A look at Straker Translations & more with Bailador

David Kirk is the Founder and CEO of Bailador Technology Investments which is a stock that I went into in the float about three and half to four years ago. It’s been a massive disappointment because the thing has underperformed terribly and is now well below the listing price of $1; it’s around 81 cents and it’s selling at a massive discount to the net tangible assets of $1.16 and it’s disappointing to David Kirk as well. 

Naturally I asked him about that and I also wanted to know about the business called Straker Translations which is, I think, their first IPO. It’s a business they backed from the start and is now IPO-ing, we’ve been talking about that a bit in The Constant Investor on the Facebook Q&A in fact and I expressed some scepticism about that. Cara MacNish, one of our subscribers has allayed my concerns, she said that it looks okay although she didn’t invest in it.

David Kirk is obviously commenting about it and that’s what I wanted to talk to him about. David runs us through their main investments, how the valuations are derived and talks about how he proposes to reduce the discount that the shares are selling at. 

Here is David Kirk, the CEO and Founder of Bailador Technology Investments.

David, you’re at an absolutely brutal discount to NTA so clearly the market just doesn’t believe your NTA.

I don’t think that’s the case.  I think you could interpret it that way.  I think the major issue is we’re very illiquid and particularly illiquid at the moment.  The people who are holders of the stock, investors in the stock, are not selling, very liquidity in the stock, but at the moment – and I think mostly because of just very recently, in the last week or so, a lot of uncertainty around tech stock valuations in other parts of the world and some of the bigger listed ones on the ASX, we have traded down a bit.  In fact, just a week ago we were around about the 89 to 90 cents which was significantly higher than where we are today although I haven’t looked today.

81.

Yeah, that is a big discount.

Could you perhaps take us through the NTA, $1.16 pre-tax, $1.10 after tax.  Perhaps you could take us through how that’s derived.  The biggest component is SiteMinder, the September NTA summary put it at 55.9 million which was 47 cents of the $1.16.  Tell us about where that 55.9 comes from.

55.9 is the value of our investment in SiteMinder.

How is it derived, how do you know?

That’s been derived progressively over time by third party investment into the business.  That 55.9 has been the last mark-up of that, it was not on the basis of third party investment, it was on the basis of independent valuation with reference to trading multiples of companies of similar size, scale and with a similar business model as SiteMinder.  We have an independent valuer value all of our investment positions every year and that then gets presented to the auditor and then goes through the board and the non-executive directors.  We invariably do not mark the companies up as quickly as they are growing and the valuation of the companies is clearly related to their rate of growth, the quality of their revenue and how much of the cash is retained, so gross margins, and how successful they are in retaining their customer base, so in other words having a low churn.

All of those things go into determining what the valuation of a company should be and what the multiple that determines the valuation should be, and we benchmark those conservatively to what’s out there in the market in terms of trading multiples and not transaction multiples which would often imply a control premium.

Just remind us what SiteMinder is, it’s some sort of hotel site.  It’s a very competitive business, this, whenever I switch on TV there’s an ad for Trivago so they’re clearly spending a lot of money on marketing, more money it would seem than SiteMinder is.

SiteMinder doesn’t compete at all with those businesses that are customer facing trying to get customers to go to their website to book a hotel.  SiteMinder is a business to business software service product and it provides the software that allows hotels to load up all of their room availability and make sure that room availability is able to be seen by all of the online travel agents such as Trivago and Booking.com and Agoda and Expedia and C Trip, which is the big Chinese one, and Trip Advisor and all of those others.  SiteMinder is not in a particularly competitive part of the hotel industry, in fact it’s three times larger than any other competitor in the space in terms of the number of hotels it’s got listed. 

It provides sort of the middle, the software between the hotels and the online travel agents.  Your example was Trivago, and they do spend a lot of money but that’s great because the more money they spend the more people they drive to go to their website to look for a hotel.  When they start looking for a hotel they are effectively looking in the SiteMinder warehouse or accumulation of hotel rooms which SiteMinder has connected to the hotels to get.

I presume SiteMinder’s metric of success is the number of hotels it signs up.

Yeah, number of hotels it signs up, the average revenue per hotel and that’s determined by the number of products it can sell and the type of products that it sells.  What SiteMinder has been able to do successfully in the last year, and this has been the first year that it’s really developed to this breadth, is to build new products.  It’s now got a much broader product range and it’s able to cross-sell those products to hotels so it’s number of hotels, number of products they can deal to them and the average price that they get.

What is the number of hotels and the average per hotel revenue?

We don’t give the average per hotel but we do give the number of hotels and it’s over 30,000 hotels which is, as I said, more than three times the next competitor in the space.

What proportion of the number of hotels in the world is that?

