Tom Winnifrith Bearcast 19 March

Comments

1. ---

   Paul Scott

   19 March 2015, 15:20

   Hi Tom,

   Thanks for the update re Synety. I fully accept that most people only see the negatives at the moment, and that’s fine. It’s an early stage growth company, that’s loss-making, so it’s perfectly reasonable that some people want to wait & see if the company can indeed get to breakeven.

   As regards your point on extrapolation, remember a key point here is that SNTY is building monthly RECURRING revenues. So, as a customer, I am billed every month, on my debit card. The rate of customer churn has been very low indeed, and if you take into account individual customer spend, then churn has actually been negative – i.e. increased usage from existing users more the small number of users who drop off.

   So, the revenue characteristics of a recurring revenue model with very low churn, are quite exciting. Each month you are strongly increasing a RECURRING revenue stream. So no extrapolation is needed – the revenue line just builds every month, and it’s growing fast.

   Where some extrapolation is needed, is to estimate the growth rate of turnover in the future. Current forecasts are based on just maintaining the existing growth in £ terms each month, not % terms. That doesn’t seem aggressive to me at all. I would hope to see a considerable acceleration in growth, as the company is deploying more people into the sales & marketing area, which is genuinely what part of the extra Placing cash is wanted for. It’s chicken & egg though – if you have a great product, what do you do, sit back and worry about cash burn, or get out there & sell it? (which costs money). It’s a very difficult balancing act – one which I think they have got wrong so far. The approach has been too much spending, on a land-grab basis, and that is now changing as they recognise costs have to be more tightly controlled.

   If you talk to mgt at SNTY, they are the first to admit that they’ve screwed things up – they left money on the table at 250p last year, because they didn’t want to dilute themselves too much. Now of course they’re kicking themselves, as dilution is happening at 90p, despite the fact that the growth figures have been excellent.

   You said maybe they boosted the year end figures to hit targets? I hope not, but it’s possible. However, the Jan & Feb 2015 KPIs have been issued, and showed continued strong growth.
   So that rather diminishes suspicion about any possible year end window-dressing.

   Having said all of this, they MUST get the breakeven point down, and I think that message has sunk in recently. I think they also know that they can’t come back to the market again for cash on the wrong side of breakeven. Lessons have been learned from the debacle of the last few weeks.

   Was the Placing announcement corporate bullshit? To a certain extent, yes! These documents usually are! But it also contains a lot of useful information about the company. I don’t see anything in there that is lies, as you suggest. You or I might have written things in a more blunt style, as to the need for the cash, but there we go.

   The company is indeed expanding its sales & marketing teams, so part of the cash being raised is being used for that purpose. Although I accept your point that they could have been more open about needing more cash partly also to finance the ongoing (but reducing) monthly cash burn.

   The company deserves praise for including an Open Offer, so that existing shareholders can participate, if they wish, in buying new shares at 90p. Many companies don’t bother, so I very much like the fact that Synety thought this was the right thing to do, instead of just giving cheap shares to the Instis.

   It’s certainly not the basket case you suggest in this week’s bearcasts. I think the company has screwed up on its cash requirement, and has taken a battering as a result. However, that doesn’t make it a bad company at all – the growth is fantastic (+247% in 2014), and you don’t have to make any aggressive assumptions to see them reaching breakeven in 2016 on current trends.

   The company has the cash in the bank to do it now, £2.6m at 31 Dec 2014 (as the tax credit turned into cash in early 2015), plus £2.5m Placing monies, plus up to another £0.7m in Open Offer monies, so that’s pro forma net cash of nearly £6m as at 31 Dec 2014. They’re burning about £300k per month at the moment, so make that say just over £5m by the end of Mar 2015. As sales grow, then the cash burn should reduce each month, say an average of £250k for the rest of 2015, so there should be £2.75m left in net cash by the end of 2015. At that point, ARR should be up to £6m+, so not far off breakeven of say £9-10m ARR. At that stage cash burn will be much lower, down to say £100-150k per month, and it’s easy to see that there will be enough to get them through to breakeven.

   Now I accept that, if sales growth slows down markedly, then the company is in a whole heap of trouble. No doubt about that. But the opposite has been happening in the last year – growth is accelerating.

   The market cap is what, £12m at the moment. Is that really a stretched valuation for a very rapid growth company that is on the right track to reach breakeven in 2016, and is fully funded now to get there? (with mgt who know that they’ve just used their Get Out of Jail Free card, and can’t come back for more!)

   I am only setting out my views on this company, and am not trying to change your mind, as I know you form extreme, and fixed views on companies. In many cases, you are right – and I applaud your work in exposing dodgy companies & dodgy management.

   However, I think you too easily slip into uber-cynical mode, and think that you HAVE to adopt an extreme position on everything. That’s fine when the company really is a no-hope basket case, but it’s unduly tough on companies that are fundamentally promising, but which have made a few mistakes along the way – how many small companies do have a smooth path from start-up to roaring success? Not many I suggest!

   Let’s see what happens with SNTY. Personally I think the company has a potentially exciting future, and the growth that is actually happening is very exciting. Roll things forward a year, and people like me who are backing up the truck & buying heavily at 90 to 96p right now could end up looking very smart. Or we could end up looking like total plonkers! lol. I’m not sure which it will be, but am betting heavily on it being the former! :-)

   I shall demand free pizza and unlimited quantities of your excellent house red, if I am proven correct, and I hereby commit to buying you a hearty supper at your pizza establishment, or any other reasonably priced eatery in the vicinity,if you are proven correct! Cut off point for the bet – hmmm, let’s say middle of 2016, when it should be at or near breakeven. Deal?!!!

   Regards, Paul.