2 key reasons JCS is mispriced: 1) The growing ERP division is...

2 key reasons JCS is mispriced:

1) The growing ERP division is masked by the declining TEMS business. TEMS rev is down from $5.7m in 2015 to an estimated $3m today, meanwhile ERP has gone from $0 in 2009 to sales of estimated $8m today.

2) Although the accounting treatment will change this year, revenues and profits have been understated historically. In 2017 FCF is $1.1m v $0.4m npat loss under old accounting treatment and here is why the FCF number is the right one to focus on.

Whilst the difference between cash flow and profit can typically be attributed to a change in working capital and therefore temporary, this is not the case here because deferred revenue which has grown $2m during the year is the entire reason for the difference.

Deferred revenue is recorded when JCS receives payment upfront for software it sells to a customer on at least a year long contract. The cost for JCS is primarily incurred at the beginning during implementation which coincides with when customer pays.

But because the contract is defined over a period of time JCS historically spread the revenue evenly over the term even though it receives all the money upfront, the payment is nonrefundable and JCS carries out the majority of the work involved upfront. For these reasons deferred revenue is meaningless in this situation and cash flow is a more realistic representation of the performance of the business than profit.

This is especially so in cases such as with JCS whereby software sales are growing significantly YoY - ERP sales growth is over 40% compared to 2016 ($5.5m to $8m) by my estimates.

So we have a $5m market cap in return for $3.5m in net cash, $1.1m FCF, a fast growing recurring revenue cloud software business (albeit one that does not own the underlying product) and an excellent leadership team and company culture (based on numerous awards).