Shares in Israeli-based Albert Technologies (LON:ALB) took an almighty fall today as its latest trading update revealed that it would miss full-year market expectations. Formerly known as Adgorithms, this is yet another proprietary software company whose fortunes have taken a tumble in the past year:
For long-term holders, this is just the latest disappointment in a series of blows. Originally listed just four years ago, the share price almost reached 150p but collapsed just four months after listing as it dished out a profit warning. Since then, it has been on a shallow downward slide, and the share price today marks a new low.
Here are the results from previous years:
I don’t think you can blame anyone who invested in the IPO to feel cheated, because the results simply took a nose-dive straight after. I do suspect that the accounts were heavily massaged for the IPO. Perhaps to get away from the debacle, the company changed its name to ‘Albert’, but anyone doing a tiny bit of research will still know this is a highly risky tech company, and the Israeli domicile throws in added risk.
Albert is the name of the ‘artificial intelligence marketing platform’, which seeks to use the greater flow of information to enable firms to reach consumers more effectively and perhaps in more innovative ways. This sounds like a great proposition, especially if the said platform could have some advantage over others, but this has not proven to be the case. In many ways, Albert are much at the mercy of others, with previous profit warnings alluding to the fact that giants such as Google can rewrite the rules of the online playing field: this is something that similar companies such as XLMedia have found out.
The warning comes in a morning RNS. First up, we have plenty of good news, albeit of the ‘jam tomorrow’ variety:
As previously reported the Company made significant progress in 2018 in successfully deploying Albert with some of the world’s leading brands and agencies, and management is highly encouraged by the potential of our current client base, as well as the pipeline of opportunities.
Since the start of the year, a number of our existing Enterprise clients have continued to expand their activity with us, whilst others are in active discussions with us regarding expanding their activity in the coming months.
In addition, we started 2019 with a dozen additional Enterprise clients in the pipeline and we expect to commence activity with the majority of these potential clients by the end of the current year. The Company’s management believes that each of these
Onto the bad news:
As for actual performance, revenue growth in the year to date has been slower than anticipated, principally as a result of longer ramp up time with the Enterprise clients, such that revenues are similar to those for the first four months of 2018. The Company’s management expects growth to pick up in the coming months based on their assessment of the existing client base and the sales pipeline.
Slower conversion times are a common theme with warnings recently. Unlike others, no real reasons are provided as to why these times have slipped.
Taking into account the performance for the start of the year, and the fact that as previously stated Enterprise clients’ sales, onboarding and expansion of activity, takes longer than for our previous roster of midsize and small businesses, management anticipates that revenues for 2019 are unlikely to reach current market expectations, which forecast revenue to more than double over 2018. Whilst the Company’s management expects that the outcome for 2019 should show significant improvement over the performance achieved in 2018, it remains difficult to accurately predict short term revenue outcomes.
This provides very little guidance, the nature of the miss could be small, or large. Revenues for the previous year was $4.61m so what ‘significant’ means in this context remains to be seen. I also would have thought that short-term revenues might be slightly easier to predict, and this line may make investors nervous.
I’d regard the accounts pre-IPO as rather useless now. It is plain that the IPO raised a significant amount of money for the business, and an almost immediate profit warning came in which destroyed the previous model. Turnover dropped from $22.1m in 2015 to just $0.23m the next year, so what we have now is likely to bear little relation to what we have had before.
Recent years have been characterised by heavy losses: helpfully an example is here:
The 2018 report is not out yet, but the value for R&D is even greater: at over $7m. The company can afford this largely due to the cash pile raised at IPO and an additional $16m raised in a share issue last year. Cash stood at $15.4m at the end of December 2018, so it is likely that at current levels the company can keep going for at least another year if no profits materialise.
We should treat the company like a new one despite several years of accounts. Therefore many expenses are expected to be incurred at the start, with revenues catching up later. The fact that revenues were anticipated to double in this year does show some evidence that the heavy expenditures were beginning to pay off. Assuming that expenses stay flat, this would have pared the operating loss back somewhat, although in 2018, the losses were still above $12m, so break-even is a long way out.
One good thing about the accounts is that these research costs are not being capitalised consistently, this would make no difference the the cashflow but the size of this item could be used to distort profit measures in future. The breakdown of these costs show that most of this cash is going on salaries, presumably to develop the algorithms. Overhead costs for this division have jumped sharply.
The company is heavily owned by the CEO, Or Shani who has a near 47% stake. Given that he also is pulling a salary of $500,000 on these types of results does not fill one with confidence.
A couple of things stand out from the accounts. Albert genuinely is a world-wide company. The bulk of its revenues are concentrated in Australia and the USA but also has presence in Europe and Asia. This is perhaps not a surprise, because the nature of software and global marketing tools means that this type of business can transcend boundaries.
It is also apparent from the client list that Albert deals with many large multi-national corporations and advertising agencies, thereby giving credibility to its product. It is also clear that AI-driven applications are part of the future: the annual report references a potential incremental benefit to advertisers of $200-300bn.
By virtue of the historic cash position, the market cap of Albert might also be above the book value, although given the run rate of the losses, this is not likely to hold for long. In addition, with the current profit warning it seems likely that losses for the year will be large again and that 2020 might require some kind of further capital injection. Certainly the market is pricing failure as a more likely option at present.
I would guess the viewpoint on this might depend heavily on faith that what the company are doing is good. They are spending heavily on a product, but the details on how this might create competitive advantage is unclear. The marketing field can be subject to heavy change and there are many competitors.
On balance I am not familiar enough with these products, but would reserve a 2/5 rating to account for the financial status.