Key takeaways:

1) Unaudited revenue for the FY of $7.4M (up 55%)

2) Poistive EBITDA and cashflow in H2 2020.  

3) 112k users on the platform (up 40%)

4) Strong pipeline reported.  

5) ARPU grew to $65, up from $54 in FY2019.  

Ok, solid results.   However, gross margins remain low, due to publisher payments.   Publishers have the whip hand, and Readcloud do not have any leverage to increase their share of the pie.  My concern is it will be hard for readcloud to achieve decent profit margins when the publishers are taking the cream off the top.   

Improvements made to platform are encouraging, and management are confident strong growth will continue, driven by the digital transformation of schools.   I just think they need to expand the platform beyond eBooks to achieve their full potential.  

$500 million announcement to offer free VET courses for school leavers. Its subsidiary, https://aiet.edu.au/, should be a beneficiary.  However, the funding is contingent on co-operation of the state governments, and is light on in detail.

Key higlhights:

1) Revenue tracking at $5.5 M, as at end of February, 83% above pcp. 

2) Revenue will be heavily skewing to the second half.  e-book sales for Jan/Feb were $1.55 M, up from $0.48 M in pcp.  

3) VET auspicing fees exceeding $0.77M in Jan / Feb, with more invoicing outstanding.  Also VET student fees are yet to be invoiced.   

4) Looks to be on track to exceed $8M in revenue for FY2020.

Outlook:

1) reported competitors struggling with implementation issues. 

2) Antipate growth through existing customer schools, through expansion into additional school years, and cross selling VET and readcloud platforms.

3) Anticipating increasing momentum in acquiring new schools, with a focus on larger schools delivering cost efficiencies.      

4) Digital transformation of schools anticipated to provide tailwinds for RCL into the future.  

Approximately 40% of RCL capital (including options), will be released from escrow on February 7.    

depending on the holders intentions, this may present an opportunity to buy RCL at a reasonable price......

Redcloud has released their Q2 update, and it is quite positive.

Key takeaways:

1) 103k users signed up,  an additional 7k signups since the November update, with more to be onboarded in the next month.  

2) Q2 receipts up 285% in this seasonally low quarter.  

3) No. schools is little changed from novermber at +350 schools. Reported encouraging pipeline generation from signing up 3 large Qld high schools. 

4) VET school signups will not be resolved until the end of Febuary, however, RCl reported VET schools more than doubled to +200 in teh Nov. sale update.   

5) Importantly, staff costs have remained relatively flat for the quarter.   

6)ARPU was reported to be $54 in FY19, with CAGR of ARPU at 39%.  Assuming ARPU of $64 per user, revenue for FY20 looks like being $7.5-$8.5M, depending on final results of the onboarding season.   

Overall, strong revenue and good cost control should see RCL reach beyond breakeven in H2 2020.  

Readcloud report 352 schools now signed up, up from 202 in January 2019.  RCL now has 13% of the secondary school market.  The sales strategy has bene to focus on larger schools, and expanding the use of the platform in existing customer schools. 

Estimated user numbers increased from 54000 to 92000 over the past 12 months.   78% yoy increase.  

All things being equal, RCl are on track to achieving $8.2 - 8.5 million in revenue for FY2020.   

Longer term RCL have flagged the VET education market is the biggest opportunity, with a TAM 2.5x the size of secondary schools.   

it RCL can chieve 35% market share in secondary schools, this will equate to approxiamtely $20 million in revenue.  The VET sector could potentially be an additional $40 million.  

it is important to note gross margins are relatively low, at around 35-40%, so there will not be a tremendous amount of operational leverage in the business.   

Surpisingly strong result, with the follwing key takeaways:

1) Readcloud platform now used at "well over" 300 schools / institutions.   This is very promising, given there were 277 schools signed up just 4 months ago.  With Q2 being the peak sign up quarter, this bodes well for the 2020 school year.  

2) Strong growth in revenue from existing customers, as they expand the platform across the school years. ARPU growth for the last financial year was 55%, demonstrating the success RCL has in expanding the service offering over time to customers.  

Assuming ARPU growth of 30%, and the addition of 30% more schools/institutions to the platform, revenue of $8M is possible, depending on sales over the next 2 months.   

Management reported on 5/6/2019,  the following:

1) Expanding services to existing schools, with revenue per school growing by 22% from 2018 to 2019.  

2) Despite being in the early stages of the sales season, 18 new schools have agreed to trial readcloud, with 3 already committing to multi-year contracts.  RCL report a high success rate of trials converting to contracts. 

3) Early cross selling success of VET course to high schools.

4) Bulk-buying initiative for QSPA (200 + high schools) with publishes, enabling the discount if using the readcloud platform.  Currently only a small proportion of studnets using redcloud, but this initiaitve is expected to drive sales.   

5) APT integration will be completed in the next few months, and readcloud will commence a joint marketing campaign at Qld and National VET conferences (September 2019).   

6) Product developments include embedded videos for VET courses, and direct integration of Oxford universty press digital resource delivery platform.

Revenue for 2019 to be $4.6+ million, with $3.3 million in the bank.    

The company reports no need for further acquisitions, now that it has 4 revenue streams, (direct schools, resellers, VET in schools, and VET).   

My prediction is RCL will have approx. 350 schools and 10-20 APT customers on the Readcloud platform by February 2020.   I think this will equate to around $7-8 million in revenue for FY 2020.   

I would like to see gross margins creep above 40%........we'll see. 

RCL released an investor presentation, which provided a little more detail regarding the business. 

RCL have 20 FT staff.  This equates to an operating cost of around $3.6 M pa.

One competitior, Learningfield has dropped out - leaving 60 school sales opportunities.  

