On March 5th, 2020, Riwi 2019 financial results were released. The news release can be found here.
I had high hopes for RIWI in 2019, and still do. However, 2019 was a year of missed guidance from the company. Issuing guidance and then missing it by a wide margin is something that no investor wants to see.
Disclosure: I own shares of RIW.CN
1.1 RIWI 2019 Financial Results
Let’s start with a bright spot for the company, their balance sheet.
1.2 Balance Sheet
RIWI ended 2019 with a rock-solid balance sheet. They have accumulated $3 million in cash and have zero debt. This cash figure will continue to grow as the company grows revenue and maintains margins. I am interested to see how this cash will be deployed in the future.
1.3 Income Statement
For RIWI’s 2019 financial results they were able to grow revenue 17% over 2018. They did this while lowering technology costs by 23%. Net income grew 118% compared to 2018, however, $184,000 was from tax recovery. I think earnings before interest and taxes is the most telling number of their performance. RIWI grew EBIT 76%. a very healthy increase. Their EBIT margin was 22% in 2019 compared to 14.7% in 2018. The increase in EBIT margin was achieved by reducing expenses by 6% while growing revenue by 17%.
They also achieved a return on equity of 17% according to company calculations.
1.4 Management Guidance
My issue with RIWI is in relation to their revenue guidance for 2019. Here is RIWI’s revenue guidance for two of their three business lines:
“Management expects that our finance-focused clients, which together generated approximately 25% of our combined revenues in 2018, will grow by at least 150% in 2019 based on existing contracts and contracts in active negotiation.”
“RIWI’s Global Citizen Engagement business line accounted for approximately 45% of RIWI’s revenues in 2018, and, based on the growing diversity of inbound customer inquiries and continued long-term signed agreements, management expects its 2019 revenues to exceed 150% of its 2018 revenues in this business line.”
For their global security line, they did not give a revenue prediction for 2019 but expect their work in this area to increase over the next twenty years. I will assume no growth for the remaining 20% of their business made up by global security.
Based on this guidance RIWI expected to earn $5.5 million attributing no growth to the security business line and 150% growth to the remaining 70% of revenue. According to that estimate, RIWI missed its revenue guidance by 77%. This is without giving the security business line any growth. Very disappointing.
I’ll revisit RIWI and their track record of giving guidance and the new revenue guidance they gave in their MD&A.
1.5 Shares Outstanding
Fully diluted shares outstanding grew 5.8% which is something I am not fond of at all. Part of this is due to non-executive directors being compensated with equity instead of cash. With a growing cash balance sheet, this is something I disagree with. Unless RIWI is reserving cash for an investment I don’t see why directors can’t be compensated in cash to prevent dilution.
1.6 Cash Flow Statement
In 2019 RIWI generated $1.1 million in cash from operating activities from $3.1 million in revenue. This equates to a 35% cash flow margin which is an excellent margin. RIWI so far has required little investment into their business.
2.1 RIWI 2019 Financial Results: MD&A
RIWI has one of the most in-depth MD&A I have read. They make a genuine attempt to give enough detail so that investors understand the dynamics of the business. In this section, I’ll pick out some sections of the MD&A I feel are important and give my two cents.
2.2 Page #3:
RIWI has decided that they will no longer break out the revenues from their three business lines. As mentioned above in 2018 they broke out their business lines into Global Private Enterprise, Global Security and Global Citizen Engagement.
I take note when a business changes the metrics they judge themselves on. Clearly they missed revenue guidance for these business lines. I am guessing that they recognized this mistake and no longer feel the need to break out each business. It is nice to see how each business line is doing. I agree they don’t need to be some granular by providing revenue guidance for each business line.
2.3 Page #4:
“Management strives to limit all costs that do not foster a clear path to revenue growth, in order to have the cash to invest intelligently in the things that do help accelerate recurring sales.”
I appreciate RIWI’s focus on controlling costs. They do not want to spend money on services that do not directly increase revenue. This means they spend very little if any on investor relations. General and administrative expenses grew 13% while revenue grew 17% making G&A a smaller portion of revenue.
2.4 Page #5:
RIWI classifies its revenue into thee categories:
- 50% as subscription-based recurring revenue;
- 40% are long term contracts of six-month or longer that have a reasonably strong chance of being renewed or expanded;
- 10% of revenue is fluctuating revenue related to a long-term rapid response contract.
The major theme throughout the MD&A is RIWI’s focus on high-quality recurring revenue. Further to this on-page #8, RIWI is careful to avoid customers who may not renew their contract after the initial service is provided.
Also on Page #5 RIWI outlines that their goal is to have $30 million in revenue by 2024. In order to accomplish this, they identify turning more of their clients into long-term subscription-based clients.
Still on page #5, RIWI gives some insight into how the recognize revenue. When RIWI signs a contract the quickly realize 75% of the revenue from that contract. The remaining 25% is earned upon the completion of the project. They give the following example:
“For example, for a $300,000 project, 75% or $225,000 of the revenue will be recognized during the early stages of the project, and then the remaining 25% or $75,000 of the revenue will be recognized upon project completion.”
This can cause their revenue to be lumpy quarter to quarter and is used as an explanation for their low Q4 revenue as a lot of revenue was recognized in Q3.
2.5 Page #7
RIWI outlines some of the challenges they faced at the top of page #7.
- Long sales cycles (12 months on average). Clients take time to review RIWI’s data sets to validate their value proposition;
- RIWI is still a new company with limited “historic data from a recurring-revenue business model”. This created difficulty coming up with accurate revenue projections for 2019;
- Lack of sales staff.
