A lot has happened since I published my first Research Report on 01 October 2020.
I would like to use the Annual Report for FY2020, published on 03 March 2021, as an opportunity to bring you up to date.
What has happened since then? Quite a lot!
On 10 November 2020, RIWI reported results for Q3/2020. For the first nine months of FY2020, RIWI grew revenue to $3,262,900, an increase of nearly 30 % over the same period compared to the prior year which is actually very good against the backdrop of many many companies around the world no longer generating revenues due to COVID-19. However, the revenues in the third quarter (US$ 940,019) did not reach my expectations and probably also the expectations of other market participants. Not only were Q3/2020 revenues 6.1% lower than Q2/2020 revenues, but they were also 6.6% lower than Q3/2019 revenues. Keeping in mind that RIWI began promoting the U.S. Election product in Q3/2020 and that RIWI has invested heavily in the sales team throughout the year, the revenue performance was a real disappointment. The new sales staff obviously has not yet been able to generate significant sales. On the other side, the new staff has of course incurred personnel costs, so the EBIT margin declined to 7.6% in Q3/2020.
This did not leave the share price unscathed. In the weeks following the release of the Q3/2020 numbers, the share price fell from a high of C$4 to C$2.5 just before Christmas and has since hovered between C$2.5 and C$4.
Besides, I would like to mention that RIWI did not predict the outcome of the U.S. presidential election quite correctly this time. RIWI did predict, contrary to other polling methods, that the race between Trump and Biden was tight, but on the morning of 02 November 2020 (the day before the election), RIWI data showed Trump to be re-elected at that time.
That was like a slap in the face. Boom!
In the stock market, it is important to remain calm. I did see the investment case as being knocked on the head. I wanted to wait and learn because I see RIWI as a long-term investment, and it was clear from the beginning that RIWI would not have linear growth because of its business model. Not every quarter is automatically better than the previous quarter because the previous quarter may be inflated by a large contract recurred as revenue.
On 17 November 2020 RIWI announced that a major U.S. bank has awarded an initial contract order to RIWI for a significant amount under its new three-year long-term agreement. Only one day later RIWI was named as one of Canada’s Companies-to-Watch in Deloitte’s Technology Fast 50™ Awards.
Fortunately, the FY2020 numbers released on 03 March 2021 make me feel positive.
The company generated revenue of US$ 4.6 million in 2020, up 47% from 2019, and EBT increased to US$ 927,115, representing an EBT margin of 20.2 % (23.3 % in 2019). The slight decrease in the margin is due to growth investments. The bottom line decreased because RIWI posted a tax recovery of US$ 184,000 (deferred taxes) in 2019, but incurred a tax expense of US$ 270,581 in 2020, as all tax loss carryforwards have now been used up. The tax rate in 2020 was thus approximately 29 %. Revenues in Q4/2020 were US$ 1,317,838, which is only marginally less than the best quarter in the company’s history (Q1/2020 with US$ 1,322,216 in revenues).
In my opinion, RIWI is back on track. The MD&A contains a few exciting sections that I would like to share:
- “In February 2021, to lead our growing financial services practice, the Company hired a sales professional with over 15 years of institutional sales and business development experience increasing recurring revenues for institutional clients while working for Morgan Stanley, Zacks Investment Research, and MSCI Inc.”
- “…we increased our commitment to demand-generation, outbound marketing and account-based marketing and sales in order to increase our sales pipeline…”
- “In January 2021, the Company engaged a consultant to work with our technical team to refine our offerings for traders and financial institutions.”
- “Beginning in 2020, we struck partnerships to evaluate, promote, sell or market RIWI data feeds. RIWI’s data marketplace partners include: Amazon Web Services, Battlefin, Benzinga, Bloomberg, Datarade, data.world, EagleAlpha, Esri, Knoema, Neudata, and ThinkData Works.”
- “In 2020, RIWI earned strong market awareness in major finance media and RIWI earned new, expert validation.”
- “Our future revenue growth through data partnerships also benefits from our increasingly agile technology, which now enables the easy ingestion of RIWI datasets with the technical requirements of major data marketplace partners, and from our expanded salesforce that now works closely with data marketplace partners to define sales packages for our partners’ client base.”
- “Based on management’s strategy, our milestones to create sustained growth and value include:
- Expanding the diversity of our client base to ensure resilience and further growth. This is the goal of our investment in sales and marketing personnel during 2020 and early 2021.
- Increasing our number of channel partners and resellers.”
- “As we continue this process of development in response to client needs, RIWI is also growing its scalability to take on many more projects, and, in the process, we are increasing data integration opportunities with new partners and resellers. For example, a wide range of consulting firms and “platform” companies – i.e., data aggregators and data access firms for finance, pharmaceutical or other data-focused industries – can now easily ingest RIWI’s raw data to fit the diverse parameters of their data delivery systems.”
Another learning for me from the FY2020 numbers was that margin is (not yet) scalable to the extent I expected. In this respect, one should take a look at the margin development in the future.
The second point I would keep an eye on in the future is the geographic distribution of revenue. As the following excerpt from the financial statements shows, the revenue growth came from Canada alone. Revenue in the U.S. was actually slightly lower than in 2019. I would expect the U.S. to have the most growth potential long-term.
I incorporated the 2020 figures into the valuation model and rolled the model forward by one year. I asked myself which scenario the current price is pricing in.
The result (see pages 6+7) shows that the market expects growth of 20% p.a. with an EBIT margin of 20-22%. The margin only has to remain constant compared to 2019 and 2020 and the growth has to be below average compared to the last years to justify the current value. It’s not unlikely that the valuation still has some room for improvement.
In my view, there are three alternative paths of action:
- You do nothing
- You sell the shares and put the money into another company
- Put the share price and fundamentals today in relation to where they were when I published the Research Report on 1 October 2020, and you may conclude that the risk-reward ratio is even better today than it was about five months ago. I have once taken advantage of the current somehow depressed share prices to buy a few more stocks, but ultimately you have to make the decision yourself. After all, investing should not be about being right, but about making the right decisions. You can only see whether the decision was right in retrospect.
If something is exciting to report again, I will get back to you with another update. Stay tuned!
Author’s ownership disclosure: At the time of publishing this update report I hold shares in RIWI Corp.