Starcom Systems Financial Analysis

None of the information below should be viewed as financial advice.

Data:

Financial information prior to the FY 2014 results was not included due to a move from accrual accounting to cash accounting and some figures in this report have been rounded for ease of use.

Starcom Report in USD	Revenue/Million USD	Recurring SAS Revenues/Million USD	Operating Loss/Million USD	Operating Loss As A % of Revenue	Cash Used in Operations/Million USD	Cost of Sales/Million USD
Yr End December 2014	5	1.3	2.9	58.00	0.831	2.49
Six months to June 2015	2.64	0.793	0.691	26.17	0.261	1.48
Yr End December 2015	5.1	1.6*	1.6	31.37	0.4	1.9**
Six months to June 2016	2.5	0.845	0.613	24.52	0.2	1.55
Yr End December 2016	-	-	-	-	-	-

*1.18m Revenues after cost of sales and administration expenses.

** Does not include a 1.1m decrease in inventories.

Analysis:

While the data collected above is useful for achieving a comparative understanding of Starcom’s historical performance year on year, it’s significantly more useful to analyse this data in acknowledgment of the company’s more recent achievements. 

The below quotes are taken mainly from the 2015 FY results:

• “we remain cautiously confident that second half revenues should comfortably exceed the first half and therefore that annual revenues will exceed last year’s"
• “The Company is hopeful that it will return to profitability during the year ending 31 December 2016 by converting its strengthening pipeline into growing sales across the product range.”
• “the recurring income flowing from the Company's SAS monthly fees is also expected to grow, and should reach nearly a third of the total revenues. This is a stable and high margin source of income for the Company that is gradually becoming the foundation for covering most of the overheads of the business.”
• Raised £150,000 in late November in response to “investor demand” and £300,000 in mid October.
• Collaboration deal agreed with SATO for North American market.
• New contract signed with Pinnacle for Kenyan market.
• New product launches for: Helios Hybrid, Watchlock Pro and Kylos Air.

Cash Position:

The use of only £200,000 cash in the six month period to June 2016 is a clear indication that major savings initiatives have taken place in the company, which will ultimately assist in making the company profitable in the near term.

Moreover, having raised a total of £450,000 (of which £150,000 was to meet investor demand) in October and November, it suggests that the likelihood of another raise in the short term is very low, which will support investor morale at these levels. Furthermore, the time gap between now and the placing of the shares suggests that any flippers of the placing are likely out of the stock now.

Revenues:

Recurring SAS revenues amounted to $1.6m in in the FY of 2015 and with these representing a very high margin product to the company, their growth in tandem with regular sales places upwards pressure on the overall product margins of the company (38% as of H1 2016).

In fact, the break down at the end of the 2015 FY report suggests that the SAS products had a profit margin of 73.8%, which is expected to only grow now that the system is fully in place and requiring less investment.

Revenue from sales moved up inline with expectations in FY 2015 ad with an evermore diversifying sales base to work from these are expected to both continue and expand at a faster rate as collaborations with SATO pay off. 

In addition to this, the publicly available data from Gurtam.com suggests that ~150 units have been sold in December via the Russian distributor for Starcom. Moreover, in July there were approximately 1,000 registered units online via Gurtam and this figure is now ~2150, illustrating the major push up we should hopefully see in SAS recurring revenues and pure sales revenues.

Operating Losses and Cost of Sales:

The operating loss year on year from 2014-15 was down 45%, in part due to a significantly reduced cost of sales, which fell 24%, but also due to major savings being made on general and administrative expenses, including a saving of $200,000 in management salaries.

Interestingly the operating loss as a percentage of revenues in FY 2014 was 58%, compared to 31.37% in FY 2015 and more recently 24.52% in H1 2016. This suggests that the move to profitability could come very soon, as it’s clear that losses are being absorbed at a faster rate as the company progresses.

Moreover, this fits in with the company’s expectation that “it will return to profitability during the year ending 31 December 2016”.

Summary:

• A more than 50% reduction of cash in operations  between FY 2014 and FY 2015 suggests that the BOD are making significant progress in reducing the company’s outgoings and that they stand a good chance of meeting their expectations of reaching profitability by the end of 2016.
• Rising high margin SAS revenues will feed through into the overall sales margin for Starcom, pulling their overall margin significantly higher as more units come online.
• Compared to FY 2014, FY 2015 saw a 45% drop in operating losses, suggesting that at the current rate of business growth, a move to profitability should occur soon (bar black swan events).

For a relative valuation compared to other companies in the same sector, I would direct people to work I’ve done previously on price to sales ratios:

https://twitter.com/ProAIMTrader/status/778126679898263552