I really appreciate what kind of nonsense companies (in a positive way) you dig up. It always goes from „what is this?“ to „Ah, I get it“ and even though they would not be in my considerations (for the most part), I enjoy getting those thoughts.
Thanks for the write-up – I think its an interesting opportunity to explore. I have scanned the financial statements quickly to get a high level view. What is your take on the following two topics:
1) Net Working Capital consuming Cash in the past 21 months
The working capital of the business seems to structurally consume cash. In FY 2023, it consumed USD 4m. YTD P9 2024, it consumed USD 2,2m. Assuming an annualized EBITDA run rate of USD 8m, it feels as if the NWC is going to eat significant chunks if the potential FCF, if NWC keeps consuming so much cash.
In addition, YTD P9 2024 NWC increase is driven by an increase of roughly USD 2.9m of unbilled revenues recognized on the balance sheet. Do you have any clue about what is happening here? This could be a single large project that they are working on. On the other hand, it wouldn’t be the first business that is trying to fool investors with posting fake revenues and profits.
2) Potential seasonality influcing the improvement in EBITDA margin
The Adjusted EBITDA margin in Q3 2024 was 19%. Compared to Q2, Q1 and Q4 it shows a strong improvement. However, compared to Q3 2024, the EBITDA margin is just 1% higher as the margin back in Q3 last year was 18%. To what extent are the improvements real improvements versus driven by potential seasonality?
Re 1. the existence of unbilled revenue simply arises from the nature of the business in conjunction with IAS. Of course, unbilled revenue should not be constantly increasing, and it is something to keep an eye on, but I am not worried yet.
Re 2. The cost cutting measures are real and understandable as you can see from the quarterly reports ;).
Have you considered that having a big part of the employees in Argentina (70% according to LinkedIn but probably is less), combined with high USD wage inflation and recently stable FX (USDARS), could be a strong headwind for margins going forward?
Sorry for the late reply. Obviously exchange rates and inflation in Argentina have significant implications that go in multiple directions. Can you please elaborate on your specific assumptions and how you envision things moving forward? Feel free to send me a message so we can discuss the topic in more detail. My general assessment is that the exchange rate was a stumbling block in the past, but that the geographical positioning will actually provide a tailwind in the future. However, I would like to understand the assumed mechanisms of your point better in order to give you a more focussed/useful opinion.
Apologize for replying to this question as I didn’t post it, but I potentially see the same issue with Argentina as the country is currently in a hyperinflation state. I think it has multiple angles to it. First is revenues. If they invoice their customers in Argentina in USD and/or they have contractual mechanisms to offset inflation to their customers via price increases, I think there is not so much of an issue. However, if the revenues from customers in Argentina are invoiced in Argentina Peso, then your revenue will decrease as expressed in USD, if the Peso inflates against the USD, all else equal. Do you maybe know in what currencies they invoice their customers and/or whether they have any contractual agreements to offset inflation towards customers? Interestingly, revenues on a USD basis are increasing double digits, comparing September 2024 with September 2023. Do you know how much of this is acquired revenue growth? If its organic growth then maybe there is not so much of an issue at all. Second, there is cash and especially trapped cash. Typically hyperinflation countries might do all they can to prevent money flowing out of the country and this will result in further depreciation of the currency. Hence, I believe they have around half a million USD stalled in Argentina that might be hard to get out of the country and for instance be used for dividends, debt repayments or settle future acquisition payments. Do you have any clue whether their able to get the money out of Argentina? This could become an increasingly bigger issue given roughly half of the revenues today are coming from customers in Argentina. Hence, it might be harder to get future profits out.
Exchange rates are of course a big issue here, but as you wrote, it has several aspects and it was therefore a conscious decision not to discuss it in my post. Polymath's comment was in response to his concern that NowVertical benefits from cheap labor in Argentina to provide services outside of Argentina, but that this advantage disappears or becomes a disadvantage due to USD wage inflation in Argentina. To summarize my response to him: I don't see this as an issue because they have not done so in the past and Now has approximately the same share of the workforce in Argentina as of sales in Argentina. It could even become an advantage because they want to generate more international revenue with Argentine employees right now (Argentina and India as global delivery centers).
To address your specific points: 1. All Argentine contracts include automatic monthly or quarterly inflation adjustments, as I learned in a conversation with senior management. 2. Growth is organic, as the last acquisition was in 2023. 3. They have money in Argentina that they cannot withdraw according to the last earnings calls. The company has a plan to mitigate this risk in the future by essentially generating Argentinean revenue to offset its Argentinean expenses, but also providing services abroad, which gives it foreign currency where it does not have this problem (essentially receive the profits of the business in foreign currencies).
In general, I am very bullish on Argentina and believe that we will see lower inflation (already happening), a harmonization between the unofficial and official exchange rates (already happening), strong economic growth and fewer capital controls. But that is just my own opinion, like everything I write btw.
I really appreciate what kind of nonsense companies (in a positive way) you dig up. It always goes from „what is this?“ to „Ah, I get it“ and even though they would not be in my considerations (for the most part), I enjoy getting those thoughts.
