For the background to Beeks (BKS), please see my June article.
On the 5th September, Beeks issued their full year results to 30th June 2019 which I commented on in that morning’s 7:59 cut. Given the interest in my earlier articles I had intended to give a fuller update later that day. Initially I delayed so I could listen to the live results presentation, then further so I could double check against the recording (published on 19th September at piworld.co.uk), and then inevitably other investing work got in the way. So apologies for the delay, but here it is, hopefully better late than never.
Track Record
Before looking at the results in detail, let’s first review their record of meeting forecasts from their house broker, Cenkos (more recently they have also paid Progressive to cover them). As you can see their record is very poor in meeting revenue projections, and the EPS forecasts have been wildly inaccurate.
| Date | Revenue £m | Basic EPS (p) | Underlying EPS (p) | |
| FY 2018 | 28/04/2017 | 6.2 | – | – |
| 09/01/2018 | 6.2 | 2.0 | 2.0 | |
| 24/04/2018 | 6.2 | 1.5 | 2.0 | |
| Actual | 5.58 | 2.37 | 2.27 | |
| FY 2019 | 28/04/2017 | 8.6 | – | – |
| 09/01/2018 | 8.6 | 3.4 | 3.4 | |
| 24/04/2018 | 8.6 | 3.3 | 3.3 | |
| After finals | 29/08/2018 | 8.0 | 3.4 | 3.6 |
| 06/12/2018 | 8.0 | 3.4 | 3.5 | |
| After interims | 27/02/2019 | 7.6 | 2.8 | 3.0 |
| 09/05/2019 | 7.6 | 2.3 | 2.9 | |
| Actual | 7.35 | 2.10 | 2.58 | |
| FY 2020 | 27/02/2019 | 10.4 | 3.6 | 3.8 |
| 09/05/2019 | 10.9 | 3.8 | 4.0 | |
| After finals | 05/09/2019 | 10.7 | 3.6 | 3.8 |
| FY2021 | 05/09/2019 | 13.6 | 4.8 | 5.0 |
FY 2018
Note how they missed revenue by 10%. Generally revenues are known well before the finer details of profit and loss are calculated and this miss is right on the normal threshold of materiality which would require a market statement. To put it another way, the company very narrowly avoided having to issue a revenue warning in July 2018.
FY 2019
As can be seen above, both revenue and EPS were a very clearly a miss compared to forecasts, despite reductions through the year as the hoped-for Tier 1 contracts took longer to materialise than expected. This despite a weak pound which should have increased reported sterling revenues (although not significantly profits).
The year-on-year reduction in EPS was caused by an increased average number of shares as the company only floated part way through 2018, and is therefore of no concern. The large miss against forecasts is however all too real.
Since 99% of revenues are recurring, a critical figure in forecasting the following 6-12 months is the Annualised Committed Monthly Recurring Revenues (ACMRR). In June I said that anything much below £9.2m would be an issue and in July Cenkos increased their forecast to £9.3m. The actual reported figure was £9.1m. This appears to be due to delays with connectivity on the first tier 1 contract and the new sales manager taking time to bed in.
What I find most concerning is that neither the results statement nor brokers notes, nor the conference call acknowledges that the full year significantly missed the guidance (as communicated in company-sponsored research) that had been recently updated after the poor interims, let alone the initial forecasts.
Future
FY 2020
With no need to give any benefit of the doubt in H2 2019 terminal run-rate, I now lower my FY 2020 projections from £10.1m – £10.6m to around £10.1m. This is compares with broker forecasts of £10.7m lowered from £10.9m. My projections are based on another similarly-sized tier 1 being signed imminently (or the previously announced PoC resulting in equivalent revenue flowing by the start of December), and a further tier 1 being signed up around November with revenue flowing from February / March.
It is possible that such customer(s) have already been signed up, or at least as close to signed up that work has already started and delivery will be earlier than described as above; in the latest results call it was disclosed that the tier-1 announced in December was actually signed September/November time. It is also possible that more or larger contracts will be signed in the next few months than I have modelled. The language was certainly very upbeat in the results presentation.
However, what seems much more likely is that history will repeat itself and both contracts and full implementation times will be delayed further than expected. The risk of this increases with every day that passes without a further contract announcement.
FY 2021 and beyond
It is much easier to come up with a scenario where FY2021 forecasts are hit.
The share price was steady for two weeks after the results we published and then suddenly jumped. It can hardly be a coincidence that this jump was the day after the extremely upbeat results presentation was published. While I hope investors applied some scepticism over the short-term prospects, I think there is cause for some optimism that tier 1 prospects will start to bear fruit in 2021.
Profitability / Cashflow
There is considerable comfort to be gained from the results presentation here: on the profitability side in that they are maintaining 50% gross margins; on the cashflow side that they still target a 6 month return on capital expenditure, which given the current rate of progress means it should be funded from profits. Additionally, an increasing amount of the business is expected to be around connectivity which has a lower capex requirement.
