RE: Californian Contract4 Apr 2023 15:34
Hi Uh-oh, glad the comments have been of use.
First up, they are actually profitable on an operating cash flow level and balance sheet cash was higher at 31/12/22 than 2 years earlier, so forever loss making isn't true here. They are more or less scaling at breakeven, which is exactly where the opportunity lies in my view.
Where does profit come from? It's all about scale + operating leverage.
UK gross margins have historically been 70%, if the size of the California contract is anywhere close to what I think it's going to be then the increase in gross profit will be highly significant and start to generate material profitability.
The majority of their costs are related to the practitioners who provide the service, beyond that they have to pay for the tech, product, customer success & management teams + other overheads, however not all of those costs scale in line with revenue growth. It's a capital light tech business with a human front line, which makes it highly scalable & typical of a SAAS company.
If the California contract adds £20m per annum to the top line & gross margins remain at 70% then overall gross profit nearly doubles to >£30m. IMO the rest of the business will need to add a few more hires, but nothing material - product, tech & US management teams may need a couple more heads, but overall I'd be surprised if they added more than £2m in other staff costs. Let's say they add a further £1m in none staff costs and you have a net addition to operating profit of £11m.
That would leave 2024 profit before tax at around £10m, PAT £7.5m & basic EPS at 22p. If the Californian contract is larger than £20m then the bottom line figure could theoretically expand further. It's part of a $4.7b scheme & they beat 450 companies to the contract so the potential is massive.
If the above comes off this won't be trading at £2.35 that's for sure... Obviously all in my opinion / no investment advice ;)
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