Ann: Trading Update for Year Ended 30th June 2018, page-6

Today share price seems under-reacted to the news. Possibly, the market might believe its recent run-up actually reflects this update. In my opinion, the great thing is that
(1) Its laser & Ultrasound seems to grow at reasonably pace, 8% from last year with good EBITDA margin of 12%
(2) Its 2RT LEAD trial result will be due by the end of Sep. This is exciting and critical to the commercialization
(3) the Sales of iTrack is back on track with 20% growth from the 3rd to 4rd quarter.

However, one thing that might mislead investors is the EBITDA loss of 5.2m for iTrack business. On the face value, it looks bad, because why Ellex would sell iTrack, if it's losing money. Underneath this number lies the nature of medical procedure business. In order to sell iTrack, Ellex initially needs to invest a lot into marketing and educating doctors to adopt and learn to use the procedure. There is a longer learning curve than simply selling medical lasers, because of the effort and times required for doctors to learn and feel comfortable for recommending iTrack to patients. Once doctors are used to the procedures, they are more likely to order iTrack and less likely to switch to another procedure, which would require another learning curve.

In short, the business model of non-invasive procedure such as iTrack is similar to that of software. Once customers/doctors learn and adopt the product, they are likely to stick with the company and generate profit for companies with small marginal cost. The "stickiness" or "high switching cost" is due to the learning curve associated with using this product (i.e. procedure).

In my opinion, the criteria of success for iTrack is to see if Ellex repeated customers require small marginal costs/investment and if the continuous investment attract more new accounts. In the coming-up annual report, it is critical to analyse the revenue of iTrack to see the source of revenue (new vs repeated account)
It is okay to loose money by making investment, if Ellex can attract new accounts.
But, it is not okay to loose money by making investment , if Ellex mostly sells to repeated account (bad business)

From my view, this report clarifies a lot of uncertainty around iTrack.
Its revenue accelerate in the last quarter. 2018 Q1 - 2m, Q2 - 2.1m, Q3 - 2m Q4 - 2.4m
It is likely that Ellex's investment is reasonable, since the revenue accelerate. Even though we don't how much of revenue is from new account vs repeated account, based on the update in April, new accounts continued to grow.

The value of Ellex for me is
1. iTrack margin can improve significantly over the next 1-2 years. (medium-term profit growth)
2. 2RT market is about to get commercialized. (long-term profit growth)
3. Its leadership in glaucoma laser seems to be strong. (Competitive advantage & strong margin)