Strong open likely, page-113

Foster note from this morning.

21^st June 2016

**SALES DESK COMMENTARY**

9 Spokes International (9SP.ASX) – Imminent launch of white label platforms with Tier 1 channel partners and well-funded post $25m IPO to attack huge market opportunity. High conviction story.  RECOMMENDATION RESTRICTED.

• 9 Spokes recently raised $25m via an IPO and currently has a market cap of ~$60m.
• 9 Spokes recommends the world’s best business software cloud applications (i.e accounting, payroll, inventory management, booking engine, etc) for small and medium sized businesses and integrates them into a smart dashboard, revealing key information on how their business is performing. The business owner can run their business from anywhere at any time, while also offering collaboration opportunities with their business advisors. In the future, non-sensitive and de-identified client data from the apps can be consolidated, to form benchmarking data, displayed through widgets on the dashboard.  When the ‘tipping point’ is reached, 9SP will be able to serve this data at an industry and country level, on a live basis.

• 9 Spokes offers a model for businesses to access their smart dashboard and features directly (black label), as well as a white label product that channel partners can offer to their SME customer base.

• Click here for a 90 second snapshot of the product - https://www.youtube.com/watch?v=P-Kb0hsjJto

• The growth in cloud-based business applications is huge due to the flexibility, reduced cost and scalability (compared to historic systems). Microsoft’s $26b bid for LinkedIn last week is the strongest indicator yet that the traditional software business is fast shifting to cloud computing. Some compelling stats:
  • 90% of global businesses are SMEs; and
  • More than >60% of SMEs currently use 3 cloud-based business applications. This is expected to increase to 7 by 2018. (Forbes)
• The revenue model in simple terms is a 20% margin of the monthly cloud-based app subscription price. For example, on average it costs an SME $28/month per app and 9SP will retain $5.60 per app per month for each SME that purchases (or transfers across an existing subscription) with 9SP.  In addition, for white label channel partnerships upfront deployment/development fees are charged together with a minimum license fee (which essentially underwrites a certain take-up level within the channel partner’s SME client base).
• 9SP has signed major clients that are a key focus today, including Barclays, Deloitte and Suncorp (live from Q3 16 with $325k with minimum monthly billings).  Following the launch of Suncorp, the direct product to small business owners will be launched.  We would not be surprised to see some further larger organisations signed up in the near-to-medium term, particularly in the US. These channel partnerships provide 9SP with large SME subscriber bases very quickly with zero acquisition cost.

• The potential revenue from a single contract, such as a Barclays, in its own right is massive. 9 Spokes negotiates a licence fee that provides a base minimum payment over the term of the contract, while 9 Spokes accesses the App Margin as per the normal business model. The matrix below indicates that if a 20% margin on 7 cloud-based apps (as per Forbes guidance above) were be to be achieved for up to 600,000 SME clients then this would represent ~$300m revenue opportunity to 9SP. This would be from justone channel partner contract. 9 Spokes has signed Barclays, Suncorp, and Deloitte Private in Australia. We would expect more news as the business follows this Channel Strategy.

• We attended a function in the period following the IPO at which Suncorp attended and was extremely positive about their relationship with 9 Spokes, the quality of the team and delivery of product. See below LinkedIn post from one of their Executives. Suncorp have clearly been embracing tech and innovation - they recently bought an equity stake in insurance start-up Trov (http://www.smh.com.au/business/inno...ity-in-tech-startup-trov-20160425-goevfz.html). Trov presented with 9 Spokes at Suncorp’s recent Investor Day in May.
• With the significant operating leverage dependant on adoption rates at Barclays, Deloitte and Suncorp, 9SP has the potential to expand in additional jurisdictions such as the USA, and become a truly global “go-to” brand for both channel partners and SMEs in offering, procuring and integrating business apps into a smart Dashboard.
• In summary, Suncorp and Barclays are on track for “go live” in Q3 CY16. Revenue will be flowing at >$300k/month. Deals continue to be worked up so news flow in next few months should be strong. The more time we spend with management, the more comfortable and bullish we get on this story. Fast-forward 3 months with channel partnerships launched and potential for an additional channel partner/s contracts we can see the share price re-rating significantly. What could take the stock to another level is a decent take-up within one of the channel partner contracts (as per the revenue potential detailed in Barclays matrix above).
• The business in our view is so much stronger with the $25m in bank and yet 25% cheaper from IPO. This creates opportunity for savvy investors.
• We are currently restricted on formal research on the stock (given our role in the IPO), however our research team are expected to initiate formal coverage in due course.