Increasing Risks For Rightcrowd (ASX: RCW) After H1 FY 2022 Report

At the end of February, presence control company Rightcrowd reported its results for the six months to December 2021, showing revenue of $7.75 million and a loss of $3.4 million. Rightcrowd has guided for a $19.8m full year revenue target, leaving it about $12.05 million to generate in the second half. It also says it will increase ARR from $9.1m to $11.5m at the end of the financial year. That’s a big ask, since it only increased ARR by $1m in the last half.

At the time of the most recent quarterly, Rightcrowd said “Several material new enterprise deals sit at an advanced stage in the pipeline but have been re-forecast to close in Q3 and Q4.” In the half year results presentation, the CEO said “We’ve moved slower than what we were hoping at the start of the year.”

Guidance Dependant On Closing Big Deals

He continued by saying, “This guidance figures are still valid in that we do have sights on achieving these numbers but they are dependent on being able to unfreeze some of that front end pipeline, and we can’t dictate when those organisations do come back.”

To me, this sounds like the company is extremely uncertain of actually achieving the guidance. That is the primary bit of new information from these results, but before we jump to any conlclusions, it’s worth taking a look at how the constituent parts of the business is performing.

There is “literally a handful of larger deals… which actually makes a material difference”

“We’ve modelled out on the basis of us achieving our outlook or guidance, which means we’re going to have a very strong second half… we actually feel that our cash burn is going to narrow…. we’re at $8.2m [cash] we see that that will probably dip a little bit but not too much further from where it is on the basis that those sales start coming through in the second half.”

Segment Reporting Introduced

One positive from these results is that we are getting a better view of each segment.

The workforce management segment generated revenue of $4.98 million, up just 2.75% on the pcp. This segment has been hampered by covid, because obviously the access management solutions are less relevant when people are working from home.

The presence control segment is most useful for contact tracing and understanding which employees have interacted or existed in the same space. It saw revenue of $2.76 million, up 31% on the pcp.

Finally the dormant access analytics segment, saw revenue drop from $50k to $5k, since the segment was “on ice” over covid. It has just been re-launched.

An Element Of Bad Luck

As regular readers will know, I have absolutely zero hesitance in blaming management for bad decisions or bad results. However, in this case, I actually think it was bad luck. Essentially, the presence control segment is seeing its prior tailwind fade, as everyone is vaccinated now. But the headwind facing the enterprise business hasn’t yet fully abated. So Rightcrowd finds itself in a lull.

Too Many Red Flags For Me To Ignore

Because everyone has a tendency to fall in love with their stocks, I have a checklist of red flags that I run every time a company reports. Rightcrowd has triggered the following:

  • Claiming a “much stronger second half”
  • Elevated possibility of missing guidance
  • May need to raise capital again

Although the company says it won’t need to raise capital again, it has made it clear that this is dependent on hitting their guidance (or getting close to it). And hitting guidance depends on signing some big contracts, the timing of which is out of their control.

Now, personally, I don’t think that this set of results breaks the thesis. Rather, I think that it has just been a matter of unlucky timing, as one tailwind falls away, while another headwind hasn’t quite yet gone.

At the current price of 16c, the company has a market cap of about $42 million. Even if we only give them credit for the recurring revenue actually booked in the half, being $3.9m, we could pretty safely say these guys are making at least $8m per year in recurring revenue (assuming the revenue recurs annually — which I have not clarified — but is usually the case). So even using this conservative revenue multiple, the company is on about 5x revenue.

That’s not very high — and indeed when I bought Rightcrowd shares, that would be considered very low compared to peers. However, the problem is that unless it hits guidance, or gets close enough, Rightcrowd might be in a position where it has to raise capital at the lows, or else aggressively cut costs.

In my gut and heart, I believe the thesis is still intact. Ultimately, I think these guys have an attractive scalable product, and that $40m is way too little for a company that is probably going to make at least $15m in revenue (even though that would be below guidance). I could see this company being literally worth ten times that, one day.

Having said that, I have investing rules for a reason. The reality is, I have heard “stronger second half to hit guidance” way too many times in my career, and mostly, it ends poorly. As a result of that, I am probably going to force myself to sell at least 35% of my shares, booking the loss. My gut tells me this is the wrong thing to do but my intellect tells me that I would be wrong to ignore the risks, and I need to acknowledge that, and that the odds are that Rightcrowd will miss guidance, because most of the time when a company forecasts a massively stronger second half, it will fall short.

Finally, I think it’s worth noting that the breakout of (at least) a new cold war between the west and Russia means that workforce management, presence control and access analytics will likely become more relevant, given the increased risk of corporate espionage. I suspect that is a long term tailwind for Rightcrowd.

While the facts dictate that this was a “bad” report, I actually have to say I come away from the results just as interested in the long term thesis as ever. Unfortunately, the road to success may be bumpier than I had hoped. One thing is certain, and that’s that there is plenty of upside if the company can reach profitability in the near term. Unfortunately, a weak revenue result means that looks less likely than before.

Please remember that these are personal reflections about a stock by author. I own shares in RCW and will not sell any for at least 2 days after publication of this article. Therefore I will wait until at least Monday 14 March before selling any. The amount I will sell and timing of my sale will depend partly on the prevailing price. This article should not form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer.