Why I think Bigtincan Holdings Ltd shares could be a buy

Bigtincan Holdings Ltd (ASX:BTH) is selling for 6x annualised MRR and growing quickly on high gross margins.

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This morning sales technology platform Bigtincan Holdings Ltd (ASX: BTH) reported a net loss of $3.165 million on revenues of $6.04 million for the half-year period ending December 31 2017. The loss widened from $2.365 million in the prior corresponding period, although revenues were up 40%, with monthly recurring revenue (MRR) growth of 43% to $1.065 million.

For now 90% of its revenues come from the U.S., with 300+ customers in more than 50 countries.

The company boasts that MRR growth is important as it demonstrates the success of its software-as-service (SaaS) business model. Recurring revenues via SaaS are attractive as they mean a company does not have to constantly make new sales (of a medical device for example) just to get revenues back to the same level they were in the prior corresponding period.

The gross margin of 85% also benefits from the SaaS capital light business model, as it effectively shows how the company retains $85 for every $100 of sales after deducting for operating costs. For now the company is losing money as it is investing heavily on growth levers such as sales, marketing, and technology.

Over the half operating expenses grew to $8.98 million from $6.21 million in the pcp. As at the end of the period the group had cash in hand of $11.4 million and no debt.

Over the half the group also announced an important deal with US communications giant Verizon Wireless and announced the acquisition of Israeli tech company Contondo. This acquisition is part of the group's strategy to help its clients leverage machine learning to improve sales and employee-facing workflows.

Outlook

All the core financial metrics appear to be ticking in the right direction for Bigtincan and with 176.3 million shares on issue its market cap is around $72 million with the stock changing hands for 41 cents.

If we annualise MRR to get to $12.72 million we can see the business is selling for around 6x sales which is reasonable for a SaaS business growing at around 40%. The kicker is the gross profit margins of 83%, which suggest this business could turn serious profits in the future if growth rates are sustained. However, given the risks the stock looks around fair value for now.

Far bigger peers to consider in the SaaS space include WiseTech Global Ltd (ASX: WTC) or XERO FPO (ASX: XRO).

Motley Fool contributor Tom Richardson owns shares of Xero. You can find Tom on Twitter @tommyr345 The Motley Fool Australia owns shares of WiseTech Global and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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