As a result of point number three RIWI has prioritized building its sales team that will be lead by new hire Neil Weitzman. Weitzman will join RIWI as the Chief Revenue Officer. Weitzman will be tasked with developing a more comprehensive sales team and process.
Hopefully, this will reduce their twelve-month sales cycle however it will likely be multiple quarters before this initiative really starts to pay off. It takes time to get the new sales employees familiar with RIWI and its unique offering.
2.6 Page #9
Here RIWI gives some insight on their marketing strategy and their continued focus on intelligently managing expenses.
“Management believes that spending heavily on brand-awareness marketing is neither sustainable nor effective in a heavily saturated marketplace of competitor data offerings focused on the US market.”
The company believes they have a unique advantage in China. It is very difficult to gather reliable and accurate data out of China. The demand for this data is high and without RIWI companies don’t have access to accurate Chinese data. This is a powerful marketing tool RIWI is utilizing to get on the radar of large global companies.
RIWI can market data sets collected in China to multiple clients. The ability to sign up a company and then deliver multiple data sets to them is a major driver of growth for RIWI. Countries, where data sets are limited, is where RIWI excels. As the internet grows in developing countries RIWI’s ability to gather more data grows.
2.7 Page #10
RIWI identifies its competitive advantages as:
- Two US government positive performance assessments These assessments recommend RIWI for global data collection for any US government agency;
- RIWI’s data is anonymous and privacy compliant;
- Many esteemed Universities have approved RIWI’s data collection methods;
- Key leaders at RIWI have earned security clearance allowing them to work on sensitive contracts.
2.8 Page #11
RIWI has begun to sell its historic data sets to finance sector buyers. As RIWI invests in its sales staff they should be able to monetize already collected data sets.
RIWI also learned that its data sets are also useful to other sectors other than finance. RIWI mentions the pharmaceutical sector as a sector that could benefit from their data sets.
This bit of information is what I find most interesting from their MD&A. I believe that RIWI has tremendous potential to expand its customers well beyond finance and government. The pharmaceutical sector is one example RIWI identified. I think RIWI’s technology and data sets will be applicable to industries that they haven’t even thought of yet. As the world gains more exposure and develops an understanding of what their random domain intercept technology can accomplish I think companies will be reaching out to RIWI with problems to solve that RIWI hasn’t even thought of. This is one of the main reasons I am so excited about RIWI.
On page twelve RIWI identifies some potential investments RIWI could make. The true test of management is how they allocate capital over time. They are focusing on artificial intelligence, data science, and sales. They are also looking at opening offices with sales teams around the world to service international clients.
3.1 RIWI 2019 Financial Results: Guidance Track Record
RIWI has provided guidance on two occasions that I am aware of. In their preliminary prospectus from 2015, they predicted that by the end of 2015 the company would be cash flow positive (page #24 of their Preliminary Prospectus).
RIWI failed to accomplish this and had a negative cash flow of $600,000 in 2015. It wasn’t until the full year 2018 that RIWI was cash flow positive, although in 2017 they had a small negative cash flow of $137,000.
From 2015 to present RIWI has been growing the business and making investments in staff and technology. I believe they could have avoided making investments in the company to reach cash flow earlier than 2018 however this is still a significant guidance miss.
As mentioned above RIWI guided to a 150% increase in revenues for two of their three business lines in 2019. They missed this guidance by a very wide margin, as much as 77%.
This is a very concerning trend. They have missed both their guidance goals by multiple years or huge margins. Their most recent guidance number is to earn $30 million in revenue by 2024. Over the next five years, RIWI will have to grow revenue by 57% CAGR.
There should be no excuses if they don’t reach that number in five years. This is a very tall order and one I will be watching closely to see if they reach it. Based on their track records of providing and missing guidance I am skeptical but definitely rooting for them to achieve it.
4.0 RIWI 2019 Financial Results: Conclusion
RIWI achieved numerous good things in 2019. They grew their business by both revenue and cash flow. They were recognized by various institutions for the quality of its predictive data. RIWI hired Danielle Goldfarb as head of Global Research and Neil Weitzman as Chief Revenue Officer. I was however disappointed with RIWI 2019 financial results. This is mainly due to expectations that were set by the guidance given by management that was not met.
In Q1 2020 RIWI signed a $1.1 million contract and $300,000 contract. The $1.1 million contract is very notable as it will all be recognized in 2020. This should ensure RIWI has revenue growth in 2020 unless they are negatively impacted by COVID-19 (was trying not to include it at all).
As of today’s date RIWI is trading at $1.80 CAD and $1.30 USD. All of RIWI’s financials are in US dollars. I always like to see companies based in Canada that earn the majority of their revenue in USD.
Even with the recent sell-off, RIWI is trading at 20x free cash flow. Definitely not cheap but RIWI should trade at a premium based on its high margins, growing recurring revenue base, unique technology, and capital-light business model. I really like management but have been disappointed by their two guidance misses. If they can meet their five-year revenue projection, with a continued 5% dilution of shares per year (I hope this decreases) and a 30% cash flow margin (35% in 2019) RIWI trades at 3.1x 2024 free cash flow. A decrease in the free cash flow margin to 20% RIWI trades at 5.2x 2024 free cash flow.
There is a lot of assumptions built into that number but it just shows that if RIWI can earn $30 million by 2025 the company is very attractive right now.
I am most excited about RIWI’s technology and the possible applications it may have. Almost any sector or industry could benefit from additional insight into their consumer base or macroeconomic factors. RIWI is still a very new company with disruptive technology. It will take time to fully implement. I anticipate sticking around for the ride.
Here are a couple of recent RIWI videos:
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