Clausi on Mr. Market and Snipp Revenue Results
We last visited Snipp Interactive Inc. in Nov/15 after Q3. Snipp (TSXV: SPN | OTCQX: SNIPF) is a brand management / marketing company in the relatively early stages of its existence. It’s a “soft” company – no real estate, no heavy equipment, no machinery. It if were a human, it would be about 10 years old.
For a company like this, at this stage of its existence, investors almost always look to organic revenue growth as the key metric of management’s success. Cash flow is great, good debt is acceptable, but growth in non-acquisition revenue tends to be the market’s focus of attention.
Snipp’s growth in revenue quarter-over-quarter was relatively flat. In Q4/15 it was $2.5M, and only increased to $2.7M in Q1/16. Like a chemical reaction, the market automatically punished the share price in response, cutting the market cap of the company by roughly 50%. The company was growing up, but not fast enough for Mr. Market.
We advocate looking beyond facts to “what they mean” (you did well if you listened to us argue “what the facts mean” on Anaconda, Hornby Bay, Integra Gold and Nemaska Lithium). This dip in the share price gives us cause to reflect on the nature of a “soft” and “young” company, and what the revenue numbers could actually mean.
First consider a landlord with various income producing real estate assets, in which there isn’t much variation in revenue quarter-over-quarter. The landlord knows what the aggregate monthly rent will be from all the tenants, across all the properties. It’s a simple mathematical exercise of this much rent per month multiplied by 3 months and then add it up for each property, for the quarterly gross revenue. This is easy to calculate and more importantly to the market, easy to predict. There aren’t many surprises in the revenue line for these real estate companies.
This also means the beta for the shares of public real estate companies tends to be rather small. Real estate analysts might spreadsheet themselves into a migraine worrying about the impact of a 10 basis points rate hike, but the market impact if such a rate happens is relatively small. Some investors like the comfort of less risk, happy to trade off larger returns for the comfort of predictability.
(As an aside, the last overnight real estate market pummeling in Canada was The Hallowe’en Massacre in 2006. The Hon. Jim Flaherty, then Minister of Finance, reversed an election promise and made shocking changes to the Income Tax Act‘s treatments of income trusts, causing the trusts to plunge in value.)
Two more facts to consider: basketball games last four quarters, and playoff series last seven games. Why does this matter? Last year’s NBA champions, the Golden State Warriors, were down 3 games to 1 in this year’s conference final. The series wasn’t over. They took the next two from Oklahoma City. Trailing by 6 in at half in the deciding game 7, the Warriors battled to win by 8. Anyone betting against them took a beating.
Like partying in Vegas, it’s a marathon, not a sprint.
So back to Snipp. It’s only ten years old. Think of the ten year olds you know. Some days they’re brilliant. Some days, not so much. It’s part of growing pains to face challenges, stumble, get up and do it better the next time. Step back and take a larger perspective on the facts.
Snipp is showing a lot of potential. Press releases over the past year show revenue from long-standing clients, a financing to raise $7M, new Fortune 500 clients, a new consortium of pharmacy clients in Switzerland, and an astonishing client base (see page 14 of the company’s presentation for a list of some of these).
And since revenue growth seems to be so important to some, Snipp announced in May/16 that at the close of Q1/16, it was running a record-breaking 60+ simultaneous programs worth $3.5M. A quarterly run rate of $3.5M x 4 quarters yields $14M revenue for 2016, which would be roughly a 20% increase over 2015.
Part of the problem with being a reporting issuer is that companies report quarter-over-quarter. For some companies, that’s an irrelevant reporting period. It takes time for business plans to unroll, for marketing to be converted to revenue, for companies to grow up. Sometimes, a year over year comparison isn’t even enough. Snipp shows enough signs of maturity that we as investors must give it the space to grow up.
Mr. Clausi is an experienced investment banker, executive, director and shareholder activist. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, ... <Read more about Peter Clausi>