Note: Ackroo trades on the Canadian Venture exchange as AKR.V, and OTC as AKRFF
Finding that next ‘home-run’ idea is no easy task. Most of the time that ‘home-run’ idea usually comes with just as much downside as upside, and as many value investors would agree, what’s the point of buying something without a solid margin of safety? Finding a ‘home-run’ idea with limited downside? Well that’s a whole other level of rare.
Some investors looking for that next home-run idea will venture into the micro-cap space to find these opportunities. Let’s be real for a second though: the micro-cap space is usually very sketchy. Overly promotional management teams, companies with junk products, and a few fallen angels. Yet every once in awhile, you stumble across something that makes you do a double take. Not all micro-cap companies are as bad as you think.
Meet Ackroo, a formerly overhyped start-up that turned into a broken, cash burning machine that left a lot of previous shareholders with pennies on their original investment. Fast forward to now, and you have a company that fired the previous management team, drastically reduced headcount, and has positioned itself on verge of breakeven, all on a barebones budget.
Even with all this change, the market still views Ackroo as broken, with nothing positive on the horizon. Yet, with profitability likely less than a year away, it’s pretty easy to see a path to multi-bagger potential without overly aggressive assumptions.
What $6 million of cash burn looks like, or 150% of the current market cap.
Before we get to where Ackroo is going, let’s recap to how it got in this position. Ackroo is a SaaS based provider focused on selling its cloud based gift card and loyalty platform into the retail and hospitality markets across North America, with a focus on the SMB segment (small to medium sized businesses). Essentially, the SMB segment is very underserved and very fragmented when it comes to the loyalty market, since most of the big players in the space only focus on enterprise accounts. This was Ackroo’s opportunity. Original shareholders ate that up. What’s better than a sticky, recurring revenue business within a highly fragmented market? Investors love consistency and predictability.
Pre-money valuations for the company were around $19.5mm (current market cap is about $4.3mm). So what was the problem? Ackroo wasn’t making any money. The company burned through cash like no other as they tried to build a big salesforce. Things just kept going downhill from there as the company was constantly running out of money.
During this time, the company hired Steve Levely, who happened to stumble across Ackroo because he was trying to build his own loyalty and gift card offering to take advantage of the underserved SMB market. In May of 2014, the board appointed Steve as the CEO with the goal of becoming profitable of selling the company.
The biggest issue for the new management team? Raising money. No one wants to invest in a company that’s already burned through millions of dollars. Luckily, they were able to raise some money in a few private placements to keep the lights on. The management team also decided to fire the whole sales force and switch to a referral only model, which dramatically reduced costs, and if you think about it, what other choice did they have with a barebones budget? Since then, they’ve made a few acquisitions and secured a few partnerships to increase their scale and improve their offering.
Like I mentioned earlier, Ackroo is a SaaS based provider focused on selling its cloud based gift card and loyalty platform into the retail and hospitality markets across North America, with a focus on the SMB segment. Their platform provides the processing of gift card and loyalty transaction at point-of-sale, gives merchants important administrative and marketing data (this is important, think big data), and also allows customers to access and manage their gift card and loyalty account. It’s a very, very fragmented space, with a lot of different players and a lot of different offerings. My big question at first? Where’s the competitive advantage/moat? To be honest, there really isn’t much of one.
Let’s think of where Ackroo fits in for a second. You have well known names like Square that have a loyalty and gift card offering as well. Why can’t they out-compete Ackroo? Well, Square focuses on very small businesses with only a few locations. They also charge a much higher transaction fee (~3%) than a typical enterprise payment processor would charge (sub 2%). Yes, that 1% is a big difference. Ackroo often works with companies with many locations. Companies like that don’t work with the Square’s of the world because of the high fees, and the infrastructure needed to handle all their locations. They also prefer third-party providers like Ackroo because Ackroo’s platform can support any sort of point of sale environment and because it allows merchants to use which payment provider they’d like. Payment neutrality is key.
So what about they big guys? Why doesn’t First Data come up with their own loyalty offering for the SMB space? They certainly can, but it’s not worth their time and resources. They instead have offerings for big enterprise accounts which will actually help move the needle when it comes to revenue and profits. Instead, companies like First Data and Global Payments will partner with Ackroo, and have their salesforce sell Ackroo’s offering into their current customer base.
Ackroo’s niche is really within some of these bigger businesses with many locations that prefer to have a third party provider of loyalty and gift card solutions, which can work with many different payment providers. Ackroo’s direct competitors are more like companies such a Datacandy which have a similar offering, which a few differences. For example, Datacandy looks cheaper upfront, but they’ll charge you for any additional services you request. Ackroos allows merchants to add on most additional features at no additional cost. Datacandy requires merchants to request customer spending data reports from them, Ackroo’s platform is completely do-it-yourself so you can generate reports on your own. Again, I don’t think any of this can be called a strong competitive advantage. The real selling point to investors is the consistency of the recurring revenues and the stickiness of the business.
Ackroo really has three different types of revenue: the recurring revenue which is the SaaS fee they charge merchants every month, the lumpy, seasonal revenue they’ll get from things such as when merchants do big gift card campaigns around Christmas, and then the truly one-time revenue they’ll get from initial set up fees, etc. Obviously, the recurring revenue is every investors dream. Pretty predictable and consistent every quarter, with only about 2% attrition in Q2 as well. That revenue is quite sticky as well. Once you’ve integrated software like this into your platform and get used to it, the monetary and psychological switching costs get much higher. Steve and his management team believe they’ll be able to hold onto their accounts for upwards of 9 years.
The Future and The Upside
Now for the fun part. The common bullish argument is that Ackroo should trade