Updater Inc: Saved by the bell?

Updater Inc: Saved by the bell?

Updater Inc (ASX: UPD) is an ASX-listed, USA-domiciled company that provides services to people who are moving house. Updater’s “digital tools help people find and reserve trustworthy moving companies, connect TV and internet, forward their mail, transfer utilities, update accounts, and much more – all in one easy-to-use platform.”

I believe that there are a number of unanswered questions at Updater that make the company difficult to understand from an investment perspective. As a general rule I also believe that a lack of transparency makes companies harder to value, and increases the risk to shareholders as relevant risks cannot be easily analyzed before the fact.

See the performance of opaque business models at Blue Sky (down 80% TTM), Big Un Limited (stock suspended with main subsidiary in administration), and Getswift (down 60% TTM) for recent examples of times when nondisclosure of parts of the business model was not in shareholders’ interests, despite it being part of each firm’s “competitive advantage”. 

Market capitalisation

As of its latest 3B and the time of writing, Updater has 21.83m shares of common stock on issue, 5.09m unlisted options, and 0.23m warrants. Each share is equivalent to 25 CDIs (Chess Depository Interests) which trade on the ASX. 

Fully diluted, Updater has 27.15m shares on issue which are equivalent to 678.75m CDIs as of 2 August 2018. This gives the company a fully diluted market capitalisation of approximately  A$821.3m at A$1.21 per CDI.

This is equivalent to approximately US$607 million in market capitalisation. All figures below will be USD unless otherwise specified.

In the first two quarters of 2018, Updater recorded $7.3 million in bookings (revenue) and $5.35m in cash receipts from customers. The company burned $9.8 million in operating cash flow to achieve this level of sales.

Management reaffirmed guidance for $19m-23m in full year revenue, pricing the company at around 30x full year revenue.

What is Updater?

Updater is a technology platform that helps users book services associated with moving house. Updater partners with property managers who then offer Updater’s services to clients. If you are a client of a property manager that has signed up with Updater, you will receive an invitation via email to use Updater’s services. The user then signs up to Updater’s app, entering their address and other personal information.

According to Updater research, when consumers are moving house, they are more likely to switch providers for products like insurance, internet, etc compared to when they are not moving. Companies are likely to pay up for the ability to target customers as they move, because this type of advertising should have a higher ROI and conversion rate. This intuitively makes sense, and Updater has research that shows a higher rate of engagement with ads provided on their platform, supporting this idea.

Once signed up to Updater, the user can be presented with recommendations for services such as removalists, insurers, cable tv providers and so on. Users that purchase these services through Updater’s platform generate revenue for the vendor and a commission for Updater.  Updater can also advertise to its users by running paid programs paid for by vendors.

As of August 2018, Updater currently has 5 “verticals” including, in order of pilot program completion, Insurance, Moving, Pay TV,  DIY Moving, and Local Services.

Updater should, in theory, be a good business. If it can generate a virtuous cycle of network effects where more users use the platform, which leads to successful advertising and conversion for vendors, which in turn leads to more users and greater investment and commissions from vendors, Updater should see steadily rising advertisement and commission revenues and may also be able to raise prices in time. This will effectively take marketing dollars from other customer acquisition channels and move them onto Updater’s platform.

However if this virtuous cycle does not happen, Updater in effect becomes just another digital channel (instead of the channel) for insurers and removalists to distribute their products. It will be subject to competition and there will be a risk that large providers can develop ways to bypass it or that large property managers refuse to use the platform.

This is a rough diagram showing how I conceptualise of the Updater model:

There is a software business, MoveHQ, which I have not included in this diagram but expect may become an important part of the business in time.

With any network business, the strength of the network effects are important, and enhancing them is key to the business. If the network effect is not continually being strengthened then Updater, in my opinion, will likely fail. The same is true of any pre-scale platform.

Updater does not appear to disclose much in the way of information that would allow investors to evaluate the strength of these network effects. Below is a brief list of my concerns with Updater.