There is also the possibility of companies paying up-front, although perhaps this is less likely for a relatively small player like Beeks. Nonetheless, I can foresee circumstances where they would need to increase borrowings and/or raise equity if current contracts continue to be delayed and then several land at once.
Conclusion
This is a well performing company that has put itself in a difficult situation by being continually overly optimistic in its forecasting / guidance. Investors continue to value the company on (mostly genuine) high growth rates and (untenable) forecasts. While the company does have the potential to grow into this valuation, there is a danger that investor sentiment could become more realistic or, worse, swing to the other extreme, severely hitting the share price.
My expectation of a further miss for FY 2020 is supported by my model, by history, and by the company’s cavalier attitude to missing forecasts. I will update again within two months, news or no news.
LeoInvestorUK's blog 
Hi Leo, great analysis!
My only question is – what do you think is the best way to value this company?
If you look at where the high-recurring revenue (ie SaaS) companies trade in the US then you could easily say Beeks should be on 10x ARR (or even higher if one believes the long-term opportunity is v significant given how nascent the business is) which means the market cap should be double of what it is today.
I am not sure what the right answer is but I believe 10-11x EV/EBITDA may be a steal if the company continues to compound revenue at 20%+ while the incremental margin is close to 50%..
The lumpiness of future revenue growth is important as perhaps if the future growth volatility will be so chunky then maybe it’s worth a discount to a 10x ARR… perhaps.
The key question is – what do you believe the business will look like in 4-5 years and what the long term opportunity is. Because if you think they can be a £30m ARR business within 5 years (with more growth to come after) then today’s price is peanuts and you will do well owning the stock regardless of whether they miss the analyst estimate by 5% or 10%.
I am still not entirely convinced they will be a £30m ARR company by 2024 as my concerns are whether a) there will be significantly more competition by then, b) the economics of working with tier-1 clients won’t be nearly as favourable as the management expect. But who knows.
If you are a long-term believer – the share price today is absurdly cheap; for example if Beeks was listed on Nasdaq I could easily see it trade on 10-12x forward revenue (as it is actually a profitable business already unlike many tech companies trading on double digits multiples of revenue).
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Well, firstly I wouldn’t use EBITDA as a metric for a capital intensive business – that depreciation is very real. It is a long way from a lender saying that in a run-off situation 2.5x actual EBITDA is a safe level of debt to an investor saying 10-11x of dodgy forecast EBITDA is a steal.
I realise this is a crude way of looking at things, but given FY 2019’s EPS forecast started at 3.4p and turned out at 2.1p, reducing FY 2020’s forecast of 3.6p by the same amount to 2.3p doesn’t seem unreasonable. And at 50% gross margins you can easily see how they could miss by that much. That would put a company with a three-year track record of negative free cashflow, static retail revenues and slowing medium-size corporate growth on a forward PE of over 40x. That’s about twice what I would like to pay.
I think the big 2-3 year opportunity here is the work with an FI application provider who are hoping to use Beeks for hosting / connectivity to replace a legacy hosted solution across multiple large banks with a 12-24 month rollout. This is discussed from 17:15 in the results presentation. If that comes to fruition then everything changes.
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Thanks Leo.
Well, of course you are right in that one should always err on the conservative side with regards to use of earnings metrics. The point I want to make (and the reason why I think looking at EPS or CPS for Beeks is spurious at present) is that the company is still v early in its lifecycle. With a 50% incremental margin (or thereabouts) the business should be generating a very attractive level of return on its capital employed once at scale. For that reason alone, the best thing the management should do for the business is re-invest every penny back into growth and arguably even borrow to do so – this is the arbitrage of long-term shareholder value creation vs shareholder remuneration.
I am trying to take a long-term holistic view of the business and the industry it is. For now, there is little direct competition. It will start catching up eventually and so Beeks should plough every penny into expansion (as long as prospective returns are there, which is course the most important question).
So a long way of saying that today’s earnings of this business are meaningless to me – purely as they are nowhere near an accurate representation of a full earnings power of this business. The same about the cash flow – yes they are not generating cash but I would not be happy if they did at this point in their existence.
So while conservatively-speaking, you are probably right by saying you wouldn’t pay more than 20x earnings for this business, I don’t even look at the P/E for this company. The time will come to do that but for the next few years all I care about is pipeline, growth in ARR, churn, and incremental margin.
I agree with your big point in that the business is lumpy/chunky and I fully agree that management have been poor at guiding the market. Both are important. But if the prize 4-5 years down the road is massive (again, this is the most important question), then does it really matter that Gordon is repeatedly too bullish on the near-term results. I would prefer no guidance by management at all. Just like Games Workshop. So one would then have to figure out himself what the realistic assumptions should be.
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