I would love to hear some views on this write up because it is quite comprehensive and concerning, although speculative. The case around Microsoft and SharePoint in particular. What is the Kojensi product moat????
Does Archtis Ltd Have a Bright Future? No:
Does Archtis Ltd Have Enough Breadth? Yes:
Does this company have breadth of customers? Yes:
The CEO's letter lists 4 new government clients in the past year, I know they already have DOD, plus 2 industry clients. They have established partnerships with DXC, Thales, KPMG, Oracle, Microsoft and Nucleus Cyber and their connections and customer relationships with large government organisations means they have a network effect as the secure intermediary platform between government and industry.
Does this company have breadth of suppliers? Yes:
Suppliers are just average office space and IT hardware supply companies. Probably the biggest supply issue is staff as they are creating and maintaining a sophisticated piece of cyber security software. Regardless, they should be able to hire from ANU, one of Australia's best universities which is in the same city as them, plus from the talent pool serving other defence industry companies in Canberra.
Does Archtis Ltd Confront Maximum 1 Strong Force? No:
The number of strong forces this company confronts is 3. To consider it further, there should not be more than 1.
The bargaining power of customers is Strong:
Number of customers: Seems there are at least 7.
Improbability of backward integration: Frankly I would have thought that government would provide a secure platform for file sharing and collaboration. It seems that this company spun out of a DOD project, DOD encouraged them to commercialise. This is an interesting example of the government supporting emergence of a commercial enterprise when I would have though taxpayers should have reaped the benefit of keeping it as government software and not having to pay fees to ArchTIS to use what was probably developed with public money. In my view this is just a cloud platform integrated with Office 365 that has a more user friendly security control system. Honestly, with groups and other user security controls Microsoft Office should probably be able to do what this company does. It reminds me of the security that Portal for ArcGIS offers. In my view, plenty of custoemrs will backward integrate this sort of system as we're talking about governments and defence contractors with huge budgets. Indeed, in their own slide deck (https://www.archtis.com/wp-content/uploads/2019/07/AR9-Investor-Update-Presentation-April-2019.pdf) they showed that the Department of Finance produced GovTEAMS (https://www.govteams.gov.au/about) which does everything archTIS does except only up to unprotected security level. Surely a government department, if it needed to, could achieve security for these higher classifications and it wasn't done because it was just the Dept Finance, not DOD?
Switching costs: ArchTIS promotional material states these customers are sticky as large government and defence contractors sign up for a long time and do not change easily to another system once trust is established.
Summary: They have very few customers, their customers are very rich and technologically adept so can develop this platform themselves, although for the ones that cannot (be bothered to), the switching costs are probably too high for them to change to other providers once signed up. Overall strong.
The bargaining power of suppliers is Weak:
Number of suppliers: There would be huge numbers of office space and office hardware/software suppliers. They main issue is talented programming staff but the best university is 5 minutes drive away and there would be a large talent pool to draw from in Canberra, serving other similar businesses and government departments.
Improbability of forward integration: Office supply and space companies won't start a business like this but staff might up and leave to make their own similar business, I presume their contracts and NDAs stop this happening.
Switching costs: Minimal except for staff that may have the software in their heads and not created sufficiently detailed manuals to hand it all over to someone else. I do not know but there may be key man risk here.
Summary: It is low - but key man risk needs investigating, if possible.
The threat of substitutes is Strong:
Wholly different products that perform the same basic function: An acquaintance told me that USB sticks with a code on them were replaced by this software. Customers could return to, or potential customers could keep using, this approach..
Doing without: Less and less possible due to China hacking everything.
Direct substitutes: This https://www.archtis.com/wp-content/uploads/2019/07/AR9-Investor-Update-Presentation-April-2019.pdf states their competitors are Macquarie Cloud Services, Objective Connect, Microsoft (SharePoint), Micro Focus, GovTeams, Sigbox as competitors. They, however, state that no competitors allow gov agencies, organisations and companies to share and collaborate on classified documents straight out of the box.
