It’s gratifying that I’ve written about businesses that have experienced significant re-ratings, contributing to some good returns in FY24 for Goforgrowth. However, the mistakes always hurt more than the wins, and there’s more to learn from mistakes. Given that I’m very early in my journey as an investor, I’m much more focused on learning and growing than anything else.

Work can compound by teaching you, since learning compounds. This second case is an interesting one because you may feel you're doing badly as it's happening. You may be failing to achieve your immediate goal. But if you're learning a lot, then you're getting exponential growth nonetheless.

-Paul Graham

I’ll start this three-part series by reflecting on the general performance of the year. Later, I’ll talk about the many things I got wrong and share what I've learned from those mistakes. The last part is about some things I got right (for now), and trying to distill what can be gained from wins at what looks like the beginning of a bull market.

I’ve structured this small series into three parts:

• Part 1 (Today) - General comments and learnings from the financial year

• Part 2 (Next Week) - My losers and what I learned from them

• Part 3 (The week after next) - Some winners and what I learned from them

A Good Year, at Last

This year has been positive with returns of 40%.

*Note: My Sharesight reads “in the last year” because I didn’t take a screenshot before the year ended. This screenshot was taken on 6/07/2024.

This result was strong enough to pull my 2-year returns into positive territory above my benchmark.

However, if we zoom out one more year to my 3-year returns, the picture quickly becomes less flattering (I would take a screenshot here too if Sharesight permitted this option). I wrote about my underperformance openly during those two down years. If you want to brag about your wins, you should also have the decency to present your mistakes openly.

The trend of retail investors writing openly about their yearly results is interesting. The reason I’ve decided (after long deliberation) to jump on the bandwagon is simple: doing things in public has helped me increase the speed of improvement. It also attracts some nonsense, but on the whole, there has been more upside than downside.

Surround yourself with people who have the same goals as you. Rise together.

James Clear

It’s not all positive, of course. The two biggest drawbacks to this trend I see are:

1. Some are very selective about what they share, quick to promote the good years, and disappearing in bad times. That’s simply lame.

2. Seeing others share very positive returns when your strategy isn’t delivering results could cause you to make the wrong decision at the worst time. I don’t have a simple solution for this, other than being able to take a step back, reflect deeply, and think independently.

Returning to my results, I’m sure we can all agree that this good result is too short a performance period to be labeled as skill. We all had an inkling that the markets would become favourable to small and micro caps again. Typically, at the beginning of such periods, a large and quick re-rating causes inflated performance. It feels to me that this is what the last 6 months brought about.

With the goal of this post to share lessons learned, let’s not delay these lessons any longer. Here they are.

1. Hang in there

One very simple lesson from this positive year is that you should stick to your strategy long enough to see it play out.

How long is long enough in the markets? Perhaps a simple answer should be a full market cycle from bear market to a complete bull market and back. About 10 years. Give or take. But that’s too simple a heuristic, and certainly, one wouldn’t want to keep doing something that doesn’t work for 10 years. So the short answer is ; it’s up to you.

Investing in micro and small caps can be very painful; it’s typically the first part of the portfolio to get axed by institutions when they sense stormy skies ahead. Funds are also often slow to return to this area, waiting for signs of recovery to be in plain sight before re-entering a part of the market that caused them a bloodbath.

But this downside is often the price to pay for the large potential upside.

Why not just buy the NASDAQ 100 and call it a day?

If 40% returns sound good to any of us, we should remember that simply buying an index that tracked the NASDAQ 100 would have delivered nearly the same return in the past 12 months.

Undoubtedly, the effort-to-return ratio would have been much higher by simply putting in a buy order once and forgetting about your portfolio for the next 12 months.

So how do you know if you should stick to your strategy when other, seemingly easier strategies seem to be outperforming you?

For me, this is where passion comes into play. Investing has never felt like ‘work’ to me. I’ve been passionate about businesses from a young age, having started my first business quite young (not knowing at the time that this is a trend I would continue all my life, hopefully). Trying to make an intelligent bet on where I think the future of one business is headed will always be a pleasure.

Also, perhaps this is an unpopular opinion at the moment, but I struggle to believe that the NASDAQ 100 can continue this unbelievable streak of performance for another 5 years. If your heart is in it, I think this is a good litmus test for sticking to your strategy.

2. Momentum

Another investor which I’ve come to respect through his writings, Guy Carson at Tauranga Investments wrote in his monthly newsletter about the power of momentum. Momentum is an incredible driving force in public markets, especially at moments of peak emotions in the pendulum.

Guy ends his most recent monthly update with, “Momentum, both positive and negative, is a significant force in financial markets and a lot of the time you just have to go with it.”

While it’s not my personal style to chase momentum, what I’ve learned from it is that you should be very careful about trimming your positions as they start to move upwards. Many of my positions have shot far above my assessment of fair value. In the winners section, I’ll share a relevant example of the dangers of trimming past your assessment of fair valuation. In my case, if I had been too pedantic about it, I would have achieved worse results, given that the majority of my returns came from 3-4 companies in a broader portfolio of 20 companies.

3. Write

If something is important to you, then you should write about it. If something is very important to you, then you should write about it publicly.

My initial goal in writing publicly about investing was to grow my network of other investors. None of my friends invest in this space (all think I’m crazy, and probably rightly so), so it felt like a lonely passion project at times.

I got more than I expected from writing publicly. Investors I have a ton of respect for started reaching out. I spent time with many over coffee and learned more in those one-hour conversations than I had by reading entire books.

While it’s not been possible for me to keep the writing cadence I wanted (and I apologise dearly to my readers), I don’t intend to stop writing anytime soon.

4. Get Feedback

Building on my previous point, one of the benefits of deciding to start writing publicly two years ago has been the relationships this opened for me. Relationships with other investors you respect, who have more experience than you, position you in a great place to get valuable feedback.

As a tangible example, Claude Walker gave me the chance to write for a rich life after last year’s reporting season.

I chose to write about two of my holdings, Playside and Camplify. He pointed out some positives in the articles, namely the good groundwork I had done to get insights from their customers. But more importantly, he pointed out two things I could have done better:

1. Plot your most important metric on a chart to see if how moves over time. It’s always easier to see things visually.

2. Be clear on the 2-3 most important metrics you will track over time to tell if your thesis is still on track.

These two pieces of feedback are so simple that I couldn’t help but feel like a fool for not having included them in those articles. But that’s how you learn: repetition, reflection, and feedback. No other way. Thanks, Claude, for making me a better investor.

5. It’s you vs. you

One of the best practices I've adopted in the past year is to start tracking my performance against myself. This is a strategy I picked up from Ian Cassel, in his article “How Much Are You Hurting Your Returns?”. Ian spotlighted this idea which originally came from Nicolai Tangen, the CEO of Norges Bank Investment Management, Norway's sovereign wealth fund.

Doing this has been an incredibly useful practice, and one I suspect will become even more useful over longer periods of time.

I have a simple method to do this. I capture my portfolio at the beginning of the year using Google Sheets, which fetches current or historical securities information from Google Finance. I take this screenshot twice per year since I’m not incredibly active (I suspect this strategy would not be feasible for a trader).

Every quarter, I review if the changes I made were positive or if they detracted from my performance. One quarter may be too little time to tell, but in a market that moves quickly, there are still lessons to learn if you look close enough.

Conclusion

It’s been a good year, but this is only the beginning. If time permits, I will be doing this for another 30 years or more, so there’s plenty more to learn. And hopefully, there’s plenty of time to learn it.

I’ll get deeper into the weeds next week to draw some lessons from some losers.

“A golfer has to learn to enjoy the process of striving to improve. That process, not the end result, enriches life.”

― Bob Rotella, Golf is Not a Game of Perfect

Thanks for reading folks.

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I did this 6 months ago in 2 Down Years when I shared 5 important lessons I had learned over the last financial year. I concluded this article saying:

As this cycle turns, investors’ mentality will slowly start to change, from today’s very pessimistic view, to a more optimistic tomorrow. News about inflation has improved and the economy doesn’t seem so bad after-all. With a reporting season coming soon, we may find that the forward return for some of these extremely cheap stocks could be dramatic.

Thinking optimistically, the last two months may mark the beginning of the scenario I foresaw back then. Perhaps this rally is a response to the Federal Reserve's decision in December to maintain unchanged rates, acknowledging the easing of inflationary pressures. It could also be attributed to the widely shared sentiment that small companies are currently undervalued.

Alternatively, this upswing might be the adversary throwing us a lifeline before another blow. Who knows? I have no idea how to make money in the short term, I’m in this for the long haul.

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This Year’s Result: 6.34%

Over the past 12 months, I lagged behind my benchmark, the ASX 200, by 6.7%.

I've always leaned towards the ASX 200 rather than the Australian Small Ordinaries Industrial Index. The rationale is straightforward – if I weren't actively picking stocks, chances are I'd opt for an index mirroring the ASX 200, rather than one representing small caps. I suspect this inclination is shared by many investors.

However, delving into the performance of small companies becomes pertinent for me, given my sweet spot lies in market caps below $250M.

Zooming in on these smaller players, the bear market that started nearly two and a half years ago finally shows signs of coming to an end. The recent shifts in interest rates might just be the catalyst needed for a long-awaited rally in this asset class.

Reviewing all the decisions you made

Reflecting on the year, I've come to terms with a fair share of mistakes. While it's true that the small company landscape faced challenges, I don't use that as an excuse for some of the lapses in judgment I've made.

My philosophy has always been that making mistakes is inevitable, but repeating them is not acceptable. On a recent podcast I listened to with Nir Eyal, he shared this gem of a quote by Paulo Coelho who said it better than me.

A mistake repeated more than once is not a mistake anymore. It is a decision.

- Paulo Coelho

In order not to lose the lessons, I’ve created a habit a few years ago to spend 2 hours at the end of the year reviewing my key investment decisions over the last 18 months.

I chose the timeframe of 18 months because I like to evaluate the quality of a decision 12 months after it was made. Whilst this may be too early in many cases, in many others it’s the perfect timeframe to rate the quality of your decision, and to write down key lessons you learned on the back of this decisions.

Creating new guidelines

Building on these insights, I've crafted a set of new investment guidelines. These guidelines are not set in stone; some may not withstand the test of time and could be proven wrong, with reasons only becoming apparent later.

In the last 3 years, I’ve found that more often than not, these guidelines evolve into integral aspects of my continuous improvement.

Since the inception of GoForGrowth was driven by my pursuit to become a better investor, it only feels right to share these guidelines with you. If you hold a differing opinion or have insights to offer, I'd love to hear them.

New Guidelines

New Guideline #1: Sell when the stock drops 20%

I’ll start with perhaps the most controversial of my new guidelines. I will now exit most of my positions if they decrease by around 20% of my entry point. Here’s why. In 2022 and 2023, losses have significantly impacted my gains. Of course, being black and white is not nearly as easy as it sounds, but quick math on my returns point out following this guideline would have improved my overall results by 10%.

Lack of discipline in selling has prevented me from achieving better results. For 5 companies in my portfolio, I’ve accumulated losses exceeding 30%. Setting a stop loss at 20% would have limited this loss significantly.

Yes, small, illiquid companies can witness substantial drops quickly, so it’s important to monitor that this loss of 20% didn’t happen on irrelevant volume. Sure. But in general 20% is substantial enough that it won’t happen in a matter of days. This rule is somewhat of a proxy for the fact that in investing, there’s often no distinction between being too early and being wrong.

New Guideline #2: Only Add to Existing Position When Growth per share is Above 25%

In 2022 and 2023, several poor additions to existing holding were made. These may not have damaged results, but often led to nothing at all, and a 0% return is not good enough.

When I looked more closely at my bad calls from these additions, the most common factor among the worst decisions was adding on results updates that were good, but never great.

Many of them showed revenue growth in the high teens, but never above 25%. It’s OK to be demanding as an investor. I will now be much more demanding when adding to positions.

New Guideline #3: Almost Never Average Down

Upon reviewing my decision log for 2022 and 2023, it became evident that almost all averaging down decisions proved to be unfavourable.

Notable exceptions include Dropsuite, Camplify (I wrote about it for a rich life) and Frontier Digital Ventures. For Dropsuite and Camplify, the exceptional growth (with growth per share above 40%) played a crucial role. As for Frontier Digital, its recent comeback is not entirely clear to me.

This realisation reinforces the principle: when growth is not above 25% per share, never, ever average down.

New Guideline #4: Don't Buy Against the Trend

I used to think that the old addage of : “fundamental analysis provides insights into what to buy, while technical analysis tells you when to buy or sell” was too simplistic and not helpful in small caps. Now I think it may still be too simplistic, but I’m beginning to think it’s more helpful that I once imagined.

Upon reviewing my decision log for 2022 and 2023, it's evident that a common and costly mistake was buying into a new position or adding to an existing one when the chart was unfavourable.

It was a mistake to go against the market trend. Aligning with the tailwind of other investors' buying behaviour can make a significant difference. Buying when the chart looks favourable can lead to gains of 20 to 30% in a matter of months, and the same holds true in reverse.

New Guideline #5: Sell When Management Guides for an Upcoming Slowdown in Growth

Whilst this one won’t be applicable all the time, I've learned this rule the hard way in the last 12 months. A prime example is IKE GPS (I wrote about them here, and exited my position months later when growth disappeared), where management explicitly communicated upcoming challenges.

Despite this clear signal, I failed to take action, resulting in a significant loss of 40% in the next 3 months.

There’s advantages to investing in public markets (as opposed to what VCs do); why not take advantage of this dynamic?

New Guideline #6: Add to Your Winners

Upon reviewing my decisions in 2023, I've noticed a pattern of averaging down but very little averaging up.

This represents a significant factor that needs adjustment.

My tendency is to add to winners because I do believe that winners keep winning.

• David Gardner

At the end of every quarter (not more often, I haven’t got the time of desire to trade a lot), I should assess the share price performances of each holding in the portfolio. As part of this evaluation, I should consider selling at least one loser to add to a winner. This is a simple experiment that could yield good lessons.

New Guideline #7: Start with a small Position Size at Cost (2.5%-3.5%), Only Add When Momentum is Clear

This approach serves as an effective means to minimise losses. In the past, I’ve made mistakes from building up a position too quickly.

A 20% loss on a 2.5% position translates to an overall portfolio loss of 0.5%. Protect the downside.

Rule 1: Never Lose Money

Rule 2: Never Forget Rule No. 1

• Warren Buffet

The crucial aspect is that substantial gains are unlikely unless position sizing is increased over time. Therefore, it's imperative to adopt this strategy more consistently.

Conclusion

I can't be the only one in this community with this habit.

If you review your decisions and distill new rules from them, I'd love to read your notes.

Feel free to share them with us here and drop your thoughts in the comments. This post also signifies my one-year milestone of writing publicly. It's been a pleasure. Thank you for being part of my readership over the past 12 months, and here's to the continued journey ahead.

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The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

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Well, it took me a while, but we got there in the end. Today, we’re aiming to validate or disprove two hypothesis:

1. That Revenue per Employee is ‘The GOAT of SaaS Metrics’

2. That Revenue per Employee can be very useful outside of the world of SaaS

Let’s get into it.

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The Challenges we ran Into

Understanding the employee count of Australian public companies poses challenges due to the absence of reporting obligations.

To obtain this information, manual research, primarily using LinkedIn, becomes necessary. However, relying on employees to maintain updated profiles and dealing with multiple LinkedIn profiles for a single company present hurdles. Some industries also disregard LinkedIn, leading to potential inaccuracies.

The challenge therefore lies in the inherent imperfection of manual efforts. While inconsistencies may exist, I think the metric's utility remains when applied across a diverse sample.

I’ll also add my usual disclaimer that I’ve likely made some errors whilst doing this. Accept my apologies if you find some.

Now, let's delve into the findings.

What CJ Said

This metric, often used in the world of Saas, is sometimes referred to ARR per FTE; meaning Annual Recurring Revenue (ARR) per Full Time Employee (FTE).

The reason why this metric is especially good in Saas is because the vast majority of your expenses are your people. You essentially need developers, product managers, and GTM folks. The rest is typically your Kombucha expense and your compute costs. So in the world of SaaS, Revenue per Employee is great way to benchmark companies against another to measure comparative efficiency.

Of course, the stage of the company will impact these results. If you’re really early days and pre-product-market-fit (PMF), most of what you do is inefficient by nature (remember rule #2 ; do things that don’t scale). As you grow past PMF, efficiency starts to matter a lot and you will be benchmarked against your peers.

brings up a good example which offers an accurate scenario in which this metric is a helpful view into a business’ efficiency.

You see it all the time - a company is doing $10M in revenue with 50 employees. They’re excited about the traction they’re seeing, so they go on a hiring spree to “double down on GTM and capture the market.”

But 12 months later, they’re stuck at $14M in total revenue with 130 employees.

When you take your eye off revenue per employee, there’s a proliferation of supporting functional heads that tend to get hired (finance, HR, legal, strategy, and anyone else telling the people who build or sell the products what to do).

Revenue per employee is the most honest metric in the world.

I’ve worked for companies in which the above happened, and it’s no fun. Everyone feels less efficient, and the data supports that this is indeed true.

Why Revenue per Employee is a good metric

The above highlights one of the main reason why it’s a good metric:

Resource Management.

• It helps you understand if you're using your resources (employees) wisely.

• If you have a low Revenue per Employee, it might indicate that you're either overstaffed (common) or your GTM team is underperforming (which in itself could indicate issues with your product too).

Here are other reasons why it’s helpful:

Productivity Check:

• Allows you to compare your business's productivity over time or against competitors.

• Increasing Revenue per Employee over time can show that your team is becoming more efficient and effective.

Profitability Signal:

• Generally, higher Revenue per Employee can contribute to higher profitability. If you're making more money with the same or fewer employees, it can positively impact your bottom line.

Strategic Decision-Making:

• Helps in making strategic decisions about hiring, expansion, or streamlining operations.

• If Revenue per Employee is low, you might consider optimising processes, improving employee skills, or re-evaluating your business model.

What does good ARR / FTE look like?

So back to my point above, what does good look like? Well, as is often the case, we've got data here, but it’s US based data. There’s an argument that the numbers shouldn’t change too much from the US to AU, and my research support this. So let’s see it. Credits to for putting OpenView’s numbers into a neat chart:

Who are the high performers on the ASX?

On the back of our research, here are 26 companies who appear to be performing well on this metric.

In reviewing the table, some results are genuinely surprising, while others align with expectations. The presence of Pro Medicus (ASX:PME) at the pinnacle is hardly shocking; it's arguably the highest quality business listed on the ASX, and the Revenue per Employee metric further reinforces this notion.

Another noteworthy mention is Jumbo Interactive (ASX:JIN), a high-quality, founder-led business that has demonstrated consistent growth in both revenue and profitability over the years.

The Questionable Performers

Then, there are the surprising companies. When the metric looks very favourable, it can cause raised eyebrows and gets me to think a little deeper.

Gratifii Limited (ASX:GTI)

Take Gratifii Limited (ASX:GTI), for example. The company has been experiencing impressive growth, but upon closer inspection, much of it seems to be inorganic. While the top line is heading in the right direction, there's a lack of corresponding improvement in the bottom line—both in accounting and cashflow figures. Moreover, they continue to burn cash and the cushion is noticeably thin.

To gain more insights, let's examine the cashflow statement:

The staff cost of only $837,000 for the quarter seems to support the claim that this isn’t a very people heavy business.

