ADA Update - Thesis On Track, page-9

@peterdoobes

I agree to some extent. But I also think the market isn't fully appreciating how sticky these clients are and how strong ADA's competitive advantage is, hence reducing that risk of 3 big customers.

The primary revenue from these customers is:

US ATOP program - ADA's software is part of the US Oceanic airspace system managed by Lockheed. Unless something goes wrong with the system it will be in place for another 10+ years. This is, from what I have read, about 25-30% of total revenue each year and has been consistent since ADA won the contract.

FAA TSS Program - This program is for the towers installed with the FAA. There are about 40-50 towers. The US$46.5m contract won earlier this year is for the sustainment of these towers, i.e. recurring revenue. Adacel own the source code to these systems. What that means is that when the contract goes up for renewal only Adacel can support and service these systems. The FAA even stated this in the announcement with one of the contracts they awarded (I believe I've posted the link prior, but if I haven't I will find it and post it). Yes, the FAA could use another supplier for additional systems, but they can't change from Adacel for the existing systems without replacing those existing 40 odd systems completely (a huge cost, probably $40m+ just for the new simulators).

USAF - 92 towers, the largest contract installed globally. Same applies as above. It would cost USAF $80-$90m to replace these towers. Only Adacel own the source code for MaxSim systems. They will continue to win the support and maintenance contracts for USAF.

Simulation is a growing market and Adacel are the market leader, particularly in the US. The FAA and USAF have been early movers for simulation, smaller ANSPs and airports will continue to follow suit.

The acquisition of CSC's business reduces customer concentration further as CSC was primarily in US colleges, but didn't contribute for a full year.

The US Army will ramp up sales from their contract secured in 2013/14 in the months ahead. The reception to their mobile training product has been very strong and new orders are likely.

Customer concentration will fall over the next few years as ADA secures further ATM deals in regions outside the US.

The flip side of the high revenue concentration is that these customers are incredibly sticky.

My view is that the issue is not so much the customer concentration, but the fact that most customers are government organisations that might hamper the PE somewhat in future.

All of that said it at least deserves a market PE of ~15-16x, and likely closer to 20.