RPMGlobal Holdings Ltd’s (ASX: RUL) financial statements might appear uninspiring on the surface but a little bit of digging reveals a company with the potential to surprise.
About RPMGlobal
RPMGlobal is an IT company within the mining industry that has traditionally provided advisory services and technical support in regards to mine preparation and planning. Questions of where, when and how to dig are the types of questions RPMGlobal’s technical consultants and mining software addresses when dealing with miners looking to extract their commodity in the most efficient way possible.
The RPM Global share price has traded sideways for much of the past 12 months as CEO Richard Mathews and his team continue to lay the foundations for a period of sustained success.
Hidden Value
For the sake of analysis, it is helpful to break the company down into two distinct but complimentary divisions, the advisory division and its software division. It is within the software division where things are not what they first appear when analyzing the financial statements.
RPM Global is in the process of transitioning their software business from a model that sells perpetual or one-off licenses, receiving all revenue upfront in lump sum payments, to a software as a service (SaaS model) whereby revenue is received on an annual recurring basis. This transition has huge ramifications for the presentation of future financial statements.
The move to the SaaS model will negatively affect profits in the short term as revenues that had previously been recognised upfront as a lump sum are now recognized in smaller amounts each and every year over the life of the customer’s relationship. In the long run, this creates a very lucrative recurring revenue stream.
If RPM Global is able to successfully fulfil the needs of its clients it should be able to achieve a high client retention rate and in an ideal world, its technical expertise will allow it to increase its subscription fees each year whilst maintaining its market share.
Gathering Momentum
Recurring revenue is now starting to grow rapidly, increasing more than 5-fold from $800,000 to over $4 million in the first half of 2019.
As the subscription model takes over from perpetual licenses the financial accounts will slowly but surely start to become more compelling to investors. With a market cap of only ~$130 million, RPM Global will fly under the radar of many fund managers but if subscription revenues continue on their impressive upward trajectory it may not stay that way for long. I recently purchased shares at just under 60 cents and will be closely monitoring their progress.
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Disclosure: At the time of publishing, Luke has a financial interest in RPM Global Holdings Limited.