But then we have the problem of $5.8M in product manufacturing expense. If this business is indeed a “full-stack customer engagement technology provider that delivers end-to-end technology solutions for businesses to engage with their employees and customers”, then it seems to me that the only logical explanation to this bulky product manufacturing expense is outsourced development costs. If my hypothesis is true here, then our promising-looking revenue per employee metric is void for them.

I can’t be sure here. And certainly, Gratifii appears to be moving in the right direction. With claims that the next quarter will be cashflow positive, and that growth will continue, it’s likely one to keep watching closely.

Laserbond (ASX:LBL) and Rectifier (ASX:RFT)

Whilst they are mostly two completely different businesses, Laserbond and Rectifier share in common that they are both manufacturers (sort of).

Why do the numbers look so favourable for both of them?

I’ll offer 2 potential reasons:

1. Limited LinkedIn Representation

One factor contributing to the favourable numbers could be the nature of the manufacturing industry. Many manufacturing roles, such as trades, mechanical engineers, and machinists, may not have LinkedIn profiles, leading to an under-representation of staff numbers. Consequently, relying solely on LinkedIn data may not accurately capture the workforce size.

2. Embracing Efficiency Through Automation

Efficiency is paramount for manufacturers, and a significant portion of their expenses may be attributed to leveraging machines and industrial automation. In such cases, the revenue per employee metric might not offer a comprehensive understanding of their operational efficiency. Manufacturers, particularly those employing advanced automation, tend to allocate a substantial portion of expenses to machinery and technology rather than a large workforce.

So perhaps this means that for some industries, namely this one, my second hypothesis is void.

Betmakers Technology (ASX:BET)

Betmakers is another interesting one. If it’s so efficient on the Revenue per Employee front; than why is it struggling to make a profit?

This discrepancy can be attributed to Betmakers' business model, specifically its acquisition of content rights necessary for marketing bets and the upfront minimum guarantees stipulated in contracts. These aspects pose working capital challenges for the business.

You can see evidence of this in the latest quarterly (see 1.2 (b)):

If Betmakers can execute its growth plans as promised, simultaneously maintaining cost control, there is potential for the company to become more compelling in the not-so-distant future.

The Performers

The primary objective of this exercise was to identify companies showing promise on the metric, and the results were encouraging.

Although the small ASX companies are still a distance away from the benchmarks set by NASDAQ giants (with Google and Meta boasting significantly higher Revenue per Employee numbers: $1.7M and $1.4M, respectively), our evaluation is based on a different perspective. We are betting on this metric to witness substantial improvement over the next 5 to 10 years.

Here are my thoughts on a selection of companies.

Pointerra (ASX:3DP)

Despite recent missteps and errors, Pointerra (ASX:3DP) showcases good efficiency by generating $8 million in revenue with only 28 employees (assuming this figure is accurate). Although a stagnant software business without reported Annual Recurring Revenue (ARR) does not interest me, there's potential for a shift in my perspective if two crucial aspects change—growth and transparent reporting of ARR.

According to management, these changes are on the horizon, so it's worth keeping an eye on Pointerra to see if they deliver on their promises in the near future.

Cogstate Limited (ASX:CGS)

Facing some growth delays, Cogstate (ASX:CGS) recently reported modest movements in growth at the AGM with 1Q24 Total Revenue at $9.2 million (1Q23 $8.9 million). Despite these figures, management expresses confidence in the near-term future, highlighting achievements such as a significant increase in deliverables by the proposals team (1Q24: 109 vs. 4Q23: 64) and a record historical high in the value of sales opportunities.

For Cogstate, successful execution could help transition the company into a growing entity with enhanced quality. The revenue per employee metric, the potential for increased profitability, and the positive indicators mentioned by management position Cogstate as one to watch closely in anticipation of future developments.

Energy One Ltd (ASX:EOL)

Energy One Ltd recently acknowledged that the fallout from a failed takeover has been a source of distraction, resulting in an anticipated growth slowdown. Despite these challenges, we can see from the revenue per employee metric that the organisation is a good image of efficiency.

Looking ahead, with the transaction mishap behind them, Energy One promises to be an increasingly interesting company in the not-so-distant future.

Medadvisor Ltd (ASX:MDR)

I was surprised to see Medadvisor rate so highly on this metric. You could argue some of the GuildLink employees are incorrectly labelled on Linkedin, but from my research it appears the company transition them onto the Medadvisor profile. While recent growth has been commendable, a substantial portion is attributed to the acquisition of GuildLink. The future trajectory of growth will be crucial in assessing the company's overall performance.

Of greater importance to me is whether MedAdvisor can successfully navigate its current transition phase—shifting towards generating sustainable, positive cash flow and, ultimately, achieving profitability. Over the next 12 months, I will closely monitor their progress to determine if the company can make the necessary strides in these key areas.

The Laggards

On the other end of the company’s I looked at, we’ve got:

That’s also an interesting bunch, there are companies in there I also find very interesting.

A high level view indicates many of these entities are still in the early stages of their growth trajectory. The nature of early-phase startups often involves substantial investments in various areas, from technology to GTM, which tends ti result in a lower Revenue per Employee metric. However, this metric alone may not tell the full story, as there are other contributing factors.

Beyond the growth phase, operational inefficiencies, industry-specific challenges, or capital-intensive business models could be influencing the lower Revenue per Employee figures. Identifying the root causes behind these metrics requires a deeper analysis, considering the unique circumstances of each company.

FELIX Group Holdings (ASX:FLX)

I wrote up a 1 pager on Felix (here) and made comments on their recent quarterly (here). I find this business interesting, but clearly this metric highlights a current weakness in the business. While the Revenue per Employee metric unveils a current weakness, a closer examination provides valuable insights.

Notably, a significant portion of Felix's workforce, 34 employees in the Philippines and 13 in Panama, highlights their strategic use of overseas talent. Leveraging international expertise, especially in the early stages, can be a prudent move for companies, and in Felix's case, this appears to be a positive aspect.

Further scrutiny into the roles of these employees reveals a concentration in business development, with approximately 40 staff dedicated to sales out of a total of 112 employees. This emphasis on sales positions signifies a strong focus on driving growth. If Felix continues to deliver on this front, the business will remain one to watch closely.

Get the Full List

For the complete list, you can get it here.

Please note that I do not plan to maintain this list regularly. The information is (mostly) accurate as of December 9, 2023.

Conclusion

Let’s go back to our initial hypotheses;

1. That Revenue per Employee is 'The GOAT of SaaS Metrics.'

2. That Revenue per Employee can be very useful outside of the world of SaaS.

The second hypothesis has faced quick disapproval, as seen with Gratifii Limited (ASX:GTI), Laserbond (ASX:LBL), Rectifier (ASX:RFT), and Betmakers Technology (ASX:BET). Various business models demand significant investments in physical assets, marketing, or allocate people expenses differently, rendering Revenue per Employee less useful outside of SaaS.

Regarding the first hypothesis, I personally don't deem it the GOAT (Greatest of All Time) metric. If I had to choose a single metric to evaluate a company, I would still prefer the Rule of 40. The Rule of 40 indirectly captures efficiency through margins, whereas Revenue per Employee provides no insight into growth.

What could be an even better metric?

An even more insightful metric could be free cash flow per employee.

However, the typical challenge arises – many of the small caps we follow are not yet optimizing their cash flow. While they may generate positive cash flow, it often serves to fuel future growth rather than accurately representing their financial reality.

This is where revenue per employee proves its utility; it gives us a baseline understanding for all companies, as revenue is a universal metric (unless they are just an idea rather than a business).

What’s Next?

I’ve got a list of 10 articles I’ve been working on in the past year sitting in my drafts. This new cadence of monthly writing will hopefully be sustainable for life.

If there’s a topic, a metric, or a company you would like coverage on; send it through.

In the meantime, happy holidays folks, and thanks for your support throughout the year.

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Disclaimer 

Please be aware that there may be mistakes in this article; I write quickly, and after all, I'm only human. If you spot any errors, kindly let me know and forgive me.

The content and data provided on this website are for informational purposes only and should not be construed as investment advice or guidance on tax or legal matters.

The companies and strategies discussed on the site are presented for entertainment purposes. We may or may not be invested in the mentioned companies at any given time, and references to companies may serve as examples, ideas, or for discussion.

By viewing the contents of this article, you agree:

1. You have read and understood the warning and disclaimer above.

2. Not to base any decision on the contents of the article.

3. Not to place reliance on the contents of the article.

4. That the author is not responsible or liable, directly or indirectly, for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

Which Saas company, beloved by the market at the time and still trading today, released this announcement? Here’s a hint to help you out: The company's name begins with the letter 'L.'

Only six months after this announcement, this company's Annual Recurring Revenue (ARR) growth showed no signs of slowing down, and reached a whopping $34.5 million. It quickly climbed to $50M afterwards.

Here's the next question: If this company was achieving ARR growth rates of over 100%, even considering the natural slowdown over the years, how much ARR do you think they're making today?

The answer is that no one knows.

In case you haven't guessed it by now, the company in question is none other than Livetiles Ltd (ASX: LVT). Following this announcement in 2019, where they managed to increase their ARR tenfold in just two years, the company's market cap skyrocketed to nearly $500 million.

Fast forward to today, and Livetiles' market cap currently stands at $7 million. 

So, what exactly happened? Well, I think we need to chat.

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ARR: What it is, and Why we love it. Until we don’t.

Annualised Recurring Revenue (ARR) is the total revenue a company anticipates earning from all its customers who are subscribed to its software for a year.

Let's break it down with a straightforward example:

• Imagine your company has 10 customers, each paying $10,000 per month for your services. That sums up to $100,000 in Monthly Recurring Revenue (MRR).

• To calculate ARR, you would take the MRR ($100,000) and multiply it by 12 (for the 12 months in a year). So, in this case, your ARR would be $1,200,000.

Your ARR provides a snapshot of the revenue you expect to generate in a year from all your subscription customers.

Now, here's why ARR and reported revenue figures usually don't align perfectly: every new customer is immediately added to the total ARR, but accounting rules dictate that you can only account for the revenue you've earned during that specific year.

So, let's go back to our example:

• You’re currently at $1.2 million ARR and your financial year ends in December.

• If you close a customer for $10,000 per month in December, your year will end with ARR of $1.32 million.

• However, since the customer only came on board in December, they've either added no revenue or only one month's worth of revenue for your financial year, depending on your billing practices.

Investors have a soft spot for ARR because it provides insights into the stability and growth potential of a company's revenue stream. A high and steadily growing ARR should indicate a successful business with a reliable income source from its customers. It's a valuable metric for assessing a company's financial health and growth prospects.

ARR: Why we love it until we don’t.

If the statement in the previous paragraph holds true, then what on earth happened with Livetiles?

First and foremost, let's address the elephant in the room: Livetiles encountered a multitude of problems. The previously mentioned announcements revealed some concerning cash burn figures. In the fiscal year 2019, the company reported a net loss of $42 million on revenues of $18 million. There’s also the problem that much of this growth was acquired. We haven’t even talked about unit economics yet or competitive dynamics…

But, let's dive deeper into the ARR figure because we all know it's a red flag when a company's star metric begins to fade. Unfortunately, that's precisely what occurred at Livetiles.

Over the past 12 months, there's not a single mention I could find in the company's announcements regarding ARR.

What was supposed to be a dependable source of recurring income took a sharp turn, leading the company to report a staggering 42% year-on-year revenue decline.

Livetiles offers a suite of products, combining an intranet seamlessly integrated with the Microsoft 365 suite, an employee communications app, and a corporate directory featuring an internal org chart publication. On the surface, these are undeniably useful tools. However, I see a few potential challenges. Larger organisations might opt to develop their bespoke versions of such a combination, while smaller companies may find their needs well met with a blend of Slack and email. This leaves a viable customer profile in the mid-market, but therein lies a crowded landscape of competitors, including good products like Atlassian's Confluence, Microsoft's Yammer, ClickUp, and plenty more. The moat around Livetiles was likely not as robust as needed, especially when economic hardships prompted organisations to scrutinise their software expenditures more closely.

I don’t know the whole story here, this is purely my speculation. To be absolutely clear, I'm not here to pass judgment on Livetiles. I understand the challenges that come with running a software startup (more on this in the conclusion). It's far from a cakewalk, and they must have faced their fair share of hurdles. The meteoric growth of LiveTile’s story is somewhat incredible.

Within this challenge, there lies an important lesson: the primary issue with ARR is that it's at the company's discretion to categorise revenue as ARR, and, as it turns out it some instances, it can vanish as swiftly as it comes in.

So in the next short paragraphs, I’ll share a few things I like to do to understand more what makes up the strength of this recurring revenue.

Who’s the user, and what does he do with it?

The first thing I try to understand is the product.

Principle #1 - It needs to be (relatively) easy to understand the software - If it’s very hard to understand what the software does, and who the user is, that’s normally a bad thing.

A good way to get to the heart of this is to look at a demo on the company’s website or on Youtube. If the company is making upwards of $5M in ARR and you can’t easily find a demo, that’s normally a bad thing.

On 26 June 2023, Xpon Technologies Group (ASX : XPN) told the market the below:

Only a quarter before on 28 April 2023, the company reported an ARR figure of $18M. Now, ARR was down $9M. What happened here? Well, let’s go to principle number 2.

Principle #2 - Software vs. Service - If the so called software sounds a awful lot like a service “ie. we’re developing custom mobile applications”, that too may be a bad thing. The contract lenght of a service can be over multiple years, therefore, it can be annualised to look and feel like ARR. But the problem is that the service typically is more like a project, rather than a tool you use everyday to do your work. So the service-type ARR can dissapear faster than you might think, as was the case with Xpon.

True software should be a staple in your toolbox, not a fleeting project, ensuring a more reliable and sustained revenue stream.

Candy, Vitamin or Painkiller

There’s a multiple of different types of software business models, and I won’t go into all of them here.

Principle #3 - Candy, Vitamins, or Painkillers: In this step, we aim to classify the software within the spectrum of "candy," "vitamins," and "painkillers." While there's nothing inherently wrong with "candy" (just look at the staggering $1.21 billion in revenue reported by Candy Crush in 2021), when it comes to enterprise software, "candy" is often less robust than something truly mission-critical for your workflow. On a related note, I tend to approach management teams cautiously when they overuse "mission-critical" to describe their software.

We divide business plans into three categories: candy, vitamins, and painkillers. We throw away the candy. We look at vitamins. We really like painkillers. We especially like addictive painkillers.

Kevin Fong

Principle #4 - Horizontal vs. Vertical Software: The second part of this classification involves determining whether you're dealing with horizontal or vertical software. In broad terms, horizontal software can be used by various user types across multiple categories, such as Slack or Microsoft Teams. On the other hand, vertical software is tailored for specific industries or even user roles within those industries. Examples include software for theater bookings or solutions for reliability engineers in manufacturing. While this is a generalisation, vertical software can often be stickier due to its tailored nature, as users might find it challenging to accomplish their unique tasks using horizontal software. This classification can offer valuable insights.

Principle #5 - Average Deal Size: As a high-level rule, you can hypothesise that the larger the average deal size, the more challenging it will be to acquire customers and the harder it will be for them to switch to an alternative solution.

Conversely, smaller deal sizes might indicate a lower barrier to entry and exit. When you analyse a company's ARR, keeping this principle in mind can help you gauge the software's stickiness.

Step 3: Forget about CARR or ACV

Let’s go with another guessing game.

Who is this company that was growing ACV at 60%+ YoY and showed no sign of stopping?

Take a look at that graph – it's a thing of beauty. But wait, oh shit, there’s a problem.

The gap between cash collections and ACV widens with each passing quarter.

And then, like a magic trick, the graph vanishes in the next quarter.

But wait, you might be wondering, aren't ACV and CARR both cousins of ARR? Why the distinction?

explained the difference well in a recent article:

What is CARR? It stands for Contracted Annual Recurring Revenue.

You see, in software land, you can sell multi year contracts. And the first year may not be the same value as, say, the third year.

Many companies will claim the larger, exit year Contracted ARR (CARR) as ARR. However, CARR will not track to current period GAAP revenue or billings.

Why does this disconnect exist in the first place? There are a few reasons:

First year discounting: You offer a customer 25% off in the first year, and then return to the base price for the out years, decreasing the revenue you actually get in year one.

License ramp: You negotiate for the contract to increase in license count over time, with the objective of aligning to the customer’s anticipated headcount growth, hence increasing the revenue you get in the out years.

Embedded price increases: You add in a lever for inflation that kicks in during subsequent years, increasing future contracted revenue.

My process here is that I tend to completely discount any mention of ACV and CARR, unless the company as got a track record of multiple years of converting CARR in ARR within 12 months. If that hurdle is not met, than forget about it.

Conclusion

In hindsight, it's clear that investors may have become overly enamored with ARR two years ago, embracing it as an infallible metric. The truth is, it's not.

On the flip side, I believe that today's average public investor might be too quick to dismiss all the incredible advantages that stem from a business model generating recurring software revenue.

The real challenge lies in distinguishing those companies with a genuine secret sauce, the ones poised to enjoy the benefits of operational leverage over the long haul. It's a task that's always exceptionally challenging.

In the future, I'll delve deeper into my thoughts on this matter. In the meantime, I'd love to hear your thoughts and engage in a discussion. Please feel free to share your insights.

Stay tuned for more, and let's keep the conversation going.

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Change of Pace - Going to Monthly

It's hard to believe that it's been a year since I started this blog. My original goal was simple: to write about investing and interesting companies every week, not only to expand my network in this space but also to put my own beliefs and ideas to the test. Looking back, I'm genuinely pleased with the progress I've made.

It's been an incredible journey, and I've had the privilege of meeting some of you who read these articles in person. Even more rewarding has been the chance to learn from you. I'm immensely grateful to the investors I deeply admire who reached out, shared their time and wisdom, and even offered assistance with my startup.

Throughout this year, my writing routine has remained consistent. I carve out a brief window on Saturday afternoons, during my girls' naptime, and spend those precious hours clacking away on the keyboard. Time is a luxury, and this writing endeavour has served as my escape from the demands of both startup life and parenting (both of which I absolutely love btw, no complaining here).

However, since I started on this writing journey in January, my life has changed. We're now a family of five with three daughters under the age of three, and nearly every minute I'm not with them is devoted to steering my startup through its very early days.

To ensure that I can sustain this writing venture for many years to come, I've decided to change my pace.

Moving forward, I'll be shifting from a weekly schedule to a monthly one.

If you find yourself deeply disappointed by this change, I have a few suggestions:

1. Start writing: Consider creating your own original content. That’s how I started at the beginning of the year. You'll gain valuable insights along the way and potentially contribute to the broader discourse.

2. Explore other exceptional Substack writers: There are many consistent writers who share high-value content on this platform. Dive into their work and expand your horizons.

3. Take a break: You’ve earned one brother. Go for a surf and listen to a Beatles album. That’s pure joy, ain’t it?

As always, I'm immensely grateful for your time and attention. Here's to delivering more quality content over the next few years. Thank you for being a part of this journey.

Sources

• Livetiles announcement in introduction of $15M - Link here

• Livetiles grows ARR by 10x in 2 years - Link here

• Xpon Business restructure update & ARR Update - Link here

• Pointerra’s 29th of April 2022 - Enterprise Sales & ACV Update - Link here

Disclaimer 

Please be aware that there may be mistakes in this article; I write quickly, and after all, I'm only human. If you spot any errors, kindly let me know and forgive me.

