X2M Connect Limited - On Track Despite Some China Delays

5 Views26 Oct 2022 08:00

Issuer-paid

SUMMARY

X2M Connect Limited (ASX:X2M) has provided a trading update in conjunction with its September quarter 4C release. In a nutshell, the September quarter results place X2M on track to achieve both our H1 FY23 and FY23 revenue forecasts and connected device assumptions despite some delays in China due to COVID lockdowns. Q1 FY23 revenue rose 137% (to $3.8m) and represents 40% of our H1 FY23 estimates. There is $12.5m in contracts to be delivered over the remainder of FY23 which covers 85% of our FY23 estimates before any additional contract announcements. Connected device growth was 19% against June 2022 and 92% relative to September 2021, in-line with forecasts and a key driver to future SaaS revenue. Annual Recurring Revenue (ARR) grew 50% over September 2021 to $0.9m and will continue to grow in-line with connected devices. Cash at bank ended the quarter at $2.7m, with cash used for both prepayments and additional inventory. An R&D tax rebate of $0.5m is expected to bolster cash in November.

Business model

The X2M business model starts with the sale of a hardware device which enables legacy utility meters or sensors to communicate with an Internet-of-Things (IoT) platform. This sale historically has been at gross margins between 10% and 25%. A monthly SaaS software fee is then charged for each device in the field for the ongoing reading and monitoring of data from the meter, together with a monthly maintenance fee. The average yearly SaaS fee across all regions is currently ~A$3.40 with gross margins between 60% and 90%. Additional functionality is being developed and deployed to increase this yearly fee over time. The benefits for utility companies include the detection of leaks, a reduction in manual reading and increased customer insights, while for end customers improved public safety and overall customer service are key benefits. In some regions a licensing-only model is employed where the customer provides all hardware and marketing and X2M the SaaS services.

FY23 RaaS estimates on track

RaaS is forecasting 85% revenue growth and a narrowing in EBITDA losses over FY23 as both connected devices and resulting SaaS licence fees continue to grow. The FY23 September quarter trading update implies these estimates are on track with revenue delivered and contracted for delivery this financial year already 85% of our FY23 estimate. Connected devices are half way to our H1 FY23 forecast with growth of 19% since June 2022. ARR has been released for the first time, growing 50% from September 2021 to reach $0.9m. Such revenue growth has been achieved despite some delays in China due to Covid-related lockdowns. Cash has been used for working capital and prepayments in anticipation of new contracts.

Valuation of $0.27/share or $50m market cap fully diluted

We use a DCF methodology to value X2M given the early stages of market penetration and current loss-making position. The resulting valuation is $0.27/share, with the biggest assumptions being device numbers in the field (including China) reaching 1.6m by FY25 and the recent Australian Energy Management initiative reaching 7.5k housing blocks (or equivalents) per annum by FY25.

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