I think that this is the reason that the stock is not trading...

I think that this is the reason that the stock is not trading higher, though there has been a little bit of upward lift over the last few weeks.

It has been quite difficult to judge even the intrinsic value of the company because of the lack of detail in the revenue statements over the years. A couple of clues have emerged in the most recent end of financial year report.

If we look at fundamentals, assuming for a moment that we have no knowledge of their business model, they have gone from losing lots of money - millions of bucks a year (including quite substantial rights issues, given the current market cap), to making what is starting to look like a sustainable profit. I think last half-year profit was about $400K, really their first ever truly profitable half, and now we have a full year figure of about $1.8m, with substantially increased revenues, $18-19m up from around $12m. They have $3m in the bank. Simple fundamentals would value them at roughly 8 * 1.8 + 3 = $14.4m, which, coincidentally, happens to be about the current market cap.

Add to that the seemingly upward momentum in both revenue and profit, and the fact that there is certainly a global push for governments to be seen to be doing something about the GFC and regulation, and one would have to feel that it is trading somewhat cheap.

However, as mentioned, it is important to analyse the scant financial data that has been released and try and read between the lines. In fact we are no longer getting regional revenue figures. Accurate regional revenues would be helpful. In fact, the regional data never seemed to align with the story that the directors were giving in terms of announced sales. E.g., the North American revenues were always about $1m, which seemed to be the Monarch maintenance revenue, despite talk of a number of Razor sales. The fact that they have dropped the regional figures (such that they were) is a source of slight concern.

Another interesting detail is that, for the first time as far as I can recall, they have put a figure on maintenance revenue, namely 15%, or $2.73m a year. That means that, in order to keep up their current revenues this financial year, they'll need to sell about $15.5m in consulting, customisation, and new sales/projects.

Another important detail is that there seems to be quite a substantial drop in their costs. They are a lot less top heavy. If one looks at the annual spend on senior management in this report and compares it with the previous couple of years, there has been a huge drop, particularly on the sales and marketing side.

To me, what this all adds up to is that, they've burnt through a lot of cash on marketing, etc., over the last few years, and certainly have picked up a number of sales, but their sales are of the license up front with an industry standard 20% p.a. annual maintenance variety, as opposed to a larger annual license fee, and hence currently only about $2.7m a year in locked-in revenue, for what is actually quite a large number of sites. At the same time they've cut their budget hugely, so in the medium to long term it's not clear where the future sales growth is going to come from.

Credit is due for the establishment of a niche in terms of exchanges, semi-governments, clearing houses and the like, but these customers, whilst giving a handy revenue stream, are not going to bring in the big bucks that big bank clients generally do, because the kind of risk that they carry in terms of derivatives isn't anything like that carried by large banks. This is evidenced by the rather small maintenance revenue stream.

In addition to new customers, there are clearly upgrade and customisation projects for existing sites, and these could well assist them is obtaining enough revenue to cover their cost base of around $15-16m over the next couple of years. As the poster says, however, where to from here? Do they have enough momentum with their existing customer base to pick up significant new sales without significantly increasing their marketing spend (which they've indicated in the report they are not going to do)?

There are many imponderables in this, and again a paucity of data to come up with even a fundamental valuation on. On the whole, I think that their is a lot of volatility between making a profit and a loss when your costs are $16m and definite revenue is more like $3m. Without more concrete data, it is difficult to tell whether the year just gone was one with lots of up-front licensing and project revenue or a "typical" year for the number of customers that they have, and without a better idea, it is difficult to put a valuation on the thing. Once more, they have stopped talking about fat pipelines, etc., which is probably sensible, but it is a little hard to see where the new sales are coming from.

Finally, the fact that the directors have bought so much stock has to be some sort of a positive, even if the amounts of money involved are generally of a similar order to purchasing a taxi license.

So, to labour a point, I think that there is not enough info to put a value on this operation. It's a little bit like betting on a prospector. They could strike gold with a couple of big ticket projects that would grow their profits quickly, but at the moment it's hard to see that there is definitely enough revenue to keep the prospecting going for long enough in an industry where sales cycles can be as much as 5-7 years, and there is definitely serious competition for projects where there is significant budget.