All great questions and considerations.
I think that software integration is ultimately in line with CXZ's strategy to a) grow/strengthen/protect the value of its
streams, rather than pursuing short-term profit from services. In saying this, for Connexion, Aaryn is well aware that
(customisation work) are still a very important tool when used judiciously to keep the customer happy and sticky.
"Integration can sometimes create a moat however does everyone think CXZ is doing enough in adding value for CXZ to exist long-term?" I think CXZ is on the right path, but that it is too early to tell what CXZ will look like say 10 years from now (2032). The GM contract renewal has provided an excellent runway and foundation for Connexion to continue to build on its product (at GM's cost!) and also seek out further growth outside of GM. May 2026 — when the next renewal is due — is a long time away and the product (/other yet to be released products) will likely evolve considerably over that time. In addition, CXZ's investments for growth are a clear signal that they are thinking long term and working to a) entrench their existing position and b) expand on it. A range of big thematics will face GM over the next decade including EVs/ AVs & ride-sharing and these developments will present both opportunities and challenges for CXZ.
Greg Ross (CXZ Board Director) has an excellent series of articles (https://connexionltd.com/category/insights/) on the value of (and opportunities for) connected car technology across the next decade. There is considerable future value to be unlocked in CXZ's backyard. For example:
- "In Sales, vehicles can be made available for any-time test drives and parked inaccessible locations. Vehicles can be electronically disabled to prevent theft and only enabled for prospects with a valid authorization code."
- "Also in Sales, a limited test drive can be extended to a short- or longer-term rental, with data collected to make effective suggestions to the customer for a customized vehicle, accessories, and software."
- "In-Service, ongoing monitoring of vehicles will create increasingly sophisticated predictive models. These will allow Dealers to contact customers long before a failure occurs and offer either a physical repair or a software update."
- "Also in Service, Dealers can monitor vehicle diagnostics trends, and can proactively schedule vehicle maintenance to be done at a time that is most convenient for the customer and also the most efficient for the dealer."
Ultimately, with increased investments into product and growth and the growing importance of connected car technology, I would have to think that the moat around Connexion is expanding not shrinking, as of 2022, but this is something worth monitoring going forward and is a dynamic situation.
"Moats are fairly rare but come from a variety of things, such as regulation, intellectual property, sustainable cost advantages and superior management. True moats give you more confidence in projecting future performance." — Chuck Akre
One of the best ways to test for an economic moat is to consider whether the company could raise prices and still hold its customer base or whether the company could sustain price leadership (lowest market prices) due to a sustainable cost advantage. The latter applies to Connexion. CXZ is currently the clear pricing leader (with the strategic intent to grow its
network: 'come for the tool and stay for the network') and is actively building out the value inherent in that network (while pricing very cheaply)... this is possible due to the extremely lean & agile arrangement that CXZ has in place. That, in my view, is their main competitive advantage (alongside the entrenched business relationship with GM).
@ChickenK1ng, in terms of investor comms, I've touched base with Aaryn on the topic and he has given me a very sensible answer as to why the company is not interested in pursuing short term opportunities such as investor videos with a service such as Proactive. His answer fell under two considerations: Shareholder Capital & Competition.
Shareholder Capital: CXZ operate an extremely lean team, consisting of Management (CEO, COO, CFO), one Salesperson, a Business Analyst, a team of Developers and Customer Support. There are no paid “helpers” in the form of admin, IR, marketing, consultants or similar. As such, all shareholder material that you see comes from Aaryn, with the numbers supported by the CFO, allowing everyone else in the business to remain focused on the product/customer. All cash saved through efficiency is re-invested into productive assets (namely developers). The relevance of all this is that CXZ has worked hard to instil a culture of maximising employee productivity and Return on Shareholder Capital. As such, the required rate of return for introducing any new activity is high.
In Aaryn's view, notwithstanding a potential near-term boost to the share price, he does not see any meaningful return generated from shareholder comms videos. Aaryn's view was that shareholder videos only serves to give some of the less-diligent shareholders something to temporarily feel good about.
What I appreciate is that Aaryn is always available for one-on-one Shareholder calls and he told me that aside from myself, the top 2 shareholders and a couple of others, the shareholder base has shown no willingness to pick up the phone. This indicates that the current investor base is either: a) genuine long-term investors, and that the existing shareholder comms are sufficient for their needs, or, b) that they are speculative investors who do not actually conduct any deeper research on their positions. Over the past year, CXZ has adopted a communications strategy to attract the former over the latter, and this appears to be working, with the Top 200 ownership increasing from 63% to 74% over the past year.
Although the register is improving, short-term investors appear to be self-selecting out of the register, which is causing pressure on the share price. Perhaps this is useful short term pain for longer-term gain. For CXZ. at 1.2c/share and a $10.56m market cap (4.4x FY21 gross profit, 7.3x FY21 EV/EBITDA & an FY21 PE of 15x), I would think that CXZ might be in a position to benefit from a share buy-back, particularly if the share price falls further to below a $10m market cap and the semiconductor shortage improves.
“In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results or short-term stock market consequences, they will, in large part, attract shareholders who focus on the same factors.” — Warren BuffettAaryn noted that CXZ has also made a very clear point of delineating the corporate history of the company into three phases, with three distinct communication styles:
- Phase 1 - Founding Mgmt/Board (IPO to 2018): promotional comms (reporting on blue sky potential) leading to total shareholder wealth destruction
- Phase 2 - Investor-led Mgmt/Board (2019 to 2020): dry comms (only reporting on achieved results) so as to regain shareholder trust whilst the company recovered
- Phase 3 - Current Mgmt/Board (Mid 2020 onward): balanced comms (reporting on achieved results + added detail + some of the more obvious elements of the strategy. No overt promotion or release of competitively sensitive material)
With that said, Aaryn does want to continue improving the quality of the register, and the quality of their communications. In time, CXZ may release an “Owners’ Manual”, being a live document that encapsulates what CXZ does, how they do it and their approach to capital allocation. The concept was popularised by Berkshire, and brought to the ASX by Kelly Partners. Apparently, such a document can be produced and maintained efficiently, using underlying material from CXZ's Board Reporting and Shareholder Reporting, along with some unique but long-standing material (management principles). Most larger shareholders are in favour of this, apparently.
Competition: Lastly, Aaryn's main apprehension around excessive public reporting has been (and remains) the risk of over-sharing information with CXZ's competitors (they are all private, sharing little/no corporate information with the public). AN communicated this with shareholders over a year ago, and this remains a concern for him today.
Aaryn genuinely appreciated the time and consideration taken in making the suggestion – he just doesn't feel that this one is in our best interests long-term.
T.E.P. 