That’s a pretty small proportion.  It’s very hard to know actually but we think there’s probably somewhere like 175,000 hotels in the world, something around that amount only that’s not super accurate because there’s just not super accurate data but we know there’s plenty more to go.  Many of them are not yet online, they don’t have online capability and obviously in more developing areas and smaller hotels, so as they become online that market keeps growing.

Right, perhaps we’d better move along.  The next one down is Instaclustr.  You’ve got a valuation on that of your holding of 14.6 million, is that the price that somebody has paid or is it a valuation?

That is the price that somebody has paid.  Instaclustr did a capital raising just a couple of months ago, that was after the June 30 year-end but about a month after that.  Level Equity, which is a large U.S. based growth capital investor in information technology invested $15 million USD in the company, so it was $21 million Australian Dollars, and that was the price they paid.

Right.  You got diluted I guess.

Yeah, we did get diluted.

What does Instaclustr do?

Instaclustr is an open-source as a service platform.  Basically there’s a whole range of open-source technologies out there, companies that are using massive data applications need to use and the largest one that SiteMinder is focussed on is Cassandra Open Source Databases, it’s a no sequel database meaning it’s quite different from the Microsoft and Oracle databases that we’ve been used to using and they’ve been particularly developed, these databases, to deal with huge data, really big data applications.  It’s an open-source product and there are a range of other products including Apache, Kafka, Elasticsearch and others that Instaclustr provides.  They do it by providing a platform which allows customers to really easily utilise these open-source technologies and by providing technology that integrates those technologies to the customers’ databases and other [0:10:49.1] and with a great support and service offering as well.

Alright.  Number three is Stackla, which I also own a direct bit of.  I’ve clearly got an interest in knowing what’s going on there.  Your valuation is 12.6, what percentage do you have of Stackla again?

Well, we don’t say exactly what our percentages are because that allows people to sort of back calculate the valuation of the company quite quickly.

That’s what I’m trying to do.

Yeah.  Unfortunately generally speaking we wouldn’t be too concerned about that but we are bound by confidentiality agreements and some of our shareholders tend to prefer that they don’t let customers know how big they are or not.  We just have to be bound by that.

Okay.  Stackla is still going though, is it, it’s still okay?

Stackla is going well, yeah it’s going well.  That also is a third party investment, third party transaction for that valuation.  The valuation hasn’t moved very much for a while although the company has continued to grow strongly so it’s adding lots of great [0:12:08.9] and we think the business will continue to do well.

Right.  That brings us to Straker Translations which is perhaps in some ways the main reason for the call today, which was going through an IPO.  We tried to get an interview with the CEO of that business and he has politely declined.  Just explain to us what it does because obviously it’s a translation business but I wondered about it was how can it make money if it’s competing against Google Translations which are free.

Good question.  Straker translations is a language translation business and it’s a hybrid translation business meaning that it uses machine translation and human translation, and humans are crowdsourced.  It has a great platform which allows people to submit their work to be translated and for that translation to be managed through their machine translation, that draft being then sent out to crowdsourced and selected human translators that come back in again and all of that to happen very quickly and very cost effectively.  You will have no doubt used and many people have used Google Translate and any other of the online machine translations.  They give you a pretty good idea and if you just put one word in they’ll get that word but if you put a paragraph in or a few sentences in it still comes out a bit garbled. 

The reality is that will get better and better over time we think but that’s good for Straker because Straker will then be able to continue to manage its costs down by using more machine translation as opposed to human translation over time.  Right now you can’t get a really workable translation out of a pure machine translation.

Yes, right.  The question I guess is whether there’s any growth left in there.  Are you and the others who backed this company from the start leaving anything on the table?

Yeah, there’s a lot of growth to come.  This business has a solid growth capability for more organic growth, it sources customers in the usual ways by marketing and sales, some online marketing, some customer development people who go to major corporates or go to major platforms for instance, providing people like big commerce and who provide e-commerce platforms which enable people who are trying to develop their businesses and sell in multiple jurisdictions with multiple languages to have a translation module, and Straker plugs into that module and becomes the translation module of that e-commerce platform. 

Those are all fairly traditional but there’s another strong growth opportunity for Straker which it’s executed on significantly already, and that is acquisition.  It’s a very fragmented market, the language translation market, it’s about a $42 billion market worldwide and the top 100 providers would make up something like only 15% of the total revenue.  Very fragmented and that means there’s lots of relatively small companies that only are modestly profitable at their current scale but can be acquired by Straker and placed onto the platform which significantly increases their profitability.  Their gross margin goes up immediately, some of the overhead can be taken out and because the companies can be bought for a lower multiple of their revenues than they will be valued at in the Straker business there’s that valuation uplift as well.

