Kids smartphone and family app company Spacetalk (ASX: SPA) delivered its first quarterly results for FY 2024, today. Relative to Q1 FY 2023, Spacetalk revenue growth was 100% in Q1 FY 2024. Annual recurring revenue experienced a 35% increase to $8.8m on a quarterly basis. However, across the same time period, gross margins fell from 60% to 41%.
Spacetalk revenue growth was primarily driven by device sales, rocketing up 400% compared to Q1 FY 2023. This surge stemmed from strong sales of its higher-priced smartphone model Adventurer 2, which made up for the clearance sales of older models. In the same period, revenue from its family app subscription fell 20% due to an 18% fall in subscribers.
Spacetalk seems to have carved out a niche — parents who desire digital eyes on their children without exposing them to smartphones. Strong growth in Australia led to an expansion across the UK, Europe and the USA. Spacetalk failed to achieve the same success in these markets, ceasing its global ambitions in FY 2023.
Greater Risk Ahead
A renewed focus on Australia could help it steer towards profitability. But history suggests otherwise. In the past three financial years, Spacetalk has recorded negative operating cash flow. Over this time, funding from capital raisings and loans has sustained the business. Spacetalk is now arguably in weak financial shape with a long-term loan of $5m sitting on its balance sheet with an interest rate of 9.5% per annum.
Whilst Spacetalk delivers features and solutions specifically tailored to a niche customer, it’s not difficult for competitors to replicate. It’s also not really mission-critical and parents can always find cheaper alternative methods to achieve the same level of comfort. As parent’s budgets tighten, their spending on Spacetalk watches may reduce.
The fact that nearly half of device sales in Q1 FY 2024 were from the newest model shows how quickly old models lose value. These devices are targeted at kids and parents, who want simple solutions. Such simplicity makes it difficult for Spacetalk to develop a technological advantage over peers. Whilst a niche market indeed, it comes with low customer lifetime value, because kids grow out of the watches (stylistically, if not physically).
I would much prefer to invest in businesses with an existing competitive advantage, like RPM Global. Ideally, these businesses also possess a strong balance sheet. However, we tend to save favourite our ideas exclusively for subscribers.
Disclosure: the author of this article does not own shares in or have position in Spacetalk. The editor of this article does not own shares in or have position in Spacetalk. This article is not intended to form the basis of an investment decision and is not an official 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 Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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