RPMGlobal: The Microsoft of mining

In popular myth, miners are like Neanderthals, mindlessly digging their rudimentary tools into the earth to extract riches they neither own nor understand. 

The truth couldn't be more different. Modern-day miners still dig holes, but where and how they do this is far more complicated than many imagine. 

When a big miner dispatches a piece of heavy machinery, software has already divided the orebody into minable blocks and directs equipment to the optimal blocked section to mine. 

The software will consider dozens of variables including grade, density, volume and geometry before giving directions. The machines doing the work may well be thoughtlessly digging, but a lot of smarts goes into deciding what and where to dig. 

Software is used to optimise grade and output, to figure out the best way to access ore or perhaps to find the best gradient to roll huge trucks. Assets are managed over decades, simulations are run, and reserves are counted with software. 

Mining isn't about digging with shovels any longer; it is about solving thousands of problems, often with the help of technology.

The sophistication on display at the best mines is being replicated and deployed across the industry. RPMGlobal aims to play a part in this revolution.

The old school

The business houses two divisions. One is a typical advisory business that sends consultants to far-flung mining projects to help solve specific problems. This is the origin of the company and, in one form or another, RPM has been doing this for decades.

The advisory arm carries a particularly storied reputation in the coal industry, and its fortunes are intimately tied to coal prices; no-one hires advisors and consultants when mining coal is barely worth it. So a pick-up in thermal and coking coal prices should ensure an excellent 2019 result for this business.

This business was savaged in the commodities bust and the company may choose to sell it as its software business matures. For the moment, though, advisory remains an important cash generator that has helped pay for much-needed investment into software.

The advisory business is where RPM got its start but it's the software business that will determine the future of the company. 

Learning to code

RPM's dalliance with software was minor until Richard Matthews took the helm as managing director in 2012. Mathews, with a decent record of building (and selling) software businesses, has spent years painstakingly building a software product suite during the bust. 

Mining software isn't quite like payroll or accounting software. Some parts, such as asset maintenance, can be single products that are sold to many customers. Most products, especially those used at the production end, are specifically designed for a specific commodity or mining method.

RPM, for example, has developed different products for open-cut and steeply dipping coal mines; it has something for underground metal mining and for open-pit diamond mining. Since the industry is rich with variability, so must the software be. 

That diversity means RPM won't scale in the sensational way that Xero does, but it also puts competitors at a disadvantage because adding value to customers means building not one product but building a dozen. Software that doesn't integrate with other software won't sell.

Integration

RPM is, uniquely, building an integrated product suite that can do everything from design a mine pit, plan and schedule production, simulate variables, make financial plans and maintain assets. And it can do that for about 10 different commodity groups, making it perhaps the most comprehensive software provider in the industry. For mining houses - the big budgeted BHP's of the world - integration with the enterprise is crucial. 

RPM can now capture real-time data from drilling sensors which feed into scheduling and production software and integrate into financial systems. 

For a miner that's still doing these tasks separately, this is a revolution. Slowly and deliberately, RPM is building out its moat.

A large team of developers, bold and well-priced acquisitions, a wide product suite and industry-best integration all form a formidable competitive advantage. The business boasts impressive capability and potential for its relatively minor $120m market capitalisation. 

If the moat is so grand and the product so great, where are the profits?

Unpacking numbers    

Not on the income statement, that's for sure. Measure RPM from its reported numbers alone - a task that most large investors have probably done - and there is little to impress. 

Last year revenue actually went backwards and, over four years, it has increased by just 10%. If raw numbers were all that mattered, it'd be easy to understand why RPM might fall off the radar. 

Yet those numbers deserve unpacking. We must first recognise the cyclicality in the advisory business. A period of low commodity prices has only recently ended, and revenue should pick up this year. Advisory isn't a great business but it's probably underearning.

The software business is also changing, from recognising revenue from perpetual licences, which attracts large, upfront cash payments, to smaller but longer lasting subscription revenue. 

RPM, like many software firms before it, is turning to a 'software as a service' (SaaS) model and that means passing the dreaded revenue cliff.

The Saas cliff

Currently, revenue comes from lumpy perpetual licence sales and ongoing maintenance revenue. Those revenue streams tend to result in stronger revenue recognition in early years. 

A SaaS model recognises lower revenue upfront - a single year's subscription is smaller than one perpetual licence sale - but the lifetime value of the customer is higher and, with RPM now offering software in the cloud, customers benefit from the lower costs associated with cloud offerings.

RPM is taking a short-term hit to its revenues while it builds a subscription business that will benefit in the long term.

Table 2 illustrates this by breaking down software revenue. Licence sales and maintenance revenue will fall while subscription revenue rises. This is starting to happen, but the business is still at the start of the transition. 

The business recently announced that annual recurring revenue had risen from $800,000 to over $3m in the first quarter of 2019. The transition to a subscription model appears to be gathering pace.

Unlearn

Even if the advisory arm is worth just $20m - and it's potentially worth more than that - then the $100m valuation attributed to the software business doesn't reflect how large or profitable it's on track to become. The messy accounts and the changing revenue model mean the numbers don't yet reflect the progress being made. In time, though, they will and we're happy to be patient. We're buying 65,000 shares for our Model Growth Portfolio, for a cost of $36,075 and a weighting of about 2.5%. SPECULATIVE BUY.

Note: The author owns shares in RPMGlobal.