The content and data provided on this website are for informational purposes only and should not be construed as investment advice or guidance on tax or legal matters.

The companies and strategies discussed on the site are presented for entertainment purposes. We may or may not be invested in the mentioned companies at any given time, and references to companies may serve as examples, ideas, or for discussion.

By viewing the contents of this article, you agree:

1. You have read and understood the warning and disclaimer above.

2. Not to base any decision on the contents of the article.

3. Not to place reliance on the contents of the article.

4. That the author is not responsible or liable, directly or indirectly, for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

Well damn brothers, the same rings true today.

This reporting season had us all on the edge of our seats, with the big macroeconomic picture starting to look ominous again. The prevailing consensus seemed to be that interest rates are destined to remain higher for an extended period. We even saw Cramer lose his shit about the sharp rise in the benchmark US 10-year treasury yield. If you’re wondering how I fared, well let’s just say one thing I won’t lose my shit about is the price of bonds. With 3 daughters under the age of 3, I have plenty of reasons to lose it on other things.

Anyway, back to the original programming. 5 companies that reported strongly. When I do these, I attempt to cover new and different companies, but I must admit I haven’t seen many standouts this reporting season, so please excuse the commentary on many of the usual suspects you’ve seen here before.

Here they are:

1. Dropsuite (ASX:DSE) - (Quarterly report link here)

2. Camplify (ASX:CHL) - (Quarterly report link here)

3. Acusensus (ASX:ACE) - (Quarterly report link here)

4. Felix (ASX:FLX)- (Quarterly report link here)

5. Austco Healthcare (ASX:AHC) - (Contract win announcement here)

FELIX Group (ASX:FLX)

Let's kick things off with a shout-out to Felix Group (ASX: FLX). I've been keeping an eye on Felix, having written about them earlier this year. In that article, I mentioned my desire to see Felix achieve strong and sustained growth, coupled with progress toward positive cashflow.

As I had mentioned then, this milestone was unlikely to be exactly on the immediate horizon. The little cash left in the bank led to their recent capital raise to secure necessary funds.

Now that the funds are in the bank, let's dive into Felix's current state.

The Positives

There are two noteworthy aspects that caught my attention:

#1 - Impressive ARR Growth:

In the latest quarter, Felix recorded $800,000 in new Contractor Annual Recurring Revenue (ARR), marking a 32% increase compared to the previous quarterly record (Q3 FY23: $606,000). The Total Group ARR for Q1 FY24 stood at $6.9 million, reflecting a nice 47% increase year-on-year.

#2 - Encouraging Signs in Cashflow:

Felix chooses to capitalise their software development costs and often emphasises operating cash flow. However, I suggest we disregard this metric and focus on their net cash burn. For the last quarter, I'm willing to exclude the expenses associated with their recent capital raise from the net burn calculation. With this adjustment, we find that they burned through $825,000. As illustrated in the chart below, there appears to be a positive trend in cashflow.

What to look for next

In my opinion, Felix are still not out of the woods with cashflow challenges.

With simply mental maths we can gather that with $6.9M in ARR, a quarter of $2.5M in cash receipts is probably a positive outlier.

So let’s continue to monitor them from quarter to quarter. I will take a few more of these for me to get properly interested.

Camplify (ASX:CHL)

Camplify continues its solid execution.

In the quarterly update, they highlighted a "Combined global Revenue of $11.7 million (unaudited), including vans, representing a year-on-year growth of 114.2%." They reported cash receipts of $36.5 million for the quarter, marking an increase of 58.7% compared to the previous year.

Cash receipts, while occasionally subject to fluctuations, can serve as a reliable indicator of organic growth, especially considering that Camplify hadn't yet integrated Paul Camper into their business last year.

One positive development was highlighted about the UK market. They attributed their growth of 156.1% for the quarter to a change in their marketing approach. Justin, in the full-year announcement call, explained that this shift involved moving away from optimising for customers at the backend of the funnel, where competition is fierce. Instead, they've chosen to follow the blueprint that's worked well for them in Australia and focus on optimising for the early stages of the funnel. This shift seems to be right one, and the numbers back it up.

One of the key performance metrics for Camplify, the take rate, increased from 27.2% to 28.2% for the quarter, which is a positive sign for the company's business model health.

The company remains in good financial shape, with a small positive cashflow for the quarter, primarily due to their effective cash collection model (which I’ve explained in my article for a rich life).

All in all, the outlook appears positive. We'll continue to closely monitor Camplify's progress and performance.

Dropsuite (ASX:DSE)

Also in the category of consistent execution is Dropsuite.

While this quarter witnessed a rollercoaster ride in the share price, Dropsuite's performance remained steady. 

The Annual Recurring Revenue (ARR) chart shows ARR now standing at $33.4 million, marking a 10% increase compared to the prior quarter (QoQ) and a 44% rise over the previous corresponding period (PCP).

Notably, cash flow is moving in the right direction, although management acknowledged that this quarter saw robust collections.

The share price action

The share price experienced a surge of enthusiasm when Dropsuite received favourable coverage in the AFR. This article was published on July 4th, and in the ensuing days, the share price soared to 37 cents, resulting in a market cap of $267 million. This valuation seems excessive, even with the current ARR of $33 million and strong, consistent growth.

However, only days later, Microsoft officially introduced its Microsoft 365 Backup and Microsoft 365 Archive product, Syntex. This announcement sent Dropsuite's share price on a rapid descent, returning to levels it had maintained four months prior.

Now that the dust has settled, and with more context from both Microsoft and Dropsuite, it appears that the market's reaction may have been somewhat exaggerated (on both the rise and fall). 

While Microsoft is undeniably a formidable competitor, Dropsuite's focus on serving Managed Service Providers (MSPs) and offering them a more substantial margin may continue to set them apart.

Moreover, Dropsuite remains a very small player compared to Microsoft, and there is significant untapped market potential, as many individuals and businesses still do not prioritise data backup. Thus, Dropsuite's strategy of capturing a small portion of this market remains a plausible scenario.

We'll keep a close watch, of course. If Microsoft begins to pose a genuine threat to Dropsuite, it will become apparent in the quarterly growth figures in the coming quarters. Stay tuned for updates in this space.

Acusensus Ltd (ASX: ACE)

Let's turn our attention to Acusensus Ltd (ASX: ACE), which recently reported its third quarterly results since going public, and the numbers were quite promising.

• They posted revenue of $12.1 million, marking a 22% increase compared to the previous corresponding period (PCP). 

• Cash receipts stood at $12.3 million, resulting in a positive operating cash flow of $2.9 million. 

  • It's worth noting that the company acknowledged that this figure exceeded their expectations and was partly due to some good fortune. Under normalised conditions, the net operational cash flow would have been $0.6 million. 

With only three quarters of 4C data available, we still lack sufficient data to establish meaningful trends, in my opinion.

The announcement didn't reveal any significant developments, but there were positive comments regarding product development in the road-worker protection segment (Acusensus Guardian). It's an intriguing space, and Acusensus seems to be among the first to offer such a solution in the market.

As I previously mentioned when discussing Acusensus, I find this Founder-Led company particularly interesting. Given that they are still in their early days as a publicly listed company, I plan to keep a close eye on them a bit longer before making any moves. I'll continue to share my thoughts on their progress as new announcements surface.

Austco Healthcare (ASX:AHC)

At last, I thought I’d share quick comments on Austco Healthcare.

Austco has been turning a profit, and as a result, they aren't obligated to file appendix 4Cs. 

However, I wanted to give them a shout-out for a nice contract win they recently announced on November 3rd.

The company secured a $3.8 million contract to revamp the nurse call system for Jurong Health Campus in Singapore. This contract win has boosted their order book to an impressive $40 million, a figure that's not too far off from their current market cap of $53.8 million.

This is pleasing because It's showing evidence that Austco is proving the value of their investments in expanding their Go-To-Market (GTM) efforts on an international scale.

I'm genuinely curious to see how much of this order book they can deploy and how their margins will continue to evolve as they implement their strategy to grow software revenue through the rollout of new products. 

I'll be keeping a close watch on their progress.

In Conclusion 

While these five companies did display some positive indicators, it's fair to say that, on the whole, the recent quarterly reports were a mixed bag, with some even leaning towards the poor side.

It's evident that smaller companies faced some challenges in getting larger guys to settle their outstanding invoices, which is a concerning trend.

Nevertheless, my optimism for the long term remains intact. Most of the companies I track are staying the course and effectively executing their strategies. They continue to demonstrate healthy growth in cashflow and revenues, and what's particularly encouraging is that their valuations appear more reasonable than what we've witnessed over the past five years.

In the interim, I'd love to hear about some of your top-performing companies.

Leave a comment

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

1. The Appeal of Founder-Led Businesses - Part 1

2. 50 Founder-Led Small Caps on the ASX - Part 2

3. The Mental Model of Investing like a Founder - Part 3 (this post)

I'd like to thank those who reached out after the previous week's article. Many of you helped correct instances where I had mistakenly attributed the founder, while others contributed additional names to the list.

You can access the updated founder-led list here, and I intend to refresh it annually.

In today's post, we'll wrap up the series by exploring the founder mindset, and how it can help investors. This is a concise piece where I share my thoughts.

I hope you find it valuable.

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Think Like a Founder Mindset

I had this post in my drafts for a long time, not entirely sure how to go about it. Until two months ago I landed on an interview with Monish Pabrai. Whilst he’s not typically an investor I would follow, a friend suggested I might find the back end of the episode relevant.

Towards the end of the interview, Monish articulated what I had been wanting to write about so well.

I’ll paste here the transcript, which I have edited to make it easier to read:

“Consider the Walton family, the custodians of Walmart since 1970. They continued to hold onto the company even after Sam Walton was no longer at the helm. While they may have limited control today, with perhaps a single Walton on the board, they've maintained their ownership.

So, why should an investor approach this differently from an entrepreneur?

Frequently, we witness entrepreneurs with 99% of their wealth tied to the business they created. They sleep soundly at night, even without complete control. This highlights that control is often overrated; it can’t be the defining factor.

The framework we should adopt is to view ourselves as operators or partners in the company. Picture it as a partnership in a private enterprise.

Once you shift your perspective to see yourself as a significant owner without being the founder, the roles of the investor and the entrepreneur start to blend.

Take the example of the IKEA founder, who established a foundation while virtually all his net worth remained tied to IKEA. Similarly, the Google co-founders stepped aside from day-to-day operations but retained their significant stake.

This shift in mindset allows investors to embrace the founder's spirit and understand the business intimately, just like an entrepreneur does.

It's a powerful approach that can lead to meaningful and successful investments.

Source: Mohnish Pabrai on Cloning & Compounding - Link here

The drawbacks of this approach

Just like all suggestions that sound very smart and punchy when you first hear them, they are obvious downsides to this approach.

One might be that you might accumulate too large a portfolio. Good businesses will continue to appear, and you’ll want to take part in them, so you’ll add. But if you embrace this founder’s mental model of investing, then you’ll be thoughtful on removing the lesser performers, accepting that businesses are hard and naturally go through cycles of good performances and others of underperformance. This is a hard dynamic, and I’m afraid I still haven’t found a perfect answer for this one.

Secondly, If you accept that ups and downs will be unavoidable parts of running a business, you’ll find yourself wondering when exactly your thesis becomes truly broken. As Ian Cassel likes to remind us, the most likely thing to accompany a bad quarter, is another bad one right after.

I think part of the lesson I learned here it to not fall prey of over-analysing the business when stocks go down (fear) and under-analysing the business when stocks go up (greed). Stock performance shouldn’t impact your due diligence effort.

Founders get up everyday, put it a hard day’s work day in and day out. Not just when the sun is shining.

Conclusion : Remember the Power Law

To wrap things up, I thought we could soak in to one more good story from Monish:

One of the most remarkable examples of this approach is the story of Shelby Davis.

The Davis Dynasty was an early adopter of investing in international insurance companies. They placed numerous bets, all of which were relatively small, often less than one percent of their total assets under management.

Almost nothing worked.

But, the Davis Dynasty end up with a very large net worth because one worked. They were very early in AIG.

Regardless of whether a bet was considered excellent or subpar, he held onto them, never selling.

In the case of AIG, which initially represented less than 2% of their total investment, it eventually grew to make up 80% to 90% of their overall wealth.

The key principle here is that when evaluating a business, you form a vision of what it will look like in the future—five, ten, or fifteen years down the line. More often than not, those initial visions prove to be incorrect. That's just the real candid answer.

But on occasion, your projections align with reality.

To truly reap the rewards of your insights, you must hold onto both the investments that went awry and the ones that bore fruit for an extended period.

Where many investors fail is in their tendency to go in and out of stocks all the time. In contrast, the index does so well because it's too dumb to know that it owns Microsoft. It’s too dumb to sell Microsoft, and too dumb to sell Google and Facebook. 

The only time the S&P 500 throws a company out of the portfolio is when it's so long in the tooth that it's obvious.

As always, thanks for reading folks.

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Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

It's worth noting the insights shared by one of our readers, . Like myself, Damien is a founder with extensive experience working with and observing numerous other founders in his multi-decade long career. He distilled his observations of successful founders into these 9 key characteristics:

1. Outcome-Focused: They prioritise outcomes over ego.

2. Money as a Scorecard: They view money as a measure of success, not the primary goal.

3. Results-Oriented: They emphasise results over mere activity.

4. Clear Thinkers: They exhibit clear and rational thinking.

5. Optimism and Resilience: They embrace positivity and effectively combat negativity.

6. Unwavering Persistence: They display unwavering determination.

7. Timing and Innovation: They don’t attribute every once of success to their brilliance, instead recognising the significance of being at the right place at the right time with the right idea. This is a frequently underestimated factor.

8. Accountability: They take responsibility and embrace accountability.

9. Fearless in Financial Challenges: They demonstrate fearlessness in the face of financial difficulties, often putting their own compensation last and receiving less than their staff.

I found these insights so valuable that I felt compelled to spotlight them. Thanks to Damien for contributing and adding value.

This week, we turn the spotlight to 50 founder-led businesses on the smaller end of the ASX. Let's go.

How I went about this

I kept things fairly simple here.

• Initial Watchlist Assessment: I looked at my wider watchlist, ran through it quickly, making a note of companies that I knew were led by the founder(s).

• Validation Process: For companies I wasn’t entirely sure, I double-checked. I spent a few minutes only cross-checking with the sources I could find.

Acknowledgment and Apology : In the course of my research, I’m sure I made errors, and I apologise for any inaccuracies. Please write a comment below if you spot any mistakes.

Step - Make a note of Founder-Led Companies

The first surprise I had when I ran through this exercise was to find that founder-led businesses occupied a majority of my watchlist.

This discovery, though surprising at first glance, makes sense when you consider that many of these companies are relatively young and, hopefully, on a trajectory of rapid growth.

I’ve included the sheet for you to download below. Here’s a quick snapshot of 20 Founder-Led businesses:

The Owner-Operator vs. the Founder

In 2011, Charif El-Ansari was working as the Head of Business Development for Google's Southeast Asia branch in Singapore. During his impressive career ascent, the entrepreneurship bug was growing on him. He wanted to start a business of his own, do his own thing. His desire to chart his own path led him to explore angel investing, eventually leading him to meet the team at Dropsuite. He was the first investor in the company, and became the CEO while the company was in its infancy.

At big companies, managerial decisions and processes might hinder the speed to implement new ideas.

Instead of becoming impatient for things to be done, I joined Dropsuite as CEO; an avenue to build a strong and committed team, and to focus on the user and partners, not solely on the products.

-Charif El-Ansari

Charif El-Ansari is not the original founder of Dropsuite. His actions, as evident in interviews, results presentations, and, most notably, in the company's impressive execution, reflect an attitude and approach akin to that of a founder.

When we factor in his decade-long experience in the industry, the distinction between the individual who conceived the initial idea and the one who has diligently developed it beyond the product-market fit becomes less relevant.

In my view, Charif embodies the essence of a founder. That’s why I’ve included Dropsuite on the list.

Find work that is meaningful. That can mostly be found within small companies and startups. Never underestimate the importance of tenacity, grit, and luck when you start your own company.

-Charif El-Ansari

Source: Investor Turned CEO Charif El-Ansari On How Dropsuite Helps SMEs Protect Their Digital Assets (link here)

Step 2 - Add Growth

Step 2 here is to take the list, and add the recent full year results.

Here’s a snapshot of 25 with good results for which I’ve done this here:

Get the list, and add to it

👉 As I promised above, if you want the sheet I used, feel free to access it here.

Additionally, while you're at it, please leave a comment in the section below with any businesses that I may have missed. I'll make sure to add those to the sheet.

What’s Next

In the next few parts of this series, I close this up with my thoughts on what investing like a founder means.

Thank you for reading folks, and enjoy this Sunday.

All great companies started as small companies. The smaller the company the more important the CEO, founder, management becomes. The smaller the company the more hats the founder is forced to wear which amplifies his or her impact on the business. Bad decisions can destroy a small company. Great decisions have a compounding effect on a small company.

If you don’t believe that founders and management are important to small companies like microcaps, just wait a little longer. You will. 

-Ian Cassel

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

In the spirit of making this exploration engaging and insightful, let's kick off with a couple of stories. No lengthy preamble – let's dive straight in.

Is this just a ‘Jobs’ for you?

On a sunny day in 1996, Steve Jobs struck a what appeared like the deal of lifetime. For him, it was only the beginning. Apple would buy NeXT for $400 million.

At the time, Apple was run by Gil Amelio. Having recently overseen Apple's worst-ever financial quarter, Amelio wasn’t particularly loved at Apple, so it seemed sensical that he should leave. With Amelio gone, Jobs offered to help Apple locate a new leader. The idea was that he would step into the role of CEO until someone suitable could be found.

This is where the founder mindset comes in. Let’s pay attention to how Jobs' return to Apple serves as a powerful example of how founders' distinctive thinking and actions can yield remarkable results.

At the time of his comeback, the prevailing wisdom held that Apple was losing ground due to "PC Economics" and that the winning formula was to separate the operating system from the hardware. The conventional belief was that Apple had to adopt a more horizontal approach, allowing commodity hardware manufacturers to compete while Apple focused solely on the operating system. The previous CEO, Gil Amelio, embraced this notion, even fostering an ecosystem of Mac cloners to supply hardware alongside Apple's renowned OS. Jobs did the opposite.

He challenged the status quo upon his return, a move that confounded nearly everyone in the industry. He discarded the commodity hardware and the horizontal strategy to pursue a radical vertical integration. Alongside the fundamental hardware and operating system, he introduced applications. One day, he got a big stage and changed the world when he suggested we could all have 1,000 songs in our pockets. He even added retail stores.

He didn’t win people over immediately; in the years after his return, the share price was either dropping or not moving at all. This meant the value of Apple was barely above their IPO price from 17 years before.

That didn’t matter, because founders think long term, and that’s what Jobs did. Slowly and consistently, Jobs executed.

The share price, adjusted for splits was $0.20 on September 16, 1997, the day of his return. It’s $174 today. $10,000 invested at the time would mean $8.7M today.

A story from close to home

40 years ago today, a Doctor called his ‘tech’ friend to suggest the pair go into business together. The ‘tech’ guy told his friend to take a few Valiums and call back later.

The idea seemed crazy, why would a Doctor want to leave a high-paid general practice to start a business in technology when personal computers hadn't yet been released? Perhaps because this Doctor recognised the potential to harness emerging technologies in the field of medicine, and wanted to be at the forefront of this trend which would change the world of medicine.

