Ooofff...this update was a bit of a body blow this morning. 

The good news first (won’t take long). The migration of customers from an upfront sale per use model to an annual platform subscription is progressing well with more than half of what they call their ‘key customers’ now on the SaaS model. They’ve previously called this their ‘green list’. 

Except the numbers have changed. A few months ago Lee said there were 1200 customers on the green list. Now there are 1100, based on extrapolating the figures in the update. So are they bleeding clients? Quite possibly. I’ve heard Lee proudly declare their retention rate is 87%. That doesn’t sound great to me. All else being equal you have to grow your customer base 13% a year just to stand still. In theory, moving customers to a SaaS/platform model should make them stickier but it’s hard to make that case right now. Maybe they redefined the definition of ‘key’, but I don’t love the inconsistency.

There’s other stuff that doesn’t stack up either. According to Lee 271 clients had migrated to SaaS at the end of October, representing $7.6 million of ARR. Now they say 551 clients have migrated (more than double in two months), but ARR is only $10.9 million (only 43% higher). What gives? Ok, you’d likely target your bigger customers first so maybe that accounts for part of the difference, but that’s a big discrepancy. Also, if that’s true what does it say about the remaining clients yet to be targeted? 

But I’m kind of nit-picking and in danger of burying the lead. Revenue of $10 million for H1 was pretty bracing. Last we heard from Lee (November), XRef were billing $0.5 million per week so to come in at $10 million for the half is well below expectations. It may be up slightly on pcp but the comparative doesn’t include XRef Engage, which was acquired in January 2023. Back that out and it looks like revenue is down around 20% versus pcp. That’s reasonably close to Seek’s employment index, which showed a 17.4% decline in national job ads from Dec 22 to Dec 23, but again suggests the customer base isn’t growing.

But all that’s in the price now, right? Afterall it’s at 1x revenue, and if you believe them that revenue is largely recurring. I’m a little more cautious. Job ads have certainly rolled over but they remain well above the historical average. Maybe they don’t go back there (unemployment is still low, growing population etc.) but maybe they do and without a growing customer base to offset it, that’s a big risk.

The other announcement the company was ‘pleased’ to make was a refinancing and extension of their debt facility. Given their burn rate they had little choice other than raising at exactly the wrong time but the terms are not exactly borrower friendly:

By my rough workings, assuming they only use the initially drawn amount, at the end of the interest-only period, the financing cost will be $2.7m a year (compared to a financing charge of $0.6m in FY23). Over the course of the loan they’ll repay $9.6m, plus have a $0.5m bubble at the end of 2027. That all assumes exchange rates stay where they are. Maybe they’ve hedged, maybe they haven’t.

They are cutting other costs and their cash flow is better than the P&L would suggest but the thesis no longer stacks up for me and I've sold both here and IRL. I'll keep an eye on it and if things change I might consider buying back in but I can't imagine that is anytime soon.

[No longer held]

Urgh...what do you do when your favourite fast-growing microcap stubbornly refuses to grow?

XRef's FY23 results were nothing short of underwhelming. After initially guiding to a small profit, they later downgraded that to a loss, which ended up being a greater than I expected $(3.4)m loss. What made this worse was they capitalised $2.5m in development costs, most of which appears to be headcount that will be ongoing (opex or capex - doesn't really matter). This resulted in their traditional strength - strong free cash flow - being an outflow of more than $2m. Add in the acquisition of Voice Project and other costs, the overall cash outflow was $4.8m. One thing I didn't think I'd be saying about them was that the balance sheet was looking stressed, but with that level of outflow it is now the case that you need to think about the balance sheet carefully.

It wasn't all doom and gloom. Voice Project (now XRef Engage) delivered $1.8m revenue since January 2023 and what's really impressive added 57 clients to the existing 212 they had at acquisition. That 27% increase in just 6 months demonstrates how valuable the opportunity to cross-sell a premium product to XRef's existing 1300 customer base is. Annualising that and assuming a similar level of growth (but let's say over 12 months rather than 6), would result in Voice Project providing a really meaningful contribution to XRef in FY24. If Voice Project's founder were here right now I'd be shaking his hand because without him things really would be bleak!

Also, while organically XRef's revenue was basically flat year on year, the quality of their revenue has increased. Since rolling out the subscription model in October 2022, ARR has grown to $5.5m as at 30 Jun. That's actually reasonably impressive given that they didn't have Pulse Surveys as part of the platform until May and so were selling the Hire to Retire story without a big chunk of value in the middle. It's conceivable that ARR could represent half their revenue by the end FY24.

