I sold quite a lot since the CFO resigned 5months ago. Proud to say that I timed the trade well. With FY21 results out it's a good time to reassess the company. 

In my last valuation note: 

• Revenues -> projected 10-year CAGR of 19% equating to $230M. 
  • Comprising 1200 customers where customers move up the value chain from single-use to Enterprise etc... 
  • They currently have 800 customers with $50M in ARR. 
• Operating margins of 20% 
  • They have yet to grow profitably and have guided for further loss in FY22. 
• Reinvestment 
  • Investing heavily into S&M as well as R&D till FY23. I think it will be even longer as they have yet to gain meaningful traction in the US. Despite winning channel partners. The competition is fierce. 
• Risk/Return 
  • Was 11% with the majority coming from the Equity side of the business as they have little debt. 

They made good progress on their goals, however, a lot of revenues are still coming from Aus/NZ. It's still a massive "if" Whispir can execute on their international expansion. It goes to show how hard it is to win customers even though they are starting from a very low base. I believe they abandon competing for large customers in North America due to Twilio, so let's see how they go penetrating the SME market. 

I have to do some scenario analysis and consider a range of potential outcomes. 

This week we saw that Justin Owen CFO resigned after joining Whispir in June 2020. He stayed with the company close to a year before leaving. In the announcement he will remain CFO until mid-August 2021 to ensure smooth transition to his successor. The Company has initiated a global executive search for a new CFO. 

Whispir is my 3rd highest weighting, but with this announcement it questions my assumption on a stable management. Usually the best companies have low CFO turnover. Whispir has not found the right CFO, and the short tenure is concerning.

With high levels of uncertainty from the team, I will take some profits and I think it is a good time consdering the market is valuing the company at $400M with ARR at $47M growing 25% p.a. The company is still cash burning and they have guided for EBITDA loss between  $3M - $4.5M. It could be a dumb move on my part as the quarterly results will be out soon, but for me, better safe than sorry.   

Whisper completed the capital raise and we are given more information on how they will use the funds. 

• 30% towards product development, I like this. 
• 30% towards ANZ and Asia expansion using existing customers.
• 30% towards North America market penetration. I assume this is towards the SME market.
• 10% working capital buffer (which is around $4.5M) 

Fortunately, no mention of acquisitions and I am happy to back the SPP. Luckily we get the same price as instos at $3.75. The offer available on March 9, so if the price were to grow from here, you can take up the SPP as it would be lower.

After the capital raise Whispir will have more money in the war chest. Also, the instos bought up the offer very quickly so the demand is very high. 

Whispir Trading Halt 1/3/21

Based on the AFR leak, they are expected to raise $45M which is 12 million new shares at $3.75 a share. Following the capital raise, they are also planning SPP capped at $3 million and not underwritten. The brokers were calling for bids by 7pm on Monday (which is 30mins ago).

Despite the dilution, they need to do it. The valuation is held by future growth in the North American market. The term sheet state: capital raise to accelerate the product roadmap to drive growth in ANZ and Asia and for North American expansion. I would assume North America is the focus, Asia is doing great with direct sales. 

To put the capital raise into context, Whispir is sitting with $11M cash. They burned ~$2M from running the business and will be ammortising the development cost by $2.5M for the next 3 half years. I hope they don't use cash for M&A and instead focus on making the product better so that they can acquire more customers on to the platform.           

1HFY21 update

• From a rough look, I liked the result 
  • They are growing transaction revenues whenever a customer buys workflows off the shelf. It is one of 2 key drivers of the platform, the other is new customers acquisition.      
  • Their S&M as % of revenue is slowly decreasing which is important for them to scale profitably. G&A as % of revenue decreased substaintally during the half which was a surprise. What I am inferring from those results is that Whispir is approaching their target revenue threshold where future revenues flow to the bottom line. 
  • The churn is hovering around 10%, in my last update I said that the churn should either: 
    • Stay the same but revenues grow faster (Whispir is taking this approach)
    • decrease, putting less pressure on meeting sales targets     
  • The image I attached to this straw is my perspective on how I see growth in the business. 
    • Customers increased for all use cases, but the key takeaway is that there are more customers with one use case as they spend the least on the platform. 
    • The strategic goal for Whispir is to turn the single use customer towards multiple use cases. Going from (1) to (2-3) is around 5x revenue growth and from (2-3) to (4+) use cases is around 4x revenue growth.
    • Classic example is Chemist Warehouse in their case study. They started with Whispir in 2016 on a single use case and now they have 5 use cases. Chemist Warehouse brings ARR in excess of $500,000. On an average monthly basis that is ~ $42K which is higher than $26K average monthly recurring revenue from enterprise customers. 
  • Target market in North America are 150k SME & SMB market. They have 7 new customers on the platform and have new go-to-market partnership with Nasdaq-listed communications provider 8x8. I have no clue how 8x8 would roll out, but will watch with interest.     
  • ANZ still makes up 80% of revenues - $18.9M for 1HFY21 with 84% coming from channel partners. Interestingly, Asia makes up $3.5M which is ~ 15% of total revenues where 65% revenues come from direct sales. 
    • They will have to diversify revenues over time and not be reliant on ANZ. My valuation assume successful penetration in the North American and Asian market. 
• Overall, I don't mind seeing Whispir sacrifice margin in pursuit for growth. The digital transformation market is massive with very large players like Twilio & Microsoft expanding the market size. Whispir need to win more customers and build products that keep customers on the platform.   
• Finally, they have increased guidance on ARR and EBITDA for FY21: 
  • ARR between $53M to $55M (Before it was $51M to $55M a larger range corresponding to 25-30% annual growth) 
  • Revenue between $49M - $51M 
  • EBITDA between -$4.5M to -$3M (before it was (-$6.23M to -$4.8M))
  • R&D between $9.2M to $9.8M

