Ordinarily I do not spend a lot of time on shares that have not made it through my first filter. Some companies are fairly obviously pretty smelly to start with and you can move on. But I thought I would start to dig deeper into Buddy after my first pass through when I looked at their product. And I also want to think about the need as investors to “crack the narrative” as I have written about previously.
Firstly I will establish the narrative that Buddy is building. Then we can use the Appendix 4C to see if this narrative is being supported by the data. Importantly I have no skin in this game, so I am just reporting the facts that management has presented in ASX filings. This post is longer than I would have liked but unfortunately I think it needs to be.
I will focus on the Buddy Ohm product as this is where the hype is. The company also has Buddy Platform (which generates the majority if not all of the revenue) and Buddy Parse.
The market has run the share price in the last few months on the back of some chunky contractor and channel agreements. It started in July with Digicel, then SaskTel and Micro Ingram both in Canada and most recently a prospective agreement with Telstra in Australia.
The announcement on the 3rd November 2017 states that the company is finalising negotiations with Telstra to be its major distribution channel in Australia, and it is only a proposed deal. Funnily enough this is a “pet peeve” of CEO David McLauchlan as spelt out most recently in the 2016 Shareholder Year in Review Letter:
Reviewing Buddy Announcements
The Buddy Ohm is an energy, water and gas monitoring device. The pricing looks to be in the range of $1,500 per month, but the company has said that it would expect a blended average price of $750 per month for their base pack when it is sold into different market channels.
Buddy Ohm is being sold as a product as a service on contract terms. The company has quoted a typical contract length of 3 years.
Let’s now look through some of the company announcements and establish its sales cycle and how sales are going.
In the Investor presentation dated 20 June 2017 on page 30 the company announced Buddy Ohm was launched in March and initially they were selling/pricing to customers to save energy costs.
On page 38 of this presentation, after product launch in March, sales were launched at the end of May and the first installations were in early June 2017 where initial interest has been “staggering”, including submitted purchase orders:
On the 14th July 2017 Buddy announced they had signed an agreement with Digicel to market, sell, distribute and install the Buddy Ohm product in the Caribbean and Central America.
In the same announcement they ‘surprised’ the up to 400 attendees (what does “up to” mean, how many were actually surprised?) attending the Smart Destination Jamaica event with access to a free 30-day trial of the Buddy Ohm product.
In the same paragraph they claimed that Buddy has seen “very high conversion rates” from trial implementations in commercial deployments.
Moving onto the July 2017 Investor Webinar Tim Ritchie, VP of Global sales around 16 minutes into the presentation stated interest has been “enormous” and they could not be more pleased. The Australian market has seen sales traction in retail, govt, unis and corporates.
The following screenshot was taken around 40 minutes into the Webinar. Installations began in early July in the Caribbean according to this slide and 7 were performed that week ie around mid July 2017.
Also we know from the June Qtr 2017 4C that in Australia they had average 2.5 installations and had done 7 two weeks ago and expect to do more this week:
The following screenshot was taken around 46 minutes in the Webinar. In this section CEO David McLauchlan reiterated conversion from trial to a contracted customer had been extremely good.
He did not stipulate a figure as to the conversion rate, however in the June Qtr 2017 4C the conversion rate was exceeding 75%:
He also commented that the overwhelming majority of customers are on a 30 day trial, the exception are larger govt or military contracts which have a longer 45-60 day trials.
So the narrative from the company is sales interest has been staggering since product launch. Installations began in June 2017 in Australia. There has been huge interest in trials, in fact in one instance we offered free trials to “up to” 400 attendees at the Smart Destination Jamaica Conference. In July we were averaging 2.5 installs a week and we installed 7 sites in the Caribbean in mid July with more the following week.We have seen a high conversion rate from trial in the vicinity of 75% for commercial installations.
The overwhelming majority of our customers are on a 30 day trial, with a small few in the range of 45-60 days.
One of our customers in the Caribbean believes they will save over $550,000 in annual electricity costs, from the Sept 2017 4C:
But because the way accounting standards are written we do not accrue revenue on signing of the contract rather we accrue revenue on a straight line basis as the contract rolls forward. So we will not offer guidance in the future, but we are happy to announce large contracts with minimum off-take agreements.
Also around 51:30 in the July 2017 Webinar the company said they had no plans at this point for a capital injection as they believed they had enough cash in hand as well as option money. So what has changed?
So how can the Appendix 4C help us understand this narrative?
Initially Appendix 4C (and 5B) were a listing requirement placed on mining companies in the 1980’s to ensure speculative companies were held to account on their spend so investors could be kept informed on a more regular basis rather than on a half-yearly or yearly basis. The ASX changed the rule to include tech companies in 1999 so investors had a good handle on cash burn of those high tech darlings. Buddy is required to 4C due to the Potash Minerals legacy.
Appendix 4C reporting is done on cashflow. Money into the bank and money out. The beauty of the 4C is it is based on cash receipts from customers. It is a cash statement not a P/L statement. Revenue is irrelevant.
Buddy like all SaaS companies that generate revenue on a contractual basis accounts for revenue over the lifetime of the contract. See comments made in the June Quarter 2017 4C:
If Buddy was converting its trials at a high conversion rate of 75% into multi-year contracts and customers were paying the full, or at least partial contract size, we should have seen this appear in the cash receipts in the 4C.
Take the 7 trials that were installed in mid July. At worse with a 60 day trial, then these contract should have commenced by mid-September. Based on a 75% conversion average we would expect 5 out of the 7 trials to convert. At a base package of $54,000 for a 3-year contract paid upfront should we not have seen $270,000 in cash receipts in the latest 4C?
In addition based on the “staggering and enormous” interest in trials and the overwhelming majority of trial periods being 30 days should we not have seen more cash receipts in the latest 4C?
Not to mention the trial installations installed in June 2017 according to company announcements. Where is the cash-flow receipts from these customers? Were they converted at a high conversion rate? If so where are the cash receipts in the 4C?
In the table above there does not seem to be any traction in the cash receipts for Q1 2018 from the previous quarter to indicate trial conversion into customers paying.
It also makes no sense to raise $23 million if you are receiving a good portion of your contract value as deferred revenue. The capital raise is in direct conflict with the narrative.
If you had faith in your ability to generate trial leads, if you had faith in your ability to convert, and your business model was to receive a good portion of this contract value up front then you would not need to raise and not the size they have done. Buddy seems to lack no faith in its ability to sell and convert.
Having deferred revenue on your balance sheet and the associated cash is really the best business model as your customers are funding your business at a zero rate of interest. Negative working capital is the wet dream of any good business.
Now the business model may have changed. Maybe they are not getting money upfront or partial prepayment for contracted customers. But even still some monthly cash receipts should have shown up in the 4C for the conversion rate they are claiming.
Or maybe the simple answer is they are not converting the trials into paying contracts.
One final thought, have a look at the capital structure, which does not include the recent $23m raise. I get the feeling shareholders are being sold at a higher conversion rate than its prospective customers.
AFR article dated 31 May 2017.
Article quoted 1,000 systems taken up in the first few weeks. At $US1,500 per month this equals monthly revenue of $1.5m a month or $4.5m a quarter. If this revenue is being collected then the AR is having trouble converting this into cash into the 4C. Something just does not add up.