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Oliver’s real food has had a volatile first couple of months on the ASX. While the share price initially soared to a high of 39 cents, market sentiment cooled when the company announced at the end of July that they would narrowly miss their FY17 earnings and revenue projections. Although missing prospectus projections is never a great look, Oliver’s management stated that this was mainly due to delays in opening new locations and one-off costs rather than lower sales, and have re-committed to meeting their FY18 forecast of $41.9M revenue and 2.37M NPAT. At time of writing the share price is in the mid-twenties, still comfortably above the initial listing price, and Oliver’s have continued to provide market updates on the roll out of their new stores.
After such a dynamic first few months as a publicly listed company, I reached out to Oliver’s founder Jason Gunn, to see if he would answer some questions over email regarding the strategy of the business and how he felt things were travelling. Jason has kindly provided the below answers to six key questions of mine about the Oliver’s business and other related topics. Jason's answers give great insight into how the business is performing and his vision for Oliver's in the future. In a first for the IPO Review, I present my interview with Jason Gunn.
Oliver’s is obviously a business that has strong values and ideals, but now as a publicly listed company there is more pressure than ever on financial performance. How do you balance your desire to be ethical and responsible with the pressure and scrutiny of being a publicly listed company?
Jason Gunn:
-To me this is simple. To actually be a business we have to make a “Healthy profit” We have always had to do that, just to survive and attract investment. But it is not the main focus of the business; it is just something we have to do, just like we have to comply with the regulations and award rates of pay etc. Our number one goal is to make healthy food choices available to the travellers on the highways of Australia, focussing on providing a great product, in a very clean environment, with fantastic customer service, and we know that we have to do that profitably.
While there has been a revised guidance to your FY17 numbers, you have maintained your forecast for FY18. This now means you are forecasting revenue to grow from 20.436 Million to 41.909 million in one financial year. As an outsider, this seems like a hugely ambitious growth target. Are you able to explain why this is achievable?
Jason Gunn
-It is achievable for a couple of reasons. 1) We have bought back the 8 franchised stores. These stores were the best stores in our network, with significant turnover. As they are the highest turnover stores in the group, they are also the most profitable. Just buying these stores back will add over $11m to our group TO, and a significant EDBITDA contribution. 2) We are opening another 11 stores in FY18. All of the stores we are opening are expected to be good performers in great locations. Plus, with all of this growth comes scale, and with scale comes efficiencies.
You have gone from being the founder of a small start-up to the Managing Director of a publicly listed company. How do you feel your role has changed over this time, and have you had any challenges adjusting to the realities of running a larger company?
Jason Gunn
-Oh yes, there has been quite a transition. But you know, I love my role, and I absolutely LOVE this business, so I feel that this is what I am destined to do. At the end of the day the role is largely about building a really strong team of motivated and experienced people that are all pulling in the same direction. I have that now, more than ever, and with the support of a very strong board, and an committed investor base, who believe in what we are doing and where we can take this business, I feel more confident and clearer than ever before.
While online reviews of Oliver’s restaurants are generally very positive, one of the criticisms that is made from time to time is that prices are too high. You have said repeatedly that your margins are not excessive and that your prices reflect the costs of providing healthy food. Are you able to provide some detail on the costs of providing fresh, healthy food at highway locations, and do you see potential for your prices to come down as the business grows and economies of scale kick in?
Jason Gunn
-Good question, but realistically no, they wont come down. In fact I do not believe that we are expensive, it just seems that way to some people. It seems that way to some people because we have all been conditioned to think that food is cheap, when it is not. What is cheap, is highly processed food that is full of artificial colouring, flavourings, and preservatives. This is not actually food. We should stop asking why REAL FOOD is so expensive, and start asking, “How can this cheap food be so cheap?” I think it is also worth mentioning, that being the worlds first certified organic fast food chain, we face many challenges around supply chain management that traditional fast food business’s do not have to overcome.
