through the year. I expect reported revenue to be in the range of $23-24m. Management have flagged a ramp up in costs to chase further growth with the strong tailwinds they have with the shift to cloud based call centre infrastructure and cyber security solutions. I'm not exactly sure how much will be tacked onto the cost base, but given the revenue growth I'd expect the business to be profitable (but definitely cashflow positive given the negative working capital model).
4x ~$20m ARR.
Business is cashflow positive and likely to tip into profitability this year but re-investing incremental cash back into growth.
Hi is anyone aware of the GM% for the emite and /or Snare businesses? i sent the CEO an email got no reply. i find the communication from these guys a little unusual, probably nothing. business appears to be doing ok rev/pbt/cfo. thnx
I wasn’t present at the Prophecy AGM, but dug through the slides and compared them to their annual results to (released in August) to see if I could pick up progress they made in the 1st quarter considering they don’t tend to be overly communicative.
Thought I would share some of the things I’ve found interesting. If anyone attended the AGM, would love to hear if anything else came up.
All in all, I would say things appear to be on track for another good year, although with ARR potentially not as strong as this last year (70%). They do have a tendency to win large contracts so a few of those could significantly turn the dial on their growth.
Keen to hear from anyone else on their thoughts/opinions
Disc: Hold a small parcel IRL
Prophecy International has been absolutely smashing it of late - up almost 3x in the past couple of months, which is pretty extraordinary for a business that was established in 1979 and listed in 1997.
They are a B2B software solutions provider in two major verticals. They have three products but you can pretty much discount eFoundation, which they are not developing and running down. The other two are:
eMite
Which is an analytics solution for contact centres (on premise or cloud). It does number crunching, visualisations, KPI management and reporting. As at mid-Oct it was generating $10.5m in ARR, up almost 40% since Jun 21. This was partly on the back of their largest ever signing (Humana in the U.S) but it has grown steadily and strongly over the past few years.
SNARE
This is Cybersecurity and compliance tool. Up until now I believe this has been offered on a perpetual license basis but was recently rolled out as a subscription offering. This has been a little slower to get going but is growing and has been growing faster of late.
Clearly there's no shortage of competition in the space but they must be doing something right given the growth they're experiencing. Having said that they've been investing to get the growth and haven't been profitable since FY17. Despite the top line growth I'm not sure they will be in FY22 either but we'll see.
Insider ownership is healthy with the non-exec Chairman (joined as GM in 1987) being the largest holder with 12.2%.
Congratulations to ValueInvestor who is its only Strawman investor. You must of been turning over a lot of rocks to find it as it hasn't looked like much on many measures until very recently. Wini has been spruking it of late also so props to him too.
One cautionary note - it's worth reading ValueInvestor's ##Not so honest communication post here.
Psychologically it's hard to look at a company that has recently gone 3x and not think that you've missed it. Having said that the market cap is still only just above $100m and it's not unreasonable to think ARR could end FY22 at $20m. An ARR multiple of 5x? Pro-Medicus holders might like to have Prophecy's ticker symbol but I'm pretty sure they're content with PME's multiple...
[Not held]
So Prophecy announced today, that it has increased ARR to 13.6m ( at the back of the new eMite SaaS deal).
However, they changed the ARR figure for FY21 in this announcement to hide that Snare's ARR has reduced ( which I knew anyway because Snare's main Managed Services partner stop selling it last year - Although, new Managed Services partner has been onboarded later in FY21). It may take little time to ramp up Snare's sales.
The thesis is active -- both products have significant momentum. However, Management tried to change the figure to show more growth.
Look at the following twitter thread, Company did respond to my initial tweet - I am waiting for their further response.
But my confidence in the integrity of Management is somewhat shaken and I will reduce my holding on share price strength.
Update: 15th Oct 2021
Attended webinar hosted by CEO. Products definitely have momentum and CEO also sounded very driven and focused on growing the business.
I will keep this on the watch for ongoing announcements.
Prophecy agrees to provide eMite to Humana Inc. (NYSE: HUM) for an initial term of 3 years, with a minimum commitment of AUD$1.784M million in annualised recurring revenue (ARR) and total contract value of AUD$5.518 million over the initial term. eMite ARR now exceeds $10 million.