Founders can be persistent. And eventually, persistence pays off.

So from a modest two-story residential building at 450 Swan Street in Richmond, Victoria, 2 gents got to work. Of course, you know the rest of this story.

Under Sam Hupert's leadership, Pro Medicus completely changed the world of medical imaging, eventually going public on the Australian Stock Exchange in 2000. In 2005, they embarked on a partnership with the global imaging group Agfa to introduce a range of software products to the global market.

Then, In 2007, Hupert stepped down as CEO, believing that others were better suited to grow the international-facing business. Unfortunately, the Agfa partnership was going sideways. This prompted Hupert's return to the helm in 2010.

This is where we see the founder’s hedge.

Unfased by the initial setback on the international stage, Hupert forged ahead. He made his best decision when he received a phone call from the former CEO of a small company who was open to selling their software. Sam had met this CEO at the annual Radiological Society of North America conference. This software was called Visage, and it had been going through a transaction to be purchased already, but the initial buyer had now pulled out.

Visage had this simple and powerful value proposition to let radiologists view reports and large image files, generated by X-rays and other scans, from their mobile devices in seconds, enabling them to make diagnostic decisions remotely.

So Sam decided to buy them for $US3.5m. Today, Pro Medicus still runs its radiology information system software, now called Visage RIS. This imaging software constitutes the majority of revenue and is driving the growth of the business.

Over the past two decades, the founders transformed Pro Medicus into a global, multi-billion-dollar company. It wasn’t easy, and that’s where you want to back founders. Truly having a long-term lens allows you to power through the years of hard work, and periods were you’re nearly certain you will die (this happened to Pro Medicus 2011).

In 2010, the share price hovered around the $0.50 mark. It’s $72 today. $10,000 invested at the time would mean $1.44M today.

Other good examples

Certainly, the stories mentioned above represent extraordinary cases. Admittedly, they are significant outliers. It's essential to acknowledge that investing in founders doesn't guarantee success, and there have been instances where investments in founder-led ventures have resulted in losses. However, the overarching idea is that, when all other factors are equal, founders tend to exhibit higher levels of determination, discipline, resourcefulness, and self-accountability.

Here are a few additional examples (credit to a16z for the list).

• Acer—Stan Shih

• Adobe—John Warnock

• Amazon – Jeff Bezos

• AMD—Jerry Sanders III

• Apple – Steve Jobs

• Dell—Michael Dell

• EA—Trip Hawkins

• Hewlett-Packard—Dave Packard

• IBM—Thomas Watson, Sr. (*)

• Intel—Andy Grove (*)

• Intuit—Scott Cook

• Meta - Mark Zuckerberg

• Microsoft —Bill Gates

• Motorola—Paul Galvin

• nVidia—Jen-Hsun Huang

• Oracle—Larry Ellison

• Salesforce.com—Marc Benioff

• Sony—Akio Morita

• VMware—Diane Greene

I have a job, and being the CEO of Nvidia is a great privilege. It is once in a life time opportunity.

– Jensen Huang

Photo: a young Jen-Hsun Huang in his early years as an engineer

Research #1 - University of Ohio

German economist Rüdiger Fahlenbrach, currently a professor at the Swiss Finance Institute at EPFL and serving as the Institute's Senior Research Chair, has dedicated a significant portion of his career to investigating corporate governance issues stemming from the separation of ownership and control within modern public corporations.

In 2009, his pursuit of this research avenue led him to delve into a comparative study between "founder-CEOs" and "successor-CEOs." The results of this study were encapsulated in a paper titled "Founder-CEOs, Investment Decisions, and Stock Market Performance," published by the University of Ohio.

Fahlenbrach's findings unveiled several distinct characteristics of Founder-CEO companies, including their propensity to:

1. Invest more significantly in research and development,

2. Allocate higher levels of capital expenditures,

3. Engage in more targeted mergers and acquisitions.

As a consequence of this, an equal-weighted investment strategy, focusing on founder-CEO firms from 1993 to 2002, would have yielded an impressive benchmark-adjusted annual return of 8.3%.

If this doesn’t sound impressive, let’s put it into perspective. The tumultuous dot-com crash occurred in the early 2000s. Against this backdrop, founder-CEOs delivered a substantial excess return of 4.4% per year (after accounting for various firm characteristics, CEO attributes, and industry affiliations).

Source: Fahlenbrach, Rüdiger. "Founder-CEOs, investment decisions, and stock market performance." Journal of financial and Quantitative Analysis 44.2 (2009): 439-466.

Photo: a young Estée Lauder - one of my favourite founders

Research #2 - Bain and Co

Bain & Company is renowned for its thorough research in this domain. Partners Chris Zook and James Allen have extensively examined this topic and outlined their findings in their book, "The Founder's Mentality: How to Overcome the Predictable Crises of Growth."

Their research reveals that founder-led companies within the S&P 500 consistently exhibit superior performance. They tend to have 31% more patents, valuable innovations, and a propensity for taking calculated risks to drive innovation.

The essence of the founder's mentality comprises three pivotal elements:

1. A Clear Sense of Business Insurgency or Purpose: Founders infuse their companies with a profound sense of purpose and drive.

2. A Front-Line Obsession with Attention to Detail and Empowering Front-Line Staff: These companies prioritise meticulous attention to detail and empower their frontline employees, recognising the crucial role they play.

3. An Owner's Mindset Emphasising Speed, Risk-Taking, and Personal Responsibility: Founder-led firms foster an owner's mindset, prioritising agility, risk-taking, and a culture of personal responsibility.

Their extensive research underscores that companies upholding the founder's mentality are 4 to 5 times more likely to emerge as top performers. This is evident in the performance of S&P 500 companies with deep founder involvement, outpacing others by a remarkable 3.1 times over the past 15 years.

We found that the companies most successful at maintaining profitable growth over the long term were disproportionately companies where the founder was still running the business (such as Oracle, Haier, or LBrands), was still involved on the Board of Directors (like Four Seasons Hotels and Resorts), or, most importantly, where the focus and principles of how to operate that the founder had originally put in place still endured (as at IKEA or at Enterprise Rent-A-Car)

Source: Founder-Led Companies Outperform the Rest—Here's Why

What Taleb Would Say

An excellent book which a number of investors recommend is Nassim Nicholas Taleb’s Skin in the Game: Hidden Asymmetries in Daily Life.

To me, that book represents well the value in power of alignment between founders and their businesses. Taleb’s points, if they were applied to founders mean:

• Long-term Mindset: Founders focus on multi-generational growth, while CEOs' average tenure is short-term, leading to different priorities.

• Skin in the Game: Founders' personal investment aligns their interests with the company's success, fostering commitment and performance.

• Soul in the Game (Emotional Investment): Founders' passion and love for their businesses create a long-term intent and drive for success, often underestimated in its impact. A founder’s commitment goes far beyond financial incentives, which in turn can contribute to remarkable performance.

“Entrepreneurs are heroes in our society. They fail for the rest of us.”

― Nassim Nicholas Taleb, Skin in the Game

Chris Mayer’s 5 Key Themes

In his excellent book, '100 Baggers,' Chris Mayer identifies five predominant themes that frequently manifested in companies achieving a 100-fold return on investment:

These are:

1. They start small

2. You’ve got to hold these for a very long time

3. Low multiples are preferred

4. High returns on capital are very important

5. Owner Operators are preferred

On his last point, he shares three compelling studies on the world of owner-operators.

The findings of these studies are as follows:

• Rich founders (or founders that get rich) tend to keep winning. A study in 2012 concluded that companies built by members of the Forbes World's Billionaires list had handily beaten the stock market over 15 years. "The rich do indeed get richer. Now we provide an index of billionaires that may allow the rest of us to get richer, too,’’. Billionaires’ have access to a wide network of people, and tend to execute. (Ref. Shulman and Noyes, 2012)

• Family-owned businesses think more long-term and win. This one was done in 2005, and the authors show that family-run companies have produced considerably higher stock returns than their non-family counterparts. They showcase 2 reasons:

  • 1. Family-owned and controlled companies sidestep the classic agency problem, a challenge often faced by publicly traded companies, where professional managers may prioritise personal interests over shareholder welfare.

  • 2. They avoided offering quarterly guidance, and focused on long-term value creation instead. (Ref. McVey and Draho, 2005)

• CEOs with Skin in the Game can be just as good. There is a category of CEOs who, while not the original founders, operate with a founder's mindset and hold a substantial stake in the company. I love this category as well. A 2009 study found that companies where the CEO voluntarily holds a significant portion of the company's stock consistently outperform the market (Reference: Lilienfield-Toal and Ruenzi, 2009).

What’s Next

In the next few parts of this series, I will look at Founder Led businesses on the ASX.

Thank you

I’d like to offer a special thanks to my friend Chadd Knights for sharing some valuable resources with me that were critical in the writing of this article. Thanks brother!

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

His expertise lies in fundamental cashflow and earnings analysis for small and micro-cap companies. With 30 years of diverse experience, including co-founding two public tech companies and serving as CEO and director of another, his background formed as the basis skill to identify companies with the potential for 100%-1000% returns.

Paul's style is primarily based on identifying smallcap growth stocks before they gain broader market attention. He calls this the ‘discovery’ process. Let’s dive into his methodology today.

“I don’t want to buy when there is blood in the streets, I want to buy when no one is in the streets.”

@PaulAndreola

Books he Recommends

Your investment philosophy and process evolve over time, influenced by theoretical knowledge, but mostly through your own experiences as an investor. Initially, you draw inspiration from others until you refine your approach to become distinctly yours.

I think it's likely that much of Paul's process was shaped during his years as an executive, complemented by his three decades of practical experience. He still emphasises the significance of three books that have greatly influenced his investment journey. Here are 3 he recommends as worthwhile reads:

1. How to Make Money in Stocks - William J. O’neill

2. What works on Wall Street - James O’Shaunghnessy

3. 100 Baggers - Chris Mayer

Knowing where to look

The person that turns over the most rocks wins the game.And that's always been my philosophy.

- Peter Lynch

Paul emphasises the significance of having a systematic approach to his search for opportunities. His method is straightforward: his team and him review every announcement on the Toronto Stock Exchange (TSX).

His focus on sub-$500 million market cap companies means he’s looking at ~2,300 of the ~2,800 listed on the TSX.

If this sounds like the impossible task, let’s keep a few things in focus:

• Firstly, Paul's interest is typically reserved for companies that are profitable, preferably those that have recently achieved profitability (more on this below). Currently, this translates to around 300 out of the initial 2,300, making the pool seem considerably more manageable at 13%.

• With a good system in place, knowledge gets stored and compounds. You don’t have to repeat the heavy lift as deeply every reporting season; your notes from the prior seasons will help you move much more quickly through the noise.

Still, there’s no way across it, this is a demanding task. Investing is not easy. Investing with a goal to have returns that are well above industry average is very difficult. One must put in the effort. If you do, rewards can be spectacular; Paul once shared his returns went from maybe averaging 10 to 15% a year to an astonishing 100% - 120% a year when he started applying more effort into this methodology (Source: Business Insider).

The System

His system is built on 5 key criteria.

1. Hyper growth

   1. Seek companies with revenue and earnings per share (EPS) growth exceeding 25%.

2. Low PEG Ratio

   1. Target a price-to-earnings growth (PEG) ratio of less than 1.

3. High ROIC

   1. Look for companies with the capacity to reinvest their profits at a high rate of return on invested capital (ROIC).

4. No to Early Discovery

   1. Focus on companies in their early stages of discovery that also have high margin expansion potential. Their smaller size will keep large investors out, and offer a greater potential for mispricing.

5. Skin in the Game

   1. Paul’s preference is for leadership to own between 10% to 40% of the company.

HyperGrowth

Paul explains hypergrowth as:

1. Growth of revenues per share of at least 25%

2. Growth of earnings per share of at least 25%

3. At least 2 quarters of profitability

The added emphasis on per share growth and earnings is important. At the smaller end of the market, there’s a lot of capital raising for acquisitions. This can make the reported growth figures look great, but the dilution is typically a high price to pay for it. Not to mention the painful beating companies suffer when raising. When you dig into the story and go through the math-ninja exercise, often the most common realisation is that organic growth is poor, and the acquisitions are there to mask this truth of the company having challenges with product-market-fit.

Two consecutive quarters of profitability is also very useful. Many business models can result in a company accumulating significant cash in one quarter, leading to profitability. One quarter doesn’t form a trend. Looking for a minimum of two quarters provides a more reliable indication of the potential for sustained profitability.

Low Valuations

Paul’s low valuation system means:

1. Low price to growth per share (PEG ration) of 1 or less.

2. Low enterprise value (EV) to cash earnings.

3. Financials that are easy to understand.

Return on Invested Capital - ROIC

This means:

1. High ROIC - a company’s ability to invest its capital at a much higher rate than their cost per capital.

2. A company that can re-invest its avaiable cash and profits at a high rate of return.

3. A good understand and clear dialogues from management about what will be done with the profits.

The best compounders he’s identified over the years had always mastered this.

Early Stage of Discovery Cycle

1. Minimal Analyst Coverage: Limited or no analyst coverage.

2. Low Bullboard Discussions: Minimal discussions on online forums.

3. Limited Social Media Activity: Low engagement on platforms like Twitter, Seeking Alpha, HotCopper, etc.

4. Low Institutional Ownership: Minimal institutional investment.

5. Minimal Promotion: Limited or no promotional activities.

6. Size Matters: You want it to be small in size to keep the big investors out, until later. Paul says often his preference is sub $50M in market capitalisation.

7. Focus on Margin Expansion: You’re looking specifically for the potential for margin expansion.

8. Increased Potential for Mispricing: Smaller size and lower visibility contribute to a higher likelihood of mispricing.

Microcaps is the only place in the public markets where an astute investor managing a small sum has a structural advantage over institutions.

- Ian Cassel

Conclusion: Are These Companies Real?

Yes, they are.

Paul has not only found one, but multiple "100-baggers" during his three-decade-long career, alongside dozens of "multi-baggers" that yielded returns of 5 to 10 times the initial investment.

While such opportunities are rare, they do exist. And that’s why we’re here ladies and gents. Here's to discovering the next one.

Other similar articles

• My profile on Ian Cassel

• My notes from Free Capital

Disclaimer

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

The level of wisdom on the podcast was impressive. I found myself stopping and writing down some quotes on my phone mid-run.  

After I finished my 40 kilometres (just kidding), I decided I should sit down properly and listen to it over again, this time taking notes on the whole thing. 

What you find below is the result. After about 1 month of getting into the weeds of company reports and crunching some numbers, I felt now would be a good time to take a step back from it all and remember the forest from the trees. I think all investors can benefit from Morgan’s 30 rules (he’s a great investor himself).

Quick notes:

• I haven't used block quotes because I believe it enhances readability when everything you read is presented directly from Morgan's words.

• I want to make it clear that I take no credit for the wisdom shared below – all credit goes to Morgan (thanks for sharing, mate).

• I may have incorrectly captured a sentence or two. Please attribute mistakes to me. 

Hope this is useful. I’ve made a note to review this one quarterly. 

Rule 1: Read fewer forecasts, but more history 

History shows you people tend to get hit by surprise a lot. 

Rule 2: Money’s greatest value is to give you independence over time

The money = more stuff mindset is nothing compared to having full control over your time.

Another way to think of this is that every dollar you save is a peace of your future you own, and every dollar you go into debt for, means someone else owns a piece of your future.

Rule 3 : The only way to build wealth is to have a gap between your ego and your income 

Another way to say this is nobody is thinking about you as much as you are.

Rule 4: On Bullshit

There’s an optimal amount of bullshit in life, you can’t completely get away from bullshit, even with all the wealth in the world.

Just accept it, and go on with it. 

Rule 5: The Bullshit detector rule

A lot of bullshit comes from well meaning people in a situation with poor incentives.

Think about it this way:

How many people are evil Vs How many would be willing to do something evil if they were incentivised to do so.

Having a good bullshit detector is a crucial skill. 

Rule 6 : Most Financial debate is people with different horizons talking over each other 

Everybody in finance is making a bet about some unknown future.

Arguments happen because people don’t factor this into consideration when they view things differently to the person their interacting with. 

Rule 7 : There’s no believing in risk without my believing in luck 

They are the same thing, but in opposite directions.

Both are simply an acknowledgement of things outside of your control can have a bigger impact on the outcome than anything you do on your own.

Rule 8 : Save like a pessimist, invest like an optimist

You need both of these in equal parts to do well over time. 

• Most investors want to answer the question; how can I earn higher returns?

• The real question you should answer is (perhaps one of the most important questions in investing): What are the best returns that I can earn for the longest period of time? 

Sub-rule: Nothing too good, or too bad, lasts indefinitely

The side effects of a trend erode that very trend

1. When there are no recessions become confident

2. When they become confident, they take risks

3. When they take risks, you get recessions

4. It’s the lack of crashes that plants the seed for the next crash.

5. When there’s a crisis, people get motivated. 

6. When people get motivated, they try to solve problems

7. When they solve problems, crisis ends

Rule 9: Having no fomo, could be the most important financial skill

Dwight D. Eisenhower used to quote Napoleon, and use to say : “ a military genius is the man who can do the average thing when everyone else around him is losing his mind”

Fomo is recklessness masked as ambition

There’s this great quote by Charlie Munger where he says: “Somebody is always getting richer than you, and that is not a tragedy” 

Rule 10:  If you’re expectations grow faster than your income, you will never be happy

Wealth is growing you income, but keeping your expectations in check

All the financial services industry focused on the first one, and yet there seems to be a no focus on the second part of this equation. 

Being never satisfied means taking more risk, and working longer hours, until this catches up on you. 

Image credits: /

Rule 11: There is rarely more or less economic uncertainty, there are only changes in how people are ignorant people are to risks

Studies have tried to track economic uncertainty. These studies show that the most amount of certainty we had in the world peaked in 2 periods. Right before 9.11, and right before the 2008-09 financial crisis. This clearly shows we were oblivious to these enormous risks we were staring at. 

Asking what the biggest risk is, is like asking what you expect to be surprised about. 

If you knew it, you would do something about it, but you can’t.

Risk is what’s left over when you think you’ve thought of everything. 

Rule 12: An extreme adherence to any investing strategy is dangerous in a world that changes all the time

Benjamin Graham’s Intelligent Investor was updated 4 times.

In every edition, the formulas would change.

Jason Szwag wrote about this, very evidently, that there’s a short shelf life on things that work. 

Rule 13: There are few universally right answers in finance, there are only a lot of shades of gray

Finance arguments happen because people get upset at not wanting the same things

The single most important decision you’ll make in your life is whether, when, and whom to marry. 

That topic is never taught in schools. One reason for this is because it’s so difficult to teach about a topic for which so many people have differing opinions. 

Rule 14: Pessimism always sounds smarter than optimism

That’s because optimism sounds like a sales pitch.

And optimism sounds like someone trying to help you

It pays to be a long term optimist

There is a historian named Deirdre McCloskey who’s got this quote that says “For reasons I have never understood, people love to hear that the world is going to hell”

Rule 15: Most of what people call conviction, is nothing but a wilful disregard for new information that might make you change your mind

When beliefs become dangerous is when you have a brick wall that does not let in counter examples.

Cognitive dissonance is hard because its painful.

Charlie Munger says “You can only have an opinion, when you can state the other side’s position as well as they can”

Rule 16: Your willingness to believe a prediction is influenced by how much you want of need that prediction to come true

People do this with relationships, careers, their investments, and political views.

