I don’tusually post my research, but the future prospects offered in CXZ are to put it mildly, outstanding. And yet, the amount of naysayers during the recent sale by Lucerne shocked me - I have also watched the comments from inexperiencedshareholders over the last few days, hearing that they have sold out, in what I consider the perfect buying opportunity. Thishas compelled me to post my views, because I believe if many were aware of allthe information they would not be giving away their shares so cheaply.
Thefollowing information is my research which could be factually incorrect (correctme if so), and also includes my own viewpoint. I’m not a financial advisor, don't claim to have any expertise in the area, andyou should do your OWN RESEARCH. I’m just a fool on the Internet – so go andvalidate all of this for yourself. 
Broad Picture
Growth Industry Opportunity
- The globaltelematics industry reached ~26.18 billion in 2020, registering a compoundannual growth rate of 33.7% during the period 2014-2020.For the period 2020-2026 the compound annual growth rate is anticipated at 20.3%.
- The globalfleet management software market size of the industry has been estimated at14.59 billion in 2019, and is projected to reach 50.09 billion by 2027.
- TheUS makes up the most significant portion of market share of the industry, withGM being the leading manufacturer in the US and the fourth largest manufacturerin the world (based on 2017 statistics).
Thoughts: In terms of the telematics industry, we are already in the most profitablemarket, in terms of region we are there too, and already in partnership with the leading manufacturer in that region. Not bad for this small cap Aussie stock – a quiet achiever based on outstanding 2020 results. 
Why is telematics (and use of telematics in the fleet industry) such a growing market and what is the logic behind it continuing to grow so rapidly?
Telematicsbegan in the 1990s utilizing radio based communication to submit data – we havecome a long way in 30 years, and with the rapid rate of technological developmentthe implications and extent of services that can be provided is seeminglyendless.
I have previously viewed telematics in a car as something additional/extra. My viewis that this perception will change rapidly over the next 10 years to wheretelematic software is seen as important as climate control or sound systems.
Thisperception change will be significant for the fleet management industry, which upuntil lately (things have really moved in the last 5 years) the industry penetration of telematics in fleet management has been quite low, particularly in passenger and light commercialfleets.
The main and highly compelling reason for increased penetration of telematics in fleet management is ROI. The efficiency and cost savings even for smaller fleets is undeniable. This takes the form of fuel savings, accurate usage charges, maintenance monitoring to avoid unnecessary asset depreciation, lower insurance premiums - the list goes on.
CXZ: Rapidly growing revenue and great prospects for growth and expansion
It’snoteworthy that the main source of revenue, OnTrac, which is supplied via GM’s ComplimentaryTransportation Program (CTP) has grown rapidly since the rollout of the program in January of 2019.
"Revenue initially commenced with 23k vehiclespre-registered to adopt CTP, which steadily grew since inception to circa 72kvehicles utilising OnTRAC. As a direct result of COVID-19 and the variouslockdown measures imposed, vehicle subscriptions decreased from 72k vehicles asat 31 March 2020 to 64k vehicles as at 30 June 2020."
The steady increase in of vehicle subscriptions aligns with the view of the overall market, and it is likely to continue to expand solely based on the partnership with GM. The decline in subscriptions due to COVID is understandable - why would you pay for a service that nobody is using due to the lockdown? Yet unlike many other businesses, a temporary decline in revenue is not going to put CXZ at any risks (see assessment of financial reports), and is just a temporary setback.
Prior to this success, the company did not have much of a 'resume' so to speak. Consider now the successful track record with GM and the implications for making successful deals with additional businesses. The company has obtained a wealth of experience in establishing this partnership, building on it and meeting requirements for GM and are now well positioned to seek new growth opportunities.
Timeline and Achievements
Ithink it’s very important when investing in a new company to look back at whatthey said they were going to and whether the company achieved this and the timeand efficiency in which it was done.
The following goals are taken directly from the 2019 Investor Presentation (final slide)
Short Term Goals
• Unlock near term business value of company for shareholders(Achieved +585% YOY Profit)
• Deliver cash flow positive operating business model from GMOnTRAC subscriptions (Achieved)
• Source and appoint CEO (Achieved – but sinceresigned, so work in progress.)
• Delivery of the CTP on time and on budget – (Achieved)
• Convert OnTRAC registrations to paying subscriptions – (Achieved)
• Optimise operating/cost platforms CTP – (Unclear)
• Leverage Commercial Link fleet management subscriptionuptake through GM OnTRAC customer base (Not achieved)
Medium Term Goals
• Develop and build a highly capable management and salesteam to implement growth strategy (Unclear)
• Convert dealer experience with CTP to Commercial Linkexpansion (In progress)
• Development of additional software solutions in GMadministrative eco-system (In progress)
• Expand customer base outside GM i.e. non OEM users (InProgress)
• Leverage GM telemetry access to pursue synergisticopportunities in the telematics space (In progress)
Review of Financial Reports (FY20)
Income
• Revenue!The numbers speak for themselves. Up 131%, it’s clear that the CourtesyTransportation Program is a big earner for the company and will continue to be so throughout 2021.
• No ballooningadmin expenses or lavish payments to management that you sometimes see when acompany starts to grow.
• Thegross profit margin decreased slightly, which will be something to watch in thecoming year (60% FY19 down to 45% in FY20). I would expect this is due to themany operational changes including ceasing Commercial Link and also dealing with complications arising from COVID.