Unlike a lot of food chains, Oliver’s has decided not to pursue a franchise model and is in the process of buying back existing franchises. Are you able to comment on your reasons for avoiding the franchise model? Was this decision at all influenced by recent franchise problems at 7-11 and Dominos?
Jason Gunn
-No, nothing to do with 7-11 and Dominos’. Like Ray Crock in the movie “The Founder” my first experience of franchising was a disappointing. We are a unique brand in that we have strict nutritional guidelines and we are out to set a new standard when it comes to the quality of the food and the way we do business. I am not saying that we wont have a degree of franchising again at some point in the future, but for now we want to have absolute control over the way our stores are run and retain the profitability in the listed entity, rather than sharing that with franchise partners.
The Oliver’s real food IPO eventually went ahead at a lower than expected price due to what I assume was limited interest from institutional investors, and recent proposed IPO’s from Craveable Brands and Sumo Salad have been cancelled in entirety for the same reason. Is the Australian market too conservative when it comes to new IPO’s from Australian companies? Are you able to comment on the reception you received when promoting the Olivier’s Real Food IPO?
Jason Gunn
-We received a fantastic reception from the institutions we met with, but the feeling was that we were over valuing the business. That said, we had significant applications from our customer base, so they did not think it was too expensive. But there were other factors affecting the overall market, and as a result, we lower the price to meet the institutional market, and thereby achieve our goal of listing.
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By Emma Hinchliffe2017-06-14 19:17:23 UTC
For anyone who wants to...
As someone working in business development, I’m used to being called into a room by an executive or manager for a presentation of the new sales tool that is going to reduce our admin/allow us to accurately forecast sales/provide quality leads. 9 times out of 10 it’s a bit of a let down. The tools are rarely demonstrated in a live environment, the data is often inaccurate, and the supposed insights with “machine learning” seems to be nothing more complex than a couple of if arguments in an excel cell. It is for this reason that I was a little sceptical when picking up the prospectus for Bigtincan, a content platform for sales people on mobile devices.
The Bigtincan hub allows companies to selectively push sales content to the mobiles and tablets of sales staff. The idea is that instead of sales people having to hunt through different emails or folders for the presentation or collateral that they need, all content can be accessed from the one hub, with both offline and online capabilities. Bigtincan is seeking to raise 26 million for a fully diluted market capitalisation of 52.34 million once all the various options and are taken into account.
Financials
BigTinCan is currently burning through a lot of money. The total loss in 2016 was nearly 8 million, and based on their own forecast figures they will lose another 5.2 milllion in 2017. In any other sector, trying to argue a company with these sorts of losses is worth over 50 million dollars would be ridiculous but in the tech space this is pretty standard. Any successful tech company you can think of lost huge amounts of money during their growth phase, sometimes for a long time. To use the most recent example, Snapchat’s market capitalisation post listing was around 29 billion dollars, despite losing over 500 million dollars last year.
Taking a closer look at the numbers, the extent of the loses seem more strategic than involuntary. In FY 2016, BigTinCan spent just under 9.5 million on product development and marketing, or 135% of their total revenue, and they plan to spend another 12 million in FY 2017. They could have easily reduced their loses by cutting back in these areas, but as every other tech company knows, the real key to success when you are selling software is scale. It costs nearly the same amount of money to sell a product to a million-people compared to a thousand, and you only get to sell to a million people if you have a great product. The key metric for any young software company is growth, and here Bigtincan does not disappoint. Total revenue was 5.17 million in 2016 and grew 35% to 7.04 million in 2016, with projected revenues of 9.7 million for FY2017.
The one potential problem I found regarding Bigtincan’s financials is whether there is enough available cash to sustain the future losses the business might make. BigTinCan will have 14.421 million dollars cash immediately after the IPO. Given their current and projected loses, there is a reasonable risk that they may need to refinance before they get into the black, which needs to be taken into account when deciding if purchasing these shares make sense.