Anything forward looking is subject to being swayed by your desire to have a pleasant life.

An ironic example of this is when people will believe a forecast with an abysmal track record who will say what they want to hear.  

Rule 17: Everybody belongs to a tribe, and underestimate how impactful that tribe is on their thinking

Tribes are everywhere. Your country, state, political party. Investing style., schools, majors, etc.

Tribes have rules and ideas and are supported because they are part of the tribe.

Rule 18: Most financial mistakes come when you try to force things to happen faster than they should

Investing in the stock market is great

Investing and demanding that your money double in the next two weeks is not great. 

Compound interest does not like it when you try to use a cheat code. 

It’s so easy to underestimate how much time is needed to put the odds of success in your favour.

Financial history will tell you it takes 5-10, 20 years to put the odds of success in your favour.

A lot of people are making good decisions, but are simply not giving these decisions enough time to pay off. 

Image credits: /

Rule 19: There are the 3 types of hedges one can have

1. Being smarter

2. Being luckier

3. Being more patient

Only the last one do you actually have a fighting chance at. 

Rule 20: The goal of investing is not to minimise boredom, it is to maximise returns

So much of what happens in the financial media is done for entertainment. Just like sports, it is designed to entertain you. 

People are turned off by simplicity because it’s simply boring. 

Money is one of the only fields in life where simplicity tends to equal better results.

This isn’t true in sports. You don’t get ahead in sports by doing nothing. You should train a lot. This isn’t true in finance, it tends to be the opposite in finance. 

So many highly intelligent people in the field can’t do this, because it feels like a waste of their resources. 

Rule 21: Your personal experiences make up 0.0001% of what has happened in the world, but maybe 80% of how you think the world works

We are all prisoners of our own experience. 

When and where you were born can have a bigger outcome in your life that anything you do intentionally. 

Rule 22: All investing ability is unproven, until it has survived a disaster

One of the reasons to admire people like Warren Buffet, even Geoge Soros, is not because of the magnitude of their returns, but rather that they have earned money during so many different market cycles. 

Both of these people have done it for 50+ years. During high-inflation, low-inflation, during booms, during busts. 

Rule 23: Past success always seems easier than it was, because you now know how the story ends 

You can’t un-reminder what you know today, when you think about the past. 

It is easier to quote Warren Buffet, than actually do what he does. 

In hindsight, everything seems easy. The only reason why its easy is because you now know the outcome. 

Every past market crash looks like an opportunity, every future one looks like a risk. 

Rule 24: We are bad at imagining how change will feel, because there’s no context in dreams

Everybody’s got a high risk tolerance when things are going great, but when things turn around, the pain becomes more intense. 

When thinking about the future, we tend to think in isolation. 

We image the future in a vacuum, failure to contextualise all the reasons why this future as occurred. 

Future fortunes are always imagined in a vacuum, but reality is lived with the good and the bad taken together. 

Rule 25: The best way to teach your kids about money is to make them feel the power of its scarcity 

Making sure your kids understand the power of scarcity with money teaches them the difference between necessary and enjoyable. 

It makes them learn to enjoy what they have, and fix what’s broken.  

Rule 27: Embrace and accept your flaws, and build a financial plan around them 

Do this rather than assuming that you can alter your susceptibility to dopamine and cortisol just by reading a blog posts.

So many people think they can look at their past financial mistake and that the lesson is learned. 

Most of the time, the way you responded to a past crisis is likely how you will respond to the next one. 

The best thing you can do is build a plan around that, rather than trust yourself. 

Image credits: /

Rule 28: Emotions can override any level of intelligence

A genius who loses control of their emotions is a disaster

The opposite is true

Ordinary folks with no financial education can be wealthy if they have a handful of behaviour skills that have nothing to do with formal measures of intelligence 

• Patience

• Level headed

• Low ego

Rule 29: Comedians are the only good thought leaders

They understand how the world works, and they only wish to make you laugh, rather than making themselves sound smart. 

This has got nothing to do with money, but I put there for laws of communication in general. 

Rule 30: The luckier you are, the nicer you should be

Some say the opposite; the nicer you are, the luckier you become. 

To me, this is there to protect against entitlement is to be nicer to the people around you.  

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Reference 

Here is the link to the podcast:

• Rules of the Money Game - The Morgan Housel Podcast (link here)

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

I hope the sun is shining wherever you are. My Substack statistics tell me we've got a new reader from Illinois (bloody oath, we’ve gone international). So here's to hoping that life is treating everyone well in Chicago and all the other cool places you wonderful folks are joining us from.

Over the last three weeks, I've shared quick insights on ten companies that have reported strong financial performances for the year.

Today, I thought the analytical minds among us would enjoy a deep dive into some simple, back-of-the-napkin math (well, kind of) into the numbers. To make this exercise more valuable, I've added another 12 companies to the mix to our initial 10 performers. The goal of this exercise is to share a simple way to add companies with potential to your watchlist.

Below, you'll find the list of companies we'll explore today. Let's jump right in.

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Step 1: Pick 20 companies that reported strongly

On top of the 10 companies we spotlighted over the last month, I added another 12. Many of these were companies I was keeping an eye on from a distance, looking for more proof in the pudding.

Out of these 22 companies, an impressive 16 surpassed the Rule of 40, with the remaining ones exceeding the 30 mark (we’ll grant Racing and Sports rounding points).

Step 2: Add share price performance to chart

Now that we have our 22 companies and have populated their data, let’s add the column that will serve as our primary benchmark: the annual share price performance.

Note: Rather than plotting share price performance for the financial year, I’ve taken rolling last 12 months share price performance (September 15, 2022 to September 14, 2023). I’ve done this to help the share price movement reflect financial year reports.

Observations

• Massive winners all profitable. This year's standout winners (From DUG to Connexion), with share price performances exceeding 100%, are all profitable. No surprises here.

• Biggest margins ≠ biggest winners. It seems there’s still a certain level of acceptance (albeit low) for companies that are showing low margins as they continue to grow. Both Duratec and Chrysos saw big share price moves on small margins while they continue to prioritise growth over profitability.

• Lack of profits means no love. Out of the five companies that were not profitable in our list of 22, 3 saw their share prices decline. Again, this aligns with expectations and the sentiment of current times.

• Is steam accumulating? The average revenue growth of companies in the chart is 60%, whilst the average share price performance is 46%. A gap like this is normally good for long-term minded investors.

Beyond these initial observations, there are more insights to uncover. Let's delve deeper into the data to uncover additional lessons in the next phase of our analysis.

Step 3: Look at the Delta between performance on the Rule of 40 and Share price performance

There is no evidence stating that a company's share price movement should be proportional to its performance on the Rule of 40. That would be way too simplistic thinking.

What we're essentially doing here is using a yardstick to gauge how the company's performance aligns with its share price.

We do this by:

[Rule of 40 - (Share Price Movement * 100)] = Delta

I've used conditional formatting to quickly identify potential mispricing:

• Green highlights upside potential, suggesting that the company's performance seems to have outpaced its share price movement.

• Amber indicates the possibility that the stock may have surged ahead of the company's fundamentals.

• Note 1: way too simplistic to be completely accurate.

• Note 2: See Phil Fisher’s quote below.

Observations

• Context matters. The first thing to do when we see a potential anomaly is to dig into the story. Vitura and Mad Paws are both good examples here. We’ve looked at them in Part 1. Numbers alone seem good. Numbers with the story, less good.

• Upside Surprise. What we observe with the share price performance of DUG, Duratec, and Vysarn, even over the short timeframe of 12 months, is the lesson we keep re-learning: winners can run higher than we might think. Even in tough markets. A healthy reminder for me: don’t sell your winners too early.

• 64% of companies are building steam. If we accept the hypothetical logic of this exercise, we find that 14 out of the 22 companies seem to have fundamentals that have performed more strongly than their share price. That’s 64% of the companies in this small sample.

Step 4: Look at the Delta between Revenue Growth and Share price performance

Simplifying further, we'll now solely focus on revenue growth and its correlation with share price performance. This step eliminates the influence of margins, which has been a primary focus for investors in the past 18 months. By doing this, we aim to determine whether the emphasis on margins might be causing investors to overlook potential opportunities.

While this approach may seem overly simplistic, let's step back and examine the logic behind it.

If all aspects of a company have remained consistent over the last 12 months (such as the same margins, the same number of outstanding shares, the same balance sheet strength, and the same prospects), then theoretically, share price performance should align with the company's organic growth. This is often where “In theory, theory and practice are the same. In practice, they are not.”

That’s true, but it can still serve a purpose as a useful exercise.

We do this by: [(Revenue growth * 100) - (Share Price Movement * 100)]

Observations

• Biggest revenue growth ≠ best returns. It's interesting to note that only one company from the top 5 in revenue growth, Chrysos, also made it to the top 5 in terms of share price growth. This suggests that the "growth at all cost" mentality is dead. At a deeper level, this observation underscores the importance of organic growth and the fact that today's investors pay more attention to the overall context than they did a couple of years ago. That’s a good thing.

• Gradually and then suddenly. Some of the share price movement numbers may initially seem staggering, but upon closer examination of these high-performing companies, it becomes clearer that it may be reasonable. This serves as a reminder that when small, rapidly growing companies hit a turning point (not all of them will), things can accelerate rapidly.

• Profits pay off. In line with the previous point, it's worth noting that many of these significant share price movements occurred when companies had recently become profitable.

Step 5: Come up with your list

As a result of this exercise, we’ve landed on at least 10 companies that are certainly worth keeping tabs on.

• Speculate on the Gap. You can get fancy like me and add a column speculating on why you think a gap exist at present. Perhaps even another with your notes on what you would like to see happen for you to get properly interested.

• Adjust to Organic Numbers. To get even more accurate, you could adjust the numbers here to reflect organic growth rather than reported growth. See my article on Camplify for a rich life for an example on how I tend do this.

A note on the strong share price performers

In a future article, I’ll share some notes on my recent re-read of Phil Fisher’s classic; Common Stocks, Uncommon Profits.

The book is filled with gems.

Here’s one of particular importance to today’s article. I have a feeling Phil would remind me of this if we had beers together after he read this article.

“By giving heavy emphasis to the “stock that hasn't gone up yet” investors are unconsciously subscribing to the delusion that all stocks go up about the same amount and that the one that has already risen a lot will not climb further, while the one that has not yet gone up has something “due” it. Nothing could be further from the truth.

The fact that a stock has or has not risen in the last several years is of no significance whatsoever in determining whether it should be bought now.”

Context matters. Make sure you get the context right.

Conclusion: let’s not be so short term minded

While this analysis provides valuable insights into short-term market trends, it's essential to recognise its limitations. We've primarily focused on a one-year snapshot, which may not capture situations where previous expectations of strong results have already led to share price adjustments ahead of the company's fundamentals. We know this happens all the time.

Nonetheless, this exercise underscores the ongoing inefficiencies in financial markets. However, it's crucial to remember that inefficiencies alone cannot form a comprehensive investment strategy; they must be integrated into a broader narrative. Mispricing opportunities can persist for 5+ years, so we must also understand what catalysts or compelling events might trigger a change in the situation.

Additionally, I would caution against drawing overly narrow conclusions based solely on share price performance that may have outpaced company fundamentals. There are numerous factors to consider here. One obvious factor to keep in mind is the significant underperformance of small companies over the past two years. It's entirely possible for a company’s share price to surge by 300% in a single year and still be effectively "underpriced" in the context of a broader investment horizon. Ultimately, your investment strategy should align with your individual goals, style, and philosophy. It's essential to remember that none of the information you read from me here constitutes financial advice.

I hope you found this helpful.

As always, I value your perspective and welcome discussions on where you've identified mispricing opportunities, particularly within the small-cap segment of the market.

Leave a comment

Previous Related Articles

• Part 1 : Camplify (ASX: CHL) Vitura Health (ASX: VIT) Vysarn (ASX: VYS) - here

• Part 2 : Rectifier (ASX : RFT) Mad Paws (ASX: MPA) Acusensus (ASX: ACE) - here

• Part 3: AVA Risk (ASX:AVA), Chrysos (ASX:C79), DUG (ASX:DUG), XRF Scientific (ASX:XRF) - here

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

1. Camplify (ASX: CHL)

2. Vitura Health (ASX: VIT)

3. Vysarn (ASX: VYS)

4. Rectifier Technologies (ASX : RFT)

5. Mad Paws (ASX: MPA)

6. Acusensus Ltd (ASX: ACE)

Here are their performance on the rule of 40 (using NPAT margins):

The articles of the last 2 weeks examined the context behind their numbers and my thoughts on key factors to monitor in the coming year.

In this week's edition, we wrap this up in style with the final 4. Let’s go.

#7 : AVA Risk Group (ASX:AVA)

AVA is a business I’ve followed for a while, but never wrote about here before.

In a nutshell, they are a provider of technology and services to safeguard critical assets and infrastructure. They have three key business segments: Future Fibre Technology (FFT), BQT Solutions (BQT), and GJD Manufacturing (GJD).

• FFT specialises in smart fibre optic sensing systems for security and condition monitoring in applications like perimeters, pipelines, conveyors, power cables, and data networks.

• BQT focuses on high-security biometric readers, access control, and electronic locking products.

• GJD develops hardware like perimeter detectors, illuminators, and ANPR cameras.

Although results were mixed, I would say in general they were mostly positive. Here’s my take on things.

Reported figures:

The Opportunity

• Back to strength. Recently appointed CEO, Mal Maginnis, turned his focus towards enhancing customer-facing sales and support capabilities. With a remarkable 54% increase in top-line revenue compared to the previous year (factoring in GJD, organic growth stands at 36%), it's evident that he has already achieved impressive results in a short time. If the new leadership team he’s appointed are given another full year, we should anticipate sustained strong performance ahead.

• Investment in growth conceals margin potential. Setting aside the success of their services division (the proceeds of which have been returned to shareholders through a special dividend), AVA hasn't fully impressed the market in the past five years. This might be attributed to the absence of a positive bottom line (this year, they reported a loss of approximately $1M). However, this is not unusual given the emphasis on expanding sales. As these efforts continue to yield benefits, the currently unseen bottom-line figures should gradually start to emerge.

• Untapped markets. While it's challenging to estimate the Total Addressable Market (TAM) precisely, it appears to be large. This offers significant room for growth. The CEO asserts that in their current markets (APAC, the UK, and the US), there's ample room for expansion.

The Challenges & What to Watch Out For

• Large Contracts. Following the final report, AVA announced two contract wins, totalling $1.8 million. The vas majority of AVA’s revenue isn’t recurring, so achieving $40 million for the year would require securing numerous such contracts. Ideally, they would also secure more substantial deals ("elephant" contracts) to drive substantial growth. Keep an eye out for those.

• Acceleration of Growth. With the company openly stating its aim to reach $70-$100 million in 3 years, we’ll need to see sustained and even accelerated growth. If this doesn't materialise in the next 2-3 reporting periods, it may test the patience of investors who are already eager. This would not be great. While their current organic growth of 36% aligns with the lower end of their goal, it's important to remember that as the base expands, achieving such growth can become progressively challenging each year.

• Profitability on the Horizon. The market's response, or lack thereof, to AVA's positive results likely stems from the investor's desire for profit and cash flow. AVA didn't deliver these this year. However, the improvements in nearly all metrics above the Net Profit After Tax (NPAT) line, along with management's emphasis on future dividends, suggest that these are forthcoming. Although AVA doesn't provide a 4C report every quarter, they still offer updates. While these updates typically omit the bottom line, I'll analyse them for any subtle hints.

#8 - Chrysos Corporation Ltd (ASX:C79)

Chrysos provides assay services to the global mining industry using a patented technology called PhotonAssay, developed by CSIRO, which they have the rights to sell.

They manufacture a specialised machine for this purpose. Their clients consist of gold mining companies and laboratories.

Why is this thing leading to a gold rush? In short because their technology offers a faster and more accurate assay process, reducing sample preparation time and labor requirements. It also operates mostly automatically, enhancing workplace safety, and providing better environmental outcomes while accommodating larger, more representative sample sizes.

Reported figures:

The Opportunity

• Sustained Organic Growth: This year, Chrysos achieved an impressive 89% year-on-year growth entirely through organic means, deploying 10 new units. There were no bolt-on acquisitions or questionable joint ventures involved—just pure, clean growth. Such growth is always a pleasing sight. As per the point below, looks like it’s set to continue…

• Strong guidance. In FY24, Chrysos anticipates total revenue ranging from $48 million to $58 million, based on revenue from installed units and 18 units scheduled for deployment during the year, without provisions for consumables supply (which they’ll stop doing). They also expect an EBITDA range of $7 million to $17 million. The clustering strategy of their manufacturing hubs is set to reduce average unit costs over time, with at least 18 PhotonAssayTM units projected for deployment and a total of over 38 units operating by the end of FY24, supported by improved deployment and manufacturing capabilities. This guidance is very strong. Considering their track record of slightly surpassing this year's guidance, it appears entirely plausible that they may not only meet but exceed these expectations.

The Challenges & What to look out for

1. Valuation Concerns: When I first covered the company in February, I noted that the valuation was already on the high side. Since then, it has nearly doubled. Considering the presence of a significant number of escrowed shares, the fully diluted market cap, at today's share price of $6.05, stands at an impressive $602.45 million. Let's imagine they surpass next year's guidance significantly and achieve an EBITDA of $20 million. This would result in a Market Cap to EBITDA (MC/EBITDA) ratio of approximately 30. While exceptional companies can often surprise us with high valuations, this introduces an element of risk. Any misstep by the company at this point could potentially lead to a painful drawdown.

2. Total Addressable Market (TAM): Management asserts a "Total Addressable Market of 610 units globally." Currently, with 38 operating units forecasted for this year, they've captured just 6% of their TAM. Clearly, room for growth remains. However, I still question: how much of the TAM can they realistically claim? It's reasonable to assume that a significant portion of miners will continue relying on traditional methods such as fire assays. Management claims that their technology has growing applicability, especially in other metals, which is a positive sign. Still, I will closely monitor how they discuss the evolution of their pipeline to gauge whether future deals become more challenging to close. When a new technology enters the market, early adopters are often easier to convince, and there might be a lull in adoption afterward.

#9 - DUG Technology Ltd (ASX:DUG)

DUG’s monster year was mostly evident. Despite the ASX lifting the requirement to lodge Appendix 4Cs in May, we had access to them for most of the year, allowing us to clearly observe the signs of their remarkable achievements.

I covered them after their strong quarter in February, and again in April. Their consistent growth and impressive results have rightfully earned them a spot among the top performers of the year. Now, let's wrap up the annual DUG story with my insights and reflections.

Reported figures (note this company reports in USD):

The Opportunity

• Stepping into the Big Leagues: DUG's impressive year has brought them to the attention of more institutions. Notably, we've observed additional purchases on the ledger from institutions like Regal Funds Management and newcomers such as Philip Imperial Schwan and Wilson Asset Management Group. This development bodes well for DUG as it can help stabilise stock movements and may attract even further institutional interest in the medium term.

• Leverage appearing. With this year’s big move, we saw the margin profile become much more interesting. Their EBITDA margins moved from 8% to 30%. That’s very nice to see, and if this story repeats again this year, we might expect continued improvement which would trickle further down on to the NPAT line.

