The devil is in the detail
Shares in business dashboard aggregator 9 Spokes (ASX:9SP) have continued to disappoint, and have tracked lower since our last review. We have highlighted that the recommendation was a highly speculative one, and that Members would need to adopt a longer term horizon given that revenues, let alone earnings, were at an embryonic stage. Nonetheless, the performance of the shares has been frustrating given the company has gained strong validation by signing up major blue chip customers, and has more in the pipeline.
The company has gained further traction with other potential clients, and has been arguably able to punch above its weight in terms of ‘getting a foot in the door.’ Despite all this, what has not transpired is hard detail on the customer take up of ‘apps’ in the SME (small-medium enterprise) environments where the dashboard has been introduced. Having spoken with management we believe there are legitimate reasons for this.
As a reminder, the 9 Spokes (ASX:9SP) dashboard itself enables SMEs to connect their software to a one stop ‘dynamic’ interface. In addition to existing software, businesses can choose to integrate from a selection of recommended industry apps – this selection process is where 9 Spokes get its ‘cut’, with the dashboard effectively being the ‘mousetrap.’ Also, over the medium-term there will also be growing data revenues from business insights and artificial intelligence.
Therefore, the third step for driving revenues and profitability (with implementation costs generally paid by the channel partner) is getting SME customers to purchase apps.
We continue to be of the view it is the absence of colour on monthly revenue per user, opt-out rates and the like, following the deal with Barclays in the UK, which has been in place for a year now, which has significantly contributed to the lack of traction with investors.
Downward pressure has been exacerbated recently by the release of shares from escrow.
The company announced on 25th May that 182,830,279 fully paid ordinary shares, along with 8,750,000 unquoted options (exercisable at A$0.20 on or before 30 June 2019) would be released from escrow on 9 June.
Share trading volumes have since ticked up despite the fact that the company confirmed that the two founders Mark Estall and Adrian Grant (who hold the majority of the securities) did not intend to sell any shares. There are also no remaining securities in escrow, while the options in question clearly remain well out of the money. It is likely the recent selling is due to other early stage investors.
Investor patience is clearly wearing thin, and despite reasonable news-flow on the face of it over the past few months. In late April management confirmed that they had completed a series of workshops for a ‘top five US bank’ as part of effort to cement a longer term relationship, and essentially win their business.
More recently the company released its preliminary report for the year ended 31 March 2018. The numbers show a surge in revenue, thanks to the agreement with Barclays et al, with turnover up almost fivefold to NZ$6.7 million. At the bottom line however losses have widened to NZ$17.4 million from NZ$14.1 million in FY17.
Source: 9 Spokes (ASX:9SP) Share Price Chart Company Announcement
The increasing red ink is clearly associated with the fact that the company has scaled up, and boosted expenditures to increase business. Arguably, greater prudence is needed, particularly given current cash balances (NZ$8.3 million at 31 March 2018), and another round of funding coming into focus.
At an announcement at the end of May the company said that the Board were ‘developing plans’ to meet funding requirements. A number of sources were being considered, but we would suggest the appetite for tapping existing shareholders at current levels would be low.
Operating expenditures increased 55% year on year, with more than half of the total spend due to headcount. Marketing spend also almost doubled to $1.6 million during the year. Management have reported that inroads though have been made into the cost base.
There is no question that 9 Spokes has punched above its weight in terms of winning major blue chip clients. In addition to Barclays in the UK, the Royal Bank of Canada, and Bank of New Zealand have been added in the past year to the client base (while a deal with Suncorp was ended by mutual consent). We believe though that the company would now be wise to pull back on non-client associated expenditures, and focus on delivering results of existing deployments to the market.
Source: 9 Spokes (ASX:9SP) Share Price Chart Company Announcement
The company certainly has the building blocks. Annual recurring revenues are now above NZ$6 million, while the user base has grown 50 fold over the past 12 months from 1,000 to 50,000 at the end of the financial year (31 March).
Source: 9 Spokes (ASX:9SP) Share Price Chart Company Announcement
Encouragingly, at an update at the end of April the company confirmed that there was another record quarter of user adoption, with 50,000 small businesses signed up to its platforms. This was up 48% quarter on quarter. What continues to be missing is any real detail on the level of customer engagement.
We maintain confidence in the offering which 9 Spokes presents, but believe that the shares are suffering with respect to an ‘information gap’, and a detailed update on the user reaction to the company’s platform, and the extent to which apps are being brought through it – this will ultimately determine how successful the company is financially.
As we have said previously, part of the reason for a lack of detail could be due to the company’s blue chip banking clients also wanting to protect their moat and maintain confidentiality. But there should be some degree of balance.
Alternatively, the results might not be volunteered because the response has not been overtly positive. This in itself though would not be cause for substantial alarm, given that it will take time to bed the offering in and build up acceptances. In any event it is unlikely that the company would be continuing to make the business wins it has if such were the case.
Summary
Shares in 9 Spokes (ASX:9SP) have continued to disappoint, and have tracked lower since our last review. We have highlighted that the recommendation was a highly speculative one, and that Members would need to adopt a longer term horizon given that revenues, let alone earnings, were at an embryonic stage. Nonetheless, the performance of the shares has been frustrating given the company has gained strong validation by signing up major blue chip customers, and has more in the pipeline.
The company has gained further traction with other potential clients, and has been arguably able to punch above its weight in terms of ‘getting a foot in the door.’ Despite all this, what has not transpired is hard affirmative detail after the customer take up of ‘apps’ in the SME (small-medium enterprise) environments where the dashboard has been introduced. Having spoken with management we believe there are legitimate reasons for this.
We remain impressed by the ability of the company to bring on-board large blue chip clients, and the validation which that represents. But the company needs to do much more in communicating to the market detail about the progress of existing integrations, and to assure that the leap of faith by blue chip clients has been justified.
9 Spokes (ASX:9SP) will remain held in the Fat Prophets Portfolio.
