I think a few comments have been misinterpreted. The main reason for me posting warnings is that this company was operating so close to running out of cash (as of March 31, 2014). I don’t know if that was the cash low point or if it dropped lower in April or May. What is the cash balance now? I simply don’t know because the numbers are not yet available because they haven’t reported the June quarter yet.
Thanks Chris, that post gave me a much better understanding of what you meant.
I realize that I was thinking about a company with stable revenue. For example, a company with roughly $100 million revenue every quarter takes in $100 million in payments every quarter, even if it takes 90 days on average for them to get paid. (For example, if it takes 3 months for them to get paid, they collect the $100 million in the June quarter that they billed in the March quarter, etc, assuming full collections for simplicity).
I see now that for a rapidly growing company like AEYE, it will be quite different. For the sake of discussion lets assume that their billed revenue for the first and second quarters of $1 million and $3 million was divided like this:
Jan — $200,000
Feb — $300,000
Mar — $500,000
Apr — $700,000
May — $1,000,000
Jun — $1,300,000
That gives them $1 million in the first quarter and $3 million in the second quarter and seems like a pretty logical progression, at least.
If their average collection time was 30 days (very optimistic), they would have collected Mar, Apr, and May billings in the June quarter, but not June billings. That would give them $2,200,000 in collections – which would well cover their operating expenses and leave some cash left over.
Note that, even with this very optimistic collection schedule, their receivables will rise by an enormous $800,000 ($3 million less $2,200,000), but that, with this kind of accelerating growth, this is TOTALLY normal, and doesn’t send up any red flags at all.
If their average collection time was 60 days (which seems more likely in dealing with large enterprises) they would have collected Feb, Mar, and Apr billings, but not May and June. That would give them $1,500,000 in collections – which would just cover their operating expenses, or not quite if they have grown, and they would use a little cash perhaps.
Note that, with this more normal collection schedule, their receivables will rise by an astounding $1,500,000 ($3 million less $1,500,000), but that this would still be TOTALLY normal and expected, and still doesn’t send up any red flags.
However, this would be the bottom of their cash crisis, and if they haven’t done a secondary or raised money in May, June, or July, why would they do it in August or September? A secondary dilutes them primarily, as they undoubtedly own most of the stock.
The reason I say it would be the bottom of the cash crisis is that (assuming 60 day average collections) in July they would collect May’s billing of $1,000,000 and they’d be out of the woods. Then in August they’d collect June’s $1,300,000, and in Sept they’d collect July’s, etc. Even assuming no sequential growth in July billing after the huge growth in the second quarter, they’d take in cash of $1.0, $1.3, and $1.3 million in the third quarter that we’re in now, for $3.6 million. At this point Cash will be rising no matter how you look at it.
The bigger question I see is whether June’s huge results were due to a single large sale that won’t be reproduced in the next quarter. Their pre-announcement press release didn’t even hint at a single huge sale, although they talked about $1.0 million in contracts with leading health care companies. Another question is how much of their revenue is recurrent. Do they have a model with a lot of cash up front, or a small amount up front and a monthly lease? (I wrote and asked them that question.) Perhaps we’ll find out more. In their press release they talked about a current annual run rate of $12 million, which certainly sounds as if the $3 million in the quarter wasn’t based on a one-time sale, and also implies that a lot, at least, is recurrent. Personally, I think this stock will turn out to be a very good pick, but who knows?
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