A few folks have asked about this microcap teaser pitch from Nick Hodge for his Early Advantage newsletter (currently “on sale” for $1,299), so I thought we’d take a quick look today. The teaser has already been solved by at least one reader in our discussion sections, but let’s see if we can confirm that answer for you and provide a little context.
The general idea is that there’s a way to invest in a profitable virtual reality-related company here before the real promise of that sector explodes, but here’s the part of the spiel that caught my attention:
“The Story Starts with Thomas Jefferson More Than Two Centuries Ago…
“Jefferson was angry.
“America’s first public buildings were under construction, and Jefferson thought they were plain ugly.
“On September 10th, 1785, he wrote a furious letter to James Madison.
“How was this brand-new nation going to be taken seriously if its government was housed in hulking eyesores?
“Jefferson feared that democracy looked downright shabby.
“He asked Madison to halt construction until the designs could be improved — it was essential they inspire this young country.
“Jefferson longed for something more modern…
“Jefferson outlined an audacious plan for America to lead the way in architecture and construction.
“And now, finally… more than two centuries later… Jefferson’s dream has at last become achievable…
“It blends virtual reality and actual reality to create a powerful tool that’s been needed for centuries.”
Huh? Jefferson’s passionate interest in architecture is going to help someone sell higher-end vinyl siding to folks in Vancouver? Is there really some Jeffersonian connection here? Did he envision virtual reality, only to have his ideas buried by the Trilateral Commission and the Illuminati? Will this be the subject of the widely anticipated sequel, National Treasure 3?
Uh, no. Methinks one of Nick Hodge’s copywriters had to take some out of town visitors to Monticello, and perhaps got inspired a bit by Jefferson’s interest in technology and architecture, and then maybe had a few drinks and started writing in his notebook.
So what’s the stock? Let’s check some of the clues:
Hodge names the company Virtual Preview, Inc., and it basically does “augmented reality” — helping you visualize what your house remodeling project will look like before the first nail is hammered (and before you sign the check to your contractor). Here’s a bit from the ad:
“Here’s why Virtual Preview Inc. will change everything about the contracting process.
“For starters, the contractor no longer needs to come sit in your living room.
“This meeting can now take place in front of your computer.
“You might still prefer a face-to-face meeting, but now you have options…
“If your schedule gets tight, or if you’re renovating a home several states away (increasingly the case for today’s mobile professionals), now you can meet in a way that’s convenient for you.Are you getting our free Daily Update
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“You’ll see the contractor on video conference, and Virtual Preview Inc.’s software will show each detail of the construction plan….
“Virtual Preview Inc.’s software makes it possible to pre-visualize every single detail of your home renovation.”
And apparently the company has some exclusive arrangement with important brands:
“Virtual Preview Inc. Has a Complete Monopoly on Virtual Branding
“Manufacturer brands are the key to this story.
“I’m talking about Andersen and JELD-WEN windows…
“Overhead Door garage doors…
“And James Hardie siding.
“Virtual Preview Inc. is the ONLY company in the world that’s allowed to use these brands….
“Virtual Preview Inc. is the only company in the world with a full database of the precise measurements, colors, shapes, and design details of these products.”
And apparently this technology has a big impact on the bottom line for contractors:
“‘72% Of People Who Use Visualization Convert to A Sale.’
“That’s a game-changing statistic.
“It’s also the reason why thousands of contractors are racing to sign up with Virtual Preview Inc. for a subscription to its software.”
And Hodge says that this software has now built in pricing, in a brand-new partnership, which is making the software even more powerful and appealing for customers and homeowners who are making decisions:
“Homeowners can compare the price of each item — great or small — and feel confident they know what things cost.
“And contractors are saved hours of staring at price lists.
“But most important of all, the software makes it possible to generate a contract with the click of a button.
“So at the end of the presentation the contractor is able to close the sale right then and there.”
Hodge’s big argument is that their new partnerships, with pricing data, are not reflected in the share price, and that the evolution of the business will mean that more and more contractors come to them for this visualization and contract-building software. And, in some cases, hire the company to actually customize the sales presentations.