• Examining operating net profit margin we are up from 14% in FY19 to 24% in FY20.
• Suggests that the business model is highlyscalable due to exceptional margins.
Balance Sheet
Avery healthy balance sheet.
• Zero long term debt.
• Just under $1m in currentliabilities with total current assets of $4.2m and a cash position of $2.4m.
• Complicated? No. Thebusiness is a lean, money making machine.
• Notably,there is a large amount of accumulate losses on the books from the many prioryears in the red whilst in development. This will mean even higher returns forshareholders over the coming years ($11.7m remaining).
Questions
Beloware questions I had that seemed important to answer and that I have heardrepeated on HC. The written responses do notencompass the full research on this, but include the main lines of thought behind why these questions have not dissuaded me from investing in the company.
What is to stop GM, or any other car company from simply developing thesoftware themselves?
Toput it simply, it’s a question of efficiency and optimization of product. Doesa mining company build its own machinery? Does a machinery manufacturer harvestits own minerals? Likewise, a car manufacturer outsources software development to a software development company.
Someof the general key benefits of utilising a separate company rather than an in-house development team include:
- A separate company whose sole focus revolves around softwareinnovation is much more likely to be at the forefront of development than anin-house program whose survival does not rest upon its competitiveness withother developers.
- The more innovative the technology, the more likely thereare for errors and malfunctions. Finding and developing your own competent teamcan be costly and time consuming, and there’s not necessarily a guarantee of thesame quality of software as is already available on the market.
- Competitiveness – many telematics producers servicemultiple manufacturers, so manufacturers can choose the software easily and canverify the reputation of the manufacturer (good implications here for expandingbusiness with other manufacturers)
- Streamlining and optimization by hiring specialists reducesin-house costs
CXZ’s revenue is largely reliant on itscontract with GM – what are the implications of this moving forward?
- CXZ and GM’s relationship began in 2017, with theimplementation of OnTrac into GM’s CTP being announced Aug 2018, and rolled outJan 2019. We are now at the end of the second year of a three year contract, sowhat will occur after the contract period?
A consistent relationship is beneficial; many OEMs continuallychange their requirements due to the nature of the telematics industry, thisgoes beyond just firmware. New innovations can be problematic and costly forcar manufacturers that don’t have established relationships with OEMs. Thecontinual and growing relationship between CXZ and GM is mutually beneficial –why would GM NOT want to continue? The adage “if it ain’t broke, don’t fix it”rings true here, and we can see that there has been a sharp uptake in the useof CXZ’s software across the board reflecting its value to GM.
Having fulfilled successfully so far the contractualarrangement with GM, moving forward the reputation garnered from this for CXZwill be invaluable in establishing new contractors with other US manufacturers,before looking to expand to other countries. A new CEO appointment will likelybe an important factor in this moving forward.
What is the difference between GM’s OnStar andOnTrac?
OnStar in comparison, is a relatively simple piece of softwarewhich serves as meeting standard regulatory requirements – this includes thingslike automatic crash response, calling for emergency services, stolen vehicleand roadside assistance and navigation. There is no overlap in what they provide,and OnTrac is a significantly more complex piece of software, and meets avery different need.
On Trac provides fleet management for GM’s CTP. Basically, apercentage of loan, lease and test vehicles across GM’s dealerships across theUS are utilizing this program. There is still room for increased saturation.
What about the recent dumping of shares byLucerne?
Recently a long term investment firm, Lucerne, sold thereentire holding on market. This was done right after the company announced their 2020 FY results. Some mistakenly believed – or purported the erroneousinformation purposefully, that Aaryn Nania, our interim-CEO was selling these shares,but it was in fact Lucerne. Many were spooked and angry about this, so here ismy perspective:
If you were personally in charge of an investment firm, andyou were sitting on a 300% profit for your funds, would you not be inclined to takeyour profits? Especially considering the financial times we are in: it’s a smartbusiness move to take some capital off the table and reduce risk. The companybelieved in CXZ to invest in it when it was barely making a profit, and it paidoff. I disagree with the method of selling, but I don’t believe that it’s a reflectionon CXZ moving forward.
Nania was a cofounder of Lucerne, and was likely the maindriver behind investing in CXZ as he previously managed the composite fund.Nania no longer controls the Composite Fund, and so it was not his decision tosell.
Furthermore, from the ’20 Annual Report:
“Otherthan matters already disclosed elsewhere in this Report, no matter orcircumstance has arisen since 30 June 2020 that has significantly affected, ormay significantly affect the consolidated entity's operations, the results ofthose operations, or the consolidated entity's state of affairs in futurefinancial years. (as at 21 August 2020)”
So, as of at the date just prior to the dumping of shares,there was no significantly adverse news that we should be concerned of –anybody saying anything else is merely speculating.
Rather than see this as a negative thing, I saw it as agreat opportunity to purchase CXZ at an incredible discount – and at the timeof writing, still is on offer at this discount.
Valuation
I'm not going to include my valuation model for the company, as I think TEP has already covered this in his posts in the forum, which you can read for yourself HERE.
Needless to say, it's currently dirt cheap and there are many bags on offer in my view.
GLTAH, I hope this information is useful as a starting point for your own research into the company, and please correct anything you see as factually incorrect.
Cheers,
369
(20min delay)
