Half year results - how did this telco fare?


Published 03-MAR-2023 15:00 P.M.


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Earlier this week, our telco Investment Vonex Communications (ASX:VN8) delivered its half year results for the 1HFY23 (ie the six month period ending 31 December 2022), and it was largely positive across key metrics.

The good news is that the company continues to deliver good cashflow and growing revenue, driven by their aggressive acquisition strategy over the past 2 years. For the period, VN8 grew half yearly revenue by 40% to $21.1 million compared to previous year, spurred in particular by its Wholesale division. This led to underlying EBITDA of $3.7M for the half year, up 14% to that delivered in the corresponding half in 2022. These figures are also a little understated, given that revenues and earnings for VN8’s latest acquisition - OnTheNet (as we covered here) - were only partially incorporated for the period, due to accounting policies related to timing of the sale agreement.

On the flip side, VN8 decided to write off over $19M across its goodwill assets (the maximum it was allowed), based on “conservative forecasting due to uncertain economic conditions globally”. This resulted in a net loss for the half year of $21.1M.

Whilst that is indeed a big loss (similar in size to VN8’s current market capitalisation), we’re not overly concerned, given that it is almost entirely composed of goodwill impairment i.e. this doesn’t impact cashflow at all, and that underlying earnings remain healthy.

And while VN8 has a substantial debt (over $19M) on the back of the recent acquisitions, the robust cash flow (and growth generated by those acquisitions) more than adequately covers the repayments. Our suspicion is that by electing to impair the maximum amount of goodwill now, VN8 tidies up its balance sheet going forward - they shouldn’t need to do further substantial goodwill re-balancing in the years ahead.

Annual recurring revenue (ARR) remains steady at circa $50M - we hope that VN8 can grow this further as its customer base continues to rise. We suspect that the company will take a breather on its aggressive acquisition strategy for a while as it beds down all its acquisitions (5 in the last 2 years), and focus on organic growth this year.

We think VN8 has a good platform for organic growth via cross-selling VN8 services (with the company effectively having 5 streams for both retail and SME customers), especially to new customers derived from acquisitions. If VN8 can continue to grow its ARR in the year ahead, our hope is that it won't be long before the company delivers on our Big Bet, namely:

Our Big Bet

VN8 grows to a size that attracts a takeover bid from a larger telco (at multiples of our Initial Entry Price) by acquiring and consolidating smaller telco businesses.

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our VN8 Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

What’s next?

We are keen to see VN8 continue to increase its customer base and ARR in the year ahead. We think the following milestones will be achieved over the next 12 months:

🔲 Completion of integration of MNF Direct Business (1H23)

🔲 Further potential acquisitions (2H23)

🔲 Sustain cashflow positive half year periods going forward

🔲 EBITDA positive full year

🔲 110k PBX users (2023)


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