We also hear that Hodge has a “conservative estimate” that “only” 20% of the 400,000 contractors in the US will sign up for Virtual Preview’s software, and that sales will increase by 4,721%. That’s a common tactic in these ads, using a huge market and something that sounds like a small number (20%) to make a wildly optimistic prediction sound like it’s conservative. That doesn’t mean it’s impossible, of course, but going from nothing to taking a fifth of a large market is not at all a “conservative” assumption.
So what is the stock?
Thinkolator confirms this is Renoworks Software (RW on the Venture Exchange in Canada, ROWKF OTC on the “grey market” in the US).
I haven’t dug very deep into this one, but you can browse their investor relations website here.
And this is, to be sure, a company that’s way too small to talk about without impacting the price. The market cap is $16 million. With an M.
Not missing any commas there, this company is about as valuable as the family business that owns three auto dealerships in your area. If it were profitable, it seems to me, it wouldn’t be public.
OK, I’m being a cynic — sometimes little software companies do get huge, and if they have a great vision and can use investor money to invest in that vision, they can be great investments. Software in general is a great business — it’s almost infinitely scalable, with very little in the way of marginal costs for each new customer, so if you have some intellectual property that’s uniquely valuable and no one else can offer quite what you do, you can charge a fair price and get a nice margin and each new customer who comes in adds even more to the profit side of the ledger. Delightful.
How about the actual company? Well, over the past ten quarters or so they have ranged from roughly $500-700,000 in quarterly revenue, again not skipping any commas, and they spend that much and a little bit more, usually burning through something like $100-200,000 in cash per quarter, with occasional equity raises of half a million or a million dollars to keep them in the black. They’re pretty close to being profitable, and have been “pretty close” for years.
So what might be some red flags that would cause you to worry? Other than the fact that someone with a fairly large subscriber list is promoting a teensy weensy little company and therefore could easily impact the share price with any thumbs up or thumbs down comment about the stock?
Well, for me what jumps out is the R&D line — Research & Development should be the mother’s milk of growing technology companies, it’s what keeps them funding those rooms full of programmers who are updating the software and coming up with new tweaks and making it fresh and exciting.
But in a typical twelve month period, RenoWorks has been spending about $200,000 on R&D. That’s one decent programmer or software developer. In Alberta, Canada, at least — if they had to hire in New York or San Francisco they’d have to pay several times that much.
RenoWorks spends almost $2 million a year on Selling, General and Administrative expenses — which is all the corporate overhead, plus whatever they spend on marketing and advertising and trade shows to try to convince contractors to buy their software. They’re not paying egregious salaries, which is good — Yahoo Finance records indicate that their CEO makes $110,000 a year, presumably in Canadian dollars.
So what does that mean? Well, to me it indicates that they’re doing more to sell the product than they are to improve the product. Which strikes me as a bit worrisome for a tiny company from Alberta that’s not growing sales very quickly — if you browse online you’ll find dozens of software programs designed to help with home renovation visualization. I don’t know if RenoWorks is better than any of them or all of them, they might be, or the fact that they have some distribution partners and valuable product data in their system might be a point of differentiation, but the fact that there are these dozens of software programs available and people spending money to develop those programs means that the market isn’t standing still — if RenoWorks isn’t putting a lot of effort into development, I’d be a little concerned about their future unless they’re lucky or have some kind of proprietary or patented software that’s already leaps and bounds better than everyone else, or they have some long-term deals in place.
I don’t mean to say that RenoWorks has bad software — I have no idea whether it’s any good or not. I just mean to say that they’re not the only ones selling this kind of software, and from my perspective I see no reason why I’d jump on RenoWorks versus Chameleon Power or Home Designer Software. Here’s a product from a siding company that RenoWorks powers, for example, but they launched this product in 2013, and I’ve come across a few other RenoWorks-powered visualizer programs that are apparently designed for particular manufacturers (like C.L. Ward’s here), and I don’t see that these existing clients are having any obviously dramatic impact on RenoWorks’ bottom line just yet… so I would expect the growth to continue to be gradual, assuming that they are able to grow.