Having said that, you can't ignore one of their key disclosures - that the investment in headcount is expected to result in employee costs of $16m in FY24 (it was $11.8m plus whatever they capitalised in FY23). That's a big gap to fill in addition to the $3.4m loss before you even break even.

So back to the original question, what do you do when your favourite fast-growing microcap stubbornly refuses to grow? I can't tell you what you should do but I lightened on the result and belatedly reflected that in SM early this week. Hopefully I get to regret it.

My thoughts below are a mix of the AGM held yesterday (and subsequent chat with @Wini), my own thoughts and a chat with the CEO today:

• Sales (not revenue) are in line with pcp. On face value this is a minor disaster for a company in growth mode but the reality is sales will become increasingly less of a key metric given the company's move from sales of individual credits in advance to platform-style annuity billing. A similar but more pronounced dynamic occurs when companies move from perpetual to annual recurring licenses.
• Revenue for 1H FY23 to be 10% up on pcp:
• core business up 18%; offset by,
• RapidID down 16%. This is mainly due a drop off in crypto account signup but partially offset by new revenue from Coles and H&R Block.
• Again, on face value this is underwhelming but they are cycling an extremely strong pcp and the extent to which RapidID was benefitting from the crypto signup boom wasn't apparent until it was no longer there.
• In regards to the Voice Project acquisition:
• Lee clarified that the deal of $2m cash and up to $2m of scrip total at next two anniversaries meant $2m+$1m+$1m, not $2m+$2m+$2m. This represents 1x FY22 revenue. The company is profitable and milestones are based on personnel retention and productivity.
• Rationale includes:
• IP - Significant IP originally out of Macquarie University
• Data - Bought 20 years of data, which represents a significant 'time hack'
• Opportunity - Voice Project have 1000 clients (XRef has about 1300) with little overlap. Their biggest clients include Hungry Jacks, Downer EDI, Spotless, Higher Ed and local governments - lots of non-cyclical stuff. They've done this without sales and marketing employees, which XRef can bring.
• Analytics Engine - Voice Project spent two years building this and it's something XRef don't have but need as they move towards being an end-to-end platform that need to be able to mesh data together and deliver insight to clients.
• I still have some question marks over the acquisition. One of the things that has attracted me to them has been the fact they've grown largely organically so far and so I can hardly turn around and applaud an acquisition now. I also question why global searches so often end up finding up ideal candidates in the company's jurisdiction, but they're not Robinson Crusoe when it comes to this. Given their history and the success they had with RapidID I think they deserve the benefit of the doubt for now.
• Revenue from the Coles and H&R Block deals is flowing (utilizing RapidID)
• The Graduate Verification Scheme is live but will take time to onboard significant numbers of higher ed institutions (utilising RapidID)
• The move to become a Hire-to-Retire survey platform will move them from one competitive space into another competitive space. Key competitors will include Qualtrics and Culture Amp. Until recently Peakon was another competitor but this was acquired by Workday for US$700m last year.

Evidently the market didn't like the update but you honestly could of swung a cat in the AGMs zoom call and not hit anything, which is a pity because I'm more of a dog person and wouldn't mourn the loss of a cat, but it also represents part of the opportunity in that there is so little coverage of this company. I am questioning whether I'm becoming a happy clapper and I don't think I am, but time will tell.

[Held]

XRef got beaten up on the market today despite an announcing a record revenue print for the Q4 quarter ($4.6m), which should deliver them a modest profit for FY22. I guess the reason for the market's grumpiness was lower than expected sales in what is typically their strongest quarter. At $5.8m it was still the second best sales quarter ever but I can understand the market being underwhelmed given the bullishness management expressed at the Q3 update.

The other thing that had me doing a double take was the disclosure that Rapid ID revenue was down 62% vs pcp due to "the lower demand for crypocurrency". I think I had read that it was used when people set up crypto accounts but I had no idea it had that much exposure. It's sub-10% of total revenue though so doesn't move the dial all that much.

Other than that I thought it was a pretty solid update from them. It looks like they've delivered on the promise of profit, they're still growing revenues strongly, job ads are at record highs (although it's difficult to imagine it will stay that way if we do head into recession), they're getting real traction in North America (up 69%) and Europe (up 120%) and their lead flow (includes organisations that have tried the Template Builder or XRef Lite for free) is up 130% compared to 12 months ago. Also B2B productivity tool providers is one area that could actually benefit is there is a downturn. I have a tendency to reserve my harshest criticism for companies I own but overall I didn't see anything that has me seriously questioning the thesis.

