The proof is in the pudding
Business dashboard aggregator 9 Spokes (ASX:9SP) has been a disappointing performer since adding it to the Fat Prophets Portfolio in late 2016. We have caveated our research coverage 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. That said, and despite some operational progress, and new mandate wins, overall investor appetite for the shares has remained weak.
Subdued sentiment in our view owes to a number of factors, and primarily include the lack of detail regarding the customer take up of ‘apps’ in the SME (small-medium enterprise) environments where the dashboard has been introduced. In particular there has been an 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.
We maintain confidence in the offering which 9 Spokes presents, but believe that the shares are suffering in many ways with respect to an ‘information gap’, and a detailed update on 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.
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.
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. Also, the deals typically in place are for a 6-year duration.
We have no issue with the partner inroads made by the company, and cumulative user adoption which is rising. We however believe that a more guarded approach to the shares is warranted until more evidence is forthcoming on user responses to the dashboard offering.
That said, we remain impressed by the ability of the company to bring on-board large blue chip clients, and the validation which that represents.
9 Spokes (ASX:9SP) will remain held in the Fat Prophets Portfolio.
What’s new?
The share price has been unquestionably weak since our last review, but that is not reflective of the level of mandate activity. While the company and Suncorp have chosen to go their separate ways, a new contract has been signed with the Royal Bank of Canada, while the Bank of New Zealand (BNZ) has also come on-board.
Working in reverse chronological order, last month the company announced a deal with BNZ to provide a white-label version of the 9 Spokes platform which will be ‘integrated’ into the business banking customer journey. BNZ is a leading bank in New Zealand, with 130,000 SME customers, and the service will be launched later in the year.
The kiwi deal is significant on a number of counts, in that it is the first in Australasia, but also may open the door to a much bigger player in NAB, of which BNZ is a fully owned subsidiary. The parent company will no doubt be watching events closely to see the customer response.
The deal is also notable in that it has enabled the company to meet a targeted annualised recurring revenue run rate of $6-7 million by 31 March 2018.
The announcement was a welcome one for the market, and helped to bring a bottom into the recent decline, with the shares spiking (albeit from low levels) on the day of the release.
In February, 9 Spokes (ASX:9SP) also announced that it had expanded its relationship with the Royal Bank of Canada.
The company will provide a white-label version of the dashboard for Ownr, a product launched by RBA affiliate, RBC Ventures. This is encouraging in our view, and would not have occurred without the RBC having confidence that the platform (launched 1 November 2017) was hitting the mark. Indeed, this is consistent with 9SP management’s statement that RBC has shown “the most rapid adoption of any banking partner.”
The announcement also helped to soften the blow following the revelation a few weeks earlier that Suncorp and the company had decided to mutually end their license agreement. Also placing things into perspective 9 Spokes reported a cost overrun relating to the past 12 months of the agreement, whilst the customers in question account for less than 1.5% of the base (39,000 as at 30 January 2018). The decision looks therefore to be genuinely mutual, with Suncorp also notably having backed away from several other technology ‘partners’ over the past year.
9 Spokes (ASX:9SP) released a trading update in late January, which while lacking the aforementioned detail, was solid on a number of fronts. Cash receipts for the quarter were higher than expected at NZ$$1.8 million, up 125% on the previous 3 month period, due to increasing access and implementation feeds. Net operating cash outflows fell by NZ$900,000 quarter-on-quarter. The company also confirmed that the NZ government will fund 20% of R&D spend over the next three years, with an initial payment of NZ$160,000 to be received in the March quarter.
The company had cash at bank at 31 December 2017 of NZ$11.8 million, and we are encouraged to hear, on the conference call, that costs are in check, with staff expenses set to reduce in the March quarter. Given the share price performance over the past year, investor appetite for another capital raise at this juncture would likely be lukewarm at best.
Other encouraging developments are that discussions are continuing with a major US financial organisation, 9 Spokes has also formed a third alliance partnership with a large technology consulting firm. This comes on top of ventures with IBM and a leading global consulting firm, which management expects to culminate in further bank wins in 2018.
User adoption is certainly accelerating, and driven by the new mandates that 9 Spokes has been winning. The proof of the pudding though will come in the take-up rate and the end earnings outcome to the company.
Source: Company announcement
As a reminder, the 9 Spokes 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.
Summary
Business dashboard aggregator 9 Spokes (ASX:9SP) has been a disappointing performer since adding it to the Fat Prophets Portfolio in late 2016. We have caveated our research coverage 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. That said, and despite some operational progress, and new mandate wins, overall investor appetite for the shares has remained weak.
Subdued sentiment in our view owes to a number of factors, and primarily include the lack of detail regarding the customer take up of ‘apps’ in the SME (small-medium enterprise) environments where the dashboard has been introduced. In particular there has been an 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.
We maintain confidence in the offering which 9 Spokes (ASX:9SP) presents, but believe that the shares are suffering in many ways with respect to an ‘information gap’, and a detailed update on 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.
We have no issue with the partner inroads made by the company, and cumulative user adoption which is rising. We however believe that a more guarded approach to the shares is warranted until more evidence is forthcoming on user responses to the dashboard offering. That said, we remain impressed by the ability of the company to bring on-board large blue chip clients, and the validation which that represents.
9 Spokes (ASX:9SP) will remain held in the Fat Prophets Portfolio.
