At first glance, the results donot look good. And if you think...

At first glance, the results donot look good. And if you think that you would be 100% right. These results are terrible.

As I’ve commented before the company guided to90,000 units in late 2019, which is equivalent to almost $21m in salesexcluding the app and schools. In the end, the business did less than halfthat.

BUT, and there is a big but, this is more thanreflected in the present share price and market cap. Any cursory glance of thechart can see the very steep and sharp fall as the market adjusted to thereality of the business missing their targets by a country mile. There was alsothe headwind from covid, which led to a weaker 3^rd and 4^thquarter. It's worth noting that management, to their credit, have not blamed covid for their results, when many others would have.

So even though the headline numbers look bad, whichthey are, they are actually in line or marginally better than expectations – orat least my expectations if that is worth anything.

Let me step you through why

• Schools absolutely smashed the lights out. This was ~20% ahead of guidance and as mentioned in the reports, this segment generates GP margins of 94% - that is not a typo, check the 4E if you don’t believe me. Now there is every chance that once this covid cloud passes, demand for the Schools service could normalise, but communication methods have changed post covid and there is every chance that this level (or even higher) could become the new normal. The simplicity of this business enables profits to be redirected to the high growth part. There is also a valuation component, which I will step through in due course but if this business made $1.9m EBITDA in 2020 and we apply a conservative 5x EV/EBITDA multiple then this business has an EV by itself of roughly $10m. Given the Group EV as at today is $21.7m that implies that the whole watch business plus the app is worth ~$12m – now think about that for a moment and tell me if you think that is appropriate or not.
• Group GP margins were through the roof in 2H20. A little tip for those that like or can analyse financial statements. Listed companies will provide half and full year numbers but unless you actually work it out, you won’t know how the second half performs. That is actually really important to understand momentum, direction and/or if the company is trying to hide things. While the GP margin is a “dirty” figure – by that I mean that it is simply not a pure GP for the watch as it includes Schools and App revenues plus their cost to serve, the fact that Group GP went up almost 15 percentage points is pretty amazing. I’m a bit surprised the company didn’t point this out as that is a bright spot in an otherwise bleak report

• Expense management: There were some good saves here and there needed to be. While they could potentially have cut harder we need to remember that this is a growth business so we need MWR to keep investing and spending in a disciplined way. As expected marketing costs were materially lower but this will bounce in 1H21. Corp & admin costs, while a lot higher YoY were almost 50% lower in 2H vs 1H, which is pleasing. Options expense in 2H was close to zero and reflected the weak SP. But overall, costs were marginally lower than my estimates, so my net loss estimates came in lower than I thought – that is a good thing
• Finally and this won’t beanything new to shareholders, but there is a huge springboard into FY2021 andFY2022. The business now has two major product lines, it is selling in multiplegeographies and it has just signed a distribution agreement with a tier 1 telcoin Australia. Meanwhile new talent has been brought into the business includingan ex Amazon Head of Online Sales & Marketing, which was announced today. Theupside here is significant. With today’s bad news finally out of the way, it isnow blue skies ahead and everything is on track