For those who are worried about competition (and there is plenty) G2 has a magic quadrant for reference checking software, which puts XRef at the top of the pack. It's worth a look. Going forwards I want to see them consistently deliver profitable quarters, continue to grow internationally, rollout Pulse Surveys and see the subscription revenue become a larger proportion of total revenue.

You wouldn't want to be XRef's CFO. With their quarterly update tomorrow you've got two working days to close the books, do month end, generate the numbers for the report and sense check everything. Speaking of the update, good luck if you wanted to get in; they're just a little light on sellers:

It occurs to me that correctly identifying a risk and then doing almost nothing about it is every bit as useless as not identifying it in the first place. That's what I did when I correctly identified that a large block of shares soon to come out of escrow, owned by an ex-founder who now had no involvement in the business could be something of a problem. I did take a small amount off the table, but then bought back in too quickly as the risk played out and watched the share price go from an intraday high of 72 cents after it's recent quarterly of 5 April to an intraday low of 36 cents early yesterday - ouch.

We've had one change in substantial ownership notification in that time but he's still got a long way to go if he wants to substantially reduce his position.

Having said that they did bounce off yesterday's low pretty hard and traded up as high as 52.5 cents today (about a 44% bounce in less than two trading sessions) and are currently around 50 cents. In part that can be explained by the announcement below, although it's pretty small beer and most of the rebound had occurred before the announcement was made. Wild times - hold onto your hats!

Some thoughts on the XRef result and notes post Q3 FY22 investor briefing:

• Comparisons to pcp (see above) are all looking pretty good.
• Sales and collection are also up QoQ continuing strong cash generation profile
• Nil profit for the quarter but am not too worried about that. Slightly lower revenue QoQ is the one knock on the result. It's the first time revenue hasn't risen since Q4 FY20 but it can be a seasonal business and sorry to butcher a metaphor but one quarter doesn't make a summer (actually might want to fact check that).
• Now not required to complete 4Cs but have committed to quarterly updates going forwards as "we genuinely enjoy it".
• New format for update and some new metrics introduced. Hopefully they settle on this going forwards and stay consistent with the metrics as it's a little messy chopping and changing. I don't think there's any ill intent by them though.
• Revenue from integrations now 34%. Good to see as it will help them get buried further down the stack.
• March was an all time record for collections.
• New cohort analysis graph doesn't seem to add to disclosed sales. I suspect they are not including Rapid ID (now known as Owned Marketplace) but have emailed them for clarification.
• XRef Lite and Template Builder are resulting in high levels of leads (another metric they are now disclosing). Alot of the leads are from North America (particularly U.S., who like to self serve).
• Voted #1 reference check provider on G2. This is a key sales channel for them and they appear to invest a fair bit of time in it by replying to every review posted. Capterra wasn't mentioned though and they don't get the same love there...
• New investor presentation to be released in May.
• Head count up from 60ish to 70odd (see Q&A)
• Release of pulse checks now Q1 FY23 - getting pushed back
• Outlook is for P&L profit in FY. It means they think they'll have a good revenue qtr in Q4.
• Acquisitions not mentioned in update or in Q&A. I'm fine with this although they're going to have to figure out what to do with the money they're piling up eventually.
• Q&A
• re: headcount. Coy has "moved from survive to thrive" and not returning to pre-COVID headcount peak of 98 anytime soon i.e. operating leverage should kick in. New headcount was for Sales, Development and one board member.
• re: capex down on pcp. Will fluctuate a little, trough when developing and peak when releasing. Expect a pop in Q1 FY23.
• re: cohort analysis - can we have %s back? I agree.
• re: Rapid ID disclosure. To be known as Marketplace (owned) going forwards.
• re: US. Acknowledged US in graveyard for aussie tech. 52 HR juristictions. Like to acquire customers through channel. Focus on Texas, through mid-US and up to NY area (so pretty much most of the country!).
• re: Sales/Revenue interaction. Internally they describe this as "Mind The Gap" (like this) and track it. Subscription model adoption will help solve this.
• re: Q4. Expect to exceed pcp in sales. CFO mentioned $8m (which would be exceptional). I don't think revenue was mentioned but $5m-ish is my hope.
• re: adoption of new products to become a platform and risk of offsiding channel partners if they see XRef as a rival. MD believes XRef is creating a new data source that can tie together reference surveys, with Pulse surveys and Exit surveys i.e. it's about the data not the products and their partners don't currently offer that data (that's kind of compelling but I need to think more about the use cases).

Link to Motely Fool pitch (given it is MF it needs to said its not behind paywall and don't have to give email address).