The business has completed four acquisitions, two in the U.S. and two in Europe, and it’s got a pipeline of additional acquisitions, it’s proved up the model very clearly and been able to increase the margins and take out overhead in these acquired businesses and to retain the revenue.  That’s a really strong growth opportunity for the business which it will continue to execute on.

An investor should see it as partly at least, possibly even mainly, a roll-up strategy, is that fair enough?

Yeah, and that’s been very clearly set out in the material and the prospectus and other materials.

What’s the average size of the acquisitions?

The sort of revenue they would have would be 5 to 10 million, would be about the range that they would be looking at.

And what do they pay for them?

Typically, they probably can’t be too explicit, I think, because it would be commercially sensitive to talk too much about the valuation as usually done on a multiple of revenue.  These companies are profitable and they have to be profitable because they’re standalone businesses that have been running for quite a long time.  Nevertheless the valuations are often does as a multiple of revenue and the multiple of revenue is significantly below what a fast growth peak business like Straker will be valued at.

I understand.  I’m just wondering whether Straker has got enough cash now to do the roll up that it wants to.

Yeah, well that’s the main reason, or not the main reason but one of the strong reasons for listing the company now.  We don’t see it as an exit by any means, we’re taking 10% of our holding off the table just because it’s prudent to manage our own cash position but we are in for long haul.  We think this is a really good business that’s going to continue to trade really well and will just continue to grow.  We think it’s got a long growth path in front of it.

Those four businesses are the lions share of your NTA, that’s SiteMinder, Instaclustr, Stackla, Straker.  They are about $1 of the $1.16.

Lendi is the next one also.

Yeah, Lendi.

Which is also really an excellent business.  That valuation is also a third part valuation, last investment we’re holding it at the price that someone else invested into that company.  I can’t remember exactly, it might be eight or nine months ago.  That is the online mortgage broking and fulfilment platform.  In other words, instead of walking into a bank or going to a mortgage broker to get your mortgage you go online and Lendi matches, they’ve got hundreds of loans from somewhere between 25 and 35 different lenders including the big four banks.  They do refinancing as well as first mortgages, you provide them information about what sort of loan you’re looking for and some details about your financial position and so on, then they match you to the right loan and the right lender.  Then there’s a process, a continuous process, what they call it, of holding the hand of the person looking for a mortgage and taking them through the process of actually completing the mortgage, and in many cases completing it to the point that the money is in the bank.

That is a really efficient online process and providing a much better service than having to go to a mortgage broker and sit down with someone who has fewer mortgages to offer you and is more expensive in doing so.

Those top five investments that you’ve got, of those four the valuations are based on actual investments in the business by third parties and one is an independent valuation which is SiteMinder, the largest.

Yeah, although just to reinforce this there has been three or four different investments into the company over the years, over the last three or four years, so there’s been plenty of validation of investments.  We always marked our investment up to the next investor who comes into the company and in fact we actually did that statistic, it’s a really interesting statistic, since we’ve been going there have been 14 third party transactions into our portfolio companies, and into seven of the ten companies, and all of those investments, 100% of those investments, have been at or above our holding value at the time, PTIs holding value.  The average uplift has been 88% so that is great validation of the fact that we hold our investments conservatively and every time someone has invested in any business that we’ve had it’s been at a price higher than we were holding it at at the time of our investment, and we had 14 of those.

How are you going to get the market to see that and give you a premium instead of a discount?

Yeah, well we’re going to accelerate our investor relations, spend more time out there talking about portfolios, selling the portfolio, helping people understand the portfolio, understand the model.  We’ve got to continue to just see good gains in the underlying value of the companies, I think we’re still confident these companies are going up in value, that will help as well.  Thirdly and most importantly we need to have exits when you have crystallisation so people look at it and say okay, I can’t argue with them now, they’ve now sold this business or listed it on the stock exchange and now it’s independently valued by a whole lot of investors and that value is there. 

I think over time we’re going to hold our investments in companies that we list because we think that will help people also understand that the value is there and private companies for which we can’t provide lots of detailed information because of confidentiality agreements clearly people can be a little bit more sceptical about those valuations although our history of having 14 third party investments into seven of our companies, all of which have been a higher price than we’ve been holding them at, helps and should give people confidence.  But I think having companies listed and seeing the value actually crystallise and valued and held by other people via an IPO is also going to be a big help for helping people get their heads around the fact that discounts should close.  I think personally that the portfolio has never been in a better position. 

We’ve been listed for three and a bit years, the portfolio has seasoned, we’ve had to write one off, we’ve had to write one down and the position that we’ve got, the portfolio now, we see strong growth coming from all of the companies and we really do need to continue to work hard to realise, to get cash out of the companies by selling them or listing them.  Then I think people will start to see that the value is there.

Yes, indeed.  Okay, thanks very much, David.

Thanks.

That was David Kirk, the CEO of Bailador Technology Investments.