I have been following this company for a long, long time waiting for the right time to enter. That time has now arrived.
With the impending inflection point in cash-flow breakeven about to be hit, I think the company is about to begin the process of a re-rate back to historical levels (50c+).
Company Overview: XRef has been listed for 4 years and has been growing strongly year on year, to the point of >$10M in annual sales and global scale (despite a mere $25M market cap currently). The company has world class software that allows prospective employers to seamlessly and professionally conduct pre-employment reference checks on suitable candidates via an automated, intelligent, online candidate referencing system. Xref supports more than 1,000 organisations worldwide, including more than 40% of the ASX 50, and is used across 35 market sectors. (Further info: https://www.xf1.com/).
Company Management: Having spoken with employees at the company, I am impressed by the company culture and the leadership team. The Co-Founders collectively own 40% of all shares on issue, which is extremely high relative to other small cap stocks. They have an enormous amount of skin in the game. Lee-Martin Seymour is an energetic and humorous leader (watch his presentations on YouTube) who previously spent 17 years working in recruitment across various industries and geographies. The other Co-Founder, Tim Griffiths is a technical entrepreneur who has a strong track record, founding a2a Group Plc, Answer42 and Xref Pty Ltd. Currently, he is the Chief Technology Officer.
Competitive Landscape: XREF is a clear global leader with #1 market share in the ANZ region. Importantly, they have first mover advantage. In the US, the only 2 players of a meaningful size are Checkster and SkillSurvey. XREF recently out-competed these two competitors to win the Texas A&M University as a major client following a comprehensive tender process. Texas A&M are a huge client as the second largest university in the United States by student population and employing more than 5,000 academic staff. CV check is a partial competitor, but they focus mostly elsewhere. A quick look at XREF's clients reveals that they are extremely dominant, which is a result of their superior technology and a land grab strategy in the first 3-4 years of their listing. XREF works with major blue chip clients such as EY, Allianz, WSP, Healthscope, QANTAS, Westpac, Fletcher Building, Origin, Hays, NSW Government, KPMG, News Corp, World Vision, ABN, SkyCity etc etc.
Addressable Market: The addressable market is absolutely enormous and global. Xref's addressable market includes more than 180 million employees in North America, 120 million employees in Europe and 15 million employees in Australia and New Zealand. This is another reason why XRef has a very strong register with institutions onboard (such as Australian Ethical) and is very tightly held with not many shares outstanding beyond management and instos.
Business Model: Under Xref's business model, when clients purchase credits (credit sales) to use the candidate referencing platform, the value of their purchases is recognised as unearned income. When they pay for the credits, the cash is recognised as cash receipts. Once the credits are used by the client (usage), Xref recognises the value of the credits used as revenue (recognised revenue). Importantly, although this is not a SaaS model per se, it is a highly recurring revenue stream. In fact, clients using the software continue to increase their use over time.
Growth Catalysts: There are two major reasons why I expect the share price to commence a re-rate. Growth and cash burn inflection. On the growth angle, XF1 has recently signed a major partnership with LinkedIn that went largely unnoticed by the share market. As recently as April, XF1 partnered with LinkedIn Talent Hub to create a seamless integration of XRef's automated reference checking system into LinkedIn's ATS Platform. Xref has now become available immediately via the LinkedIn Talent Hub Integration Marketplace. The Head of Business Development at LinkedIn was quoted as saying: "Partnering with XRef helps to further streamline the candidate hiring experience. We will continue to work closely with XF1 to ensure our customers can source, manage and hire candidates all in one place." Lee-Martin commented: "The work we have done to become a truly global best in breed and multi-language platform allows us to successfully integrate with world leading ATS platforms and enjoy the scale that brings. In this market, clients are seeking one place to search, select, check and hire. We are exceptionally excited about the growth and scale that this opportunity presents. This integration is a true game changer". Growth should also accelerate as we exit from COVID, which the company has managed extremely well
Cashflow Breakeven: Lastly, XREF is at a pivotal point in the trajectory of the business. Firstly, the company has indicated that there will be no further capital raises. They have even put in place a small loan facility to draw from if required and are adamant that they do not want to dilute their future wealth potential as the largest shareholders. Secondly, the inflection point in cashflow breakeven is about to be hit. In Q4-CY19 net cash used in operating activities was -$2.97M, this declined to -$1.95M in Q1-CY2020 and declined further again to -$0.59M in Q2-CY2020. The next two quarters are set to be operating cashflow neutral and operating cashflow positive respectively. This inflection point will generate significant interest in the company and I expect a significant re-rate to historical levels as the market recognises that management have delivered on what they said they would do -- bring the company to cashflow positive operations while maintaining growth.
Lastly, it is important to note that from a technical analysis perspective, the share price has begun to bottom out and commence a new long term uptrend. The share price has passed above the 20 DMA and is about to pass above the 50 DMA. Both are very bullish signals. The share price fall was overdone and the company has a long way to rise to reach historical levels. The company has been valued north of $80M historically and I expect it to return to that level. There are 180M shares on issue. Thus, an $80M MC corresponds to a share price of 44 cents.
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