Karen Hersh Told You Everything You Need to Know I listened to the presentation at the Best 50 Virtual Investors Conference yesterday. For those following the company, there wasn’t anything new presented. I did, however, notice something on the final Q&A question, The question was about the company’s focus for the rest of 2023. Peter talked about converting contracts to installations, scaling the business and 3rd party certifications. Then he turned the microphone over to Karen CFO Hersh for her final comments. Karen said she echoed everything Peter said, and then added her main focus currently is funding all the growth ahead. And hers was the final word for the conference call.
I wondered why XTRA, who chooses their words carefully and thoughtfully, would end a promotional event talking about the need for funding, never a popular subject with investors. It seemed as if they actually were trying to talk the share price down. And then everything fell into place for me. As we have seen over the past year, the journey from interested customer to paying customer is a long one with XTRA. And with 70% of customers choosing (and XTRA preferring) the subscription model, there is presumably no cash on installation, followed by a slow and steady steam of monthly income, so cash burn is still a real thing for the company. And with what looks to be ramping growth (and thus ever higher upfront costs for XTRA), I suspect this phenomenon will continue for the foreseeable future. One need look no further than EVLV humming along at $55mm annual revenue, but with record negative cash flow of $98mm last year.
So I found Karen’s comment to be the most telling of all. Yes, XTRA is growing like crazy. But they are also playing the long game on profitability. So if as an investor, you are measuring success by next quarter’s (or next year’s) cash burn, you may as well sell now. I suspect the reason XTRA ended their presentation with talk of funding, and why Peter has been on some private equity talk podcasts of late, is that XTRA is out with hat in hand looking for massive funding to pay for a tidal wave of customer interest that has come their way. So I expect there to be ongoing dilution in the future, and frankly, that XTRA is currently understating their prospects to keep the share price in check in order to keep the share price at a level where equity investors will sign checks to fund the kind of growth we are already, the kind that everyone dreams about.
Personally, I’ve never invested in these sorts of build it first, monetize it later sorts of models. This has lead me to steer clear of the likes of AMZN, GOOG, NFLX, etc to my great detriment. But this time, I am on board, having fully loaded my position when the company was at a $50mm market cap. And while I’m not suggesting XTRA will be a trillion dollar horseman of the Nasdaq some day, I believe one day it could be a Nasdaq listed entity with thousands of installations and a market cap measured in the billions.
We’ll have to see how XTRA plays it. Looking at EVLV's 10-K, it seems they chose a $300mm PIPE investment in 2021 that gave them a cash hoard that still stands at $234mm today. I expect XTRA will need similar capital to fund the kind of growth ahead, whether through debt (currently very pricy with today’s rates) or equity. But I also expect EVLV to fund more modestly in near term, and to go for larger sums as sales, and thus its market cap, increases. Ultimately, I expect to be smartly diluted over time. But for each increase in share count, I see sales and ultimate profitability increasing 5 or 10 fold, a trade I would be happy to make in what I expect will be some exciting years ahead.