There does seem to be a trend in place here, though I don’t know where Renoworks and Remote Sales Force stand in the competitive landscape or if there are larger competitors to be wary of. There’s a piece from ProRemodeler that talks about the trend and the competitive landscape and specifically covers Renoworks here if you’d like a little more background.
The business is growing top-line revenues, and there are some attractive things about it — the most attractive thing to me, in looking quickly over their latest press release, is the fact that roughly half of their revenue is from recurring subscriptions… and those are presumably quite sticky, though the business appears to have changed pretty substantially over the past year (recurring revenue was 86% of sales in the fourth quarter of 2015, but grew much more slowly than overall revenues and was 56% of sales in the fourth quarter of 2016). They also had a press release in April here that notes that Renoworks Pro, their SaaS subscription offering, has seen annualized revenue grow to $288,000, which is about 10% of Renoworks’ latest annual revenue figure, and that seems certainly to be their area of focus (that release also notes that this is part of their strategic vision to expand their market dramatically, and that they have an “unprecedented” selection of products from 250 manufacturers in their system).
This is what CEO Doug Vickerson said in their fourth quarter earnings release:
“We accomplished many goals we set out to do in 2016 and these financial results demonstrate the good growth we are seeing in our business. Our revenues hit record highs over the past year and we are well positioned to reach levels of profitability that we are targeting. Our strategic decision to launch our new SaaS offering, Renoworks PRO and partner with Remote Sales Force are ways to tap into the large opportunity in the contractor market. With that said, we believe we are just getting started and management remains focused on growing our different lines of business to deliver continued growth in 2017 and beyond.”
And then just a couple weeks ago, in their first quarter release:
“We are pleased to report our financial results for Q1 2017 and deliver substantial quarter-over-quarter revenue growth in our design services business line. Our design services strategy is proving very effective. It’s important to note that we launched a new business model with a leading manufacturer at the beginning of March and in only 31 days it has already grown revenues in that business line organically by 323% year-over-year. In the coming quarters, we will continue scaling this business line and expect it to become a larger percentage of overall revenues. As we expand our sales channel to support revenue growth across all our business lines, we see pursuing this lucrative opportunity as being one of the main driving forces of our bottom line.”
They were not so vocal about sharing the latest quarter’s numbers, it’s not even on their website — I pulled that press release from the Toronto Stock Exchange site instead. That doesn’t mean they’re trying to hide it, it could have even been a mistake that they forgot to put it on the news feed of their website, but perhaps it wasn’t as brag-worthy — it did, after all, include a substantially larger loss than they had in the year ago quarter, and though their service revenues may have improved their overall revenue was quite flat year over year. They note that in this quarter the recurring revenue was 64% of the total, and that their increased losses were due to investment in marketing for future growth… but also that their overall revenue dropped sequentially for the third quarter in a row. That doesn’t necessarily mean things are terrible, it’s not unusual for a transition in business plan, particularly if it involves a move from software sales to recurring subscriptions, to bring a short-term dip in revenues… but it does mean that there’s no compelling top-line growth in evidence just yet, so you’d have to take some of that anticipated growth on faith.
So will they grow the business? Will the partnership with Remote Sales Force (which also includes Renoworks getting a 1/3 ownership of that software as a service (SaaS) business) boost sales, and will they become a “must have” for all construction materials companies? It seems like the customers are primarily folks who provide exterior finishes for homes, all the samples I’ve seen are helping homeowners to visualize what their home will look like with different siding, or different shingles or windows or doors, though they do also use the technology for internal finishes. It’s pretty cool. But that’s about where my understanding of the construction materials market ends.
And, as I mentioned, it’s a company that’s so tiny that there’s very little reason for it to be publicly traded, and I haven’t looked into their balance sheet or history and can’t really guess at whether their offerings are unique or compelling or likely to grow dramatically — so please do tread with caution.