Prophecy's ‘future looking bright' says Equitable Investors fundie

When the ‘dot com’ bubble went from boom to bust at the turn of the millennium, investors lost ~US$5 trillion and a handful of businesses among the likes of Intel, Cisco and Microsoft made it out relatively unscathed. After its fortunes did not play out as well others did, a smaller B2B software company and ‘dot com darling’ decided to take fate into its own hands.

Speaking on Reach Markets’ The Insider: Meet the Fund Manager in April 2023, fundie Martin Pretty focused on stocks that showed resilience in the face of adverse market events. He chose Prophecy International Holdings Ltd (ASX: PRO) as one of his favourite stocks in that category citing its turnaround strategy under the leadership of CEO Brad Thomas. Watch the full The Insider: Meet the Fund Manager session.

“[Prophecy’s] revenue cratered after a few years of listing. It had a portfolio of software back then that was servicing government and enterprise,” Mr Pretty said.

The company listed in April 1998 and enjoyed a 500+% increase to its share price in 1999 before slumping to below its listing price, remaining largely flat between 2002 and 2007. Its annual revenue declined from $12 million to $3 million.

“The current chief executive Brad Thomas came in as, I think it was general manager originally back in 2016 and then was appointed CEO,” Mr Pretty said. Mr Thomas had gained a wealth of experience serving in senior, managerial and executive positions at multiple blue chips including Telstra, Lenovo, Canon and dot com boomer Microsoft.

“[He] began a turn around process exiting five businesses, cancelling dividends, choosing the businesses to focus on which were cyber security unit Snare and contact centre data analytics business eMite which is facilitating the shift of call centres to the cloud,” Mr Pretty added.

Snare and eMite were acquired in the purchase of the companies that had developed the IP and both are now wholly owned subsidiaries of Prophecy. Snare was acquired through the purchase of Intersect Alliance in 2011 and eMite was acquired in 2015.

As at 30 June 2022, Prophecy’s software has been deployed at more than 4,000 customer sites globally, including many of the Fortune 500. One of Prophecy’s more recent high-profile contract wins was with the UK’s Royal Air Force (RAF) who will be using Snare’s cyber security software to protect the military body across 18 separate RAF defence networks.

Facilitated by partner and reseller Fujitsu, the $580,000 perpetual licence agreement with the RAF follows a $725,000 deal to provide Snare’s offerings to the UK Royal Navy, the company’s largest contract win in FY22, and extends Prophecy’s reach into the defence sector.

“[Prophecy] finally emerged into cash flow positive generation for FY22,” Mr Pretty said. As at Q3 FY23, the company was debt-free, cash flow neutral and cashed up to $12.8 million cash (up from $9.7 million at the end of Q2). Moreover, Prophecy’s sales growth has powered its annualised recurring revenue to reach $21.3 million, an increase of 16% from the end of FY22.

“It’s another company that has got a lot of battle scars, a management team that has had to think strategically, be agile and fight their way through. Our perspective on Prophecy is that their future is looking bright,” Mr Pretty concluded.

Click here to view more videos from Martin Pretty’s The Insider: Meet the Fund Manager session.

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