List of concerns:   

  • Weak corporate governance including a lack of a remuneration report 
  • Lack of consistent disclosure around key metrics and customer conversion
  • Lack of consistent disclosure around growth of verticals 
  • High ROI claims in Updater’s verticals 
  • Acquired profitable and mature software businesses but immediately cut revenue generating activity at those businesses 
  • Questionable financial decisions including hiring of Nomad Financial 
  • Unsure why Updater became an insurance distributor, which would potentially see it competing with its own customers
  • Lack of disclosure around costs of accessing tenant lists & likely evolution of this relationship over time 
  • Focus on presenting big-picture numbers like total market size instead of more granular info like customer conversion
  • Where’s the S-curve of product adoption?

Weak corporate governance

There are a number of concerns with governance that are detailed in Updater’s 2017 annual report on page 44. These include a lack of independent audit function, no remuneration committee, and the Chairman of the Board of Directors is also the CEO (and, possibly involved in setting CEO remuneration?). 

from FY17 annual report

The company’s incentive option scheme is not easy to follow as it refers to common stock with exercise prices of $20+, not the ASX listed CDIs – further complicated by the necessity of a conversion from USD into AUD. This gives the perception that stock options are far out of the money, when in fact all or most outstanding options appear to be currently in the money. The criteria for option awards and conversion is, in my opinion, opaque and set by the (not so independent) board.

I acknowledge that in mission-driven, founder-led companies with a strong focus on financial sustainability, non-independent boards can be significantly value accretive if directors have substantial industry experience and ownership interests out of proportion with their director fees.

Still, as far as I can tell, Updater does not disclose a remuneration report with executive payments and incentives. It also does not always disclose the hurdles that must be met in order to trigger incentive payments. As far as I can tell the only way for investors to determine what senior executives and directors are being paid is to track the payments to related parties in the notes to the quarterly reports (item 6).  This information does not even appear to be available in the 2017 annual report that I could see. It is also an open question of whether these figures actually include CEO salary or if it is just director fees with additional undisclosed CEO salary/perks paid on top.

I believe under Delaware law Updater is not required to disclose a remuneration report. There are also several other ‘outs’ under Delaware law (in FY17 report, p31 & p44) that I find concerning from a governance perspective.

I would politely suggest that if Updater likes the idea of becoming a multibillion dollar enterprise, it will need to live up to the standards of the largest listed companies, instead of living down to Delaware law.  I find it strange that Updater expects shareholders to own – and to contribute substantial new capital to – an $600 million enterprise seemingly without knowing what the CEO is being paid or what his incentive targets are.

Imagine owning a $600m business without knowing what you pay the CEO?

On a separate note, I have examined the registered histories of Updater’s acquisitions IGC and ACI. These appear to be real businesses with histories going back many years. Updater’s insurance subsidiary VerticalOne does appear to have insurance licenses in the US states that I checked.

The size of the funnel / user engagement

I am concerned that Updater typically appears to talk only about the top of the customer funnel (moves processed/total market size) instead of more granular statistics on user conversion lower down the funnel.

The “Moves Processed” statistic used by the company appears to indicate the very top of the funnel, i.e., the number of customers being presented with the app (I assume), or possibly even simply receiving an invitation email? Moves Processed does not appear to measure user engagement with, conversion to, or expenditure on, any of the verticals. Disclosure of other conversion rates is sporadic at best. What exactly constitutes a Move Processed?

  • Is it when the property manager sends an email invite to the tenant? (pre – sign up?)
  • Is it when the tenant does the brief sign-up and looks at the app?
  • Is it when they actually use a function within the app?

I could not clearly determine this from Updater’s presentations. This lack of disclosure vaguely reminds me of Getswift’s “deliveries” figure. Getswift was charging varying delivery prices depending on client (some were on free trials), yet the company’s heavy promotion of delivery #s as a leading indicator invited investors to multiply delivery numbers by the company’s headline $0.29/ delivery fee to arrive at a revenue estimate. Yet in reality, many clients were on lower-priced arrangements or free trials. These trials and discounts may have boosted delivery numbers in a way that could have resulted in the triggering of significant incentive awards to executives. I question whether growing Moves Processed is a similarly low hurdle for Updater.