Thank you. That's probably the best compliment I've ever received.
Thanks for the write-up – I think its an interesting opportunity to explore. I have scanned the financial statements quickly to get a high level view. What is your take on the following two topics:
1) Net Working Capital consuming Cash in the past 21 months
The working capital of the business seems to structurally consume cash. In FY 2023, it consumed USD 4m. YTD P9 2024, it consumed USD 2,2m. Assuming an annualized EBITDA run rate of USD 8m, it feels as if the NWC is going to eat significant chunks if the potential FCF, if NWC keeps consuming so much cash.
In addition, YTD P9 2024 NWC increase is driven by an increase of roughly USD 2.9m of unbilled revenues recognized on the balance sheet. Do you have any clue about what is happening here? This could be a single large project that they are working on. On the other hand, it wouldn’t be the first business that is trying to fool investors with posting fake revenues and profits.
2) Potential seasonality influcing the improvement in EBITDA margin
The Adjusted EBITDA margin in Q3 2024 was 19%. Compared to Q2, Q1 and Q4 it shows a strong improvement. However, compared to Q3 2024, the EBITDA margin is just 1% higher as the margin back in Q3 last year was 18%. To what extent are the improvements real improvements versus driven by potential seasonality?
Re 1. the existence of unbilled revenue simply arises from the nature of the business in conjunction with IAS. Of course, unbilled revenue should not be constantly increasing, and it is something to keep an eye on, but I am not worried yet.
Re 2. The cost cutting measures are real and understandable as you can see from the quarterly reports ;).
Great write-up! Thanks for sharing.
Have you considered that having a big part of the employees in Argentina (70% according to LinkedIn but probably is less), combined with high USD wage inflation and recently stable FX (USDARS), could be a strong headwind for margins going forward?
Sorry for the late reply. Obviously exchange rates and inflation in Argentina have significant implications that go in multiple directions. Can you please elaborate on your specific assumptions and how you envision things moving forward? Feel free to send me a message so we can discuss the topic in more detail. My general assessment is that the exchange rate was a stumbling block in the past, but that the geographical positioning will actually provide a tailwind in the future. However, I would like to understand the assumed mechanisms of your point better in order to give you a more focussed/useful opinion.
Apologize for replying to this question as I didn’t post it, but I potentially see the same issue with Argentina as the country is currently in a hyperinflation state. I think it has multiple angles to it. First is revenues. If they invoice their customers in Argentina in USD and/or they have contractual mechanisms to offset inflation to their customers via price increases, I think there is not so much of an issue. However, if the revenues from customers in Argentina are invoiced in Argentina Peso, then your revenue will decrease as expressed in USD, if the Peso inflates against the USD, all else equal. Do you maybe know in what currencies they invoice their customers and/or whether they have any contractual agreements to offset inflation towards customers? Interestingly, revenues on a USD basis are increasing double digits, comparing September 2024 with September 2023. Do you know how much of this is acquired revenue growth? If its organic growth then maybe there is not so much of an issue at all. Second, there is cash and especially trapped cash. Typically hyperinflation countries might do all they can to prevent money flowing out of the country and this will result in further depreciation of the currency. Hence, I believe they have around half a million USD stalled in Argentina that might be hard to get out of the country and for instance be used for dividends, debt repayments or settle future acquisition payments. Do you have any clue whether their able to get the money out of Argentina? This could become an increasingly bigger issue given roughly half of the revenues today are coming from customers in Argentina. Hence, it might be harder to get future profits out.
Exchange rates are of course a big issue here, but as you wrote, it has several aspects and it was therefore a conscious decision not to discuss it in my post. Polymath's comment was in response to his concern that NowVertical benefits from cheap labor in Argentina to provide services outside of Argentina, but that this advantage disappears or becomes a disadvantage due to USD wage inflation in Argentina. To summarize my response to him: I don't see this as an issue because they have not done so in the past and Now has approximately the same share of the workforce in Argentina as of sales in Argentina. It could even become an advantage because they want to generate more international revenue with Argentine employees right now (Argentina and India as global delivery centers).
To address your specific points: 1. All Argentine contracts include automatic monthly or quarterly inflation adjustments, as I learned in a conversation with senior management. 2. Growth is organic, as the last acquisition was in 2023. 3. They have money in Argentina that they cannot withdraw according to the last earnings calls. The company has a plan to mitigate this risk in the future by essentially generating Argentinean revenue to offset its Argentinean expenses, but also providing services abroad, which gives it foreign currency where it does not have this problem (essentially receive the profits of the business in foreign currencies).
In general, I am very bullish on Argentina and believe that we will see lower inflation (already happening), a harmonization between the unofficial and official exchange rates (already happening), strong economic growth and fewer capital controls. But that is just my own opinion, like everything I write btw.
Thanks for the great write-up! it seems the price has gone vertical too these past weeks 😉
Thx man 👍
What’s ur Twitter ?
@FinSkeptic