Whispir reported Q2FY21 results yesterday and the market was impressed by the growth. My surprise is customer growth, not revenue growth. Customer growth is increasing faster than the CAGR 19% from my valuation.   

ARR of $47.4M at end of Q2 FY21 is up 8.5% from last quarter ended 30 September 2020. This isn't extraordinary growth but more in line with FY21 forecast. Quarterly cash receipts increased 8.2% over Q1 FY21 to $11.3M. So it is good to see cash receipts closely align with ARR, it makes revenues more predictable to forecast. 

Whispir acquired 42 net new customers during the quarter, bringing total customers to 707 by the end of Q2 FY21. I believe revenue per customer needs to be reassessed in my DCF, as they are netting between 30-60 customers per quarter. The breakdown of the unit economics was not mentioned in the quarterly, but it will be in the half-yearly report on Feb 18.

I will have to revalue the business when Whispir gives us more colour on revenue per customers based on the use case. As mentioned in my valuation straw, the key for long term growth is converting customers from a single-use case to Enterprise.  This is one hint Jeromy is giving us "Whispir is benefitting from existing customers continuing to increase their usage of the platform to improve internal and external communications and digitise their operational processes". Highlighted in bold may be a clue that some customers who were on the single-use case may have transitioned into the smart bundle model this quarter. In past quarters, I saw some conglomerates on Single-use like Coca-Cola. It would be impressive if they convinced a giant like Coke to increase utilisation by shifting to Smart Bundle or Enterprise. 

The Whispir platform is seamless for customers as they can integrate with any IT system. The integration is key as companies are complex and they are "looking to implement [a] versatile and easy-to-use technology platform that can be used by multiple departments for a broad range of communication solutions".   

There was no colour on how each region is progressing but I am assuming the same with previous quarterly updates. APAC going strong and North America still ironing out the kinks. We shall see in the half-yearly. Overall a good quarterly for investors.     

Peter Gehl the former VP of North America moved to a competitor called Thunderheads in August this year. He was with Whispir for only 9 months.

This is what Whispir lost;

"Mr Gehl brings more than 20 years’ experience in the enterprise software market in North America with previous senior leadership positions at Salesforce, Oracle and Kenshoo among others. As Whispir’s VP Americas, Mr Gehl will oversee the execution of all aspects of Whispir’s North American strategy. 

We are fortunate that we’ve been able to secure an executive of Peter’s calibre who has been at the forefront of enterprise software companies in both corporate and start-ups environments for more than two decades. 

During his time at Salesforce and Oracle, Peter oversaw market development and strategy, revenue growth and profitability as well as global sales partnerships." 

Now call me crazy but there have to be some internal disagreements on the market strategy which led to his exit. Maybe Thunderheads provide better salary with his new title "Executive VP of North America"? Or maybe Thunderheads have a better offering to Whispir? Whatever the reason, it does not bode well for Whispir when a senior exec leaves. I am worried that they might not keep senior talent in the business long-term. 

Whispir's new strategy in North America is targeting SME/SMB. Hence they hired new people for the job. "New senior personnel appointments include Aled Miles as a US-based Non-Executive Director and David Gilbert as VP Americas". I will pay close attention to how long David stay with the business. If Whispir changes the strategy again, then I am selling as my valuation is based on success in the North American market. 

Rapid employee turnover in North America is very concerning especially at the senior level. They have plans to increase the headcount to 55 over the next 3 years, so that means they have intentions for growth. However, if the senior executives keep rolling every 9 months, it is a red flag for North American growth.  