[Held]

One sunny day in October 2019 XF1 co-founder Tim Griffiths walks into the CFO's office and says he need them to do him a solid. He needs the company to spot them $135,000, which he will then immediately repay. The CFO has a brain fart and agrees to this. The 'loan' is paid and as promised immediately returned. It is not disclosed how this came to light, however, it does and in March 2021 at the conclusion of an investigation the CFO gets a sizable wrist slapping and co-founder Tim Griffiths is exited ('resigned') as an employee and director.

None of this is contested and it's kind of ancient history now, except for one thing. On the way out Tim Griffiths agreed to put his shares into voluntary escrow for 12 months. That escrow period expires at the end of this month. Should holders be worried? Dunno but it's definitely a risk. Tim owns around 31m shares and that's a lot of capital to be tied up into an enterprise you are no longer a part of. If he decides to significantly lighten or liquidate it would put significant downward pressure on the share price. Hopefully the company is working with Tim and other holders like Australian Ethical and Merewether Capital to ensure if there is a sale it is done in an orderly fashion.

XRef was the last of the company's in my portfolio to report on half year results today and largely it was per previous guidance. Highlights included:

• Sales - a record first-half sales result of $10 million, up 95% from H1 FY21
• Revenue - a record first-half revenue result of $8.9 million, up 73% from H1 FY21
• Cash Surplus - $2.3 million generated during H1 FY22 ($1.6m after deducting capex)

Despite this the SP suffered some weakness and I think that was because costs were higher than some expected resulting in a really marginal net loss for the half. The company has guided to a net profit for the full year.

I have a couple of thoughts in regards to those costs. First, I think the investment to grow the top line is the right thing to do. It is a land grab and where this company is at they need to be spending in order to capture as much of the market as possible. However, the second thing I would say is that the divergence between the expectation and the reality when it came to spend was a problem of the company's making in that they haven't been entirely consistent with their messaging in regards to costs. I think I mentioned when I pitched this stock that I could point to occasions when they were pretty unequivical that the cost base was largely fixed. However, at other times they did suggest that significant investment was taking place and that maximising profit wasn't the objective. So they're doing the right thing but they're not always saying the right thing...not good but could be a lot worse...

The other thing I'd say is I don't really care about profit (well...I do, but not alot). I'm much more interested in seeing the cash come in. With the highly cash generative Q4 to come I'd expect the cash surplus to be at least $5-6m for the year. If you 20x that (even with lower multiples going forwards that seems a bit light on for a business growing this quickly) you more than justify the current market cap.

[Held]

XRef today announced their RapidID business were to be the exclusive wholesale partner for an academic result verification service being built by Higher Ed Services (HES). HES is a not-for-profit organisation owned by and working for Australian Universities. The service is expected to a fill a current gap in the Australian market to standardise and significantly speed up the verification of a student's academic results. Although flagged as price sensitive no financials were provided. I'd suggest the price sensitive nature of the announcement probably reflects the early-stage of XRef's journey and that a few more years in this might not be make the 'price sensitive' cut. I might also be a bit cynical because RapidID is not my favourite part of the XRef story. Still, better in than out as they say...

[Held]

Thanks to thamno and vijayabraham for their thoughts on this mornings 4C and trading update. I'll add my 2 cents, including thoughts post their investor call.

Overall, the headline figures were all provided earlier this month (not that stops the raging lunatic that is Mr Market adding 10% to the SP this morning, however, there was a plethora of qualitative and indirect information provided that was new or expanded on:

• amazing how much better bang for buck they're getting from marketing spend compared to old (pre-COVID) XRef. Spend has halved but sales have doubled and leads are up 362%

• highlighted new customers in the quarter, including universities, hospitals, Fortescue Metals, Downer, Rabobank and Wolves Football Club in the UK. Many others besides.
• cohort analysis updated. I still hate the way they present it (pie chart) but I've shamelessly ripped this table straight out of one of Wini's posts and updated it accordingly. Imitation is the sincerest form of flattery. It is starting to show that those cleaner more recent year's cohorts do tend to use the product more over time. A really powerful quality.

• Showed the Xmas effect by week. As per previous years there is a big slowdown but off a higher base and showing a faster recovery. Lee-Martin highlighted this is suggesting a busy Q3 and Q4 to come.

