Staying the course
Shares in business dashboard aggregator 9 Spokes (ASX:9SP) have continued to disappoint, with a release last Friday putting paid to a partial recovery since our last review.
The company has announced that the Royal Bank of Canada (RBC) has cancelled its contract to provide a white label version of the 9 Spokes platform.
This has understandably been met with angst by investors, with the shares reaching fresh lows. The news while disconcerting, is certainly not terminal for 9SP itself in our view, with the company having other blue-chip clients which remain committed to their contracts. We attended a conference call with management this morning, and they also report that the company is also in discussions with a strategic partner about making an investment.
9SP went into a trading halt in the middle of last week, and returned on Friday after announcing that RBC was terminating the contract due to ‘a change in the bank’s strategic direction.’ 9SP management confirmed on the conference call this morning that this came as a ‘complete surprise’, and reiterated that it was not due for ‘cause’ (any breach or failure to perform).
The company noted that the loss of RBC will have a ‘meaningful’ impact on revenue until further customers are brought on board. Management did however say that it will open up the prospect for dialogue with others in the region, with the deal having given RBC exclusivity in Canada. 9 Spokes also continues to progress discussions with potential new bank customers across a range of other jurisdictions.
From a cash-burn perspective ($3.2 million in the June quarter) the company is making further cost reductions to counter the impact of the customer loss.
It is clear however that 9 Spokes will need to raise capital (cash was $4.8 million at June 30) – this was always a prospect as it remained in growth phase, but the need has perhaps come earlier than anticipated. Management reports that they are in discussions with a strategic investor, with negotiations at the ‘pointy end.’ The avenue being pursued should not surprise with retail appetite for a placement likely to be low.
Source: Company announcement
Up until last week, 9 Spokes shares had been recovering some of the lost ground, helped along by a positive quarterly report at the end of July. Users across the channel platforms had at that point reached 64,000, with enterprise channels over half the increase in the June quarter. Annual recurring revenues stood at $6 million, but we would estimate around half of this relates to RBC.
The company has continued to get traction with other potential clients and has been arguably able to punch above its weight in terms of ‘getting a foot in the door.’
Earlier last month the company announced that it had signed up OCBC Bank, the second largest financial services group in South East Asia by assets. The successful provision of a white-labelled version of the company’s platform will provide important validation for other potential clients in the region.
An issue remains the lack of hard detail on the customer take up of ‘apps’ in the SME (small-medium enterprise) environments where the dashboard has been introduced. Part of this is likely 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.
We would still like to see 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 have expressed this to management and remain optimistic.
Summary
We have highlighted that the recommendation of 9 Spokes 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 extremely disappointing given (notwithstanding the RBC announcement) the company has gained strong validation by signing up major blue chip customers and has more in the pipeline.
We are however not inclined to pack up the tent at this stage. The company will have to step up customer acquisition efforts with the loss of RBC, but discussions with a strategic investor would appear to be at an encouraging stage. We maintain confidence in the offering which 9 Spokes presents, and while the RBC announcement has dented investor confidence, the platform has clearly been validated by other blue-chip customers.
9 Spokes will remain held in the Fat Prophets Portfolio.
