Description

All amounts in USD apart from share price and where otherwise noted

OneSoft Solutions is a vertical SaaS business for the oil & gas pipeline industry. The product has the opportunity to become the de facto operating system for pipeline companise and as such should be soon as a sticky enterprise sale with almost no churn and mature EBITDA margins of 50%+. It is currently trading at 8x LTM ARR with recent 100% topline growth and is fully funded for the next 2-3 years.  

The current iteration of OneSoft Solutions really started in 2016. OneSoft previously developed a not for profit sector software product with mixed success. In 2011, they invested heavily into migrating this business into the Microsoft Cloud platform. When they sold that business in 2016, they had accumulated what they call $3-4m of Microsoft Cloud IP investment which they retained along with their development team. Together with a small acquisition, they turned this into a prototype of a clould based pipeline integrity management product now called Cognitive Integrity Management ("CIM"). This product allows pipeline companies to ingest data gathered from pipelines into the cloud and let the software analyse it to predict pipeline failures.

It's worth highlighting the traditional way the industry worked in order to explain the need for such a product. A "pig" is sent down a pipeline (forced through by the pipeline's product flow) and gathers huge amounts of data as it travels e.g. pipeline diameter, curvature, bends, temperature, pressure, corrosion, metal loss, etc. The pig supplier then removes the pig and extracts the data into huge spreadsheets and sends it to the pipeline company (this itself takes 3-6 months). Pipeline integrity analysts spend another 3-6 months analysing this data. The operators authorises repairs and dispatch crews within 3-6 months. It usually takes crews 4-6 weeks to make the repairs and compliance is reported and again exported into excel. Due to the volume of data, only 2-5% of data is typically analysed (i.e. where there are obvious red flags). The advent of machine learning and cloud computing makes this an ideal application where 100% of the data can be analysed in a fraction of the time.

So in 2016 OneSoft applied to the Microsoft Accelerator program. This product obviously uses a lot of cloud compute so its interesting for Microsoft to promote. They are also trying to coax old industries into digital transformation and having tools on their cloud for this is in their interest. More than 700 companies applied worldwide and 11 companies were selected to take part including OneSoft. The whole team moved to Seattle into the Microsoft offices for a 4 month development sprint with high level Microsoft guidance on technology, product road map, etc along with free Azure credits.

Towards the end of 2017, Philips 66 which was undergoing a digital transformation wanted to integrate ML into their processes (after extensive testing OneSoft's product against truth data). While most companies use Excel spreadsheets, Philips 66 was actually a technology leader with an old Oracle on prem system. After discussions with OneSoft and Microsoft, they decided to ask OneSoft to migrate their entire Oracle tech to the Azure cloud and integrate it with their CIM product. This was a huge win for Onesoft. Not only would they gain industry validation, but Philips 66 funded the whole project and handed over the IP for all the other functionality in their system to OneSoft whilst committing to becoming a $1m ARR customer in future. In return Philips 66 receives a capped royalty on future sales to third parties (more detail on financial impact below). OneSoft was able to take all the domain expertise, company workflows, and build a new richer product integrated with their CIM module (the new "CIM"). 2 other clients pipeline operators joined this project as "private preview" customers.

OneSoft completed cloud conversion in Dec 2018 and Philips 66 decommissioned its Oracle system. One of the two other private preview customers also entered into a multi year SaaS agreement in 2018. 4 more clients engaged in proof of concept projects in 2019 including an industry supermajor. Fast forward to today and OneSoft has 6 customers, currently generating ARR of $3.6m (annualised Q1'20) but when clients fully onboard their pipelines it should be in excess of $5.1

I've been tracking OneSoft since 2016 and have owned the stock on and off since. Admittedly, the uptake has been slower than expected. It is a big digital transformation project for customers and comes with very long sales cycles (12-18 months). Apart from Philips 66, all their clients depended on Excel and CIM represented the first cloud application in their organisation. For one large client, OneSoft spent 6-12 months developing tools and an automated process to on-board onto CIM given the amount of data involved (which can now be used for other clients too). One of the two initial private preview customers who didnt immediately sign up went silent for 12 months before they thought they were ready and re-engaged OneSoft. So its easy to see why there is a lot of inertia but also why the product is so sticky and strategically important to Microsoft (OneSoft claims it has helped drive in excess of 15k users to Office 365 and huge cloud adoption) which is driving a lot of sales and C-suite access for OneSoft.

I believe we could be at an inflection point now or reaching one in the next 6-18 months. 

1. Easier onboarding: Last client took 7 months to onboard. As mentioned, they invested heavily in automated onboarding tools and refined workflows and believe they can now do it in a matter of weeks not months.
    
2. Richer feature set: with each new customer, OneSoft has added functionality to aid future customers. Recently took a new customers comprehensive dig management process which addressed logistics associated with choice of pipeline inspection gauge (“PIG”) tools to be used, job and crew  scheduling, and collection and cataloguing of inspection data following excavations and repairs, and incoporating this into the product. They are currently developing a "Repair vs replace" module where algorithms calculate which is economically advantageous based on future projected issues in a replace scenario. They are also trying to connect to Pig suppliers directly to void a "140 step process" by ingesting signal data from pigs directly into CIM with no human touch required.
   
