Company Interview / A micro cap betting big on new markets

Key points:

X2M Connect is expanding its geographic reach starting with the Middle East via a licensing model.The company is transitioning from a software and hardware play to a purely software-focused strategy.Despite putting their expansion into China on hold, X2M Connect sees potential for growth in South Korea, Japan, Taiwan, Australia, and the Middle East.

Mohan Jesudason, CEO of Australian IoT technology firm X2M Connect highlights their recent deal with Decode Technologies to license their platform in the Middle East, initially starting in the UAE. According to Mohan, X2M Connect, known for digitising utilities in the APAC region for the past 7 to 8 years, is expanding its reach through a licensing model, allowing them to generate traditional SaaS type revenues. Their game plan involves licensing their core technology to utilities, initially in the UAE and subsequently across the Middle East region.

For the success of this operation, X2M Connect's business strategy involves transitioning from both a software and hardware play to a software-focused strategy. This move is inspired by a desire to expand on their strengths and exit the hardware business. As Mohan explains, their approach to the Middle East is purely software, promising recurrent revenue with margins of 75 to 90%. Their push into the region is expected to be profitable and cash flow positive from the beginning.

As part of their expansion, X2M Connect is observing lucrative businesses in diverse markets including South Korea, Japan, and Taiwan. However, their expansion into China has been put on hold due to a slowdown in the Chinese economy. Mohan emphasises their focus on investing in high-growth markets, which also includes Australia. As a B2B company with a significant client base producing an impressive market of upfront revenues and recurring revenues, Mohan believes X2M Connect offers investors significant potential value.

Full unedited transcript below:

0:00

But it hasn't stopped Aussie IoT technology firm Kinect from putting out a market. An announcement about a term sheet with Decode technologies to license its platform for the Middle East, starting in the UAE. So let's get the highlights of the deal with zoom CEO Mohan. Jesse Jackson, thank you for joining us. Uh, Mohan, what is the detail of this of this deal?

0:26

Um, look, it's really quite straightforward as. As you may as you would know where a technology company, we digitize utilities in the APAC region. Um, and, uh, you know, where we've been established for 7 or 8 years. The company is now expanding its geographic reach, and it has entered the Middle East market initially through the UAE.

0:49

Uh, our business model, uh, for the Middle East is a licensing model. Uh, we've licensed our code technology to take our platform and supplied to utilities, initially in the UAE and then subsequently, uh, more broadly across the Middle East region. Uh, we supply them with software. They do the sales, marketing and installation, and we generate, uh, the traditional software type of SAS, uh, revenues. It's very exciting for us. Okay. Well, congratulations. I don't see any financials associated with this. Am I mistaken? What can we expect? Uh, so, look, the detail of the contract is commercially sensitive. We don't want that around the market. What we have told, uh, the market in this announcement. There are a number of components of this term sheet that are binding, uh, that, uh, it's a high margin business that we should expect to earn around $2 million of EBITDA for every 500,000 uh households or dwellings that are connected onto the

1:49

platform, uh, or more specifically, meters that are connected onto the platform. Uh, the UAE has an addressable market of about 7.5 million water, electricity and gas meters. And what we what we're doing is digitizing them.

2:02

Okay. And so where else are you making strides? I know that you were out with your quarterlies at the end of July, which just after a couple of days on markets we've had feels like a long time ago. But revenues were down on the PCP. Why was that?

2:19

That was because the business is transitioning from a software and hardware play to a pure software play. And as a, uh, when we began life, we established our foundations, uh,

2:34

through the delivery of hardware in the utility space, uh, that connects on to our software platform. Uh, we are now progressively moving away from hardware and low margin hardware to focus solely on software, which, you know, which is what, uh, what our strengths are and what you've got. Uh, in the year that's just finished is, uh, the hardware business being exited.

2:57

Okay. And so once you get into the Middle East, once you get some of this, I'm presuming you're looking for the recurring revenue that the SaaS model does provide. Um, where do you see the financials going? I know that you had a convertible note, I believe that helped enable this push into the Middle East, but how are things going in terms of growing the business elsewhere? You know, moving toward, um, you know, growing revenues. I know that you are profitable.

3:28

Yeah. The business is performing very, very strongly. So, uh, you know, we're connecting a new device onto the platform every 4 to 5 minutes. Uh, the, uh, business in the Middle East is all software. It's all recurring revenues. Uh, you know, the software space, you know, you should expect margins of, you know, 75 to 85, 90% in the Middle East won't be an exception to that. It takes very little capital for us to expand into that, into that region. Uh, it's a market that we expect to be profitable from day one and cash flow positive from, uh, from day one. Uh, the broader business, uh, you know, we started life digitizing utilities in APAC. Uh, and, uh, you know, particularly South Korea in Japan. And we're in really strong leadership positions in those two markets. Similarly in, in, in in Taiwan, we've got a very strong business in Taiwan. Uh, we provide software for one of the large renewable energy

4:28

generating companies over there. And for the gas industry. Yeah. Why did you decide to put the China expansion on, on on ice?

4:37

Well, the as you know, the Chinese economy has slowed down and a lot of the Chinese business was hardware and sales, as we established, uh, as we were establishing our channels and strategically the, the company's building, its base of recurring revenues, we think, uh, you know, China is clearly a large market. However, we think that it will be a slow market for the next, next couple of years. And, uh, and, you know, we're investing capital where the growth is and and the growth is in South Korea, Japan, Taiwan, Australia. Uh, and and of course, we expect that to come in the Middle East as well. Yeah. And I see as well that you've got more enterprise and government customers as well. In the most previous quarter, up by about 15%. We had your share price chart up before. So in your view what is the market missing if everything's going so well? Look, we're we're a B2B company. Uh, the business is

5:37

going well. Uh, we have 76. Yeah. Exactly. Right. Government and enterprise customers. They represent an addressable market of half $1 billion in upfront revenues and about $40 million of recurring revenues. This is without counting the Middle East, right? Uh, and then when you look at our share price at $0.04, you say, well, you know, why is this the case? Uh, look, it's for investors to make a judgment of where value sit. This is what I think. I think that we're a company that has got strong momentum.

6:08

Very good. Uh, base of customers, a very large addressable market. And our multiple is less than one times, uh, a market value cap business at one times revenues. So, uh, you know, at some point, uh, I'm expecting that, uh, the market will become aware of us. And of course, you know the story with micro caps and small caps over the last, uh, last 2 to 3 years, and we haven't been an exception there. But ultimately, you know, my job is to build a good, strong, viable business. And the team's doing that. And I think we'll get rewarded. And our investors will get rewarded in due course.