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EROAD Ltd
September 15, 2024
FOLLOW-UP
September 15, 2024 | Total Return: +0%
ORIGINAL ARTICLE
FREE & PREMIUM
EROAD Ltd
Ticker: ERD.NZX
Addition to:
✅ SENSU Watchlist
Addition Date: September 15, 2024
Price per Share: 1.18 NZD
TABLE OF CONTENTS
THE COMPANY
Founded in 2000 by Steven Newman, EROAD emerged from a simple idea - to modernize road user charging systems using GPS technology.
The company's journey began in earnest when it launched the world's first nationwide electronic road user charging system in New Zealand in 2009. This innovative approach replaced the cumbersome paper-based system, allowing transport operators to automatically calculate and pay road user charges. It was a game-changer for the industry, offering unprecedented accuracy and efficiency.
What particularly fascinates me about EROAD's business model is its holistic approach to fleet management. While road user charging remains a core offering, the company has expanded its services to encompass a wide range of solutions. These include electronic logbooks, vehicle tracking, driver behavior monitoring, and fuel management tools. It's a comprehensive ecosystem that addresses the multifaceted needs of modern transport operators.
EROAD's expansion beyond New Zealand's shores is a testament to the universal appeal of its solutions. The company entered the North American market in 2012, adapting its technology to meet the unique regulatory requirements of different states. This move required significant investment and perseverance, but it positioned EROAD as a major player in the telematics industry.
The Australian market followed in 2018, with EROAD leveraging its experience to quickly establish a foothold. This tri-market presence across New Zealand, North America, and Australia has allowed the company to benefit from diverse revenue streams and market opportunities.
The company has consistently worked closely with government agencies and industry bodies to ensure its solutions meet evolving standards. This collaborative approach has not only helped shape policy but has also positioned EROAD as a trusted partner for both private enterprises and public sector organizations.
The acquisition of Coretex in 2021 marked a significant milestone in EROAD's evolution. Coretex was a leading provider of vertically specialized enterprise-grade telematics solutions, with a strong presence in North America, Australia, and New Zealand.
This strategic acquisition expanded EROAD's product portfolio and customer base, particularly strengthening its position in the North American market. Coretex brought valuable expertise in areas like refrigerated transport monitoring, construction, and waste management.
At its core, EROAD's business model is built on the concept of "Software as a Service" (SaaS). Customers typically pay a monthly subscription fee for access to EROAD's platform and hardware. This recurring revenue model provides stability and predictability to the company's financials, while also aligning EROAD's interests with those of its customers - both benefit from long-term relationships and continuous improvement of services.
STOCK PRICE
The dynamic background color reflects overall market valuation, allowing you to quickly assess both stock-specific trends and market conditions at a glance.
Why logarithmic? It displays percentage changes uniformly, making price movements easily comparable across different ranges. A 100% increase appears the same whether from $10 to $20 or $100 to $200.
FINANCIAL ANALYSIS
⭐⭐⭐ Quality Score | ⭐⭐⭐⭐ Value Score | ⭐⭐⭐⭐⭐ Growth Score |
EROAD's financial performance presents a mixed picture of growth and challenges. Despite steady revenue growth, with a 28% CAGR from 2017 to 2024, the company has faced operational hurdles and capital allocation issues. Recent improvements under new management have led to cost savings and a return to profitable growth across all regions.
The company's financial metrics reflect this journey of challenges and recovery. While the Price-to-Book ratio has declined from 1.15 in 2019 to 0.43 in 2024, and earnings yield has been predominantly negative in recent years, there are signs of improvement. Total revenue increased to $182.0 million in FY2024, a 4.1% year-over-year growth, with SaaS revenue showing a robust 14.8% increase. Profitability is also on an upward trajectory, with EBITDA improving from $45.2 million to $53.3 million, and the after-tax loss narrowing significantly.
P/E Ratio
Earnings Yield
The Return on Incrementally Invested Capital (ROIIC) data shows modest improvement, but remains relatively low.
10-Years | 5-Years | 3-Years | |
|---|---|---|---|
ROIIC | -0.5% | 2.05% | 0.65% |
Ranking | N/A | 46.85% | 46.91% |
A key positive development is the turnaround in Free Cash Flow, which became positive at $1.3 million in FY2024, a substantial improvement from the previous year's negative figure. This shift suggests EROAD is moving towards sustainable cash generation. The company has also strengthened its balance sheet by reducing borrowings and raising equity, which has improved its financial position. This significant share issuance is reflected in a negative buyback ratio of -37.48%
MANAGEMENT ANALYSIS
EROAD Limited, a New Zealand-based transport technology company, has recently adopted a dual-CEO model. Mark Heine and David Kenneson now serve as co-Chief Executive Officers, a move aimed at strengthening the firm's global growth strategy.
Mark Heine, who joined EROAD in 2015, brings a unique blend of legal expertise and deep company knowledge to his role. With a background as a well-regarded lawyer in New Zealand and Australia, Heine has been instrumental in guiding EROAD through its transformation strategy. Interestingly, it was Heine himself who proposed the dual-CEO model to the board, demonstrating his strategic thinking and willingness to innovate in leadership structures.