There are other metrics that I question, for example in the recent privatisation announcement Updater reported This past week the Purchase Rate jumped above 8%. This rate is materially higher than analyst consensus forecasts, which did not expect rates in this range until FY2020. Further, management is excited to see consistently weekly improvements…”

As far as I can determine, Updater has not consistently reported Purchase Rates for its verticals and I question why it hasn’t. I also question why a one-week Purchase Rate of 8% is notable but the rate since inception of the vertical is seemingly not worth reporting. I note that use of the word “jumped” implies a significant uplift and I question whether this metric could have been cherry picked. What was the level prior to improvement? Were there one-off impacts like promotions or holidays that might have impacted it? Like many of Updater’s figures, this new and improved 8% (higher than expectations! improving weekly!) invites the investor to apply this number out to a very large market size. It is not all that useful in evaluating or valuing the business given it is only a small piece of the puzzle from a single snapshot in time.

The 8% figure does however give the investor something to work with from a calculation perspective. I found this chart from the privatisation announcement interesting:

Updater shareholders will recognise the chart on the left. This is the Moves Processed chart that Updater has touted previously. Updater’s share of Moves Processed is 18% of the total market. However the conversion rate of Movers to Users is only ~35%. How is user conversion defined?  Is that somebody that purchases a product?

Note that User conversion does not appear to be the same as a Purchase Rate (which is presumably the purchase decision where $$ changes hands). It is not clear what the difference between Conversion and Purchase Rate is. However if I understand this correctly, Updater is “Moves Processing” 18% of the total addressable market. 35% of this, or ~6.3% of the market has been Converted to being a user (I assume). I question if User Conversion simply means the user has signed up for the app.

The purchase rate of 8% I would assume is calculated on the 35% of moves processed that Updater has converted. I.e., 8% of 35% = 2.8% of Updater users are purchasing PayTV through Updater?  8% of the 6.3% of the market that Updater has converted = 0.5% of the total “Moves Processed market” is currently making PayTV purchases through Updater?

If this is correct, the numbers from a prior quarterly (Q317), show that Updater had a 16.59% market share of Moves Processed, which equated to 765,809 moves processed. That number is larger today, with current market share of 18% implying around 831,000 Moves Processed, assuming constant total market size. If 0.5% of this market is making PayTv purchases, does that imply that around 4155 people made a PayTv purchase through Updater? Uninspiring if true.

Is that right? Is it wrong? There is a decent chance I’m wrong, and I will be happy to publish a correction if somebody can explain to me how it works. Or, here’s a crazy idea, Updater could provide more consistent disclosure around how its verticals work.

Still I think this is symptomatic of the problem which is that, in my opinion, Updater does not clearly explain what many of its numbers or metrics represent. This company is on its way to being worth a billion dollars Australian and I find this lack of clarity problematic.

If the 4000 PayTv purchasers figure is correct, I would conclude that Updater is a long way from building a meaningful network effect. If this figure is correct, then the company also appears to be a long way from generating significant revenues from this vertical. If there are 4000 PayTv users at ~18% market penetration, does this work out to say ~22,000 users at 100% market penetration? It would be concerning if the implied user numbers are so low.

I question what the conversion and purchase rates are like in the other verticals and why these have not been disclosed.

Lack of disclosure of business and vertical product performance

I find it concerning that Updater does not disclose any kind of break-down of revenue by vertical. This makes it difficult to evaluate how much these businesses could someday be worth to the company.

source: UPD quarterly reports and presentations. Data directly from company 4Cs. May contain slight errors due to rounding of numbers. Numbers are unaudited as far as I know. Click to enlarge.

On the face of it, Updater is forecasting and achieving substantial revenue growth. However, at least some of this likely comes from adding new verticals and the acquisition of software businesses IGC and ACI, rather than growth in existing verticals. Not disclosing the breakdown of revenue or growth in each vertical, as well as the core real estate product revenues, makes it difficult to determine if the company is gaining traction with its network effects. It is not clear if the pilot programs contribute to revenue or if rising revenue reflects growth in other areas of the business. Note that the acquisition of IGC/ACI has effectively added at least one or more additional sources of revenue, making it even harder to gauge growth in each part of the business, in my opinion.

It is also not clear how much additional spending is required to help the business scale up. As of the 2017 annual report Updater only employed ~5 customer service staff and ~15 relationship management/client onboarding staff.

I believe this is a concern because if the granular performance of each part of the Updater business is not disclosed, this encourages the investor to rely on Updater’s numbers regarding estimated return on investment (ROI) and total market size for each of its verticals.  I believe these numbers are optimistic, as I’ll detail below.

