Ann: Quarterly Activities & Appendix 4C Cash Flow Report, page-2

When these guys first put out their "ARR =$100m" long-term target (which I think was around a year ago), I found myself thinking, "That's an almighty stretch from the current $10m level; where's the upside in creating a potential rod for your own back?"

But when I look at the 18% increase in ARR (and I think they are on the level; I think the ARR is real enough) over the past 12 months - that 12 month period being one in which M&A activity and in corporate deal flow actually contracted - it leaves me feeling that there is nothing at all grandiose about getting to $100m ARR.

If they are able to +18% increase in a market that went backwards, then what will that growth look like in a period when the overall Revenue pie is expanding again?

The operating leverage is significant, and when the cycle turns, it is imminently conceivable for AND's Revenue line to experience two or three successive years of 60% to 70% growth each year, which would leave the business already half way to that $100m ARR objective.

And besides, when Reported Revenue is routinely five or six times higher than your ARR, then what is the value of an ARR figure, anyway?

I suspect it harks back to the days when the company was not generating any profits or free cash flow, so it was valued on an EV/ERR basis.  And I suspect some investors today still say, "Ooooh.  EV of $150m vs ARR of $12m, so 12.5x EV/ARR.  Sooo expensive".

At the best of times EV/ARR is a crude approach, possibly of some use in valuing pre-profit companies, but it's a totally flawed way to value one which is at AND's stage of corporate evolution.


I think EV/FCF is the correct valuation approach and, on that basis, I foresee the company, at some point over the foreseeable future, booking +$80m of Revenue (not exactly a testosterone-charged expectation given it exited cyclically dampened DH2023 at an annualised run-rate of ~$60m).

The cost base (including provision for non-acquisition goodwill D&A) is currently around $50m.  Even if that is allowed to flex generously upward to, say $60m, it would still mean Free Cash Flow of ~$20m  (>$50m of tax losses carried forward means than AND won't be paying tax for several more years, but if it does become liable for tax sooner rather than later, then that will obviously be a most welcome problem)

So  EV of $150m vs FCF of $20m, so 7.5x  (or a FCF yield of 13%)

That's where I firmly believe the puck is going, so I skated there to await its arrival.

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