David Kenneson, the newly appointed co-CEO, brings over 25 years of experience in business transformation and operational excellence across various industries. His track record includes driving substantial P&L performance and executing robust growth strategies. Kenneson's appointment is particularly focused on accelerating EROAD's growth in North America while maintaining strong market positions in New Zealand and Australia.
Meet the Employees: Reviews
Eroad seems to have cultivated a vibrant and innovative workplace culture that many employees appreciate. The company is often described as having a great team atmosphere with talented, friendly colleagues who are passionate about their work. Employees frequently mention the exciting challenges and opportunities for growth, particularly as the company expands. The tech stack is praised as modern and cutting-edge, offering engineers the chance to work with new technologies and cloud solutions. Flexibility in work arrangements and a good work-life balance are consistently highlighted as positives. Many reviewers also commend the company's commitment to its values and its efforts to make a real-world impact in the transportation industry. The leadership, especially at the mid-management level, is often described as supportive and accessible.
However, Eroad is not without its challenges. A recurring theme in negative reviews is the rapid pace of change and growth, which some employees find overwhelming. There are mentions of frequent pivots in strategy and direction, leading to a sense of chaos or lack of clear vision. Communication from top management is criticized as being inconsistent or lacking transparency, particularly regarding the company's financial performance and strategic decisions. Some employees feel that the company is struggling to scale effectively, with processes and systems not keeping up with growth. There are also concerns about high turnover rates, especially in the US operations. Some reviews point to a disconnect between the New Zealand headquarters and the US office, leading to challenges in decision-making and strategy implementation. Compensation is a mixed bag, with some feeling it's competitive while others view it as below market rates, especially for more experienced roles.
“There's a real sense of positive momentum and forward-thinking that's driving significant changes across the business. Leadership is committed to innovation and driving mature business operations.”
“Despite the message the company provides the business and the market, they have some serious financial concerns and lack strategic direction. They do not live by any values unfortunately. If you are interviewing with them ask them what their eNPS score is and you will realise the dissatisfaction of the employees.”
MOST SIGNIFICANT MOATS
EROAD's platform becomes more valuable as more customers join and contribute data. With over 250,000 connected units globally, EROAD has built a substantial network that provides rich data insights. This data allows EROAD to improve its products and services, making the platform more attractive to new and existing customers. The network effect creates a virtuous cycle that's difficult for competitors to replicate.
Once customers integrate EROAD's solutions into their operations, it becomes challenging and costly to switch to a competitor. EROAD's products are deeply embedded in customers' workflows, from compliance management to fleet optimization. The company's high retention rate of 94.8% demonstrates the stickiness of its solutions. Customers are likely to expand their use of EROAD's products over time rather than switch providers.
EROAD has developed deep expertise in navigating complex regulatory environments across its markets. This is particularly evident in areas like road user charges, electronic logging devices, and emissions reporting. The company's ability to help customers comply with evolving regulations creates a strong value proposition that's not easily replicated by new entrants.
MOST SIGNIFICANT RISKS
Risk: Failure to achieve projected growth, especially in the North American market.
Impact: Could lead to lower revenues, market share loss, and reduced shareholder value.
Mitigating Factor: Focused strategy on enterprise customers, new product innovations, and appointment of a North America-based Co-CEO to drive growth.
Risk: Falling behind competitors in developing new technologies or features customers want.
Impact: Loss of customers, reduced competitiveness, and declining market position.
Mitigating Factor: Ongoing R&D investments (18% of revenue in FY24), focus on AI and sustainability features, and partnerships with technology leaders.
Risk: Challenges in maintaining adequate cash flow and meeting financial obligations.
Impact: Limited ability to invest in growth, potential breach of loan covenants.
Mitigating Factor: Improved free cash flow position, successful capital raise, and renegotiated debt facilities providing more flexibility.
CATALYSTS FOR GROWTH
EROAD is targeting significant growth in North America, its largest market opportunity. The successful rollout of over 9,500 units to Sysco and winning other large enterprise customers demonstrates traction. If EROAD can continue to land and expand major accounts in North America, it could drive substantial revenue growth.
EROAD has made significant cost reductions, removing $20 million in annualized costs over FY23 and FY24. The company expects to be free cash flow positive in FY25. Continued progress on profitability metrics could boost investor confidence.
EROAD is investing in AI-powered features and sustainability solutions that address customer needs. The launch of products like the Sustainability Module and predictive maintenance tools could increase customer adoption and retention.
Disclaimer: The information provided in this newsletter is for educational and informational purposes only and does not constitute financial, investment, or legal advice. The content is solely the opinion of the author, who is not a qualified financial advisor, investment professional, or legal expert. All investments involve risk, and past performance does not guarantee future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions. The author of this newsletter is not liable for any losses or damages arising from the use of the information provided. This newsletter is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would be contrary to local law or regulation.
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