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$1.07 southern cross payments ltd

I think the revenue and costs can be explained in the following...

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Whatknots

381 Posts.

62

01/03/19

16:14

Post #: 37623501
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Originally posted by jlo2012: ↑
My thoughts:

$8 mil loss (up from a $5 million loss in the previous corresponding 12 month period of Jan to Dec 2017)

Revenue: $6.6mil for Jan18 - Dec18.

Expenses: $14.6mil. - In my view this is significant.
So $6.6mil rev - $14.6mil expenses.

Loss of: - $8 mil.

Above expenses included operating costs of $5.6mil. The vast majority of operating costs will relate to cost of goods sold (above the line) based on review of previous financial reports. This makes sense as once you take out the R&D rebate of approx $450k for the period you are left with just over $6mil in actual sales revenue for the 12 months. So $6mil in rev cost about $5.4mil in COGS. Gross profit of only $400k approx. Consistent with the very low/negligible gross profit margin achieved by that revenue. The only rev last year that had healthier margins was from the first few months of the year, so that leaves you with negligible margin on revenue for the remainder of the year

Basically my concern is, even if you count all of the operating expenses as above the line (gross) expenses you are left with $9mil in other costs. They are stating that their fixed costs (below the line) costs this coming year will be $7.25mil yet these costs were already at $9mil last year. That is before a full 12 months of the Probanx/BBS related operating expenses, further staff that have been hired etc.

Break down in revenue between Jan-June18 and Jul-Dec18:

$5.5mil was previously reported as revenue from Jan18 - June18. (approx $450k of which was R&D (non sales) related).

So that would equate to only $1.1mil in revenue from Jul18 - Dec18.

So a drop from $5.5mil rev in first half to only $1.1mil in second. No graph in this report showing this.

Investment here IMO relies on believing they can significantly reduce both their COGS and their fixed expenses and being willing to "write off" last year as one focused (at least the first half) on achieving perf shares no matter what and trust that management now have goals common to the rest of the shareholder.

They spent the second half of the year building out their own network. The claim was that they needed to run the revenue at next to no margin to keep clients, but when things went wrong in the second half shown by the fact they had little revenue come in from these clients yet despite this these clients are now still expected to come fully online now the infrastructure is properly in place. Makes you wonder if they were always willing to come online when infrastructure was able to be put in place and therefore - was there really a business/customer retention need to run through revenue on negligible margin.

If all does play out as management outline then yes I see a great future for ISX but expenses, margin and trust are still issues IMO. Just my view.
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I think the revenue and costs can be explained in the following manner:

Looking back over the 2018 annual report, based on note 4. total revenue came in at $6.33Mil with total operating expenses reported at $4.95MBreaking down these revenue/costs between Australia and Europe/BVI, and excluding R&D and interest earned we are left with the following numbers.

Australia
Europe/BVI
1
Revenue
1.39M
4.40M
2
Operating Costs
1.48M
3.46M

Based on Note 5 Revenue in the report, it provides guidance on how revenue is recognised over the period, of particular interest is the note relating to Integration, Establishment, Project and Platform Fees, where it states

‘Integration, Establishment, Project and Platform Fees Revenue generated from the initial integration and merchant operational set up are billed on contract signing and service go live date. Revenue is recognised once the service has been performed. All revenue within this revenue stream has been included within ‘contracted service fees’ noted above.’

On the basis that the first 4 European customers where contracted in Feb 2018, and the fact operating expenses are very high for the period in relation to revenue, I assume the reason for the excessive costs to revenue are related to integration and not processing of KYC or Payments. Integration is generally a labour intensive activity compared with processing of transactions, and thus supports this theory.

So I agree that ISX revenue took a hit in the later half of the 2018 financial year, however this appears to be due to lack of integration of Euro customers while the tier 1 network was built out.

If we believe the assumption above, IMHO the challenge ISX faces is the transition to generating revenue from processing Payments/KYC and away from the sugar hit of integration it experienced last year. At least operating costs will drop as a percentage of revenue as payments ramp up and this will fall through to profit.

Last edited by Whatknots: 01/03/19

ISX Price at posting: 21.0¢ Sentiment: Hold Disclosure: Held
7 Upvote

2 Great analysis

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