Whispir is being very sly by not mentioning Peter Gehl leaving the company and joining a competitor called Thunderheads. 

Whispir reported Q1FY21 results today, and the market and I was hoping for more.  

• The ARR grew slightly at 3.6% to $43.7M. This is not significant and the market is thinking that Whispir is having demand issues. 
  • Especially when they only acquired 35 net customers. 
• Customer churn rate has gone down over time from 12% to 9%. However, to me, (9-10)% is too high.
  • They have 665 customers, by using a 10% churn  Whispir is telling me that they would lose ~ 66 customers a month or 178 customers a quarter. That would mean Whispir added ~ 213 new customers to the platform this quarter. 
  • If Whispir cuts down customer churn to 5%, that means they have to spend half as much on sales and marketing. Churn is an important metric to follow. My prior assumption was customer churn of around 3-4%. 
  • Ironically, the revenue churn is below 3% and has gone down from 7%. This is pretty good as it shows that customers do pay Whsipir's fees. 3% of $43M ~ $1.3M of loss revenue. As the Whispir grow, we hope the revenue churn be below 5%.
• Another important update was that "SME market launch [will be] within next year". I believe they were earlier planning for the SME launch late this year. I think this has been delayed, hopefully, it happens soon. Currently, existing customers are using it.  
• Their FY21 guidance is still intact and being conservative.
  • That is 20-30% revenue growth ($48M - $51M).  
  • 14-35% EBITDA improvement (-$6.23M to -$4.8M)
  • 20-30% ARR growth ($51M - $55M). 
  • 8-15% R&D spend growth ($9.2M - $10M). As mentioned in earlier straw, the R&D has to deliver new products and services to drive revenues in the long-run.  
• In Appendix 4C, cash burn was $3M this quarter. They have around 3 quarters worth of burn before a capital raise. I think they should do it early with a high share price so that you get less dilution but also provide support for the share price. I would raise $10M and use it to expand North American operations by using AWS credentials to win new customers.        
• Overall, it was not a bad announcement as ARR did increase and so did net customers. However, customer churn is still high. Whispir can solve it in 2 ways:
  • Reduce churn by spending more time on customer engagement and keeping them on the platform. 
  • Grow faster than churn rate. Maintain churn around 8-10% but grow customers by 30-40%. The net result is 20-30% growth. 
• If they reduce churn, new customers flow to the bottom line. If they grow faster than churn, they also achieve leverage, however, more pressure is put on sales to keep up the growth rate. Whispir is currently taking the second route. 
• I hope over the long term when Whispir has more than 1000 customers, they spend more time reducing churn and transition the customer across the Whispir value chain. In saying that, focusing on growth right now is important as reflected by the current share price.  

Whispir is on track to meet prospectus guidance in FY20 EBITDA range of ($7.4M) – ($7.9M) well ahead of ($9.4M). I expect revenues to grow to $230M in 10 years which is a CAGR of ~ 19%. To theoretically achieve this, Whispir have to grow their customers from 509 to 1177 with strong MRR growth in Enterprise product adoption. I also expect smart bundle customers to grow at 10% which is faster than 8% growth in enterprise and 6% growth in Single use. This equates to 537 customers in Single use, 494 in smart bundle and 146 in Enterprise.

Whispir will reinvest heavily into product development during 2020-2023. Thus, free cashflow is expected to remain negative until 2025. I chose sales to cap ratio of 2 for the next 10 years as reinvestment would decrease when the company matures. The profitability is the most challenging aspect of the valuation. Despite being a technology company, I assumed a low 20% operating margin due to their high reinvestment on R&D.

I attached a 4% Equity risk premium to the COE as Whispir had low weight on their market value of debt. Therefore, the cost of capital came to 11% to reflect the riskiness of future cashflows. As the company matures the riskiness of cashflows would decrease and by terminal year I expect the cost of capital to be 8.5%. The present value came to $630M or $5.60 per share after attaching a 20% probability of failure.

The important follow up analysis would be the justification of the assumptions above;

Revenues of $230M can be justified if Whispir convert multinational clients on the single use product to Smart bundle/Enterprise. Currently 60% of users are on the Single use product, over the next 10 years it should drop to 45%. This means that smart bundle would grow from 33% to 42%. Moving a customer from 1 use case to smart bundle is equivalent of getting 2 single use customers. Extending the previous analogy, getting a customer to Enterprise stage is equivalent to getting 11 single use customers. The value proposition for Whispir is greater if they can move customers along the value chain.

To attain $230M in sales, bulk of their revenue have to come from North America and Asia. Currently the composition is; ANZ (80% - $25M), Asia (15% - $5M) and North America (5% - $2M).

