Beam Communications Holdings Ltd (ASX:BCC) quarterly

Beam Communications quarterly cash flow statement showed high receipts but also high payments due to working capital build up from growing sales. The net result was an outflow of $300k for the quarter. Negative cash flow is a good thing is when a business is experiencing rapid growth and has a positive working capital cycle. This is the case here.

While we don't have final revenue figures for the half, we do know that sales were $6.8 million in Q2. Total revenue for H1 21 was just under $9 million which was up from $7.1 million in H1 20 so it is fair to say that growth is continuing. All parts of the business are firing with SatPhone shop sales up 52% and the core business (ex Zoleo) up 73% versus Q2 21. 

ANZ Zoleo subscribers grew from 1,600 to 2,000 but are still at fairly insignificant levels. The company has advised that 15k subscribers would generate $1.5m to $1.8m in operating profit. 180 subscriptions churned during the quarter in line with Q1 but the company is hopeful this number will moderate post Covid restrictions. New distributors are being onboarded (most recently Autobarn) and I remain hopeful that we will see acceleration in Zoleo subscriptions in the future.

My confidence in future ANZ Zoleo performance comes from the success the device is enjoying Stateside where the company can barely keep up with orders. It received almost 40,000 orders for the device for the quarter but shipped and invoiced just 16,000. The current Zoleo order book is not expected to be cleared until Q1 23.

While it is nice to see the traditional business thriving, this is a 40% gross margin operation with lumpy orders and fairly high capital requirements. The SatPhone shop may have slightly better economics than the wholesale side but it still only accounts for a couple of million in revenue even though it is growing at a decent clip. Sales of Zoleo devices to the JV are at even lower margin and so we can't expect to see much profit from them despite the rapid growth.

However, Zoleo subscriptions are high margin recurring revenue business and this is where the value lies. ANZ subscriptions are of most value to Beam as they take 70% of the JV operating profit for these sales but so far this segment has not taken off. Roadpost takes 70% of the operating profit for the North American subscriber base and whatever remains in the JV and is shared equally with Beam. Other territories which are yet to be launched are shared equally. 

The North American business appears to be flying and based on my model this ought to generate plenty of value for Beam over time even after Roadpost has taken the lion's share.

I note that $350k was invested into the JV during the quarter and so it clearly isn't generating much cash yet. There are plans to launch Zoleo into new territories in the near term which may explain the injection of capital.

Overall, the ANZ subscriber numbers are disappointing and it is too early to say whether the JV will deliver the returns to Beam that I am expecting. There is no visibility on North American subscriber numbers but we know that lots of devices are being sold. We do get to see summarised JV accounts in the annual report and I plan to continue holding the stock provided we see rapid gross profit growth there.

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