High ROI claims in Updater’s verticals

Updater makes a number of claims about the potential market size and estimated benefits to Updater or its partners (platform vendors/ advertisers). There is a lack of clarity about these estimates and I think there are unanswered questions regarding the likely penetration of the Updater business model. Take the insurance vertical for example.

Updater first establishes that there is an attractive market for insurance:

On the back of this, Updater then conducts a pilot test:

This seems a sensible approach to developing a new product. Updater then calculates a rough ballpark of what the likely ROI could look like for users of its platform:

This is where I think the numbers fall short.

This might be called the “if we had a fire we could roast some marshmallows, if we had any marshmallows” method of measuring market size and value – not least because Updater does not appear to consistently disclose conversion rates (“Mover Acquisition Rate of Partners” in the above diagram), making it hard to determine if these numbers are reasonable.

I understand that these are just ballpark preliminary figures and for discussion purposes only. Even so, at least two issues stand out to me about this presentation. First is the estimated 50% ROI for partners. It’s not clear how this is calculated.

Assuming I understand correctly, in return for spending $100 million on commissions to Updater, the insurers (“Profit to Partners”) would earn $50 million in profit after subtracting the $100m in commissions, hence the 50% ROI.  

The lifetime revenue per policy figure is also worth examining closer. I am no expert on US insurance pricing but $9000 would look to be at around ~4(?) years of customer premiums? This is questionable because Updater is apparently supposed to present new product options every time the user moves house.

  • How often do people move house?
  • If presented with offers every time they move house, is Updater’s app likely to increase the frequency that customers switch providers?
  • Therefore does the Updater platform actually lower switching costs for users (and correspondingly increase churn for providers?)
  • Would this lower the Lifetime Revenue per Policy?
  • Does Updater’s ability to earn commissions on sales promote churning activity? Is this likely to reduce the value (or commissions payable) for insurers that use the platform?

Updater notes in the company’s own research that customers are ~4 times more likely to switch products when they move.

The PayTV pilot ROI calculations (below) work using a similar methodology:

In this case, $85 million spent on revenue generates a 75% ROI. Actually I think it’s a 175% ROI – $85m x 1.75 = $148.75, or approx $150m. Honestly I have no idea if that’s correct, it seems a weird way of calculating it. It’s not clear if the Updater Revenue Potential is a direct commission expense for products sold, or if it is paid advertising or some mix thereof.

Imagine that you are a large insurer or cable provider and trying to grow revenues and profits, and you come across a new distribution channel that gives a 50%-75% ROI on money invested – what do you do?  You probably stuff as much investment in there as the channel will take – after all, for every $1 put in you get $0.50 back.

However, what happens when there are multiple insurers competing for the same customers on the same platform? Does this result in price based competition? What does this imply for margins and the efficacy of advertising/ commission expenditure? What does this imply for churn and the cost of acquiring a customer? I would assume that there are functional limits on the amount of investment that can be made in the Updater platform. Given the lack of disclosure of the number of purchasers on the platform, in my opinion it is difficult to gauge the market size or growth (or other stats like user demographic/target customer) and thus it is hard to form a rough estimate in the limits of advertising $ that can be effectively deployed on Updater’s platform.

The Updater platform could of course still be a great business, by claiming commissions and advertising revenues on growing volumes moving through its platform. However I am not convinced the above – static – examples of market size and ROI are realistic and persistent when the business is operating at scale. 

The real driver of this business opportunity in my opinion is not the ROI for vendors (though this important) but what sort of network effects can be generated through the platform, and can the network become strong enough to essentially force vendors to advertise on it. I.e., can Updater aggregate so many customers and fulfil their needs so well that vendors have no choice but to be on the Updater platform?

This is also relevant because if Updater is getting large insurers using its platform, how is Updater different from, and how does it compete better than, aggregator websites like iSelect?  (iSelect is Australian but I’m sure there are US equivalents). In my opinion, Updater at present looks a lot like an aggregator business, albeit with a better method for targeting and acquiring customers.

Updater should provide greater ongoing measures of user engagement, conversion, and spending (e.g. ARPU). Updater should also ask vendors how they measure ROI on Updater’s platform and then provide information about vendor ROI to permit investors to make better decisions about whether Updater’s platform is working.