In 10 years, I expect the ANZ revenues to grow slowly at (7% CAGR - $50M), Asia to grow rapidly at (32% CAGR - $80M) and North America to grow exponentially at (48% CAGR - $100M). This means that in 10 years, Asia/North America should make up 80% sales. Tying into their go-to-market strategy, the use of their partners have to be successful to pull $230M in 10 years to justify valuation of $5.60.

Reinvestment using sales to cap ratio is the least error prone for high growth, money losing companies like Whispir. The justification of having sales/cap of 2 is that in the early years, Whispir will invest heavily in R&D where for every $1 of invested capital you would get $1 of sales but in the later years, they can reinvest more efficiently at a ratio of 2.5. When you average out reinvestment for the 10 years, sales/cap ratio of 2 is reasonable.

Surprisingly I did not stress over the risk of cashflows. Whispir is growing their ARR rapidly and grew their clients during an economic crisis. Hence, the risk premium of 4% is a conservative assumption on short term commercialisation risk. COE of 7% came from using a levered beta of 1.17 indicating that Whispir is slightly risky than the market. The reduction in COE to 8.5% takes away most of the 4% premium.

Profitability drove the valuation for me. Giving Facebook level margins of 30% would have given a value of $887M or $8.57. Thus, to be in the conservative side, I chose 20%. The high reinvestment and staff cost also contributed to my decision of giving them a lower operating margin.      

Whispir currently have 558 customers as of Q3 FY20 in a range of sectors. Their strategy is to land and expand through existing customers and partnerships. ANZ encompass 80% of total revenue with Asia comprising 15% and USA making up 5%. To be successful, Whispir need USA and Asia to make up 80% of total revenue by 2030.

The go-to-market strategy for Asia is to focus operations on Singapore and Indonesia. Then expand to Philippines and Thailand through channel partners: Starhub, Telkom Telstra, IBM and Indosat Ooredoo.

The go-to market strategy for USA is to leverage existing partnerships with Carahsoft, Vonage and AWS. The USA market is also the largest opportunity and they rely on blue-chip customer referrals and partnerships to expand.

It comes no surprise that ARR growth is correlated to customers extracting multiple modules and interactions. The more use cases, the higher the recurring revenue. Thus, from the metric below, we are starting to see it happen. Especially the growth in ARR from the latest cohort. New customers have been using Whispir extensively as shown in the spike during 1H 2017 to 1H 2020. Looking at growth rates in the product suite, customers with single use are transitioning to smart bundles and enterprise solutions. The Average MRR for all products grew during 1HFY19 – 1HFY20. The single use and Enterprise grew the fastest on average 24%. This means that customers are paying more for Whispir’s products.        

The business model is monthly SaaS subscription that have different pricing based on the entities’ needs. The repeatable Single use product average $2,291/month where the use case is for autonomous deployment of repeated messages like notifications and reminders. The next tier is the smart bundle option averaging $7,239/month, where the customer can combine workflows to deploy targeted messages to their customer base. The Final tier is the enterprise solution option averaging $15,694/month, where organisations can use Whispir to deliver end to end messaging. In this solution, organisations can work with Whispir to integrate their dataset with the Whisipir API to gain further insight into their customer.  The MRR is not fixed pricing, the subscription charges varies between customers. Customers that use their products extensively pay higher transactional fees on their subscription. 

From their business model, it is evident that a key future growth driver occur when customers move from 1 use case to 4 or more use cases. That is going from Single use to Enterprise. Looking at the attachment in this straw, it show last year’s ARR broken by Industry. Whispir has secured very large companies like Coco-Cola, Nab, APA Group to the platform. Those companies are currently utilising a single use case workflow. The potential for Whispir to convert these companies into Enterprise users will significantly increase their ARR, thus lower CAC. 

Whispir founded in 2001 is a workflow communication as a service company that provide tools to entities (public and private) to drive the highest engagement from their customers. The company operate in the intersection of 3 markets (operational communications, customer engagement and crisis communication). They target entities with customers categorised in 3 tiers (small, medium, enterprise). Their customers operate in diverse sectors; Government, banking and finance, insurance, transport and logistics, utilities, telecommunications, emergency services, education, healthcare etc... They are building a complete overview of the customer using AI to provide personalised engagements with brands.

Whispir have prioritised communication intelligence for prediction, detection and automation. They are reinvesting heavily on R&D to build products that are 10x better than the current market. In their 5-year roadmap they plant to transition from product leader -> monopoly -> Indispensable communications platform providing rich datasets.   

Their products are customisable workflows that entities can use to communicate with their customers. In a recent presentation by the head of product – Brad Dunn, he talked about Whispir being in the middle when comparing complexity and user control. The attached diagram emphasis their mission.