Publisher/bookseller fees expenses are around 60-63% of revenue (this may fall if direct sales accelerate).  RCL have reported very little additional investment is required going forward.   

Assuming operating expenses remain static, RCL can achieve profitabiltiy at around $9M annual revenue, which looks achievable in the 2019/20 FY.   Based on a gross margin expansion per school of 13% (which is what appears to have occurred between 2018/2019), RCL will need to sign on an additional 83 schools for 2020 to reach breakeven (allowing for an attrition rate of 6 schools - 97% retention).   

The ATP deal is a call option on this investment, with the ATP not baked in to forward revenue estimates.   

Solid 3rd Quarter Result released (131% increase in revenue on pcp).  The report indicates 19FY revenue will exceed $5.0 million, and cashflow will be positive for the 4th quarter.   

There should be $3 million in cash at the end of the FY, which should be sufficient for RCL to achieve a breakeven in FY2020.   RCL report a strong pipeline of revenue growth for FY2020, with 257 schools currently now using the Readcloud platform, and have flagged they are confident they can achieve strong revenue growth from existing schools. 

It is unclear what the net revenue expansion rate per school is. If they can achieve 25% revenue growth from existing schools, and add another 100 schools for the 2020 school year, the business will be sustainable, and hit a critical inflexion point.   We should have a good indication of this in the Q2 2020 report.   This also does not take into account the ATP opportunity announced earlier this month.   

Readcloud announce a 3 year, exclusive distribution agreement with ATP. ATP provides VET training and assessment resources to over 1000 Registered training Organisations.   

This deal has the potential to double the TAM for RCL, although Readcloud has advised the roll out will be steady, with little change to the short term results.    

Update: I have had a discussion with the CFO, and he can't tell me too much - more will be revealed in the upcoming investor presentation.   The hiring of the sales team was only completed in July 2019, so their conversion rate hasn't met early expectations, but they expect the effectiveness of the sales team to improve over time. They are very bullish around the 2020 school year.   

To clarify, there are 3 segments to the business - 1-Direct sales, 2-Resellers, and the 3-AIET (vocational training) business.   Readcloud are a B-2-B model, therefore, "booklist" schools (where parents buy the books) are not part of the Direct sales target market - these schools are looked after by re-sellers.  

Readcloud are typically signed up for 1-2 years as a trial, and then rolled out to the other years - this should result in growth rates per school over time.   The main market is years 7-10, years 11-12 is a smaller opportunity for Readcloud, but a big opportunity for the AIET business (60% of year 11-12 students do VCE curriculum).   

Their main competitiors are companies like Campion Education, that also sell physical books to schools.   This is where readcloud believe they can disrupt their competitors, who are encumbered with warehousing, and distribution of physical books.   

The CFO advises the market sees them as an esablished player now, with runs on the board, making it easier to convert opportunities.  

In terms of payments, the schools pay for the service upfront a the beginning of the school year (good for cashflow).  The issue of volume deals with publishers - Apparently, there is uncomfirmed reports of the larger competitiors gaining these deals, but readcloud are assuming these will not materialise in their assumptions.   

Pretty much all of the income for the FY should be in the bank now, so the upcoming update should provide a clear picture around cashflow up until latee this year.  

Disc. I hold a small position, and will wait for more clarity before committing more capital.  I think RCL will know now whether a further capital raise is needed to see them through to the 2020 school year and beyond.   It will be clearer to us all in a few weeks.    

Upon review of financials, it is very difficult to determine Customer Acquisition Costs, Customer Lifetime Value, and margins  for direct or agency sales.  

The lack of clarity is something to be very cautious about.  

From what I can gather, if RCl can sign up around 450 schools for 2020, they should achieve breakeven, but there is a lot of guesswork around this number.   This looks achievable if RCl can manage costs. 

Update: I have contacted the CFO requesting clarification.  He sent me a response saying he will get back to me when he can.  Hoping the upcoming investor presentation will provie more clarity.   

There is a drive to transition the Australian Curriculum to the Cloud, to reduce costs, and admin time, and to fuly utilise the explosion in the BYOD model in high schools.  This is driving a secular transition of the curriculum to the cloud

Readcloud identifies Australian High Schools as it's target market, and Primary schools a potential market in the future.  There are 2700 Highs Schools, of which, 70 use Readcloud as at June 2018 (update: at December 31 the number increased to 112).   Representing a 4.1% market share.  Management have confirmed the No. of school using readcloud will exceed 200 in calendar year 2019, increasing market share to above 7%.  

Retention - from the data provided, it is sitting at 97%.  Readcloud is quite a sticky product, with schools changing providers infrequently. 

Revenue expansion.  Manangement report that schools expand the service over time, which is a great, low cost way to grow revenue.   No metic has been provided on this to date.  

Management have reported that therre is no need to expand the sales team, and costs will remain relatively fixed.   We shall see. 

Gross margins.  Gm fell from 45% in 2017 to 37% in 2018.  I belive this is due to the rapid growth in re-sellers in 2018 FY.   With the direct sales increasing the growth rate in direct school sales, gross margins will improve in 2019.   

Readcloud has $2.9 M in the bank.   By my estimate, RCL will continue to burn through cash until early 2020.  If RCL can dleiver on it's sales intiative, cashflow breakeven can be achieved with the current balance sheet.   This si the one critical think to watch.  

If RCl can deliver the sales and manage costs to breakeven without a capital raise, RCL is great value at this level.   the risk - reward payoff is worth a look. 

I think you need to look beyond the final quarter of this year, and consider continued organic growth from current subscribers (due to expansion to other school years), and gaining additional schools, revenue of $8-9M is achievable, which SHOULD be suffficient for RCL to reach breakeven.  I therefore think a share price target of 32c by end of the calendar year is realistic.  

DISC - I HOLD.