Connection Mobility (CXZ.AX)
SaaS company trading at 5x earnings
Connection Mobility operates US-based fleet management systems for car dealerships. CXZ is a pureplay SaaS company with 80% gross margins and recently was mandated to all General Motors (GM) dealers as their exclusive provider of courtesy transportation programs.
The mandate boosted CXZ’s revenue by 74% and NPAT by 12x to US$6.6m and US$1.76m respectively. With US$6m of cash in the bank (42% of market cap), CXZ currently trades at 5x EV-NPAT, with the mandate expecting to further grow revenue as it has only been active for H2- 2023. Backing up the strong growth CXZ's new CEO Aaryn Nania has been acquiring shares purchasing 20.6m shares on market throughout FY23 bringing his total holding to ~AU$630k (2.8% of CXZ) while being on a salary of about AU$200k, while the company has been buying back shares.
Operations
Connection run 2 software platform’s that manages courtesy transportation programs. When people bring in their car to be serviced, it is standard in the US that customers with a car under warranty receive a courtesy car while their car is being serviced. CXZ’s platforms help dealerships with inventory and appointment management, customer billings, reservations, damage, communication and more.
Connections’ primary platform has historically been OnTrac which charged clients on the number of vehicles it managed. OEMs enforce dealerships to ensure their fleet is new and up-to-date for customer satisfaction and sales purposes. The well-publicised supply chain shortages of 2021 posed a severe threat to Connection’s business model with dealers’ inventories falling. Connection quickly pivoted launching the Connection platform covering used cars as a way for Connection to navigate the lower inventory levels while increasing their offering to dealerships and opening up the opportunity for the car rental industry. Since the road bump in 2021 connection has adapted its pricing structure charging dealerships a flat cost to use their platforms.
From my understanding both platforms- Connection and OnTRAC are both very similar in their offerings, but just focused on different vehicle management types (Connection- new/ demo, OnTRAC- used/ older)
Fleet-management ecosystem
While Connection doesn’t exclusively offer their platforms to GM dealers, they are heavily concentrated with GM with GM dealerships accounting for 99% of revenue in 2023. Customer concentration is the key variable and existential risk for Connection. GM’s recent mandate of Connection’s platforms highlights their commitment to Connection and I think the short/medium-term risk of GM leaving connection is very low, especially given connections platforms represent around 1% of the average dealerships spend on software (US$150k) and GM recently resigned connection for a further 5 years.
Connections 3 largest competitors are TSD which manages 8,500 dealerships and 2,500 car rental companies, Dealerware which manages 3,000 dealerships and is owned by Audi (which is owned by Volkswagon) and Rentallsoftware which manages 2,000 dealerships.
Connection manages 4,000 GM dealerships and is the third-largest provider of fleet management software in the US (GM dealerships account for 20% of US total dealerships) . Individual dealers have the ability to choose their fleet management systems from an approved list by their OEMs. Connection’s platforms have recently been approved by Ford and Lincoln adding along with their approval to GM. Connection has recently won its first 2 non- GM non-dealerships singing up a Volvo and Kia franchised dealerships.
Management
Connections key man is CEO/ MD Aaryn Nania, joining the company in 2018 on the back of a career in funds management as a director Aaryn took over as CEO in late 2021. Aaaryn has been aggressively purchasing shares on the market purchasing 20.6m shares throughout 2023, and while this is no indicator of success it is a good sign especially given connections growth ambitions spearheaded by Aaryn. Listening to Asryn speak a couple of times and reading his commentary I was very impressed with his candid nature, openly talking about the issues and risks within their industry, growth ambitions, the consolidation of dealerships, and struggles singing non-GM dealerships, you can see management extensive commentary in their quarterly reports.
Outlook
Heavily entrenched in GM’s operations generating strong cash flows, Connection plans to continue to invest in “growth spend” which is described as sales & marketing and R&D expenditure on the P&L. Connection have missed the trend on profitability and cash flow positivity and plan to reduce their NPAT to breakeven to fund growth spend. Connection has a strict capital management approach and given their plan to reduce NPAT to breakeven the company suggest’s measuring the success of their investments by gross profit. Management targets a >25% return on their “growth spend” measured via growth profit.
Connection plan to flesh-out their offerings within their 2 platforms, connection platform and OnTRAC, through general feature enhancements, improving the quality and scope of their product offering to dealerships. Given Connection only represents around 1% of dealerships software spend there is a lot of room to grow via increasing their offerings and pricing, especially through their strong relationship with GM dealerships. Connections sales growth strategy in their own words:
Proprietary feature enhancements valued by our existing Userbase of franchised dealerships
Commercial Partnerships bringing complementary functionality to this existing Userbase
Expansion of the Userbase itself to new OEMs and franchised dealerships
So far the traction outside of GM has been slower than Connection would like, as it is below their required rate of return in relation to growth spend, commentary at the end of Q4 23 highlighted this however they have seen highlighted brand awareness and increased willingness of firms to engage, with Connection signing their first 2 non-GM dealerships throughout FY23, a Volvo and Kia franchised dealerships.
Financials
Above shows Connections financials history, I’ve used EBIT as the preferred metric given lumpiness in taxation and the large cash balance that distorts results. You can see strong boost from the GM mandate boosting margins, revenue and profit. Since taking over in 2021 Aaryn has done a great job of boosting gross margins, given the mandate has only been live for H2 2023, CXZ is on a run-rate on US$9m in revenue for 2024, annualising H2 2023 results.
What to watch
It’s far too soon to get any gauge on the success of their investments into “growth spend”, however annualising H2 2023 revenue at a normalised USD/AUD of $1.3 gives 2024 revenue of $11.7m, with a current market cap of AU$22.8m with AU$8m (normalised USD/ AUD:$1.3) of cash CXZ trades at 1.26x revenue. Not much is priced in and even if their investments don’t yield high returns their is plenty of value to be created through capital returns given they are currently operating on 25% NPAT margins, which Aaryn has highlighted as the likely outcome if their investments don’t succeed.
The important factors going forward for me are:
OEM approval- Connection needs OEM approval to be able to sign up dealers.
Dealership sign-ups- These platforms have network effects dealers will be less likely to sign-up if none/ not many of their fellow dealerships use the platforms, for reference points and confidence reasons. I think its a slowly then suddenly phenomenon and connection need a little bit of traction to get the ball rolling on their investments.
GM- If GM leave Connection its game over, but GM’s recent mandate and CXZ’s heavy investments should strengthen the relationships.