Product
As someone who is often on the road presenting to customers in my day job, I get the appeal of the Bigtincan Hub. In sales, you are constantly searching through folders and emails for the right presentation or tool that suits the customer you are dealing with, and when you have to do it all on an Ipad it becomes even harder. A centralised hub that can deal with a range of different file types, allow commentary and collaboration, and let managers push files to different users has definite appeal.
What’s more, from all the research I have done, it seems the BigtinCan Hub has delivered as well. Most reviews they have received are pretty positive, and they have received some impressive testimonials from large customers.
Perhaps the most impressive write-up comes from Bowery Capital, a venture capitalist firm that publishes an exhaustive summary of all software tools for start-up sales organizations every year. In their latest piece, Bigtincan receives the best rating out of the 13 other companies in the “content sharing space.”
The only reservation I have with the Bigtincan hub is that it is targeted to address a very specific need. What happens if in a couple of years’ time, Google, Apple or Microsoft release something that can do everything that Bigtincan can do and more? Given the natural advantages these larger companies have, it would probably be the end of Bigtincan. Of course, the more palatable outcome is one of these companies deciding they want to acquire Bigtincan by buying out shareholders at a healthy premium over market price, so there is upside to this possibility as well.
Past court cases
Buried in the financial section of the prospectus is a small note that there were two court cases that had an impact on the Statutory profit and loss for the last two years. As investing in a company with a troubled legal history is an alarming prospect, I decided to do some digging to see if I could find out more about this.
The first court case was a dispute with an early director called David Ramsay. From what I can understand from Bigtinc
an’s version of events, David Ramsey was given money to develop software for Bigtincan which he then used instead to develop an app for his own company. It appears Bigtincan won this case and Ramsey had to pay $300,000 in damages as a result. While Ramsey has tried to appeal this, it looks like his appeal to the high court was rejected. so it seems this chapter at least is closed.
The second case was with an American Software company called Artifex, which filled a lawsuit against Bigtincan over the use of technology that let users edit Microsoft office documents on their smart phone. Bigtincan reached a confidential settlement with Artifex over this matter, so we do not know the exact outcome, but as Bigtincan has continued to grow since then we can assume that whatever concessions were made did not have a major impact on the Bigtincan business.
I don’t really see any major cause for concern with either of these court cases. Given the potential money at stake, it seems inevitable that software companies get into squabbles about proprietary technology, and most successful tech companies have a story of some estranged director or other in their past, if only to give Aaron Sorkin and Ashton Kutcher material.
Price
Evaluating Bigtincan’s listing price is a more complex than for most companies, as I was unable to rely on a basic Price to Earnings ratio to get a feel for what would be reasonable. Instead, I decided to use price to revenue as an alternative as nearly all software companies list at a loss.
Based on these figures, the Bigtincan valuation seems pretty reasonable. Total revenue from the 2016 calendar year was 7.934 million vs a fully diluted market cap of 52.34 million, giving a Price to Revenue ration of 6.6. Linkedin’s initial listing was at a Price to Revenue ratio of 56 and Salesforce’s was around 11 (this was back in 2004 when internet companies were viewed with suspicion). Closer to home, Xero the New Zealand based accounting software company listed on the ASX in 2012 with a price to revenue ratio of 25.
In addition to comparing Bigtincan to other technology IPOs, I have modelled the next five years after 2017 to try and get an idea of where Bigtincan could end up, assigning different growth rates to their main revenue and expense areas.
Based on the assumptions I have made (and I accept that many will disagree with a lot of these) the company will have an EBITDA of 4.4 million in 2022. To me this is very compelling. I do not think I have been overly optimistic with the growth rates I have used, and you do not have to be Warren Buffett to know that a fast growing SaaS company earning 4.4 million dollars a year will be closer in market capitalisation to 150 million than 50 million.
Verdict
There are significant risks with this IPO. Bigtincan is still a young company operating in a competitive environment, and all it would take is a change in industry direction or a better product from a larger tech company to end their prospects completely. However, the potential upside if things go to plan is pretty substantial, and for me the price is low enough to justify getting involved.