• Something I monitor is the extent to which they are able to bury themselves lower in the tech stack, because the base product does sit right at the top and is vulnerable to replacement. Pleasingly Xref via API grew 71% YoY to $1.2m. This means customers are reference checking through a platform other than Xref but are using the Xref product. They could be in an enterprise system, or a HR system or a recruitment-only system but regardless they're stickier systems, which Xref gets to 'hide out' in. In effect in inherits the same stickiness.
• New products are rolling out. Exit surveys are being used already by some customers (by invitation). Pulse Checks will roll out in 2H FY22.
• Opex is being controlled with increases due to inflation-related salary increases and minor spend to support the growing customer base.
• Absolute COGS is rising accordance with revenue, with some opportunity to reduce COGS % on the RapidID product as it scales.
• Cash surplus of $1.4m over the half.
• First Advantage partnership will work similarly to previously announced partnerships with CVCheck and Equifax
• I asked them about competition and got the answer I expected but still largely welcomed his thoughts
• generally they see this as a feather in the cap and validation of their product
• the competition's marketing spend helps marketplace awareness of the product generally
• they are undercutting XRef on price but haven't necessarily adopted the same standards. Lee-Martin stated they were scaling out of the space with imminent rollout of XRef Marketplace, including Pulse Checks and Exit Surveys.
• Lee-Martin dodged my question in regards to acquisitions - my sense is that this time will come but not right now. Let the startups spend away to their hearts content, nibble away at the margins, wait until they need to raise new capital and then buy when there is blood on the streets (but I could be wrong).
• The CEO gave a couple of 24 month goals that we can measure them against:
• northern hemisphere sales to eclipse southern hemisphere sales
• ARR sales to eclipse prepaid sales

[Held]

Like DrPete here is the XRef deck from last night.

XRef stock pitch.pdf

Just a quick word to recommend pitching a stock (or an expertise or megatrend you are seeing) to anyone who might be considering it. Yes, it takes a little bit of time (although maybe not as much as you might think and certainly not as much as you've already spent researching it). And, yes, you are opening yourself up to whatever may come your way. But it's not an altruistic exercise that you get no benefit from. The process of preparation really helps you retest some of the assumptions you've previously made and reach a decision on the level of conviction you do (or now don't) hold...at least until the company next makes an announcement...

Quarterly Update: 126% Sales Growth and $1.2m Cash Surplus in Q1FY22

? Sales - $5.4 million - up 126% on the previous corresponding quarter

? Revenue - $3.9 million - up 77% on the previous corresponding quarter

? Cash Receipts - $5.8 million

? Cash Surplus - $1.2 million

***

Early 4C for XRef in today.  The good news is positive cashflow and record quarterly revenue.  On face value the negatives are flat receipts vs Q4 21 and significantly lower sales (sales come in advance of revenue as customers buy credits and they're only recognised as revenue when used).  It will be interesting to see whether the market can look through those slight negatives and see that comparing those metrics to Q4 is unfair given that HR departments will tend to pre-order large volumes at year end where they haven't utilised budgets (use it or lose it mentality).  If the market can't see that I think I'd be tempted to use that as an opportunity to pick some more up at a lower price.

Their deal flow demonstrates the scalability of the model, having acquired customers from the US to Switzerland to the UK.  Having said that their largest market is still Australia and they've managed to deliver record revenue with half the country in lockdown.  They're also due to roll out new products this half, which provides more optionality.

(Don't expect growth versus previous corresponding quarter to continue at current rates - there was a significant inflection in 2H 21 that will challenge that).

[Held - SM and RL]

*** [Early 4Cs are starting to drop - sorry about formatting]

Xref Revenue up 36% While Costs Remain Flat
* Revenue - $3 million ?- up 36%
* Sales ?- ?$4 million ?- up 62%
* Cash Receipts from Sales ?- $3?5 million ?- up 46%
* Cash Expenses - ?$3?.5 million ?- down 17%
* Cash Balance ?- $6?.24 million
Xref Limited ?ASX?XF??? the human resources technology company? today reported a record third
quarter of trading? The Group delivered records in revenue at ?3 million? sales at ?4 million and cash
receipts from sales at ?3?.5 million for the quarter?
New clients acquired in the quarter contributed 13% of total sales? Xref further built on its success in
healthcare globally and entered a new geographic market? South Africa? New clients in Australia
included the Australian Prudential Regulation Authority (APRA?? Cash Converters and the Children?s
Cancer Institute?. In the United States and Canada? new clients included Granite Solutions Groupe? Baylis
Medical and CrossMed Healthcare? In EMEA? Connect Health? Gray Healthcare and? South Africa?-based?
Mr Price Group were introduced to the platform?. Details about these companies can be found in the
appendix?.

***

This is a pretty good result from XRef.  They didn't highlight it but they were operationally cashflow positive in 3Q - by a very skinny margin - but this puts them on track to meet their stated objective of being cashflow positive in 4Q.  Given how they're trey're tracking and the scalability of the model this is one that I plan to keep averaging in over time so long as they continue to meet/beat my DCF assumptions and don't get too overloved by the market.

[Held]