I have found some great businesses recently and am now analysing my existing holdings trying to find the weekest link.. I'd love some feedback on IntelliHR's cost growth as the business does not seem to be scaling very well looking at 4Cs
Strenghts I like:
99.5-100% customer retention, this is very rare (think DTS, WTC) and indicates very high quality product, great market fit and big LTV of customers, along the same line they have very high customer reviews which is what got me looking at the business originally 12 months ago (though I didn't buy until ~6 months ago when I liked the valuation)
Consistent high ACV growth and growth endurance currently >1. They're hitting ~100% ACV growth on PcP which has trended up from 60% 6 quarters ago and hit 112% for Nov21 vs Nov20. This is obviously great, again indicating good market fit, good quality product and a big penetrable TAM compared to their growing share.
What's concerning me:
Cost growth is roughly matching their ACV growth over the last 5 quarters. I got figures for QoQ ACV growth less QoQ cost growth of -7%, -3%, -5%, 1% and 5% for the last 5 quarters, indicating ACV growth beat cost growth only slightly in the most recent quarter (5%). A lot of this stemmed from growing staff costs - up 87% on Q1FY21 with other costs also up substantially vs Q1FY21 - R&D 99%, Advertising & Marketing 222%, Admin & Corporate Costs 123%. If this trend continued they will never reach cashflow breakeven and just keep raising more capital. Is it possible they are more of a services business than we realise? How much is the implementation revenue costing them? Could be interesting to ask what gross margin they make on implementation revenue if somebody hasn't asked this already?
Rob Bromage is paid $492,731/year Vs his $4.5m / 6.5% shareholding. I worry that with that income his shareholding is not adequate to align his interests with shareholders. He certainly didn't do the right thing by shareholders with the recent CR and also used it to sell shares as opposed to participate and maintain his holding % - is Rob on the way out? He's diversifying his net worth into property - why? Perhaps the business could do with a CEO who can reign in their costs in order to extract the significant value which is clearly there in their underlying cloud HR software product
Despite this cash flow issue the business is trading at a pretty handy multiple of 12x EV/ACV (excluding annualised implementation) and a more reasonable 0.11 EV/ACV*Growth based on Novemebr ACV growth. For a very small company that is yet to prove it can make money, it is actually pretty expensive, although the 100% growth and retention do make it look more reasonable, a loss of the founder, more inside selling and missing a step in it's growth rate would send the valuation a LONG way down.
I'd just like to counter that negativity with the fact that 100% ACV and revenue growth can protect you from a lot of downside, if that growth continues the multiple will only get smaller. Didn't mean to be overly negative and would love to read someone's thoughts on the cost growth situation
GLTAH
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