Illiquid microcap with ugly (past) history trading at 1.3x EV/ARR despite 5-year ARR CAGR of 41% p.a. and potential profitability over the next 12 months. At $30m EV little is priced in.
DOWNSIDE: Limited, given it’s trading at 1.2x EV/REV for a growing software business that is extremely close to breakeven, and has $10m in cash. A lower valuation would only occur if it starts significantly burning cash or revenue goes backwards, both of which look extremely unlikely at this point.
UPSIDE: A growing software business with large TAM that starts to show some leverage could potentially get, say, 5x EV/ARR, which would be >4x current stock price. PRO could be following a well-worn path of transition from perpetual to subscription revenue models of other micro/small caps RUL & OCL.
COMPANY
Has been listed since 1998 and tried to acquire its way to success. Surprisingly it didn't work. Current CEO, Brad Thomas comes in (2016) and cleans it up, selling all but 2 software products, eMite & Snare, and started the transition from perpetual licenses to a subscription revenue model.
eMite is an out-of the-box software program that is used for call centre analytics and data visualisation. It helps companies improve their call centre operations by providing insights into real-time and historical data. So it’s customer experience (CX) analytics software. CX is typically delivered using multiple siloed applications that don’t speak to each other - eMite combines them all to bring real life and historical insights. eMite gross margin is about 85%. 15% of revenue is hosting costs. eMite has a leadership position in an immature market segment with no significant competitors, whereas Snare is in a mature market. Looking at 500+ seat call centres.
Snare is a comprehensive log management and security analysis platform. It meticulously collects and analyses logs from various sources within IT infrastructure to identify potential security threats and incidents. It basically tracks what someone has done once they have broken in. Increasingly required from a regulatory standpoint. Clients deploy it themselves, so no hosting costs - only COGS is commissions to sellers. Snare has many competitors, including Sumo Logic, Loggly and SolarWinds. Its competitive advantage is that it was originally built for defence and can work in a total air-gap environments. Snare will always have some perpetual contracts as military and certain segments of government require this capability.
As above, eMite revenue is all licence/ARR. Snare is transitioning from upfront + maintenance to recurring licence. A worry is the last update for Q1, where Snare maintenance revenue was down 25% on FY23 but with only a 9% increase in Snare ARR. This either means customers churned off Snare or is simply a timing issue in converting to ARR. This is a risk but given the EV you pay for this company it's hardly priced for much. Another query is why eMite revenue for FY23 was below eMite FY22 ARR.
Key Management Personnel own 16.85% of the company.
Valuation
Trades at 1.3x EV/ARR and CEO has said aiming for EBITDA breakeven in FY24 (PRO expense all software so EBITDA is decent FCF proxy).
I think downside is very limited as few growing software companies that aren’t burning cash, about to be profitable, growing revenue/ARR double digits and with large TAMs trade at such a low ARR/revenue multiples suggesting not much is priced in currently.
The exact upside isn't all that clear to me. If I work backwards and say this company could earn $2-3m in the next 24 months then on current EV it would be 9-14x which is way too cheap for a software company growing at double digits.
Firstly what could it earn in FY24? Well, last half expenses were actually slightly down on the previous half - I'll be generous and just annualise these, so FY24 expenses will be $22.9m (at this EV, with what I think is large downside protection you just have to be roughly right + the craziness of FY22-23 seems to be coming undone slightly). Revenue for FY23 was 10% above the FY22 ARR, which makes sense as you sign up a few customers during the year plus get some small implementation fees. I'll say this continues, which means FY24 revenue could be $24m (used Q1 FY24 ARR of $22.6m). So, FY24 could produce $1.1m of EBIT or $0.8m NPAT (not including interest earnt on cash balance or R&D credits). This means PRO is currently trading on 36x EV/NPAT… BUT this is a company making the transition from loss making to profitability so the NPAT multiple doesn’t mean much at this stage.
From there, FY25 could produce a $2-3m NPAT, which would not be priced in at all as per above. Overall this is just to roughly put some numbers around an upside scenario, they will for sure be wrong but downside protection is the thesis here.
Overall, I think the downside is very limited which means most of the other alternatives are good, especially with the characteristics the company has that I’ve mentioned above. I don’t think this deserves a 20%+ portfolio weight like my previous ideas but I think 5% might be appropriate and then if the thesis starts to play out actually increasing the weight to 10% depending on price of course.
This is only a 1-pager, I’ve obviously missed details but that’s not the purpose of a 1-pager. DYOR.
This isn’t investment advice - I don’t know your circumstances. I obviously like the idea, hence I hold a position in PRO at the moment, but this could change. This update is based on my opinion of things that could happen in the future using publicly available information. Writing clarifies my thoughts, but we all make mistakes so do your own research and do not rely on me
Cheers mate. I like the logic.