Fat Prophets Report below Boarding the blue chip channel It...

Fat Prophets Report below

Boarding the blue chip channel
It should be no surprise that the increasing dynamism of the technological world is continuing to create opportunities for companies offering up new innovative business solutions, either as a bolt on to existing infrastructure, or as a disruptor to existing product providers. This has also driven a host of companies to market seeking capital for expansion, and a plethora of listings in the technology space on the ASX over the past year. The hits and misses though highlight that as always it is important to sort the wheat from the chaff.

One of the booming areas is the ‘FinTech’ arena, where participants are looking to offer services and products which can make financial services offerings more efficient. Accenture reports that Global Fintech Investment grew 75 percent in 2015 to more than US$22 billion, while first quarter investments reached US$5.3 billion, or a 67 percent gain on the previous year. The report also notes that ‘collaborative FinTech ventures (targeting financial institutions as customers) are gaining ground on disruptive players that are looking to compete.

One company that looks interesting within this space is 9 Spokes International, which recently listed on the ASX. The company brings together business software cloud applications for small and medium sized businesses (SMEs) and integrates them into a smart dashboard. The company’s offering has already received strong validation with several key agreements signed, including one with Barclays Bank in the UK.

Offering and Business Model

The company’s product seeks to help SME owners by bringing all their key business applications onto a single platform, enabling a more integrated snapshot of the business performance and drivers, and also facilitating peer review.

The company was founded in 2011 by New Zealanders Adrian Grant and chief executive Mark Estall. Prior to the IPO the company had raised around A$11.5 million since inception, and has already had success securing cornerstone contracts with blue chip clients including Barclays Bank in the UK, Suncorp in Australia, and Deloitte Private.

Management highlight the critical business issue which many SMEs face is that there is a myriad of choices of business software, and little guidance on which are the best, and how to optimize visibility. Another big issue is that the data is given from an absolute perspective, with little opportunity to benchmark to competitors.

9 Spokes (the company’s name is derived from the nine key disciplines it believes businesses should follow to be successful) looks to address these problems by recommending what it believes to be the best software by industry, and then allowing key metrics across these to be presented in a single dashboard. This also allows the business to share the information with their advisor, and also benchmark to peers. The company see a ‘tipping point’ down the track where benchmarking data can be delivered live, on an an industry and country level.

The company currently has ‘partnerships’ with 56 online software providers, including the likes of Xero, MYOB and Intuit, and the universe is something the company intends to grow. 9 Spokes is also partnered with IBM to provide hosting and infrastructure support, along with the necessary levels of security.
The company’s key channels to market are business to business and white labels through channel partners, with the latter providing the opportunity to deliver scale relatively quickly, and at a low acquisition cost. The company’s raw product is patent protected.

9 Spokes does have competitors, and the barriers to entry and not overly substantial, however as the below grid shows, no rival is in position with a dashboard offering which provides benchmarking functionality and is in place with channel partners.

Revenue Streams

A core revenue stream is by way of a margin (approx. 20 percent) from third party channel partners on a monthly SaaS (software as a service subscription model basis). The more apps that an SME uses the greater the revenue flows to 9 Spokes.

The company also receives deployment and license fees from the white label channel partner with which it has agreements, with a number of blue chip companies already across the line.

The company sees the scale of the market as significant with 90 percent of all businesses being SME, and cloud app expenditure growing at a robust rate. According to Forbes 64 percent of SMEs using 3 cloud apps, and 78 percent of companies will buy one within the next 2-3 years.

Validation by blue chip companies

9 Spokes has already received validation from channel business partners of its model with an agreement signed with Barclays bank in the UK in late 2015. The deal is an exclusive one with the biggest bank in the UK (25 percent market share), and will give 9 Spokes exposure to part of the bank’s SME client base, which totals some 1.2 million.

The contract is a 3x3 deal (three years initially and a three year rollover) with Barclays paying upfront deployment fees of A$4 million (A$1.7 million already received) to cover development costs. The financial outcome for 9 Spokes will depend on the how rapidly the platform is pushed to Barclays’ client base, with a ‘test’ rollout in the coming months, and the number of apps that are taken up. The minimum contracted value though is A$27.5 million (SaaS margin revenue of A$15.8M, License Fee total of A$7.9M and Deployment Fee of A$3.8M) or $220,000 per month.

A matrix below though shows the potential annual revenue to 9 Spokes on a 20 percent margin, an average price per app of A$28 per month, and the average number of apps that are purchased. The target total of SME clients over the term of the contract is 600,000.

The company also has a non-exclusive white label agreement with Suncorp in Australia. 9 Spokes will receive a A$350,000 deployment fee, and contracted revenue after go live is A$46,000 per month. The average app retail price assumed is A$40 per month, and the company also has an option to roll the offering out in New Zealand.

Suncorp has 770,000 SME insurance and banking customers, and the year 3 target for the deal has been set at 32,500 customers.

The company also has an alliance contract with Deloitte Private, for which it is building a cloud application platform. The agreement is exclusive in Australia over the other Big Four advisory/accounting firms. Deloitte firms in other countries also have the first right of refusal before 9 Spokes can offer the platform to any of the named big four competitors. Any customers gained through the agreement are ‘owned’ by 9 Spokes, and the company also retains the entire app sales margin.

Management and Board

We recently met with founders Mark Estall (CEO) and Adrian Grant, and were impressed by the company’s strategic vision. Another point that sticks out with 9 Spokes is that the company has assembled a high quality board. Former Telecom New Zealand chief executive Paul Reynolds is the Non-Executive Chairman, and has extensive experience in the global telecoms industry, having also been a Board member at BT Group, and CEO of one of its largest business lines, BT Wholesale. Former Walt Disney and Ticketmaster executive Wendy Webb is another high profile name on the board who is also likely attracted by the company’s global aspirations.

IPO

The company listed on the ASX two weeks ago, raising A$25 million in new equity capital at a price of A$0.20 per share. The proceeds of the offer are to be used to scale channels, add further partners, build
up the company’s international presence, and grow the company’s SME customer base. Of the A$25 million raised, around $8 million is pegged for software development with a similar amount for general working capital.

The shares have slipped since the IPO, and have not been helped by a market which generally has been on edge leading into the possibility of a Brexit. There has also been some selling by earlier stage seed investors who have looked to take some gains, with a pre-IPO round of funding at $0.15 per share.

Summary

We believe that the offering from 9 Spokes is a strong one, with the contracts that the blue chip clients have signed to date representing a significant endorsement. These have provided the platform for the company to gain significant customer scale and revenue growth over the medium term. Strong execution will no doubt attract further clients, and we will be watching developments as it relates to new channel partner agreements closely.

The agreements with Suncorp and Barclays will be an important benchmark for the company’s future success and are due to go live in the third quarter of this year. 9 Spokes has not given any revenue or earnings forecasts, and this will come down to the extent to which each channel partner pushes the offering out, and the number of apps taken on by customers. A further capital raising down the track may also be necessary as the company looks to expand its global footprint.

We are putting 9 Spokes on our watch list in and will be monitoring developments in the coming weeks and months. We will notify Members if a suitable buying opportunity presents itself. Please note 9 Spokes is a smaller cap stock, with associated risks.