On November 10th RIWI Q3 2020 financials were released.
Right off the bat, it was a disappointing quarter. Revenue was down compared to Q3 2019 and down consecutively compared to Q2 2020. For the 9 months so far in 2020 revenue is up 29%.
Profitability also suffered but this was foreseeable. As anticipated RIWI’s sales expense has increased in 2020, including a 72% increase in Q3.
There was also a significant increase in technology costs. Thankfully RIWI continues to do an excellent job with its MD&A. The increase in technology costs was clearly explained.
I wrote about RIWI Q2 2020 financials here.
Riwi Q3 2020 Financials: Balance Sheet
The company continues to have an excellent balance sheet. They have $3.2 million in cash and no debt.
Accounts receivable exploded in Q3 increasing by 107%. In my experience, high-quality companies like RIWI tend to resolve large receivable balances. I think back to one of my other holdings, NamSys. They had larger than normal accounts receivables but they were collected without issue. I’ll check back on receivables in Q4 but I don’t anticipate this being a long-term problem.
Riwi Q3 2020 Financials: Income Statement
The topline number for Riwi is disappointing. Based on the comments from Q2 I expected a much stronger revenue number. In Q2 Riwi made the following comment about revenue growth and how Riwi has been affected by COVID:
My interpretation of this note was that the delays due to COVID had been resolved. Since the security issues were resolved in mid-July I expected to see the revenue delayed in Q2 recognized in Q3. Instead, revenue was down 7% year over year and 6% consecutively.
So again in Q3, we see delays due to COVID. So based on these comments some of these projects will begin in Q4 and 2021. With 92% recurring revenue and the expectation that projects begin in Q4 Riwi should report over $1 million in revenue in Q4. It’s disappointing to see revenue negatively affected by COVID when at the beginning of the pandemic it looked like Riwi would be a beneficiary of the pandemic. Riwi touted its ability to collect data related to the effects of the pandemic. While I think Riwi can deliver this data may be better than anyone this hasn’t been reflected in revenue growth.
Investing in Sales and Technology
The other highlighted numbers are for the big increase in sales and marketing expense and technology costs. Riwi has been very clear in 2020 that the company has shifted into sales mode and would be hiring qualified salespeople.
Riwi added 9 full-time employees all in sales. To put this into proper context Riwi had 13 full-time employees prior to the hiring binge. Going from 13 full-time employees to 22 is a huge change. It is also important to understand that these hires will not contribute to revenue immediately.
There is a lag between when the hires are made and when the results are seen on the income statement. The sales staff need to be trained and then start to generate leads. Since the typical sales cycle is 6 to 12 months we may not see the results from these hires until the summer of 2021.
Strategic partnership payments is a new expense that wasn’t seen in 2019. “The strategic partnership payments during the third quarter of 2020
relate to external referral fee commissions paid in conjunction with certain sales contracts.” It will be interesting to see if these payments decrease as Riwi’s sales staff starts making progress or if these payments are part of the long term plan.
In terms of technology costs, Riwi saw a substantial increase in Q3. Over the past 9 months, technology costs increased by 78% when not too long ago technology costs were consistently declining.
Riwi has been investing in its data integration capabilities. Riwi has increased the number of channel partners that now resell their data. The easier it is for these channel partners to ingest Riwi’s data the better. Anything that Riwi can do to make its data more approachable is a good investment.
Riwi Q3 2020 Financials: Cash Flow
The first big difference is the change in share-based payments. Last quarter Riwi decided to start paying its directors in cash and shares instead of just shares. This results in decreased cash flow but less dilution.
The second big change is the receivables which I looked at above. I’m not concerned about their ability to collect it.
And lastly, Riwi had a negative change of $500,000. Most of this is receivables but it’s also important to note that Riwi’s margins suffered in Q3 as expenses have increased. Riwi was barely profitable in Q3. They need revenue growth to outpace expenses. This might not start happening until the sales team has some time to build relationships with clients.
I thought this note was important. Riwi has been investing in internal projects to showcase their technology. I think this is hugely important for Riwi. The company needs to continue exploring the capabilities of their technology. Random domain intercept technology can provide insight into question customers haven’t considered using Riwi to answer. So far Riwi works for the financial industry, election coverage, pandemics, job reports, farm data, etc. This is a diversified list of applications. The list will continue to diversify as Riwi identifies new industries they can provide valuable data for.
In 2020 Riwi has really grown their number of channel partners. In March they signed a $1 million, 6 month, contract with ThinkData Works. These contracts have the potential to be very imporant for Riwi as a way to drive sales.
Riwi lists the channel partners they are working with. BattleFin, Benzinga, Knoema and Vividata are all new partners I believe. I did some poking around on the websites of these companies. There is very little if any mention of Riwi. This leads me to believe that very little revenue is being generated by these new partners.
U.S. 2020 Election Coverage
Riwi released its election data report on November 4th. Riwi predicted a very close race between Trump and Biden, much closer then the polling data. They did predict Trump would win the election but they did acknowledge how close it would be. I don’t think Riwi can be faulted too much for choosing Trump over Biden considering how close the election was.
You can view Riwi’s final election coverage report here:
Riwi disappointed with revenue due to further COVID delays. The company is confident they will still get this business, they just aren’t sure when. If Riwi wants to reach $30 million in revenue for 2024 they will need to accelerate revenue growth. My expectation, based on their own comments, was that the COVID delays had been resolved. I also expected a bump from COVID-related business but that doesn’t seem to be the case.
Margins will suffer until the new sales team can start generating revenue. I’d say Riwi has officially entered a new inning for their business. They have proven the technology for global customers now they are in sales mode with a brand new sales team. Trying to convince companies that Riwi’s data is unique I don’t think is very difficult. It is finding an application for companies that I think is the more difficult sell.
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