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Reflections and portfolio positioning
In recent years, while the majority of our portfolio has been focussed on profitable, usually dividend paying stocks, we have purchased a number of typically smaller positions in technology stocks with low market caps that have been close to cash flow break even to provide exposure to interesting emerging growth stories. We had expected that with their growth profile and attractive unit economics they would grow to become NPAT positive in the short to medium term. This journey to profitability among this basket of stocks has taken much longer, and proved more challenging and frustrating than we had expected. It has taken until this quarter to see the first in this basket (KYP - as discussed above, after over four years of holding) to reach an NPAT profit.
Gross profit improvements on the back of revenue growth have typically been offset by increased growth costs and technology spend, and complicated by strategy and management changes in some cases. We have found that for those companies that have invested in growth (and those that have a culture of gifting management shares), the transition from EBITDA positive to NPAT positive, and then generating operating leverage can be a long and painful (for shareholders) journey. CCR, which we discussed above, is a good example of this, while it is operational EBITDA positive, there is uncertainty as to when it will be NPAT positive, and post month end undertook yet another capital raise to fund its growth. For one of our companies, Design Milk (ASX: DMC) found it too difficult to transform to a profitable business and has now sold its operations and is looking for new opportunities. We are much more sceptical now of those sorts of opportunities, and of management teams that are promoting these transitioning to profit companies.