• Bullish Outlook: Management presents a notably optimistic outlook for the upcoming year, stating, "July 2023 saw the largest recorded single month of Services orders with US$18.6 million of new tenders awarded, increasing the Services order book to US$42.2 million at 31 July 2023. The Services business shows no signs of slowing down." With a robust order book and record tender wins, the prospects for the year ahead look promising. It will be intriguing to monitor how this unfolds throughout the year.

The Challenges & What to look out for

• Software and HPC growth underwhelming. You can’t blame a company for feeding the ducks while they quack, but it’s obvious that their services arm is doing all the heavy lifting. Whilst the company says “The pipeline for new Software customers is strong with a number of evaluations underway with major companies.”, this year software grew only 8%. Services don’t have the same margin profile and are not recurring in the same way. I would be mindful of this and would love to see the revenue per segment profile of this company evolve over time.

• Cyclicality in the Industry: DUG primarily serves oil and gas exploration companies, which inherently makes it a cyclical business. One lesson we repeatedly learn from economic cycles is their tendency to end suddenly. DUG, like many other businesses, was affected by the timing of COVID, which interrupted its momentum just as it was gaining traction. The sharp decline in oil prices had a significant impact on the company, setting it back by several years. Oil prices and exploration activities are showing signs of recovery, but the future remains uncertain. While I don't have expertise in this field, monitoring the oil industry's cyclical nature is a crucial consideration for DUG shareholders.

  

  Crude Oil Prices - 20 Year Historical Chart. Source: macrotrends.net/

#10 - XRF Scientific Ltd (ASX:XRF)

This one will be brief, especially because XRF is a business I admittedly have limited knowledge of. Three years ago, when a friend introduced it to me, I defaulted to my old stubborn self and dismissed it, thinking it sounded too cyclical. Now, if you want to witness the consequences of my stubbornness, take a look at the share price chart. Another lesson learned the hard way.

Reported figures:

The Opportunity

• Order book at record level: Despite concerns among investors about the sustainability of impressive growth in other companies, XRF has eased such worries with optimistic remarks about their order book. They stated, "The order book remains at record levels, with some product lines booked out for production past 1H24," and highlighted "high levels of machine demand from the mining and industrial sectors."

• New Products. The plan for growth to continue also seems fairly robust. The company plans to boost sales of the newly launched xrTGA and increase Orbis laboratory crusher sales. They are also focusing on expanding in the Precious Metals division, pursuing geographical expansion, and introducing new products across all divisions.

The Challenges & What to look out for

• Assessing Organic Growth Potential: It's worth pondering the extent of possible organic growth. While there's a strong argument (stated above) for the company's performance, it's evident that some growth has come from the Orbis acquisition, which, if my analysis of the figures is accurate, seems to have been the deal of the century. Despite management's optimism and a well-crafted growth plan, some investors might question how much organic growth will be achievable in the coming years. Examining the business's historical performance reveals relatively little movement over the ten-year period from 2011 to 2021, potentially leading to concerns about a recurrence of stagnant growth.

  

XRF’s 12 year Gross Profit Journey. Source: @ausallcapguy

Conclusion

That’s it for today ladies and gents. 10 strong growers. All interesting companies to keep an eye on as we head into this new financial year.

Next week, we’ll dive into the fun stuff.

I will be looking at the growth, margins, performance on the rule of 40 and how all these correlate to the stock price performance of these companies, and a few more.

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

1. Camplify (ASX: CHL)

2. Vitura Health (ASX: VIT)

3. Vysarn (ASX: VYS)

Performance on the rule of 40 (using NPAT margins):

I examined the context behind their numbers and speculated on key factors to monitor in the coming year for these firms.

In this week's edition, we shift our focus to another set of companies that have exhibited robust growth in the current year.

#4 : Rectifier Technologies (ASX : RFT)

The company that makes reliable power supply solutions turned 30 years old in 2022.

It’s not the first time Rectifier shows up here. In March, I speculated that the market didn’t have confidence Rectifier would be able to continue delivering such strong growth. I suggested that explained why the share price didn't show significant movement.

Although the half-on-half growth was minimal, the company's ability to match the first-half results alone is impressive.

Reported figures:

The Opportunity

• Large Contracts. As indicated in their final report, "the ASX announcement dated 16 November 2022, the Company has successfully secured purchase orders valued at USD 22 million from a critical customer." At that time, they stated, "The orders are expected to be fulfilled before the end of 2023 (calendar year)." However, management also hinted at experiencing manufacturing delays, leaving uncertainty regarding the extent of deliveries made thus far. Rectifier's ability to secure substantial contracts suggests the potential for significant future growth stemming from this agreement. More importantly to me however, it highlights their capability to secure and execute large-scale deals.

• Valuation. As of today, with a Market Cap of $71.70 million and profits of $6.46 million, Rectifier's Price-to-Earnings (P/E) ratio stands at 11. This appears to undervalue a company that's demonstrating strong growth. The market is factoring in the uncertainty surrounding future growth prospects. If Rectifier continues its growth trajectory, there's a compelling opportunity for its valuation to move closer to a P/E ratio of 20. Such a valuation would be considered fair for a growing company with favourable industry tailwinds.

• The anticipated expansion of EV charging stations is evident. Simply observing the increasing presence of EVs in our country over the past few years confirms this trend. Everywhere I look, I spot more Polestars, Teslas, and EV models from brands like Audi, Kia, BMW, and others. However, a significant challenge remains: the charging infrastructure lags behind this EV growth, (those living in apartment buildings without garages feel this pain sharply). This situation presents an opportunity for Rectifier, and if they execute their plans effectively, it could significantly benefit them.

  

  Source: Statista Market Insights - Australia

The Challenges & What to look out for

• Customer Concentration: By examining Rectifier's announcements, it's evident that they rely heavily on two major customers:

  1. i-Charging (the USD $22M order mentioned earlier)

  2. Tritium

  • While it's unclear what portion of this year's revenue these two customers contributed, it's undoubtedly a significant portion. This situation presents some risk. Additionally, the challenge lies in the depth of these relationships, as Rectifier hasn't provided an update on their partnership with Tritium in recent months. Drawing substantial conclusions from this is challenging, and we may need to await the Annual General Meeting (AGM) for further insights.

• Inventories: Monitoring the growth in inventories can serve as an indicator of Rectifier's expectations regarding shipments to customers. This year, inventories increased from $5.8 million to $18.2 million. This growth surpasses the pace of their revenue growth, which could be viewed as a positive sign.

• Future Growth: Building upon the points mentioned above, investors might be uncertain about Rectifier's potential for future growth. It's important to recognize that manufacturers typically don't experience linear growth like Software as a Service (SaaS) companies. Thus, brace for a potentially uneven journey, but also consider this year's strong performance as an indication that the company may be surmounting some of its recent challenges, as evidenced in the historical graph below.

Source: the company’s 2022 AGM presentation

#5 - Mad Paws (ASX: MPA)

I spotlighted Mad Paws in Business Models & Valuation, suggesting they were a good example of bolting on complimentary offerings, leveraging the power of the core marketplace. Whilst it’s still early days for them, this year’s strong results haven’t impacted the share price in the right direction.

What’s going on here? Let's look into it.

Reported figures:

This year’s 145% revenue growth was in part due to the Pet Chemist acquisition numbers. If we strip that out, we're left with a FY23 Pro forma revenue growth of +59%. This still represents robust growth, especially when considering the modest improvement in the bottom line. For me, the true gem in this business remains the marketplace, which I believe is the most compelling segment to watch.

The Opportunity

1. Scale: Mad Paws has attracted 46,000 new customers to its marketplace, marking a 30% growth this year. This highlights the inherent advantages of marketplaces—existing customers tend to return, and satisfied ones become brand advocates, reducing the need for extensive marketing expenses.

2. User Experience: While some negative reviews of Mad Paws exist online, the majority of users seem to adore the platform. Personal anecdotes and a solid average rating of 4.7 stars across 2,694 reviews on Product Review confirm this. Happy users are vital for their brand's growth.

The Challenges & What to look out for

• Growth plateau. While seasonal factors influence Mad Paws' performance, a quick look at their quarterly results suggests a potential growth plateau. Q4 performance remains 24% above the previous year's, but momentum appears to be tapering off. To their credit, the company has maintained marketing expenditure similar to the previous year, indicating that scale benefits are emerging. However, there's an argument for increased marketing spending to sustain growth.

Source: the company’s Q4 FY23 Update Presentation

• Cap Raise. Although Mad Paws recently raised $4 million in February 2023, another capital raise seems inevitable. Examining last quarter's figures, the company operates with an approximate burn rate of $1.25 million per quarter (subject to seasonality). With only $3 million in current cash reserves, this covers just two quarters. As a CEO, ensuring sufficient cash is a job #1, and this impending capital raise may be exerting downward pressure on the share price. With $24 million in revenue and a market cap of $29 million, the company appears undervalued if it can avoid another raise, though that seems unlikely.

• Growth unit economics change. As e-commerce outpaces the marketplace in terms of growth, the business's margin profile is changing. E-commerce typically doesn't achieve the high gross margins seen in marketplaces. This year, monitoring growth by segment will be essential to gauge the potential trajectory of each part of the business.

#6 - Acusensus Ltd (ASX: ACE)

Back in June of this year, Scott conducted an insightful deep dive into Acusensus. also wrote it up here.

While the company is gradually gaining the attention of investors, it remains in the early stages of discovery. Acusensus has had a standout year, surpassing its IPO prospectus projections and painting a positive outlook for the year ahead.

Reported figures:

The Opportunity

• Large Contracts. Just before releasing its preliminary report, Acusensus announced the extension of its initial contract with Queensland. This expansion includes mobile phone and seatbelt monitoring (Heads Up). It's noteworthy that this extension added $10 million in contract value over five years, pushing the total contract value with Queensland to approximately $31 million. This suggests that similar contract extensions with other states are feasible. Below, we've included Scott's research findings from June for a deeper understanding:

  

• US and UK largely untapped. Acusensus has been directing its efforts towards expanding in the U.S. and the U.K., where favorable market conditions appear to be aligning.

  • Regarding the U.S., they've noted that many states have submitted requests for Federal funding to access Acusensus' mobile phone and seatbelt enforcement services. Observing how this unfolds over the coming years will be intriguing.

  • In the U.K., they've done a good job at hiring Geoff Collins, a prominent local road safety leader. Their report indicates, "Further demand for Acusensus services in the UK is anticipated in FY24 and beyond," and "Acusensus anticipates the European tender will lead to other opportunities for mobile phone enforcement services in the region from FY25" (Source: Company’s Full Year Results Presentation).

The Challenges & What to look out for

• AU market tapping out. At the risk of contradicting myself, I’m not certain how much growth the company can generate in the region. Perhaps my logic is too simplistic, but the states with the largest population (VIC,NSW,QLD), therefore largest traffic, would be the most likely to invest in this technology. These states may have made the larger part of their investment already. Hence supporting the need of international expansion. The counter to this is that these states may well decide to expand their use beyond the metro areas, and good growth may remain in them, but that seems less plausible to me.

• New geographies may not be as easy. In a presentation hosted by NWR, the CEO discussed differences in the adoption of their technology between the U.S. and Australia. Although it's promising to see North Carolina as the first U.S. state to implement a mobile phone and seatbelt enforcement program for commercial vehicles, it suggests that the U.S. market may evolve more slowly. Convincing government agencies to adopt new technology can be a formidable task, even though Acusensus seems well-positioned for success. It might be a case of this endeavor taking longer than anticipated, as is often the case in enterprise sales.

Conclusion

There you have it—three strong contenders on our list of growth companies. Stay tuned for next week's edition where we'll dive into the final four impressive growers.

Your suggestions and insights are invaluable, so don't hesitate to share them in the comments. If you're tracking other promising small-cap growers that meet the Rule of 40, I encourage you to share your discoveries with our community.

I always appreciate your feedback, which helps me continue to deliver content that matters to you.

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

• Altium (ASX: ALU)

• Audinate (ASX: AD8)

• Aussie Broadband Ltd (ASX: ABB)

• Siteminder Ltd (ASX: SDR)

• Bravura Solutions Ltd (ASX: BVS)

• Accent Group Ltd (ASX: AX1)

All witnessed significant movements, with some experiencing jumps of over 20% in just a single day or a matter of a few.

I wouldn't go so far as to say that this exuberant behaviour means a buoyant bull market just yet. There were instances where certain companies reported average or even positive results, only to be heavily penalised for not meeting expectations. This situation underscores the importance of spending 10 minutes analysing the results to form your own conclusions before considering the direction in which the stock is moving as the better indicator of the truth. It's possible that other investors possess information you're not privy to, but more often than not, it may be that they have a shorter time horizon (or a shorter fuse) than you do.

Now that the reporting season has concluded, I believe it's only fitting for someone who goes by the name 'Go For Growth' to spotlight 10 strong growth results for the year. I'll be breaking this down into three parts over the next three weeks. Let's go.

#1 : Camplify (ASX : CHL)

I wrote an in depth piece detailing my thoughts on Camplify for a rich life, for those looking for the long version of this, you can find it here. Whilst not perfect of course, I thought Camplify’s full year results were strong.

Reported figures:

My Top Figures:

• Estimated Organic Revenue growth at 75%

• Average booking value at $1,799 = $473 to Camplify (flat on half year results, and up 45% from last year results)

The Opportunity

• Camplify is positioned for good growth with future bookings of $28.6 million and a market share of less than 2% across all regions they operate in (except for NZ at 2.6%). This promising outlook suggests a substantial runway for potential growth.

• Their NZ business is experiencing remarkable growth, with bookings soaring by 630% this year. At this rate, Camplify is well-positioned to establish itself as the preferred choice in NZ over the next five years.

The Challenges

• Despite confirming that the UK region returned to growth in the second half of the year, the yearly figures show a year-on-year decline. To maintain robust growth, Camplify must focus on restoring sustainable growth in the UK region.

• As mentioned in the article on a rich life, the issue of hirers experiencing van damages without proper compensation remains unresolved. I think Camplify must address this concern fast.

• Whilst Camplify claim they are not too worried about direct or indirect competitors (from the likes of Uber Carshare) I would remain attentive to the competitive landscape here. Someone’s growth is someone else’s opportunity for disruption.

What to look out for

1. Growth in European markets. Keep an eye on the growth in European markets as Camplify completes its integration with Paul Camper within the next year.

2. Growth in average booking value. Monitor the growth in the average booking value and Camplify's direct revenue generated from these bookings. This is the core of Camplify's business.

3. Marketing efficiency. Assess the efficiency of Camplify's marketing efforts. Management claims ongoing improvements based on experience and network effects, and it would be valuable to see tangible evidence of this in the coming 12 months.

#2 - Vitura Health (ASX : VIT)

I previously discussed Vitura's robust first-half results in February (here). In March, I provided additional insights into why investors might not have been impressed by what seemed to be excellent figures (here). After reporting it’s full year results, with top line growth of 75% and bottom line growth of 129%, the stock continued its downward spiral.

Why did this happen? Let's look into it.

Reported figures:

Observations:

• NPAT and EBITDA increases outpaced revenue increased. This is good, showing signs of operational leverage.

• Revenue growth came in lower than units sold growth. This is not good, and may indicate lower pricing power.

• Cash at bank healthy at $18M. They shouldn’t go broke anytime soon (dare I say…)

The Opportunity

• It's evident that Vitura delivered exceptionally strong results, and historically, successful companies tend to sustain their winning streaks (even through pit stops for water in between wins). The potential for Vitura to continue executing effectively over the next few years seems quite plausible.

• Furthermore, the medical cannabis sector is experiencing strong tailwinds, as indicated in the chart published by the Sydney Morning Herald, which I reference below [link]. These factors could further support Vitura's growth prospects.

  

The Challenges

• Why is growth stalled? The transition from H1 to H2 witnessed almost negligible growth (approximately 3%), with profit declining compared to the first half. This decline can be attributed in part to changes in the product mix, including more third-party products, resulting in narrower profit margins.

• Competitive landscape. While Vitura's CEO, Rodney Hicks, has expressed confidence in the face of competitors, the medical cannabis industry is becoming increasingly competitive. Competitors like Cannatrek, HelloMello, Polln, and Honahlee seem to be gaining traction. While Vitura may have a head start, maintaining a strong operational cadence will be essential.

What to look out for

1. Growth. Can they growth again? Whilst the stock is currently trading on a PE of ~15 at today’s price (stock trading at 38cents), if growth is dead, it will likely fall much further from here. We’re seeing our fair share of single digit PEs in the land of small caps at the moment.

2. Unit Sales. With the transition of strategy to go completely online now complete, we would want to see unit sales grow again. The company doesn’t offer regular quarterly updates, but does update us with this metric semi-regularly, I would look out for it when it comes.

3. Pharmacies and Prescribers accounts. Pharmacies and prescribers make the hard side of their network. If we can see them continue to grow the supply side strongly, this should give us belief in the long-term growth potential.

4. Director behaviour. Directors in this company have been a significant impediment to the share price’s growth. The moment momentum appeared, directors sold into strength. It would be nice to see a end to this trend soon.

#3 - Vysarn (ASX : VYS)

I'll keep this last one short and sweet, especially since I have limited knowledge of this business

They say success leaves clues. Well, that was certainly true in the case of Vysarn this year. After upgrading guidance twice, Vysarn delivered super solid results.

Vysarn Limited operates a drilling, dewatering and test pumping services business for mine sites. Let’s look into them.

Reported figures:

The Opportunity

• Valuation remains reasonable. Whilst Vysarn wouldn’t be trading on multiples of a high-margin, sticky Saas company, there’s still a simple case to be made that even after a 200% surge of the share price in the last year, the valuation still looks reasonable (Market Cap of ~$83M and NPAT of $3.8M) if they are at the beginning of the tipping point into profitability.

• Tailwinds continue. Management are quite promotional of this aspect of the company, and so far they appear to have been correct: “The board and management continue to maintain the view that one of the largest and growing impediments to ongoing iron ore production is the removal and disposal of surplus water. This thematic has since proven to be sound and has provided a unique opportunity to build a business of scale in a short period of time.”

The Challenges & What to look out for

• Growth Concentration. This was highlighted by Benjamin Sayers who introduced me to the company in his article for a rich life. At the moment, there remains risk in this company being “become just another drilling company servicing the mining sector”. This is now getting offset by new non-hydro divisions which are showing positive signs, but those signs need to keep going in the right direction.

• New segment performance. Building on the above point, it’s often easier to get a business with momentum to continue flying, than it is to get a more nascent one off the ground. This year will be about monitoring the progress of the project engineering and pentium test pumping segments.

Conclusion

That’s it for today ladies and gents.

Next week, I’ll cover another 3 strong growers. Feel free to leave your suggestions in the comments. Feedback always welcome.

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

In this month's one-pager, we delve into the story of a relatively new entrant on the ASX. Despite the challenging business landscape, this company has managed to maintain consistent growth since its listing.

Let's jump right in.

Business Summary

Racing and Sports (RAS) was co-founded in 1999 by Gary Crispe and Robert Vilkaitis, a compelling story of a domain expert (Gary) teaming up with a tech wizard (Robert) to create a powerful founding duo.

What began as a simple website gradually evolved into a full-fledged business, offering comprehensive horse racing data.

This is not a tale of explosive, exponential growth. Instead, driven by consistent improvement and dedicated effort, the founders recognised industry disruptions. The rise of digital betting sparked a heightened demand for accurate, well-structured data from betting operators.

