Q3 Preview – 65% Revenue Growth & Breakeven EBITDA…My favourite play into small cap earnings season to round into the last two weeks of November. The fundamental momentum being seen in the underlying business has been so strong this summer in addition to insider buying give us a great set up into Q3 numbers.
I Just always come back to the price where Bell bought 10% of the company last year at 0.19/share. I continue to believe anything under that price is a steal. Let’s Dig In;
Revenue TARGET: $1,700,000 ($1,000,000 Hardware & $700,000 Service/Recurring) – They continue to ramp up sales efforts and there were two key developments in Q2 that bode really well for the back half of the year. In Q2 they brought on both T-Mobile and AT&T and started to sell through their LTE-M devices with their network connectivity from T-Mobile and AT&T bundled services – you can even go on YouTube and see these multi billion-dollar companies promoting BeWhere’s connected devices.
These signed agreement which will help the sell through of their devices and this is when we should start to see an acceleration of sales on the hardware side as well to accelerate the number of connected devices on the recurring revenue side.
Combine this carrier network with their European rollout with Orange, the large French telecom you now have 4 large national carriers (1 in Canada, 2 in the US & 1 in France) pushing their devices. Pretty darn impressive for some $10M market cap company…
More importantly, you saw a big acceleration in recurring revenue in Q2 up 24% QoQ and 57% YoY. The key thing is the big acceleration in the QoQ growth as this shows the sell through and connection of total devices is really starting to increase. It is no coincidence this big increase came after 2 consecutive Qs of $1,000,000+ hardware sales. As a result, we should see further QoQ growth in total recurring software/service sales as hardware sales continue to clip along at a $1,000,000/quarterly pace.
I believe most of the growth up to now has come from the core asset tracking side of the business. 2019 has been the year of the smart city project starting to be talked about. Whether it has been directly coming from the work they are doing alongside Bell in Toronto (that Bell is press releasing about but not name-dropping Bell in the Press Release ), or what they are talking about at MWCA in Barcelona or just last month in Los Angeles. I truly believe the smart city work could be the more valuable then the entire market cap of the company currently. Especially with how hard Bell is pushing this project across the entire Greater Toronto Area. Profitability TARGET: BREAKEVEN EBIDTA!!! – This will be the first time in the company history that they will be breakeven profitable. As the business grows and scales it naturally will become more profitable and asset light as more and more of the business come from recurring software revenue.
Couple Things here;
- Gross Margin – If we normalize for the supplier problem in Q2 gross margin came in line at 21%. As the revenue mix continues to shift more and more to a recurring software business, I could see that gross margin ticking higher by 500 basis points every year for the next 3 – 5 years.
- Profitability of Recurring Revenue – If you look at the core Recurring business it is associated with data collection and analysis with the only cost of sales associated with it is cloud storage. This revenue is accompanied by 80 – 90% margin. The contribution dollars associated with each incremental device connected is huge.
- OpEx Stability – This is a big one for me, if you look YoY at Q2 they were able to generate 159% more revenue all the while Operating costs only went up 5%. There is very discipline cost management here as a lot of the marketing and sales associated with the product is covered by resellers. There is so much operating leverage in the business model.
Insider Buying This summer after Q2 we saw a spree of insider buying from 4 different individuals including the CEO in a price range from 0.175 – 0.195/share totally $25,269.
Management stepping up and buying stock after Q2 following what was a strong Q bodes well for what they are seeing. There are many direct customers they are working with that they don’t press release but I think the insider buying speaks for itself that what they see in the pipeline is quite bullish.
Seeing that they have previously said that $6 – 10M in revenue for FY19 was the goal bodes pretty darn well for the back half of the year.
Insiders already owned a boatload of stock, very positive to see them adding even more…. Balance Sheet Balance Sheet Balance Sheet As much as we all didn’t like the equity raise last fall it has put them in a great position right here especially given the cost discipline and them being well on their way to be cashflow positive for all of FY20 and beyond.
With no debt, $3,086,032 in cash and $1,212,869 in Inventory they have ample liquidity for both working capital and to fulfill orders out of inventory and not have to sit around and wait for product to be shipped.
As a result, we won’t have the same problem we had last fall where the company was scrambling to fulfill orders and you saw a massive hit in gross margin like you saw in Q4 to get the product to customers. Balance sheet flexibility, it’s a beautiful thing. Projecting Out I am quite bullish especially looking out to FY2020 as their smart city projects continue to roll out alongside of the hardware sales that began to ramp in Q4FY18 all the way through FY19 which will result in the total number of connected devices and recurring sales side of the business continuing to ramp.
I have them generating $10.5M in Revenue in FY2020 split $4.1M Recurring/Service & $6.4M Hardware. Valuation Putting a core 4x Recurring & 1x Hardware Valuation multiple gets me to 0.345/share alongside 0.035/share in cash for a target price of 0.38/share or 138% upside scenario. Shorter term, if we hit my estimates for Q3 I could see a move back to 0.20/share target by the end of the month as people come back around to the name as they can finally see the path to profitability and how quickly the business is scaling.
Personally, I think my valuation target could be conservative because my two-year stack estimate of $10.5M in sales would be greater than a 70% CAGR and should trade at a premium valuation given the growth rate.
Maintains one of my top secular growth ideas in small cap tech and my top pick into small cap earnings season in the last two weeks of November and to finish strong into yearend. LONG – added this week at 0.155 – 0.165/share