SAAS Software at a PE of 7
Earnings Update H1 2025
Connexion Mobility, a small Australian software company, published its half-year results today.
If you’ve never heard of this company, it’s best to start with a past deep dive I wrote:
In a nutshell
Connexion sells software in the niche market of Courtesy Transportation. Their customers are 4000 car dealerships (General Motors) in the US.
A typical dealership spends about 150,000 dollars on software each year. Connexion sells about 2,500 dollars per dealer and sees an opportunity to double this amount by providing additional services.1
Dealers make money by selling cars and offering services. One of these services is a Courtesy Transport Program. Connexion provides software to enable:
A loaner program (A client comes to a dealership for servicing, he needs a loaner car for the duration of the service)
A shuttle service (The dealership has a fleet of cars and offers a ride service with drivers for their customers or on demand)
Ridehail (Connexion has partnered with Uber to provide an integrated offering within their program)
In addition, it has developed a marketplace where 3rd party software providers can offer other services to the GM dealerships.
Here is their full product portfolio 2
The best way to show you what this company is aiming for is a BEFORE and AFTER picture. The current situation for an OEM like General Motors: All services are provided by different providers and have to be integrated separately.
The future: The OEM integrates with one platform
The future of self-driving cars and online car sales threaten the current dealerships. Each dealership has real estate (motorized fleet, service center). Connexion’s goal is to provide solutions that allow dealerships to use this real estate to its fullest potential. This will allow the dealerships to focus more and more on the customer experience to combat these future trends.
All investments made are expensed on the P&L (which suppresses the profitability of the company). Their capital allocation strategy is a combination of investing in growth development and buying back shares (10% in the last year).
Main Risks:
Customer concentration with general motors. This means Connexion has no real pricing power. GM has tremendous bargaining power. They continue to deepen their relationship with GM to reduce the risk of a future breakup.
TDS, the biggest competitor has exclusive contracts with other OEMS: Nearly impossible to grow through more OEM exposure
Painkiller versus Vitamine. At the moment, they are selling vitamins, but due to the above negative trends in the industry, this might more and more become a need as opposed to a “nice to have”
The extremely short pitch
This investment “feels” like a high-yield bond with optionality. Slow revenue growth combined with operational leverage and buybacks can lead to great returns.
Earnings Update
Sales
Revenue has grown 6% compared to the previous half year and 15% year over year. Growth has come from adding new subscriptions to the platform. As you might remember, most of the revenue is subscription-based:
Earnings per share continue to grow. Cash flow considerations aside, remember this company could be more profitable if they would expense investments through capex instead of on the P&L.
Other notable developments:
Marketplace subscription growth is emerging but has a negligible impact on the top line at the moment
The ride-hail is no longer in the pilot phase and has been rolled out
The first INEOS dealerships are onboarding (Ineos Automotive)
Margins
Gross margins are dropping compared to previous years. The half-year report does not address this. (I have sent the question to the company, a possible explanation could be increased sales from 3rd party vendors, but this does not coincide with their statement that the marketplace revenue is still low).
The company remains very profitable.
Conclusion
As I mentioned in my deep dive, I hold a small position in this company. I will keep on holding that position.
Connexion is gradually improving its business and its priorities are sound:
That first one is important as their business is so reliant on general motors, that they need to do everything to prolong the contract in the future.
The company keeps buying back shares, and management has stated that they are looking for a balance between cash needed for growth and returning the excess cash to the shareholders. The company has no debt and a solid cash position of 4.5 Million dollars.
There are more details available on the company, but I tried to focus on what is important in this update. Please let me know what you think ⬇️
Have a great weekend, and may the markets be with you, always!
Kevin
Further watching
Here’s a 3-minute video on their offering:
Here’s a short interview with the CEO
Another fun callout is one of their independent directors and board members runs a fund called ‘Graham Newman Pty. Ltd.’ and also has a picture of “The Outsiders” CEO book as his X profile pic.
It reminds me to PowerBand Solutions, a Canadian company with a similar business (now called Ameritrust I think). Its business grew strongly in 2020-2021, but went down significantly from that point. If you don´t know it, I think it is worth comparing both business models. Thanks for sharing!