Over the past two decades, the company gradually ascended to a prominent position in its niche. Today, Racing and Sports stands as a premier wholesale data and content provider, collaborating with some of the world's largest wagering operators. Gary Crispe handed over the reins to his son, Steven, who now assumes the CEO role.

Here are some of their clients (1800 racing centers across 30 countries), and their 4 products:

Compelling Events

Two recent compelling event makes now a good time to put the company on the watchlist.

#1 - Good value, long contract with Tabcorp

Contracts that get signed with a long time horizon and good dollar value are good proof points of a company’s value.

• In May, Tabcorp signed a six year contract for RAS content and innovation to help Tabcorp transform the information available for punters through an enhanced experience.

• The contract spans $5.4 million over the initial three years, with the same value for the following three.

#2 - ARR surpasses the $10M milestone

In calendar year 2023, Racing and Sports’ ARR (they call this AMRR) crossed the $10M threshold.

• This achievement signifies the continued alignment of product-market fit in a positive trajectory.

• Despite a slight recent decline in gross profit due to the launch of their fully managed trading service with Racebook HQ, which I imagine involves manual intervention, gross profit still grew by 27% over the past 12 months.

• One aspect to keep a close eye on, and which I dislike, is the company's tendency to classify nearly all revenue as ARR (e.g., the reported revenue for the FY23 half-year was $5.7 million, while the ARR at that time was $11.2 million).

  • It might be beneficial to distinguish their Digital/Media and Consulting services segment as a separate revenue stream.

What needs to happen

#1 - International expansion is key

As the ANZ market shows signs of maturity, expanding internationally becomes crucial. The company's efforts have been directed towards growth in the UK and US markets.

• While not a new venture, the company had previously inked an international data deal with Tabcorp for the UK and Europe back in 2010. Similarly, in 2022, they secured a contract with TVG for enhanced international data in US format.

• Despite these initiatives, international revenue remains modest in comparison to the potential it holds.

• Demonstrating increased momentum in these international partnerships and contracts is vital for future growth.

#2 - Cashflow breakeven needs to be reached.

In the latest report, the company disclosed a cash burn of $424k during Q3.

With $8.6M in cash reserves as of the last quarter-end (and considering the pending R&D rebate), the company isn't imminently at risk of needing additional capital for operations.

• Nevertheless, the focus on achieving positive cashflow is persistently on the horizon.

• Attaining this milestone sooner would be advantageous, bolstering their financial position and enabling opportunistic moves if a strategic acquisition opportunity arises.

• This would also place the company on the radar of many investors who remain averse to cash-burning enterprises, a sentiment amplified by the aftermath of 2021.

Conclusion

Racing and sports falls in a nice category:

1. Humble and unsexy, it avoids the spotlight.

2. Focused on customer engagement rather than flashy presentations (I don’t think they found Canva yet…).

3. Rooted in founder leadership and family values.

At today’s current valuation, one could make a case that it wouldn’t necessarily take home runs for nice returns to come.

However, my attention will center on two key catalysts I highlight here, serving as further evidence. If these are successfully executed, I may revisit with an in-depth analysis a year from now.

Previous 1 Pagers

• Felix Group (ASX:FLX) : 1 Pager - June 2023 - Link here

• Beamtree (BTM.ASX) : 1 Pager - July 2023 - Link here

• Kinatico Ltd (KYP.ASX) : 1 Pager - August 2023 - Link here

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

Companies with strong cultures have seen a 4x increase in revenue growth.

Furthermore, companies that have appeared on Fortune’s annual 100 Best Companies to Work For list also see higher average annual returns, with cumulative returns as high as 495% instead of 170% (Russel 3000) and 156% (S&P 500).

Are such audacious claims actually credible?

Unfortunately for us, the links he had provided to support his statements are no longer available.

Studying the relationship between culture and performance has been done for a long time.

In 1992, research conducted by Rutgers University in New Jersey delved into the interplay between culture and premium growth rates among 11 insurance companies. Their findings were:

A strong culture, regardless of content and a substantive value placed on adaptability, is associated with better performance for two to three subsequent years on both criterion measures.

Study link here.

Perhaps the most quoted research on this has been completed by Denison, who looked at 127 companies from 1995 to 2010 and found the below results:

Today, let's delve into the significance of culture and explore a favoured proxy for culture evaluation and its growth correlation on the ASX.

Why does Culture matter so much?

In his excellent book "Common Stocks and Uncommon Profits," Phil Fisher begins by presenting a 15-point checklist outlining what he believes contributes to a promising investment opportunity. After revisiting the book, I've crafted a summary post (still sitting in my drafts), and here, I'd like to highlight three of Fisher's points that are particularly relevant to our discussion:

• Outstanding Labor and Personnel Relations: Fisher's seventh checklist point emphasises the significance of strong relationships within a company.

• Outstanding Executive Relations: Point eight underscores the significance of high-quality executive relationships.

• Depth in Management: Fisher's ninth point underlines the need for depth in management. A company with a robust and skilled management team is better equipped to handle various situations, ensuring continuity and adaptability.

Interestingly, these three checklist points (7, 8, and 9) all revolve around the concept of company culture. As far back as 1957 (arguably, Fisher was ahead of his time), astute investors recognised that a company's culture offers insights into its long-term growth potential and prosperity.

My Perspective

Getting to the nitty-gritty of operations, I've gained valuable insights, (much like you I’m sure), from my experiences working at and founding companies, highlighting the immense influence of culture. Here's my perspective:

• One of the foremost reasons why culture holds such significance is its ability to attract top talent. Senior operators will actively ensure their personal values align with your company's ethos. A lackluster company culture can create hurdles in securing adept senior leaders.

  • While junior high performers might not scrutinise culture extensively before joining, they quickly assess the environment upon arrival. If the culture doesn’t suit, they will be out the there before onboarding is finished.

• Thriving companies experience rapid growth, and need to hire quickly. This acceleration is pivotal for sustained expansion. However, the challenge lies in maintaining culture and avoiding bad hires, which becomes more difficult.

• Ultimately, culture acts as the cohesive force, uniting the team during both triumphs and challenges, while also providing direction during crucial choices.

• Culture Strain: Transitioning from one phase (with fewer than 50 employees and ongoing product-market fit efforts) to a balanced Go-To-Market model induces cultural shifts, particularly in decision-making between GTM and product strategies. This can lead to a lot of early employees leaving because “things aren’t the same anymore”.

Glassdoor

Evaluating workplace culture from an external perspective is challenging and requires more than just a single tool.

The most accurate way to understand a company's culture is by experiencing it firsthand through employment. However, since most of us won't have the opportunity to work at numerous companies to build a comprehensive portfolio, we have to default to alternative methods.

Engaging in conversations with current and former employees often proves to be a valuable approach. The downside is that investing time in these conversations might not always yield desired results (been there, done that).

Glassdoor provides a partial glimpse into a company's workplace culture.

• My previous employer, Salesforce, admitted to using Glassdoor to evaluate the quality of companies to acquire.

• CNBC hypothesised, over 5 years ago, that “the internal rating of its chief executive by employees on Glassdoor” could have been used a clue of upcoming challenges at the company.

• One of the highest quality pieces on this has been written by Jason McPherson

  Founding Scientist at Culture Amp in 2017, who highlighted that “Higher engagement and product belief was associated with 51% higher share price growth”.

Limitations to look for

A common belief in the world of investing is that once a technique gets acknowledged and becomes part of every investor’s process, the benefits of it get arbitraged away. If everyone else is looking at Glassdoor reviews, than surely this variable gets built-in to the consensus pricing.

Whilst that may be true, the counterargument here is the hypothesis that a strong culture will outlast most of the other growth drivers. You can copy product features, but you can’t copy outstanding humans.

When looking at Glassdoor for small companies, one needs to be particularly mindful of:

• Low number of reviews. When the number of reviews is insufficient (e.g., below 5), I am inclined to disregard the overall rating entirely. 5 individuals internally could obscure the actual picture. Nonetheless, parsing through individual reviews can still yield insights.

• 5 star, and 1 star reviews. The extremes are typically exaggerated. Some 5 stars reviews tend to get done by internal stakeholders looking to boost the brand, and 1 star reviews can be submitted in the bad leavers still influenced by the cloud of emotions that are running wild.

• All reviews from same role type. If all the reviews are done by salespeople, that give us nothing more than a partial view on the culture of a team, not the company.

Overview

I’ve used the curated a selection of approximately 150 companies from my broader and compiled their Glassdoor ratings.

I have excluded those with fewer than 5 ratings, and I've specifically marked those with less than 10 ratings in red, as these tend to offer comparatively reduced insights.

Here are all with 4 and above:

Are winners growers?

To look at this, I removed all that had below 10 ratings. For growth, I went high-level, back of the napkin, and averaged out the last 3 financial year end results to come up with a ballpark average growth rate.

Observations

• Only 1 outlier. The first thing we note is that there’s only 1 company in the top 20 with growth rate below par.

  • Reckon (RKN.ASX) is a unique business focused that’s historically focused on growing, scaling and selling software businesses. They now have a track record of doing this (once in 2017, again in 2022), so evaluating them via top line growth can be misleading.

• The correlation exists. Given that 14 out of the 20 businesses are above average growers (20% or more range), we can conclude that a strong culture could be linked to strong growth.

Correlation or Causation?

The hardest part about this is distinguishing between correlation and causation.

In a rapidly growing company, employees experience a profound sense of achievement and progress. There's nothing quite like winning to cultivate a powerful, positive culture. However, challenges arise when growth begins to decelerate. This becomes the true litmus test for your company's culture. Employees may perceive a lack of direction and purpose. Alternatively, they might kick their efforts into overdrive if they are fully bought in to the vision.

In the upcoming article of this series on Culture, I will delve deeper into the topic of correlation versus causation.

Additionally, I will provide a more in-depth exploration of five companies listed in the above sheet, analysing their high Glassdoor ratings and attempting to discern the extent of Glassdoor's reliability.

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

Founded in 2004, CV Check is on the verge of celebrating its 20th anniversary. The company initially emerged with a vision of streamlining and securing employee information verification.

Presently, with a new name and other noteworthy changes, CV Check's evolution may merit attention.

Let’s dive in.

Business Summary

Undergoing significant transformation since its modest inception, Kinatico Ltd (ASX:KYP) has emerged as a prominent 'Know Your People' regtech enterprise software. Operating through its four products, the company's primary focus revolves around workforce compliance monitoring and management.

Here’s a quick breakdown:

• CV Check: The company’s foundational product, CV Check, carries out more than 300,000 secure checks every year for organisations, employers and individuals. These include:

  • Employment reference checks

  • Police checks

  • Traffic and licence checks

  • Employment and qualification checks

  • Credit and financial history checks

• On Cite. This user-friendly app empowers workers to store their compliance documents, receive alerts about upcoming expiries, and ensures they uphold compliance.

• Enable. Acquired through the integration of Bright People Technologies, this solution mirrors their existing offerings. The key distinction lies in tailoring compliance and rostering solutions for asset heavy industries: mining and resources.

  • This is a pertinent feature given the stringent compliance requirements within these industries.

• Cited. Also obtained through the Bright People Technologies acquisition, Cited piques our interest as an all-in-one platform providing employees with a sophisticated compliance management hub. This enables proactive management of credentials by centralising document storage, ultimately saving teams valuable time and mitigating headaches.

  • Cited incurs a monthly fee per worker, granting organisations comprehensive peace of mind in managing their compliance needs

Compelling Events

Two recent compelling developments underscore why Kinatico may warrant closer observation.

1. A recent turn to profitability. The first significant milestone occurred at the close of the financial year—Kinatico reported a profit for the year.

   1. The ASX release on July 13th heralded a "Total Comprehensive Profit exceeding $200,000, marking the company's first profitable full year since its listing."

   2. While this achievement is noteworthy, it prompts questions about the 20-year timeframe leading to this profitability.

   3. Regardless, this accomplishment signifies a positive shift. Newly appointed CEO, Michael Ivanchenko, appears to have steered the company in a promising direction since taking the helm.

2. A change to a SaaS business model. The acquisition of Bright People Technologies, announced in February 2021, is now bearing fruit. As the Bright products inherently operate as SaaS offerings, Kinatico has concentrated its efforts over the past two years on generating SaaS revenue.

   1. Cited, their real-time workforce compliance monitoring and management platform, has spearheaded this transition.

   2. SaaS revenue accounted for 18% of FY23 revenue, with Q4 showcasing a commendable 28% contribution from SaaS.

The problems & What needs to happen

• Challenge #1 - Accelerating Top-line Growth. Although management's focus on profitability and SaaS revenue growth is commendable, it's apparent that a small team cannot undertake all endeavors simultaneously.

  • Consequently, the top-line growth for the year settled at a modest ~5%.

  • To sustain momentum and capture investor attention, achieving top-line growth in the range of 15-25% in forthcoming years is imperative.

  • The rapid adoption, predominantly by existing customers, of the SaaS product is anticipated to propel this growth. Vigorous expansion within this segment remains crucial.

• Challenge #2 - New logos and international success.

  • While initiating the transition to SaaS by catering to existing customers is prudent, sustained growth is contingent on extending this momentum beyond the existing customer base.

  • Although 60% of sales stem from current customers, the remaining 40% from new logos demonstrates potential.

  • Diversifying into new regions would offer a robust evaluation of this potential and success. While the company has not extensively elaborated on this, management has mentioned that this would become a focus, and the forthcoming years will reveal its progress in these facets.

Conclusion

In an era where companies face heightened scrutiny over compliance, and where the intricacies of compliance administration compound annually, Kinatico is positioned advantageously.

Concurrently, the realm of regtech is growing more competitive, as founders recognise the mounting challenges employers confront in this domain, and see opportunities to grow promising startups.

The upcoming year will serve as a litmus test for Kinatico's journey. Should they show progress towards the milestones I mention above, I will revert back with a full deep-dive in 1 year.

Previous 1 Pagers

• Felix Group (ASX:FLX) : 1 Pager - June 2023 - Link here

• Beamtree (BMT.ASX) : 1 Pager - July 2023 - Link here

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

We can now argue that data is also eating the world.

A generation of software providers are building tools powered by collating data from disparate systems, and creating algorithms to draw valuable insights from that data.

This is Alcidion’s proposition to public healthcare. Alcidion have been on my radar for a number of years. I first heard the CEO Kate Quirk present in 2019. They’ve evolved since. With a nice recent quarter of positive cashflow (don’t read too much into it), now seems as good a time as any to dive deep into it. Let’s go.

🖐 4 bullet Summary

• The bull view:

  • With a lot of whitespace and and a clearly mandated expansion potential, Alcidion continues to grow its footprint in the UK.

  • Recent government incentives help fuel the growth.

  • The company reaches profitability in the next 2 years when they pass $45M in revenue, and growth remains strong in the 20-25% environment.

• What the market is missing:

  • True market penetration in the UK is lower than perceived (estimated at 10%)

  • The potential upside from new, complimentary products. 

• Key risks:

  • Well established competitive landscape.

  • Long history of cash burn.

  • A history of raising for acquisitions which could dilute shareholder returns.

• The bear case:

  • Failure to continue fast innovation leads to growth slowing down. With the company still “priced for growth”, they get downgraded.

History

The Alcidion story starts with one of the two co-founders; Malcolm Pradhan.

Malcolm was studying medicine in Adelaide when he started diving further into emerging computer technology in the mid-80s. When he started working in hospitals, he couldn’t help but notice how many things could be improved with technology.

This is what prompted his decision to study the field of medical informatics at Stanford in California. There, he studied medical AI, and how computers could help clinicians make decisions under uncertainty.

After a stint in academia and consulting, Malcolm noticed the growing momentum around understanding preventable errors in healthcare that cause patient harm.

Malcolm ended up working at Australian Patient Safety Foundation, which is where he formed a relationship with Ray Blight. At the time, Ray was the Chairman and CEO of the SA Health Commission.

Both had a shared awareness that problems in healthcare could be solved with technology, helping to make healthcare safer and more efficient. In 2000, Alcidion was born to improve patient safety.

A stark, painful realisation happened when they found incentives were dangerously misaligned in healthcare at the time. The government funding models in the early 2000s meant that hospitals were reimbursed for errors. Therefore, the incentive to invest in their system was only partially there.

With a lot of innovation, patience, and good leadership, and acquisitions, the Alcidion product has involved immensely since. Fortunately too, financial drivers in healthcare have changed around the world to support patient safety, so the headwinds became tailwinds.

Ray and Malcom have both taken a step back from the business and retired. Both remain close to the business with some good skin in the game: Malcolm owns 10.61%, and Ray owns 7.34% of Alcidion.

🥊  What problem do they solve?

The challenge they solve is one we would have likely all experienced. Given Alcidion works with a lot of ED departments, let’s focus on this and share a story.

You arrive at the ED, and get screened by a nice, tired nurse. The nurse will ask you dozens of questions.

One you’ve answered them, you naturally ask how long it will take to be see by a doctor, because you’re in pain. The answer comes back; “the wait at the moment is around 1 hour”. You double it in your head.

4 hours later, an exhausted looking doctor guides you through an ED ward filled with beds in the corridors because there’s not enough room for everyone.

You notice patients playing Candy Crush on their mobile phones who seem in good enough a state to head home, but remain in the crowded area.

The doctors asks you all the same questions the nurse did. Eventually, they short you out. You’re ready to go home now, but there’s just no doctor or nurse around to confirm your discharge.

What I’ve described here is a fictional version of the problem the Royal Darwin Hospital was facing.

Alcidion helps healthcare staff communicate between each other, so actions can be taken faster. They help healthcare leaders understand and track the journey of patients, so they can iron out the pain points. In the case of the Royal Darwin, results were:

• The number of patients processed within the ED in the four-hour target increased by 10%

• The number of patients discharged by midday increased from 23% to 27%

This improves your experience as a patient, and saves hospitals money.

Products

The Alcidion software suite is made of 4 primary products:

#1 - MIYA Precision

• This is Alcidion’s flagship product.

• This platform facilitates multiple clinical and operational applications, with the aim of providing new applications, and also enhancing existing IT inputs from multiple systems into consolidated, meaningful information.

• Beneath the platform are 15 modules under the MIYA umbrella.

  • These focus on areas such as bed allocation, simplified reporting, emergency department management, vital sign observations with automatic risk scores and notifications.

• Customers include ACT Health, NSW Health, NT Health, South Tees NHS Trust.

#2 Patientrack

• Patientrack is a mobile application to capture patient data at the bedside.

• The information is entered via a tablet or integrated from patient monitoring.

• This data is then automatically evaluated to give an Early Warning Score. Depending on the protocols of the hospital, alerts can be issued to management.

• Current clients of Patientrack include ACT Health as well as a number of NHS hospitals in the UK.

#3 - Smartpage

• Smartpage is a smartphone and web-based app enabling hospital communication and task management for both clinical and non-clinical users.

• On the clinical side, the platform enables group chat, image sharing, handover, and task management. On the non-clinical side, modules covers areas such as food, cleaning, security, porters, and orderlies.

• Customers include ACT Health, Monash Health, Townsville Health, South Tees NHS and Waitemata District Health Board in NZ.

#4 - Services

• Alcidion compliments its offering with a services offering.

• The includes the delivery of product implementation, product support and maintenance, systems integration and data analysis services.

• Anywhere from 20-30% of their revenues have historically come from services.

Building with Users

You may classify this as nothing but good LinkedIn marketing, but Alcidion are showing good evidence of listening to their users and building a solution fit for purpose this way.

