CYO - Clarity

[Lizard]

I thought that I'd start a thread for CYO... a story that once started out as Powerlan (PWR), achieving one of the ASX's more dramatic listings, but was trading at 1.7cps when I recently pulled it up for a look at the quarterly...to keep a story brief(ish), here is the chart:

3809

Here's the sort of hype that came with the Powerlan story after listing and setting off on an acquisition spree:

http://www.computerworld.com.au/article/102637/story_behnd_powerlan_aquisition_cssl/

In 2001, they had sales of $342m and a profit of $18.6m.
In 2002, they had sales of $211m and a loss of $146m.... so much for that.

Chairman, Theo Baker, took Director "Persecution and Denial" Syndrome to new levels with his AGM speech:
3810

Then quietly left a few years later to pursue other interests, selling his shares to interests associated with the current Chairman in the process (and moving into property development in the form of the aborted "Community Life", later morphed into CL Asset Holdings).

This should have slipped away into the abyss. Except that they are still here, still trying to struggle back and still hoping to make something from the remaining one of their early acquisitions, Clarity OSS.

Clarity used to have its own ASX listing (CLA) until PWR took first 51% and later the remainder. Now it's effectively back on its own again. They are a software provider of Operational Support Systems to Telcos (http://www.globaltelecomsbusiness.com/Article/2811369/Making-converged-OSS-a-reality-one-step-at-a-time.html) - supposedly a $10-$20bn+ market... although they only have about $16m of it. From the time of the Board being renewed in 2006, the focus has been on keeping and growing Clarity, with other businesses slowly sold off to fund business development.

Since then, the AGM speeches have remained optimistic, while the company has continued to invest heavily in Clarity, relying on the financial support of the major shareholder (companies related to the Chairman). Most recently, these companies took the two remaining lower priority businesses off CYO's hands, in return for cancellation of some of the debt owed.

The recent quarterly suggests it is possible that CYO may finally be on the road to that comeback... by my calculations, net debt is probably down to around $11m and the company finally declared a positive net cashflow of $1.7m for the first half. While one good cashflow does not a winner make, the market seemed to react positively. Putting it on the watchlist... hope the chart above is enough of a caution...don't rush this one!

[STRAT]

Hi Liz.
I like that chart :D
Could be one in tune with the original theme of the Breakout thread.
Will take a look.
Thanks.

[Lizard]

Hi Strat,

Be careful with this one. I have two issues that need clarifying before I would actually buy:

1. It's a controlled company, so the Chairman needs a bit of a going over with the magnifying glass to see what his record looks like.

2. It's difficult to be certain that Clarity is going to grow and/or remain cashflow positive - the last annual report showed revenues shrinking. The latest quarterly may be deceptive - I think it includes cashflow from discontinued business (whereas the last Annual Report separated them out of the P&L), so may be better to wait for the HY report to compare revenues on continuing operations (Clarity). AGM speech was encouraging in this regard, but then AGM-speak on "orders" have never seemed to quite match up with "revenues".

The good side of a company like this is that it has some fairly well-established business and revenue stream, so if they can get it cashflow positive, there is reasonable basis for on-going profit and growth. However, with the sudden move up to 2.6cps, market cap is $9m and they are still talking about a need for more working capital in second half, so perhaps more dilution. Therefore not sure if there is enough in it at these prices to be worth taking the risk.

Still if they can book the small op profit that they are hinting at for the year, it could make it to Steve's "Profitable Micro-caps" thread. Then we just need to see growth (and preferably no more cash-burn).

[STRAT]

Thanks Liz.
Going with the theme in the breakout thread this one is for the watch list only.
No signs of life here yet.

[Lizard]

Hey well, just to fill in the gaps on the Chairman/controlling interest before I leave this one, here's a 2007 article with a bit on him:
http://www.theage.com.au/small-business/no-room-for-passengers-on-this-entrepreneurs-ride-20090619-coui.html


[on co-founder of CPS, Dr Ritch] "(It's) funny, he didn't take any risks. He (is) level-headed and sensible. I was the gambler who'd go out and sell things we didn't have," Dr Campbell says.


From a quick scan, looks like he is also on the Board of ANQ and a major shareholder in ELT and DVA. Also loved an old 2000 article which documents an early connection with Powerlan, when CPS transferred a business to Powerlan on a 100% earn-out arrangement:
http://www.arnnet.com.au/article/76775/powerlan_cps_bet_b2b/


Tom Matic, business solutions director with Powerlan, said CPS has limited resources and needed a strong partner to make the exchange a success.

Ironic, given Powerlan survival has ended up dependent on CPS resources. Also, Tomislav Matic later made his own play to get his hands on Powerlan, with various funding offers and an Asian-sponsored takeover bid at 10cps a year or two back... this latter was fended off by a controversial same-day announcement of a substantial and heavily dilutive rights issue.

Whether or not there is any value in CYO for minority shareholders remains unclear, but it seems those who know Clarity OSS well, still find it worth scrapping over.

Anyway, enough from me on this share for now. Not wanting to ramp it, just wanted to record my thoughts where I can find them again. (You chartists can have your pretty patterns... I prefer to read a good story :) )

[STRAT]

(You chartists can have your pretty patterns... I prefer to read a good story :) )

Plenty of good stories hidden in a chart. :D

but....

without the likes of Steve, Shasta and yourself I wouldnt do nearly as well.;)

[Lizard]

Got as high as 4.4cps before HY report. Depth hollowed out and back to 3.8cps where I have now sold my tiny trade for a quick gain. Will keep on watch, but may need more funds in second half - possibly to come as borrowings from parties associated with the Chairman.

[Lizard]

Thought I'd update this thread before it ends up archived-to-nowhere through lack of use...

Since I started this thread in early 2012, CYO has managed to more than double revenue (now $39m) - but also more than doubled the substantial debt to the major shareholder (CPS). The share price has collapsed back below where the thread started, with last trade at 1.4cps and market cap down to $4.9m. As suspected, the cost of boosting revenue has been at the expense of cashflow, with substantial negative cashflows for virtually all periods since Dec 2011.

A price/sales ratio of 0.12 is pretty compelling value for a tech company with fast-growing revenue... however, there are two huge thorns:

1. The debt of $28m with a history of negative cashflows and negative equity of nearly -$13m, as well as an impossibly low market cap in terms of the ability to raise new capital would normally make it an "AVOID". Given the major shareholder (CPS) is also the major debt-holder and associated with the Chairman, the typical conclusion would be for CPS to acquire full ownership in lieu of debt just prior to the company achieving profitability, leaving either nothing or a few small crumbs for the remaining holders. However, in this case, instinct says perhaps CPS and Dr Campbell deserve the benefit of the doubt. After all, they perhaps could have taken this strategy several years ago when they took other under-performing businesses in exchange for debt in transactions that appeared very fair to CYO.

2. The changing market - can a company with these kind of financial limitations really stay at the forefront of a global software market? What was defined as "visionary" in November 2012 may well have become the norm in their sector a year later. I am certainly not expert enough in OSS systems to know! On the one hand, they have been able to restructure recently and say they have reduced costs by $10m per annum (which would make them look attractive if current sales were maintained!), but on the other hand they are reporting some drag in sales and delays in existing contracts... so there is perhaps a danger here that they will struggle to maintain revenues. Whether they have enough sales momentum to generate useful levels of cashflow will be the nub.

Once again, it looks like "make or break" time for CYO - or at least for their small shareholders. The odds are usually not great in these circumstances, but the scale of potential upside could make it tempting.