Again, I think the problem is not just whether these numbers are accurate, the problem is that very large numbers have been provided in UPD company examples, yet it is very difficult to determine if these are realistic, or measure Updater’s actual progress towards these.

Somewhere in here it may be worth noting that three of Updater’s staff key staff that established the insurance division, and “certain other leaders”, took a hike at the end of Q218 (p7), which seems odd given that this business is supposed to be just starting to hit its stride.

Updater acquired profitable and mature businesses and then immediately cut their revenue generating activities

Updater is developing a moving software program called MoveHQ. Updater acquired two well established moving software businesses, IGC Software (“IGC”) and Asset Controls Inc. (“ACI”) in September/October 2017. The purpose of these acquisitions was to integrate IGC and ACI and create a software solution, MoveHQ, that would integrate with Updater’s systems.

It appears that MoveHQ would essentially give Updater the ability to reach into moving companies workflow and use this as another point of contact with the consumer.

However, Updater immediately “materially reduced” the “certain core revenue-generating products/services” of both IGC and ACI.

This makes sense as there is not much point continuing with ancillary activities such as custom engineering when the focus is now redoubled on the core moving software.

However, Updater did not disclose how much the revenue generating activities had been reduced by. Updater also did not appear to disclose the actual revenue contribution of these businesses in the quarter. According to Updater’s announcement at the time of purchase, IGC and ACI generated approximately $7.2 million in annual revenue in 2016, or in simple terms around $1.8 million per quarter.

Updater’s total revenue in calendar year 2017 was approximately $2.4 million according to its 4Q report. This suggests that the majority of Updater’s annual revenue in 2017 may have come from IGC and ACI. You will note in the below chart that revenue hockey-sticked in Q4 after the acquisition, and cash receipts from customers of $1.7 million in the 4th quarter are close to the $1.8m/quarter that would be expected from the two acquired businesses.

At least one anecdotal report from a professional investor suggests that Updater screened out a question about how much these acquisitions contributed to Updater’s revenue during a quarterly conference call. There have been several other anecdotal reports suggesting the company has either screened questions or only taken pre-written questions on conference calls. 

source: Company announcements. Click to enlarge.

I am not suggesting there is anything sinister in this. However, the lack of disclosure both masks the ongoing performance of the core real estate product revenues as well as contributions from the Insurance and Moving verticals. The acquisition also makes it easier for the company to hit its full year revenue guidance of $19 million to $23 million this year.

I question why Updater is not providing consistent reporting on growth in real estate product revenue as well as its vertical revenues. I also question why it is necessary to withhold answers from investors on such basic topics.

Companies with an outstanding value proposition are, in my experience, typically very happy to explain how the business works and how it is performing because by definition these companies are smarter and better than competitors – having built a better mousetrap/ solved a key problem for users – and successful companies naturally enjoy explaining the nuances of their genius. Coming from this perspective I view Updater’s lack of disclosure as a sign for caution.

While this might seem like needless quibbling, my point is not whether Updater earned $1m in this quarter or that quarter. The point, in my opinion, is that this is a US$600 million dollar business that provides investors with very low visibility into the underlying sales and user engagement with each of its products.

Questionable expenditure

I struggle to understand some of Updater’s financial decisions. When Updater researches a new vertical, it launches a pilot program to test that vertical and determine whether customers on Updater’s platform are more likely to engage with the new vertical, relative to a control group.

Updater measures the difference in performance between the two groups using statistics and reports a confidence interval. This Pay TV Pilot provides an example:

I.e., there is a significant difference (p<0.01) between the purchasing habits of customers exposed to Updater Communications compared to baseline. That is as it may be.

However, Updater then hires Nomad Financial to audit the statistical result:

As a data and technology company, it should not be necessary for Updater to outsource this analysis, and I struggle to see the point of Nomad Financial’s work. This type of statistical test is very simple to run and can be done by an amateur with a few clicks in an analytical program such as SPSS. I assume Updater has the appropriate statistical skills on staff.

Notably, Nomad Financial does not guarantee the accuracy of the underlying data used to conduct the statistical analysis.

