Prophecy International’s business update today demonstrates that the company wants to be seen as a strategic AI enabler, positioning itself as indispensable to the growing cybersecurity and data analytics ecosystem. I was going to say something about the title of the announcement, given revenue of $11.6m was only up 1% on the prior corresponding period, but Clippy set me straight, as you can see below:
With 11 mentions of AI in the eight page document released less than a fortnight before the upcoming half year results, Prophecy International emphasised how its logging product Snare facilitates AI-driven security and operational intelligence.
That said, past discrepancies in ARR reporting and a dependency on large partners like Devo and Securonix introduce uncertainty around revenue predictability. And given the involvement of channel partners, it is difficult to have confidence about gross margins over the long term.
Prophecy International could be a company at an inflection point, where the next 12-18 months determine whether it cements itself as an AI-driven software success in the mind of punters, or simply becomes another vendor in a crowded space, desperately touting the latest buzzwords and chasing revenue growth without achieving true pricing power or meaningful free cash flow generation.
As a joke, I asked Minotaur fund co-portfolio manager Thomas Rice to have a bit of fun with me using ChatGPT to analyse the announcement. He was kind enough to share his model’s answer to my question about the focus on AI itself. I think does give us an interesting little snapshot into how these models work.
Personally, my view is that Prophecy International needs to transition to profitability and positive free cash flow to gain the favour of the market and I don’t see anything special that would make me overlook my general preference for profitable and free cash flow positive businesses.
At the time of publication Prophecy International shares are trading at 50c per share, some 28% below the price at which we called the stock a Sell. That said, I would definitely take another look at this stock if and when it becomes profitable and cashflow generative, as there could be an opportunity if the share price continues to languish and fundamentals improve.
Disclosure: The author of this article does not own shares in PRO and will not trade PRO shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
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