The post of the left shows a User Group meeting, and the one on the right shows the co-build process for virtual care and RPM patients at Sydney Local Health District.

Culture ⛷️

Alcidion scores highly on culture from my research. Some of my ex-Salesforce colleagues stated they have a good reputation in the world of healthcare software.

They seem to take Glassdoor seriously, with their Chief People Officer, Amanda James responding to every comment made.

Positives often stated:

• Work flexibility Autonomy and independence in job

• Strong leadership “supportive managers, and a fantastic CEO”

• Learning opportunities

• Great technology and products “Interesting product portfolio and a lot cooking.”

Potential negatives (as always, we must account for bad leavers and take this with a grain a salt):

• Integration challenges : “With any acquisition and transition into a corporate structure, there may be integration challenges”

• Management challenges : The daily huddle seems to be a practice some still need time to get used to…

• Compensation: “Need to update salaries to match Australia wide salaries”

Employees

In alignment with the wider tech industry, Alcidion seems to have reduced their headcount in the last 6 months.

Their continued investment in business development could be read as an encouraging sign that pipeline continues to get created and they see further potential ahead.

Tailwinds

4 years ago, Julie Yoo from Andreessen Horowitz wrote this excellent piece called How Software is Eating Care Delivery in Healthcare (link here). Much of it isn’t directly relevant to the landscape of the UK and ANZ, given vastly different government structures.

Still, relevant points are made. She mentions 3 tailwinds, and the first is directly aligned to Alcidion’s value proposition:

I think in future years, this statement could help drive’s the company’s acceleration.

I would add 3 tailwinds helping Alcidion:

1. Healthcare staff shortages mean digitisation is required

2. Patient expectations continue to change

3. Significant increase in patient-related data which hospital systems grappling with legacy IT have struggled to handle

Leadership

Alcidion’s leadership team have now accumulated some good good tenure in role. Kate has been in the business for 5 years now, and many of the other leaders have passed the 2 year mark in role.

Kate was asked by Ray to become the CEO when Alcidion acquired MKM Health in 2018. With the last 20 years spent in Healthcare technology leadership roles, Kate’s domain expertise would be as impressive as her rolodex in this space.

Both their country leaders appear to be well loved internally and externally.

• Kate Quirke, CEO:

  • 85% of ratings approve of the CEO on Glassdoor.

  • “CEO has a good vision on company’s direction.”

  • “Regular, transparent communication from CEO,”

• Lynetter Ousby, UK MD:

  • “Lynette is bloody awesome. She's a great combination of a very sharp mind, with a completely down to earth and hugely authentic personality.

    • - Thomas Webb, Founder and CEO at Ethical Healthcare - March, 2023

Growth 📈

Similar to my comments in Volpara’s deep dive, Alcidion’s historical growth at the top line isn’t a perfect representation of reality given the acquisitions (listed in chart).

I do hold the opinion that they’ve been strategically selective with these acquisitions and that they can scale better with them.

They have however been unlucky with the timing of the Silverlink acquisition; markets were starting to get shaky at the time and with hindsight we can hypothesise a better price may have been possible to achieve had they waited a little longer.

Here’s what it looks like at a high level, using simply their appendix 4Es:

Growth in the last 4 years has been very good, but they certainly has been helped by these acquisitions.

The important question is always; what can it look like in future years? No one knows, but we can attempt to evaluate the strategy against what’s possible.

Future Growth

Here are some of the primary future growth levers for the company:

• #1 - Expanding current customers

• This is something leadership often talk about. They mention they have very little penetration inside of their current customers, and that channel alone could see great growth potential for the company.

• This makes sense considering they’ve expanded their technology extensively over the last 5 years (by both internal development and by acquisition).

  • To that end, the company shows a potential example (pictured below). These can be summarised to say :

    • Step 1: they will lead and land with their flagship Miya Flow product

    • Step 2: Now that the customer has got quality data in one location, they will want to extend the value of their Electronic Patient Records (EPR) and add in clinical noting, medications management and Observations and Assessments

    • Step 3: This is about trying to extend clinical decision support, and upgrade their PAS : they would position Silverlink here.

      

• #2 - Net new logos (new Trusts) in the UK

• Here the company is helped by a strong government tailwind which they’ve talked about. Through the Digital Aspirant programme, 60 trusts are now receiving funding and support for their digital transformation journey (source here). It’s expected the number of Trusts will increase over time.

  • Here’s Alcidion’s strategy for this:

  

  We could make a few assumptions here to calculate the potential of such a strategy.

  • 1st, let us assume that of the 106 sites above, they can close 20-30 in the near-enough future.

  • We can 1 land, and 1 expand example:

    • Land: The East Lancashire Hospitals NHS Trust signs 5 year Miya Flow contract was for $300K ARR,

    • Expand: the Dartford and Gravesham expand upon existing Miya Precision contract was for $600K of ARR.

  • So this means 1 potential sites that be reasonably evaluated at $500K ARR (there’s upside potential on both the contracts above).

  • 20-30 sites : $10M in new ARR.

  Now, please note my calculation is overly simplistic; I’ve not accounted for services which normally take up 20-30% of the deal size. This is purely back of the napkit to draw high level portrait.

Risks & Problems ⚠️

Two years ago, investors may have looked at Alcidion thinking valuation alone was quite a large risk. In 2021, the company traded at 20x sales. (See the multiple re-rate in my article here)

Since then, the revenue has grown, and the share price got re-rated, so this risk is now reduced, but remains present. 

The problems I see now are: 

1. Remaining Addressable market: Whilst there’s a lot of growth left to be had in ANZ and in the UK, the strategy beyond these markets isn’t exactly crystal clear. The number of countries with strong social public healthcare programs that fit Alcidion’s target isn’t infinite.

   1. The counter to this is on further account penetration, and the remaining widely untapped status of the UK. Still, long-term thinkers need to bear this in mind.

2. Economic turmoil and political dramas in UK slows decisions. This is a risk that’s currently playing out now. At the beginning of the year, CNN who was covering developments in the UK wrote:

   In December, 54,000 people in England had to wait more than 12 hours for an emergency admission. The figure was virtually zero before the pandemic, according to data from NHS England.

   The NHS is now forced to deal with the crisis, and whilst one could think of this as a potential tailwind (surely better systems could help here), the reality is that in a crisis buying software tends to take the backburner.

   1. The NHS will eventually overcome this, and a return to a new normal will eventually emerge, but there could be many more months of pain ahead.

   2. Another part of this is that the NHS have now gone live with its EPR procurement program. This means hospitals now have to learn a new process to procure a system like Alcidion, and this has added to the delays.

3. Can’t turn the profitability corner.

   1. This is one of the biggest risks for me. The company had announced to the market a while ago that a target of EBITDA Positivity would be reached by FY 2023. Now it seems that has become impossible.

   2. Alcidion continues to navigate from quarter to quarter with one in the black, two in the red, and so on.

   3. For investors to have faith in the long-term, they will to reach the cashflow positivity milestone for good, and this may take still more than 1 year if contracts in the UK continue to be pushed backwards.

4. Key leadership loss.

   1. This tends to be a recurring risk for most of the companies I’ve written deep dives on. That’s because I’ve covered many companies which remain founder-led, or have had a key leader in place for a while.

   2. Over the past 5 years, Kate Quirk as become synonymous with Alcidion. If she were to leave, I anticipate the company may struggle to fill such large shoes.

Other Deep Dives I wrote

• IkeGPS - link here

• Volpara - link here

• Playside - link here

Conclusion 

Whilst Alcidion seems to be in the doghouse if you glance at the share price, recent execution has been good, and some of the signs I discussed above could indicate a potential turn to a brighter future.

I’ll remind you as always that this is article contains only my opinion, and nothing should ever be construed as financial advice. I’m not licensed to provide such advice. Good investors don’t take advice.

For those of you interested to stay abreast of Alcidion have a look at full year results at the end of August. Let’s see what they can achieve this year. Thanks for reading all.

Feel free to leave a comment about things I missed, your contrarian opinion, or anything else relevant.

Leave a comment

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

Authors of these posts are all worth following and publish their own quality content.

Claude Walker - On The Bias Of Sources For Researching Small Cap Companies

👉 link here

This is an excellent article that speaks to evaluating the context through which information about companies is shared. The first point “Heavily Promoted Company Presentations With Adjusted, Non-Audited Metrics” is something I remind myself every time I open up company slides.

📌 Follow Claude on Twitter | Subscribe to his website

Matt Joass - The Bizarre, Weird, and Beautifully Inefficient World of Aussie Small Caps

👉 link here

Ian Cassel often describes the 3 ways in which investors can source new investment ideas. In this article, Matt describes how he goes about Ian’s first way: the brute force approach.

📌 Follow Matt on Twitter | Listen to his Podcast

Luke Winchester - On Prophecy (PRO.ASX)

link here

Every quarter or so, Luke shares one of his investment thesis in the form of a short blog post on a company. They are as short as they are valuable, and he keeps finding incredible puns in the names.

📌 Follow Luke on Twitter | Read his other blogs

Andrew Page - Lessons from a 10-bagger

👉 link here

In this short article, Andrew shares the journey of Objective Corp (OCL.ASX). He comments on the obvious, but often overlooked emotional challenges of holding on to ten baggers.

📌 Follow Andrew on Twitter | Register for Strawman

Tristan Waine - Investing & Personal Finance Tips & Tricks

👉 link here

This article is dense in value; Tristan offers tools and resources for all parts of the investing process.

📌 Follow Tristan on Twitter | Subscribe to his Substack

Conclusion

Who has a baby in the middle of quarterly reporting season? Yes, yes, I know. Hopefully I recover by the time full year reports start to come out…

Thanks for reading folks, enjoy the rest of the weekend!

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.

One tendency I notice, and never studied too deeply, is that the software category in which you play, and the industry you serve, will have an oversized impact on your valuation.

This felt sharply amplified in the heyday of 2020 and 2021; at the time, simply stating you were a healthcare software company was probably enough to get people to like you.

Thinking about this a little more deeply, it should make sense that some software companies are more valuable than others.

Here’s an over-simplified way to look at it.

• Company A makes a software that helps the average structural engineering save 1H / day. The average salary for this role is 115K / year (source here). This software therefore saves ~$60/day, meaning $12K / year.

• Company B makes a software that helps the average radiologist save 1H / day. The average salary for this role is 195K / year (source here). This software therefore saves ~$100/day, meaning $20K / year.

• Company B should be able to price their software 66% more.

The benefits can be much more than pricing power.

Today I look at how the ASX values different technology companies that operate in different industries. This could help offer a lot of different insights. Let’s jump into it.

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Methodology & Assumptions

For this exercise, I started with the initial 114 listed technology companies on the ASX.

Criteria were:

1. Software & Technology focused companies: Whereas in Business Models & Valuation I used companies with all 4 business models to study that point, here I focus only on what was #3 - Technology & Software creators.

   1. Under this criteria, I had 75 businesses listed in the ASX.

   2. Removing Vertical Software, which will be covered in the next article in this category, I had 48 businesses.

2. Enterprise Value (EV): Company’s EV had to be below $1B, and preferably below $300M.

   1. I made an exception to this rule and included the following 7 companies with larger market capitalisation to broaden the scope of available measurements.

   2. More than 75% of the companies chosen have a market cap below $300M.

3. This year estimates: Same as in the last few studies, for this year’s revenue, I made estimates on where these companies may land for full year revenue.

   1. If guidance was provided, I simply used the mid-point of the guidance.

   2. If no guidance provided, I didn’t do anything fancy, I simply annualised current run-rate.

   3. Given we’re 3/4 of the way there, there’s no way it will exact, but it can’t be too far off either. Take the actual number with a big grain of salt; the point wasn’t to spend much time on this; but more time on data crunching & pulling out lessons.

Categorising Software by type & industry

The first step was to load up the sheets again, and this time create categories using my best judgement. Here’s a snapshot:

Notes

• Obvious limitation: the world of listed software on the ASX is still very nascent. Whilst the NASDAQ would have hundreds of software companies listed at scale, the ASX is still home to a number in the double digits with a certain scale.

  • This limitation makes some of the conclusions on group valuation less useful; you can see in the above that Dropsuite sits alone in the backup category, and that consumer, environmental, and gaming are quite lonely at the moment.

• ASX Listing Categories: Under the ASX’ own categorisation system, there are currently about 150 listed software companies (link here), but I like to go through a yearly exercise of filtering the list.

  • There are companies in the category with little to revenue, and others which are not accurately classified (ie. Cosol is more a ISP than a software company from my reading).

#1 - Healthcare Software - The big winner

Healthcare has long been the big winner in its ability to command very high valuations in the software category in the ASX.

Healthcare avg. ARR / MC multiple: 17

Healthcare avg. ARR / MC multiple (ex. Pro Medicus & Impedimed) : 5.6

Referring back to my example in the introduction, it makes sense that shaving time off highly paid healthcare professional’s calendars would be very valuable, and through second order consequences, that may eventually makes its way into valuations.

Some of the key consideration for healthcare software:

1. It can’t be half-baked: Traditionally, one of the reasons healthcare has been a slow mover in adopting new technology is because the stakes are high. We’re dealing with people’s life, so a product needs to meet a high standard before adoption can be taken seriously.

   1. This means that starting from scratch for startups can be more challenging. Finding your first few customers with an MVP can prove difficult.

   2. This dynamic offers an indirect moat to more established software providers in healthcare.

   3. This is also part of the reason why healthcare has traditionally been dominated by large, legacy, and dinosaur like software providers

2. Do well and do good. Healthcare software also offers the obvious “do well and do good” feeling to investors.

   1. When Motley Fool's David Gardner says "Make your portfolio reflect your best vision for our future", it’s easy to think of healthcare first with all the benefits good technology could offer in this space. This likely plays its part in higher valuations.

#2 - Engineering Software

Engineering software encompasses software for PCB design engineers (usually an electrical engineer) with Altium, to electric power engineers working for a utility using Ike’s platform.

Engineering avg. ARR / MC multiple: 11

Engineering avg. ARR / MC multiple (ex. Altium) : 7.6

The average valuation numbers in this category are skewed by the bigger players (Altium and Audinate) which offer the view that engineering software too, can command very high valuations at a certain scale and growth pace.

Some of the key consideration for engineering software:

1. Domain Expertise: Whilst this could be argued of all categories, I find it especially true that building, and selling engineering software requires deep domain expertise.

   1. If you dive into Altium’s engineering workforce, you find deep domain experts who have spent their careers in PCB applications. That’s what you need for success.

2. A differentiated GTM. The successful engineering software companies I’ve studied had thought deeply about their sales and marketing process. Engineers like to buy quality products, and don’t like to be sold to. Similar to the point above, you would likely leverage the relationships, sales by engineers, and getting your products into the hands of your users with as little friction as possible.

   1. Looking at Pointerra’s business development team, you’ll find quite a few previous geospatial engineers turned salespeople. Having experienced the pain with the previous workflow yourself is a great advantaged in positioning your software.

#3 - HR / People and Culture / Safety Software

A popular category on the ASX has been HR software. The takeover bids for Elmo, IntelliHR (I wrote about this here) and Limeade shade a light that PE may currently have more appetite for this category than public investors.

HR avg. ARR / MC multiple: 3.06

HR avg. ARR / MC multiple (ex. Kinatico & Xref) : 1.6

*Note that both Xref and Kinatico are currently transitioning to a Saas model. I’ve used their most recently reported ARR figures here rather than their revenue figures. I’ve done this to align with the purpose of this article. Given they are early in this transition, this isn’t an accurate way to valuate them yet.

Some of the key consideration for HR software:

1. It gets competitive: The primary asset of a business lies in its people. Historically, one of the first pieces of legacy software to be create was to deal with workforce management.

   1. Workday’s incredible success story (explained well here), of growing at 100% YoY would have been an inspiration to many to enter this field.

   2. People management is complex with so many angles to tackle. This gives place to a lot of point solutions (this is how Xref began its journey, as only reference checking, and is now slowly expanding into the hire-to-retire journey) that transition to broader platforms over time.

2. Data half life considerations.The half-life of data means to the amount of time it takes for the majority of it to become irrelevant. On the point above of point solutions vs. platforms, an important dynamic of people management software is the type of data that lives in the software.

   1. There’s a large difference between displacing your reference-checking engine (not very long data half-life), vs. your full HRIS platform.

#4 - Financial Services Software

Financial services will also interest investors. Blockchain, Gen AI, Autonomic systems, all will continue to have their growing place in this industry.

Financial Services avg. ARR / MC multiple: 3.5

Financial Services avg. ARR / MC multiple (ex. Ansarada) : 2.26

*Similar to the above, Ansarada is currently transitioning to a Saas model. I’ve used their most recently reported ARR figures here rather than their revenue figures. I’ve done this to align with the purpose of this article. Also early in this transition, this isn’t an accurate way to valuate them yet.

Some of the key consideration for Financial services software:

1. The Bundle disruption: Financial services software has traditionally been very fragmented. Integrating with banks was historically a difficult mission, so software providers would surround transactions and provide most of their value elsewhere.

   1. With the rise of regulations such as the Consumer Data Right (CDR) which launched in Australia on 1 July 2020, Open Banking became game changer for the financial sector.

   2. The ability to share your banking data with third parties will continue to allow for disrupters in the space to expand into more powerful platforms overtime.

#5 - Security / Cybersecurity Software

Combining physical and cyber security into one category is likely a faux-pas, but such is life when you have little data to play with.

Security / Cybersecurity avg. ARR / MC multiple: 5.6

Gartner’s report on the Top Strategic Cybersecurity Trends for 2023 (link here) is filled with buzzwords that mean little to me. There are interesting and evident ideas in there, namely about:

1. Cybersecurity platform consolidation. Gartner states 3 drivers behind this. It would seem sensical that organisations would use fewer vendors and also want to “distribute technology and analytical work to expand the volume, variety and velocity of cybersecurity risk decision”.

   1. This might mean it could be harder for smaller, niche entrants to breakthrough. But again, this dynamic might be argued for all categories, and many companies have proven this to be untrue over the years.

Conclusion

Whilst this was a useful and fun exercise, one of the highlights remains that, as a16z put it, ‘category-leading companies going after huge markets with business models that demonstrably scale’ will continue to win. This is how companies like Pro Medicus and Altium can command a valuation that’s 5x to 10x more than the average valuation of their category.

In the future, I’ll likely come back to this article to dive deeper into one single category at the time to offer more meaningful insights.

👉 If you’d like the sheet I used for this article, download it here.

Notes:

• I’ve put in ARR manually, and some companies are not black and white about it, so it will likely by inaccurate in some places.

• Given the MC field is dynamic (formula pulls from Google Finance), and that ARR is not (my manual numbers), the valuation field will become incorrect over time.

If I missed some interesting companies in these respective categories, feel free to add them in the comments; I will include them in future coverage.

Next Up - Vertical Software…

In the next chapter of this series, we dive the largest category on the ASX, vertical software.

Disclaimer 

The content and data on this website is for information purposes only, and should not be read as investment advice, or advice on tax or legal matters. The companies and strategies discussed are on the site for entertainment only, we may or may not at any time be invested in the companies, and may be referencing companies simply as examples, ideas or for discussion.

By viewing the contents of this article, you agree: 

• (1) you have read and understood the warning and disclaimer above; 

• (2) not to make any decision based on the contents of the article; 

• (3) not to place any reliance on the contents of the article; and 

• (4) that the author is not responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of these articles.