It is possible that Nomad was hired to provide additional confidence in Updater’s numbers. However, if there is reason to doubt Updater’s numbers (and I am not saying that there is) then the viewer questioning the conclusions would also need to question the underlying data. If there’s no guarantee on the underlying data then Nomad’s work does not add any value to the sceptical viewer, in my opinion.

For the record I don’t have any reason to question the data and I accept Updater’s results at face value. I am just questioning why Nomad Financial has to be hired to calculate the p values. I struggle to see the purpose to this expenditure.

I also question this focus on proving things with statistical significance. Why bother? Statistics do not sell products. If a product is working really well, it’s typically extremely obvious.

A strategic mis-step?

In addition to the Nomad Financial expenditure, I am unsure about Updater’s decision to become an insurance distributor. I’m not familiar with US insurance law, so if Updater requires insurance distribution licenses in order to permit third party insurers to sell or advertise insurance on the Updater platform, then this particular comment may be invalid.

It appears that Updater is negotiating to become an active distributor of insurance policies for large US insurers, not just an advertising channel. I am curious how this will work while Updater is at the same time a platform for insurers to advertise and reach customers on.

As a platform business, Updater is effectively selling influence and network effects to the insurer. By creating the best platform possible, it gives the best experience to the user (customer) and attracts more users, maximising ROI on marketing dollars for the vendor (insurer), and maximising Updater’s own revenue as a result.

Updater says in some of its filings that it generally seeks to sell access to the platform, not commissions for products sold. However it does disclose elsewhere that may expect “performance fees” (p20).

I think there is a definite grey area in there between being a passive platform (even if UPD gets commissions/performance fees) and being an active distributor of products. Note in that above linked presentation above that Updater says it is developing key strategic partnerships and working to develop retention and acquisition products.

The risk with becoming more active in distributing policies on behalf of insurers is, in my opinion, that it risks damaging the attractiveness of the Updater platform.  There is a potential conflict between being the platform operator (i.e., a relatively open marketplace) and simultaneously trying to partner with insurers to sell a specific insurer’s product. For example could the size of performance fees, or the closeness of the “strategic partnership” then determine which insurance policies get sold? Might this reduce the inclination of either users or vendors to use the Updater platform?  Recall my earlier questions about whether Updater’s platform might increase insurer churn and lower switching costs? You can see how this could potentially deliver sub-par outcomes to consumers as well as risk turning some insurers away from the platform.

Why would a non-affiliated insurer want to use Updater’s platform if it has to compete with Updater’s own strategic partners? If insurers stop using the platform or if customers are not getting the best deal, that will weaken the network effects because customers may be able to get other attractive products or deals outside Updater.

There are of course businesses where the platform operator can effectively compete with its customers (Amazon). However I question whether Updater’s network effects are strong enough yet that it can risk taking such a step itself. A simple measure of revenue would suggest, in my opinion, that Updater is not at that stage yet.

Again my point is not that these things will or won’t happen. My point is that this is a very large business that isn’t clear with these issues in its public filings and presentations. I believe Updater needs to spend substantially more time clarifying the mechanics and the why of its strategic decisions.

What is the cost of partnering with real estate agents?

Lastly I question what is the cost of obtaining the customer lists that Updater is using to push its product. The business appears strongly dependent on the ability to source customers via partnering with property managers. The ability to continue to source this data would appear to be key to the business until the network effects kick in, or the company finds alternative ways of sourcing customers (e.g., repeat customers).

What is the cost of acquiring this data and what is the cost likely to look like in the future? I don’t recall seeing that addressed in any presentations.

It appears at present that property managers may pay a fee to use the Updater platform. This Youtube video https://www.youtube.com/watch?v=-n0Uc3BqqyM states in the description “To purchase an Updater agent account, visit updater.com/agents.” which implies that agents pay for the app. Is this the source of Updater’s pre-IGC/ACI revenues?

If agents are paying for their accounts, does this mean that Updater is at the mercy of agent purchasing decisions? I.e., if agents don’t purchase the app & then push the platform on users, does Updater lose its market penetration (moves processed)?  If Updater’s market penetration is dependent on this channel that is a major risk. Updater reports “very low churn” from property agents but does not appear to consistently disclose how much churn it is actually experiencing. I question the length of the contracts/deals with property agents. Is churn low because contracts are structured over a long period of time (e.g. several years) and renewal dates have not been reached?

