The New Criterion: tapping the home automation boom

Tim Boreham

Independent Investment Research

Hey Google! Which ASX small caps are exposed to the unfolding home automation boom? The answer is the minnows Buddy Technologies (BUD, 5.4c) and Quantify Technology Holdings (QFY, 0.8c), although we caution that both have disappointed in the past.

For the Adelaide-based 'cloud' minnow Buddy - previously Buddy Platform - now is the time to shine after its recent purchase of home-grown smart globe maker Lifi Labs (LIFX), which competes head on with Dutch multinational Philips and its Philips Hue bulb.

Buddy recently completed the acquisition of LIFX by paying its vendors $US26.5m ($37m) cash, plus another $US24.5m of Buddy shares. Buddy partly funded the cash component by raising $18m in a placement, at 8c a share.

Given the LIFX products were developed in Melbourne, it’s a case of buying back the farm but sentimentality only goes so far: after a poorly received March quarter report that sent Buddy shares tumbling, subscribers to the raising are some 30 percent underwater.

Initially funded by crowd funding platform Kickstarter to the tune of $1.3m, LIFX succumbed to the siren call (and venture capital dollars) of Silicon Valley. Most of the company’s development team remains in Melbourne.

Having sold two million bulbs to one million households in 100 countries, LIFX runs a close second to market leader Philips in an otherwise fragmented sector.

“In every market LIFX punches well above its weight,” says Buddy CEO David McLauchlan.

“It’s a phenomenal company; it’s great to be bringing these guys back to Australia.”

LIFX certainly bulks up Buddy’s top line.

In the March quarter, Buddy generated revenue of $1.134m, up 124 percent but proforma turnover would have been $8.75m with the inclusion of LIFX.

In calendar 2018 LIFX generated $US38.5m of revenue and lost $US3.4m, but expects to be profitable in the current year.

Buddy’s quarterly statement pointed to calendar 2019 revenue growth of 70-100 percent – and first profits. But punters appeared less enamoured with the company’s cash burn of $3.24m and expected current-quarter burn of $15.2m.

The Trump administration’s decision to impose a 12 percent tariff on most of Buddy’s products also doesn’t help, although rivals are in the same boat.

Buddy also carries debt of $13.4 million via a line of credit, reduced by $9.12m. The remainder will be repaid this year, after which the company enters in a $20m working capital facility with the factoring house Scottish Pacific.

While Buddy has burnt shareholders in the past, there’s no doubt LIFX is surfing the growth of home voice devices such as Amazon’s Alexa and Google Assist (now in one out of every three US homes).

But for these gee-gaws to be of any use, households need the wi-fi connected globes.

Helpfully, light sockets globally are pretty similar.

Designed to last 22 years but guaranteed for two years, the LED globes sell for $20 to $30 for the basic units and more than $100 for the deluxe versions, which can include infrared lighting.

“Prices have come down and functionality has gone up,” McLauchlan says.

The acquisitions bring heavy-hitting investors Sequoia Corp, Qualcomm Ventures and Blackbird Ventures to the Buddy register, joining existing Buddy investor and McLauchlan’s erstwhile employer Microsoft Corp (whom we have vaguely heard of).

Post the issue of 337m vendor shares, Buddy bears a $100m market capitalisation with 1.8 billion shares on issue. But with the combined entities losing $12m, the light bulb moment will come when the promised black ink materialises.

Turning to smart appliance pioneer Quantify Technology, the company reported March quarter outflows of $1.57 million and cash of just over $1.2m, prompting the ASX politely to inquire whether the company had enough readies to stay the distance.

While capital raisings aren’t simple a case of ‘Alexa – conjure up more funding’, management is confident of raising moolah in the current quarter.

Quantify at least has an ally in Harvey Norman, which has entered a deal to distribute Quantify’s products exclusively for three years. The deal includes an initial $500,000 order within the first six months.

Quantify’s lead products, the Q-device is an adaptable wi-fi connected wall switch that can be enabled remotely by app, or by wall function.

The gizmos can control lighting, heating and audio visual equipment or open and close curtains. Selling for around $150-250 each, the devices can be altered or upgraded by inserting a new smart chip without the need for them to be removed.

Quantify chief Brett Savill says that while only one quarter of Australian houses have any form of automation, adoption is growing at around 25 percent a year.

“That will double in the next five years because Google and Amazon are fighting it out for the next growth market after the iPhone market,” he says.

“The growth is about 25 percent per annum.”

Having showcased the device at a new apartment development in the Sydney suburb of Rosebery, Harvey Norman plans to sell the units directly to developers.

“We haven’t published forecasts but what you will see is a growth in our sales now that Harvey Norman has started to commercialise it,” Savill says.

A key selling point is that a typical apartment can be wired up for around $5000 to $8000, a far cry from the $20,000 or a decade ago. The tech is also vastly improved.

“By and large it is still a business-to-business sale, you need to have someone who knows what they are doing helping you through that process,” Savill says.

“It’s not taken off as a retail proposition because it is still a bit unknown and uncertain.”

In cahoots with the Curtin University of Technology, Quantify has also entered a head of agreement to install the product in a trial building at Knutsford, Fremantle.

In September last year Copper Coast Development placed a $736,000 order for its Wallaroo Shores development in SA. Quantify has also courted interest from aged care facility providers and it is being trialled at St John of God’s new facility in the upmarket Melbourne suburb of Brighton.

A board revamp last year saw Peter Rossdeutscher, formerly managing director of the Fortune 500 company Gateway Asia, installed as chairman.

A former PricewaterhouseCoopers partner and CEO of Free TV, Savill was anointed as CEO in September last year, replacing founder Mark Lapins who became technical director.

Tim Boreham edits The New Criterion

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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