Wednesday, 8 March 2017

BigTinCan

Overview

As someone working in business development, I’m used to being called into a room by an executive or manager for a presentation of the new sales tool that is going to reduce our admin/allow us to accurately forecast sales/provide quality leads. 9 times out of 10 it’s a bit of a let down. The tools are rarely demonstrated in a live environment, the data is often inaccurate, and the supposed insights with “machine learning” seems to be nothing more complex than a couple of if arguments in an excel cell. It is for this reason that I was a little sceptical when picking up the prospectus for Bigtincan, a content platform for sales people on mobile devices.

The Bigtincan hub allows companies to selectively push sales content to the mobiles and tablets of sales staff. The idea is that instead of sales people having to hunt through different emails or folders for the presentation or collateral that they need, all content can be accessed from the one hub, with both offline and online capabilities. Bigtincan is seeking to raise 26 million for a fully diluted market capitalisation of 52.34 million once all the various options and are taken into account.

Financials

BigTinCan is currently burning through a lot of money. The total loss in 2016 was nearly 8 million, and based on their own forecast figures they will lose another 5.2 milllion in 2017. In any other sector, trying to argue a company with these sorts of losses is worth over 50 million dollars would be ridiculous but in the tech space this is pretty standard. Any successful tech company you can think of lost huge amounts of money during their growth phase, sometimes for a long time. To use the most recent example, Snapchat’s market capitalisation post listing was around 29 billion dollars, despite losing over 500 million dollars last year.

Taking a closer look at the numbers, the extent of the loses seem more strategic than involuntary. In FY 2016, BigTinCan spent just under 9.5 million on product development and marketing, or 135% of their total revenue, and they plan to spend another 12 million in FY 2017. They could have easily reduced their loses by cutting back in these areas, but as every other tech company knows, the real key to success when you are selling software is scale. It costs nearly the same amount of money to sell a product to a million-people compared to a thousand, and you only get to sell to a million people if you have a great product. The key metric for any young software company is growth, and here Bigtincan does not disappoint. Total revenue was 5.17 million in 2016 and grew 35% to 7.04 million in 2016, with projected revenues of 9.7 million for FY2017.

The one potential problem I found regarding Bigtincan’s financials is whether there is enough available cash to sustain the future losses the business might make. BigTinCan will have 14.421 million dollars cash immediately after the IPO. Given their current and projected loses, there is a reasonable risk that they may need to refinance before they get into the black, which needs to be taken into account when deciding if purchasing these shares make sense.

Product

As someone who is often on the road presenting to customers in my day job, I get the appeal of the Bigtincan Hub. In sales, you are constantly searching through folders and emails for the right presentation or tool that suits the customer you are dealing with, and when you have to do it all on an Ipad it becomes even harder. A centralised hub that can deal with a range of different file types, allow commentary and collaboration, and let managers push files to different users has definite appeal.

What’s more, from all the research I have done, it seems the BigtinCan Hub has delivered as well. Most reviews they have received are pretty positive, and they have received some impressive testimonials from large customers.

Perhaps the most impressive write-up comes from Bowery Capital, a venture capitalist firm that publishes an exhaustive summary of all software tools for start-up sales organizations every year. In their latest piece, Bigtincan receives the best rating out of the 13 other companies in the “content sharing space.”

The only reservation I have with the Bigtincan hub is that it is targeted to address a very specific need. What happens if in a couple of years’ time, Google, Apple or Microsoft release something that can do everything that Bigtincan can do and more? Given the natural advantages these larger companies have, it would probably be the end of Bigtincan. Of course, the more palatable outcome is one of these companies deciding they want to acquire Bigtincan by buying out shareholders at a healthy premium over market price, so there is upside to this possibility as well.

Past court cases

Buried in the financial section of the prospectus is a small note that there were two court cases that had an impact on the Statutory profit and loss for the last two years. As investing in a company with a troubled legal history is an alarming prospect, I decided to do some digging to see if I could find out more about this.
The first court case was a dispute with an early director called David Ramsay. From what I can understand from Bigtincan’s version of events, David Ramsey was given money to develop software for Bigtincan which he then used instead to develop an app for his own company. It appears Bigtincan won this case and Ramsey had to pay $300,000 in damages as a result. While Ramsey has tried to appeal this, it looks like his appeal to the high court was rejectedso it seems this chapter at least is closed.

The second case was with an American Software company called Artifex, which filled a lawsuit against Bigtincan over the use of technology that let users edit Microsoft office documents on their smart phone. Bigtincan reached a confidential settlement with Artifex over this matter, so we do not know the exact outcome, but as Bigtincan has continued to grow since then we can assume that whatever concessions were made did not have a major impact on the Bigtincan business.

I don’t really see any major cause for concern with either of these court cases. Given the potential money at stake, it seems inevitable that software companies get into squabbles about proprietary technology, and most successful tech companies have a story of some estranged director or other in their past, if only to give Aaron Sorkin and Ashton Kutcher material.

Price

Evaluating Bigtincan’s listing price is a more complex than for most companies, as I was unable to rely on a basic Price to Earnings ratio to get a feel for what would be reasonable. Instead, I decided to use price to revenue as an alternative as nearly all software companies list at a loss.

Based on these figures, the Bigtincan valuation seems pretty reasonable. Total revenue from the 2016 calendar year was 7.934 million vs a fully diluted market cap of 52.34 million, giving a Price to Revenue ration of 6.6. Linkedin’s initial listing was at a Price to Revenue ratio of 56 and Salesforce’s was around 11 (this was back in 2004 when internet companies were viewed with suspicion). Closer to home, Xero the New Zealand based accounting software company listed on the ASX in 2012 with a price to revenue ratio of 25.

In addition to comparing Bigtincan to other technology IPOs, I have modelled the next five years after 2017 to try and get an idea of where Bigtincan could end up, assigning different growth rates to their main revenue and expense areas.

Based on the assumptions I have made (and I accept that many will disagree with a lot of these) the company will have an EBITDA of 4.4 million in 2022. To me this is very compelling. I do not think I have been overly optimistic with the growth rates I have used, and you do not have to be Warren Buffett to know that a fast growing SaaS company earning 4.4 million dollars a year will be closer in market capitalisation to 150 million than 50 million.

Verdict

There are significant risks with this IPO. Bigtincan is still a young company operating in a competitive environment, and all it would take is a change in industry direction or a better product from a larger tech company to end their prospects completely. However, the potential upside if things go to plan is pretty substantial, and for me the price is low enough to justify getting involved.

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