Summary: Given that SharePoint already functions at security and corresponding level of Secret, and it offers two out of the four archTIS Kojensi platform functions, it does not seem improbable that a company like Microsoft could achieve what was necessary to get to Top Secret security and corresponding level. Nor does it seem improbable they could add chat and document creation/co-authoring to SharePoint, given that Office 365 already offers this. Whilst they do have a first mover advantage, Microsoft has the ultimate first mover advantage - having MS Office and Windows throughout the government and defence contractor sector. Additionally, how much money is really in Protected, Secret and Top Secret files? GovTEAMS already does all the Kojensi functions for unprotected files which would be far more numerous. Then again, the simple fact there are far fewer customers who deal with Protected and above classifications may mean archTIS can swallow all these customers as no one wants to bother. The only problem is, Microsoft exists to steal good ideas from others, such as Slack producing Teams. I can't see why they shouldn't start taking archTIS' lunch in fairly short order, unless they just buy archTIS instead.
The threat of new entrants is Strong:
Barriers to entry; barriers to success: As barriers to entry, archTIS lists in their slide deck (https://www.archtis.com/wp-content/uploads/2019/07/AR9-Investor-Update-Presentation-April-2019.pdf) the following: $10M in R&D, patent application, 12 years of Australian government relationships, availability of the software through the Digital Transformation Agency (shortening path to approval), Top Secret clearance for employees and first mover advantage. Barriers to success would be competitors, especially SharePoint (Microsoft) and GovTEAMS not enabling security for higher classification levels. This seems likely though as these organisations would also have long standing relationships with government and plenty of employees with high clearances..
Economies of scale: Definitely their competitors have economies of scale and not archTIS, which is a tiny company.
Higher switching costs: Apparently their contracts with governments and defence are sticky.
Hard-to-get permits: Secret and Top Secret clearance are very hard to get but I would have thought plenty of their competitors would have this already.
Summary: This would be strong because the government keeps getting hacked and so every IT contractor and company would now be trying to harden their software. Their competitors would all have the same clearances and especially Microsoft has an economy of scale advantage. On the plus side, archTIS has sticky customers once they're signed and a network effect is apparently forming from recommendations to use their software from government departments to industry. Overall, it's only been 2 years. This could simply be the amount of time it takes for a new entrant to come along or for Microsoft to clone their product. I would wait and see whilst assuming this is a strong force
Does Archtis Ltd Have a Monopoly? Yes:
Government: Yes. They are saying that government departments they've already signed contracts with are now recommending other departments and businesses use their software.
Network: Yes. A network effect is emerging based on government and business/industry mandating this software for file sharing.
Cost: No.
Brand: No.
Switching costs: Yes. Apparently their customers are sticky once they're signed on.
Ingrainedness: No. Whilst there are too few customers yet to call this, it may become so.
Market Growing? Yes:
As China keeps hacking everything, the market grows with each new hack.
3. Is Archtis Ltd Shareholder Friendly? Yes:
Friendly on the Numbers? No:
The CEO’s salary is AUD271,220 per year. This is -7.28% of the lower of free cash flow or net income. The highest paid outside director gets AUD93,379 a year. On the numbers, is this a shareholder friendly company? No.
Ownership and material insider buying at market
The CEO Mr. Lai owns 5.92% of the company. Executive Director Bruce Talbot owns 5.92% also. Phillip Dean, Principal Consultant, owns 4.18%. In all there is about 15% insider ownership so there is motivation here for them to succeed. On the negative side, no insiders bought shares in the past 12 months.
Share repurchases
There are none.
Related party transactions
There was a large insider transation of $200k+ to amicaa and MST Financial Services, turns out these were the consultans who took them through the listing process and they got 3M options as part of the deal. I guess this is ok. No other related party transactions of note, of course they say all such consulting was done at normal market rates.
Dividends
There are none.
Shareholder Friendly Overall? Yes:
There is a decent amount of insider ownership although no evidence of insider buying in the past year. Neither has there been insider selling, so they're sitting tight despite the recent run up in price. There are no repurchases or dividends of course as it's such a young business and related party transactions don't show gross plunder. Overall it's shareholder friendly as the top paid employee is also not paid a lot. The only problem is his efforts haven't yet translated into positive cashflow.
AR9 Price at posting:
25.0¢ Sentiment: None Disclosure: Held