What does the agent gain from the relationship and is this relationship strong enough to let Updater build a big business on top of it without substantially higher costs?

Updater should provide substantial more clarification around its relationships with and remuneration to or from agents, and what the standard terms of these agent/property manager deals look like.

Where’s the S-curve?

One possible (admittedly imperfect) Updater comparison is Xero. Xero is useful because it is a classic example of a new tech product running massive losses to exploit the S-curve of user adoption. Bronte Capital recently stated that Xero had mis-stepped by managing the company to break even instead of raising as much capital as possible and growing as quickly as possible. That is as it may be. However, Xero was likely profitable as a corporation on an underlying basis (ex- growth marketing expense) as early as 2013. Xero unquestionably had an outstanding product that could already be sold profitably and would grow very rapidly if more money was poured into acquiring more customers.

I believe that the case of Updater is not quite so clear cut. Despite claiming 18% of the market, Updater has invested massively in its cost base to create new verticals to add revenue. This is because growing market penetration alone (18% Moves Processed) hasn’t added significant revenue relative to the cost base. Additionally Updater, to my mind (unlike Xero), hasn’t yet got a track record with the products/verticals that are going to bring it substantial revenues. Indeed Updater has only just rolled out these verticals relatively recently. Meanwhile the company is supporting a monstrous cost base without (until recently) the revenue improvement to justify it.

Creating multiple verticals seems a sensible strategic decision, and the verticals themselves make sense. However Updater still seems to be struggling to convert customers – although I could be wrong because Updater doesn’t disclose much, as noted above. Still, by the time Xero had 18% market share, it was generating millions of revenue from a single core product, and was ready to invest heavily in acquiring more customers.

To my mind, Updater hasn’t yet shown that its product/s are hitting the classic S-curve adoption of new technologies that companies like Xero and Afterpay have seen. The next couple of quarters would have let investors see progress in this respect more clearly – except, of course, that Updater is now trying to go private before it’s really hit full stride. This is why I view the lack of disclosure and the possible privatisation as a meaningful concern.

One interesting question I think is Updater’s relatively recent creation of its verticals even though Updater has been around since 2012. Why is Updater only developing the verticals now in 2017? I wonder if it would have made sense to start developing the verticals earlier – surely these would have been key in building a network effect? I believe Updater states that the company wanted to win a large user base first, but usually product and user base are developed in lockstep – great products attract great users, and this is a network/platform style business.

I note that Updater has been around since 2012 but seemingly did not take on major private capital, instead opting for an ASX listing. I find it strange that the company is going private now because it’s announced it wants a lot more money to invest in growth.

Call to action?

I originally intended to end this post with a call to action for Updater to greatly enhance its disclosure. I still think it should but it’s kind of ironic that, despite all of these concerns, the company has decided to move in the opposite direction by going private and delisting (subject to shareholder vote etc). I’m certain that the idea of raising multiple millions and relisting at a billion dollar valuation in a couple of years is much more sexy than explaining how the business works and defending its valuation to the market.

After all, in the private markets, you can value yourself however you want!

Look, I think there are clear concerns with Updater given the lack of disclosure and the recent founder sell-down. I think that it’s very difficult to determine the probability of Updater either winning or failing. My opinion is that some of the company’s numbers are quite woolly, and I find it telling that instead of improving disclosure and allowing the market to better gauge the company’s progress, Updater has elected to go private, which will likely result in further reductions in disclosure. You only have to look at Netflix, Amazon, Afterpay, Getswift (ha) to see how easy it is for promising, rapidly growing businesses to raise oodles of capital – whether publicly listed or private, and whether here or in the USA.

At certain times I feel like Updater is in love with the idea of being a big tech company with the ability to spend loads of cash, have fancy offices, win awards for being a great place to work etc. Updater wants to go private again so it can raise substantial new money and move aggressively towards 35% market penetration. (This may still be a sensible strategic decision). In my view it is not clear if the company is making concrete progress towards generating network effects.

