PayGroup (ASX:PYG) increases revenue over half-year, page-3

The quick answer is that PYG has reinvested their extra revenue (plus some of the last capital raise proceeds) for faster growth and bigger profits down the track. Hence expenses have been higher and profit lower than expected this half.

The longer answer is:

• Most SaaS type companies at this stage of their development opt to delay profitability to take advantage of revenue growth opportunities. They do this because the return on that investment is usually quite high, and therefore future profits will be that much greater than if they did not do this. The reason why the return on this investment is so high is that the SaaS platform's costs do not go up much with extra revenue, so the incremental revenue comes at very high margins.
• In yesterday's presentation, PYG referred to investing in 5 new appointments for the Sales & Marketing team, which now numbers 28. This seems to be working already, as the sales pipeline is now 6x higher than it was 12 months ago.
• They also referred to the ongoing investment in R&D, software and technology to support growth, achieve greater efficiencies and support margin growth.
• FY22 is the first year (so far) where the growth is all organic. This is going extremely well. The new monetisation revenue is already at 7.7% of statutory revenue after only 2 years and comes with 95% gross margin. 20% of SaaS and SwaaS sales now come from GPP referrals at very low cost. 29% comes from upsells (proving the value in the acquisitions over the last couple of years). The pipeline of PYG sourced new customers looks very strong.
• Gross margins are already high, and will keep rising fast as PYG's investment in growth drives revenue growth. High gross margins generate the high gross profits that can either be invested in sustainable growth or be returned to shareholders as profits and dividends (or a combination of both).

IMO, the current strategy to delay profits will benefit all shareholders. Don't forget the motivations of the Executives are very well aligned with those of other shareholders.