   
3. Industry presence: The company has been in various discussions and presented at all major industry conferences for the past 3 years. The CEO has commented and how things have changed from being a small innovative supplier but not really being taken seriously to their stand being targeted by executives and integrity management professionals at trade shows. The whole nature has changed. Active client users who typically spend most of their workday in the app has increased from 20 in 2018 to 167 in 2019. Its a small industry and the word of mouth validation will grow.
   
   
4. Refined sales process: They are now only targeting companies that they know are undergoing digital transformation in order to convert leads faster and where decisions are driven by the C-suite and senior executives. They have recently hired a VP of Sales and are starting to build out a channel. Worley Parsons became a reseller a while ago and they are hoping to add more (in addition to sales through Microsoft and industry evangelism by Philips 66). 
   
   
5. Covid-19: There are a lot of opinions out there that Covid has accelerated a decade of digital transformation into the next 3 years. Make of it what you will but if true, it will massively help OneSoft. The easiest time sell into the enterprise for OneSoft is when they are moving their infrastructure to the cloud.
   
   
6. Self-service solution: 20 companies operate 80% of infrastructure in the U. But a couple of 1000 operate 20% of the remaining infrastructure. They are working on a self-serve (or partner led) solution for these companies who often engage outside consultants to run their integrity management. This could see faster uptake then the big enterprise sales.

Total Addressable Market

The pricing model is subject to change however typically the company tracks at around $100/mile of pipeline per annum running on their system. There are 0.6m miles of pipeline in the US which have PIG data which implies a $60m ARR opportunity. There are a further 2.1m miles of pipeline that are not piggable however OneSoft is developing products to address this segment too. I am not sure whether the pricing would be consistent however assuming its similar, this could be another $210m ARR opportunity. The US represents 60% of global infrastructure and has stringent regulation which helps OneSoft as it can reduce compliance burden. Nonetheless, there are international opportunities which they have started exploring (through partners and through existing multi national customers). I am not really betting on international but the TAM here could be $150-200m

So an immediate target TAM of $60m at current pricing. However, the company has previously said they think they could double their price per mile with all the product features they are rolling out / have in their pipeline. So the immediate TAM could be closer to $100m with non-piggable upside to $300-400m in the US.

Current sales funnel

The company has signed 6 active customers managing 51k of pipeline for a target ARR in excess of $5m once fully onboarded. They are in active sales discussions with 6-12 opportunities at various stages which combined manage another 100k of pipeline for ARR potential of $10m. They have identified and are tracking another 35 companies operating 300k of pipeline for a further $30m ARR opportunity.

Balance Sheet

In early 2019, the stock surged to almost C$1 which was indeed overvalued. The company took the opportunity to do a $9.2m equity round at 80c. At the end of March 2020, the company had no debt and $9.7m of cash. Given their current cash burn is c. 250k per month (and reducing), they have over 3 years of runway left.

The share structure is also relatively clean for a small cap Canadian tech company. Most of the warrants were exercised a while ago and the last equity round had no warrants attached to it which is good. There are 113.8m shares, 9.3m options @ C$0.34 and 0.6m warrants. 

Management

Management is incentivised with 38% ownership. They have been involved with this company forever and have sold software companies before. They dont pay themselves egregious salaries and receive acceptable option packages. But they dont buy the equity either. Sounds a bit staid but they've done well so far.

Outlook

CIM revenues grew 100% in 2019 and is guided to grow 100% again in 2020 (although they booked $700k for a large onboarding project in Q1 and they might have included this. Without this underlying growth guidance could be closer to 70-75% this year). You can make up your own mind as to what % of their immediate sales pipeline they can convert in the next 3 years. Bear in mind there is no competition, digital transformation is happening and they have the validation through customers / studies they have done on $ savings etc. 

In a conservative scenario, they should be able to double their ARR from $5m to $10m over 3 years. Azure costs are less than 10% of revs. There might be some other onboarding costs but generally the gross margins should be in the mid to high 80s. They have the Philips 66 royalty to pay which make take gross margins down to 80% (not much detail available) but management has hinted in the past that the cap would become effective in the not to distant future. 

Mature EBITDA margins should be 50% therefore and I dont see why the company would trade below 10x revenues which is 150% return post option dilution.
In an upside scenario, they could reach $15-20m ARR exiting the next 3 years.
In a downside scenario, I think there would be several buyers for the IP and current customer relationships alone. Even in a distressed environment, I think they could generate $20m in a sale which compares to their current EV of $30m and represents a very favourable risk reward ratio.

Risks

1. Oil price collapse: Their customers are not directly affected by the price of oil as they are usually paid volume. Nonetheless, its a volatile environment and of course digital transformation spending may be delayed. There might even be customer bankruptcies but I think the types of logo OneSoft has currently spoken to make this less likely / pipeline operations usually emerge from bankruptcy in a restructured entity anyway
2. Covid-19: there are less opportunities to meet with customers and partners. It may well be that it has delayed their sales processes

Call options

I think this is not worth trying to analyse. But the tech could well be applied to other asset management applications such as sewer pipes, water pipes, railways, etc. This is something the company talks about in its long term road map. Any traction would obviously be huge for this small company however I think they need to execute on whats in front of them first.

Catalyst

1. Announcement of contract wins
2. Absolute revenue levels this year will make it screen better ($1.4m in 2018, c. $5.0 this year)
3. Increased instituional interest over time