I note that Updater has put a positive spin on the delisting by stating that “Australian investors that seek equity in Updater should consider buying CDIs in advance of delisting (as there may not be a further chance to invest in Updater once private)”. Better get in while the getting’s good! However, I note that several large funds hold Updater shares and I question whether these funds will be able to hold the shares once Updater goes private. If they cannot hold private companies, I question if there will be substantial selling on the open market (potentially affecting the share price) if a privatisation vote is approved. Updater’s buyback does not appear to be large enough to accommodate possible institutional selling. I also question why the investors that want to invest in a privatised Updater were seemingly not interested in bidding for the shares of large public investors pre-privatisation.

I note that Updater has stated that numerous financial investors and strategic parties have expressed significant interest in Updater as a private company yet UPD has not disclosed any serious approaches to the market – which it would surely be required to do under ASX listing rules? As far as I am aware, there’s no public proof of any substantial interest from private funding. Updater has raised $5m in the US previously but the last time it needed A$50 million (for a US$ acquisition no less) it raised the money from Australian investors.

I have been told that during the recent conference call (which I missed and could not source a recording or transcript for), Updater stated that they had received interest from private entities in investing in a privatised Updater at a valuation of up to $1bn. However if there are any firm offers, this information should surely have been disclosed to investors as part of the recent presentation? A firm offer to invest in Updater contingent to a successful de-listing would surely be relevant information to investors who are deciding whether to sell their shares or hold the private entity. As no formal offers were disclosed, it seems prudent to assume that there are no firm or guaranteed offers to invest in Updater at a higher valuation once privatised.

Readers will have their own opinion on this matter. I note that Tesla has funding secured for its privatisation also.

I also question why the idea of raising more capital at a $1 billion valuation is so attractive as to be worth the hassle of privatisation. Updater is already worth US$0.6 billion, or A$0.8bn. The company is within spitting distance of being a unicorn and if it can grow at anything like the rate of Afterpay, Netflix, it will have zero trouble reaching the magic nine zeroes – in fact it could do it in twelve months if current forecast revenue growth is maintained. There are already enough supportive investors in Australia to raise another $100m to accelerate growth further. I question if there is an alternative reason for Updater’s privatisation plans.

I note that Updater has announced it will be looking to rapidly scale up its business to 10+ verticals within 2 years and 35% market penetration ASAP. If prior experience is any guide this will cost an enormous amount of money. Yet I also note that Updater intends to secure further private investment to fund acceleration of growth and/or “potential future buy-back(s).

Love or hate Updater, in what universe does a buy-back make sense for a loss-making company aggressively investing in growing to scale?

I question why a company like Updater would go private right as things are seemingly starting to take off in terms of revenue growth. I question whether Updater is aggressively adding verticals (and cost base) as a way of showing revenue growth and masking lack of progress in existing products/ verticals.

All things considered, I feel like the core question, whether Updater is successfully building network effects and growing customer conversion, has not yet been answered comprehensively by business performance. I feel like the company is going private right at a time when the next two quarters or so would prove quite enlightening regarding the progress of the business.

The bottom line

There are many questions, and no easy answers. I can see a path to Updater becoming a multi-billion $ company – with me as a shareholder. I can see a path to it asymptoting zero. I can also see a middle ground where it becomes a solid, niche marketing/commission business without being spectacular – although I think the company’s grandiose ambitions make this outcome very unlikely without a drastic change of strategy. The probability of the two polar outcomes occurring I think is difficult to determine and without greater disclosure, Updater makes itself very hard to invest in, particularly at the current valuation.

Again the problem is not just the questions and risks in the business strategy. The problem is that there are so many concerns, in my opinion, with lack of disclosure and large, woolly numbers that it makes it very difficult to get comfortable with Updater.

One of the biggest risks of investing in Updater in my opinion is that the lack of tangible information about the performance of the company’s verticals invites the investor to paint a blank canvas using the very large, top of the funnel metrics that Updater has presented to the market. After all, these are multi-billion dollar target markets. Whether Updater can convert them successfully or not I believe is still an open question. As I said earlier:

If we had a fire, we could roast some marshmallows – if we had any marshmallows.

Caveat emptor.

Disclaimer: This post reflects my personal opinion only and is not a recommendation to buy or sell any mentioned securities. All readers should always do their own research and seek appropriate professional advice before making any investment decision. I have no, and have never had, any financial interest in or relationship with Updater. I do not stand to financially benefit in any way by the publication of this post or any subsequent market activity in Updater shares. This is a disclosure and not a recommendation.


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