RE:RE:RE:RE:RE:BNN - recommended by David Barr todayThanks for the response. Your comments are what I thought too until further investigation. It turns out the company has been very selective on its disclosure. Here’s what I found out:
1. Revenue is shrinking When you take the historical annual revenue of $38M and add the revenue of the last four acquisitions - reported to have combined revenues of $22M - you get expected annual revenue of $60M for the 12 months ending Sept. What happened? Revenue was less than $54M despite a foreign exchange tailwind of 3%. Revenue has actually shrunk more than 10%. (David Barr was right on his growth number, he just had the wrong direction!).
2. The company is spending well more on r&d than is reported on the income statement. They capitalized more than $1M in r&d spend last quarter so that amount ends up as an asset on the balance sheet. (This makes EDBITDA look better than it really is) I’m always suspect on capitalized r&d as it’s hard to estimated the future value of the asset.
3. The r&d is largely targeted at Microsoft development to replace old systems. The old systems were owned 100% by the company generating product margins of nearly 100%. The new products will require a reseller payments to Microsoft in the 30-40% range, reducing product (SaaS or other) margins from near 100% to less than 60% - Ouch! If they are successful on sales, success will come at much lower margins.
4. The public sector market requires extraordinarily long sales cycles. Can they hold a salesforce together (especially ones with quotas) when a sale can take years? Hopefully they can. What we do know is the market is competitive and there’s pricing pressure. Note they had to lower their prices by 15% last year in some markets just to hold customers. Clearly competitors are offering similar solutions for less. Remember that public sector organizations have very tight budgets and not much desire for change.
5. To implement new customers, Sylogist will need to build teams to deploy the new products. This will be expensive and take time as their customers are widely spread. Service revenue has very low margin and is challenged by talent supply issues. They could outsource implementation and support to partners but this too would take time and the revenue growth from services would be lost to partner companies.
6. Management success. There are lots of new chiefs in the company (CRO, CPO, CTO, CFO, CEO and so on) which sounds good and refreshed. Most of the heads are 60+. Who will carry out the long-term plan? When you dig into the companies management have been associated with in the last 20 years, none standout as being particularily successful. Managment hold virtually no stock and receives high compensation. Are management goals alighed with investors?
There are a lot more risks to mention in the short to medium term. However, if they can make it work it could be a longer term success on the revenue line but profitablity looks questionable.