Friday, 17 April 2009

It's The Recurring Revenue, Stupid

AeroMechanical Services Ltd. (TSX:V-AMA)
Basic Shares: 82.5 million
Fully Diluted:88 million

Please click on the individual graphs below to enlarge

At one point during a particularly bad period in Bill Clinton's run for President, the campaign staff were in a state of absolute confusion about the myriad choices they had to shape his run for the White House.
Clinton's campaign manager cut to the chase by shouting: "It's the economy, stupid!"
That sharp focus turned the floundering campaign around.
Investors should also cast the same steely-eyed focus on AeroMechanical's 2008 annual report and say to themselves: "It's the recurring revenue, stupid!"

It moved from $607 thousand in 2006 for AMA's bluebox technology to $902 thousand in 2007. But by the end of 2008 it chimed in at $2.36 million, a nearly three-fold increase. Please note the bar chart that illustrates the growth in quarterly recurring revenue with Q4/2008 breaking through $1 million!

Cash revenues also climbed impressively, moving from $1.39 million in 2006, to $2.63 million in 2007 and closing 2008 at $5.25 million. As a side note, when you examine the financial statements you'll see reported revenues for 2008 of $3.176 million. The difference between this number and the actual cash through the door is related to accounting standards that mandate the revenues must be attributed over the term of a contract.

Mind you, costs in a very tough selling year when the airline industry faced the double economic blows of soaring fuel prices and a tanking general economy - were also up. So much so that the net loss for the year ending Dec. 31st was $8.52 million, compared to $6.86 million in 2007.
But AMA made great strides by reeling in costs. For example, it cost $1.63 for every $1 in revenue in 2008, compared to a much higher cost of $2.60 for every $1 in revenue in 2007.
Because of nimble footwork like that - coupled with the dramatic rise in cash and recurring revenues - AMA executives remain confident they will prosper from the storm and will likely not have to seek a new financing.
One of the major reasons for that confidence, is the addition of the fuel-saving program to AMA's already impressive capabilities of its technology.
The fuel saving program can chop 3-6% of an airline's fuel bill, a bill that combined with labour costs can account for over 25% of an airline's annual operating costs.
Because industry margins are so tight, the ability to cut up to 6% off costs has airline executives doing a double take.
As AMA President Richard Hayden pointed out in his letter to shareholders, the payback of having the fuel-saving program added to AMA's bluebox technology gives airlines an "immediate and very material" reason for signing on with AMA.
While on the topic of new customers, Mr. Hayden pointed out the recent partnership with the billion-dollar private U.S. aeronautics firm, Sierra Nevada Corporation, gives AMA the "corporate bulk" that sets AMA apart from all others in the field. This association gives AMA the clout to deal with OEMs and major airlines that a small company wouldn't normally enjoy.
And there was another intriguing aspect to the Management Discussion and Analysis report that accompanied the annual report.
That gem is that AMA is also working with a "major supplier" to provide airlines with the ability to get real-time approvals for credit card purchases for everything from movies to meals, drinks and even duty-free items most airlines now offer on board.
To read the entire report please click here.