Often our investment thematics are centred around the opportunities and threats

created by disruptive forces. We have targeted companies which are turning

disruptive technologies to their advantage, with Spark New Zealand a clear example
in the telecommunications space. At the other end we have marked avoid labels on
companies which have been too slow to react to less-traditional competitive forces,
with an example here being Woolworths which, despite some recent bluster, in our
view remains complacent towards the market share being taken (with more to go) by
foreign discounters.
The increasing dynamism of the technological world is also throwing up opportunities
within the FinTech arena. We certainly have a positive view on big blue chips (such
as Suncorp) which are embracing this opportunity. We have also backed innovative
financial service platforms such as HUB24, Praemium, and OneVue which have
moved with the times, and are strongly leveraged to a rising investment pot in the
funds management industry.
The Fintech sector is certainly here to stay. In fact, global Investment here (per
Accenture) grew 75 percent in 2015 to more than US$22 billion, and first quarter
investments reached US$5.3 billion (up 67 percent on the previous year).
Significantly, Accenture also noted that collaborative FinTech ventures (targeting
financial institutions as customers) are gaining ground on disruptive players that are
looking to compete.

Source: Accenture
This is an appropriate segue into 9 Spokes International which we highlighted
in June as an interesting player within the fintech space. The company brings
together business software cloud applications for small and medium sized
businesses (SMEs) and integrates them into a smart dashboard. 9 Spokes offering
has already received strong validation in the form of deals with three blue chip
customers, including Barclays Bank in the UK.

Source: Company Website

We put 9 Spokes on a traffic light alert in June, as we monitored the companys

operational and strategic developments. The last few months have been positive on
a number of fronts in our view, with three meaningful contracts (including Barclays)
set to kick off by the end of the year.
With the revenue line now set to swing into action, and the share price
remaining at a discount to the IPO price of 20 cents, we are now upgrading our
recommendation to a speculative buy.
It is important to note that this is a HIGH RISK recommendation with the
companys revenue generation at an embryonic stage. The company is also a
small cap stock, and comes with the associated liquidity risks. Patience
should be exercised when buying.
Company Recap - Business Model
9 Spokes product seeks to help SME owners by bringing all their key business
applications onto a single platform, enabling a more integrated snapshot of the
business performance and drivers, and also facilitating peer review.

Source: Company Presentation

The company was founded in 2011 by kiwis Adrian Grant and chief executive Mark
Estall. Prior to the IPO the company had raised around A$11.5 million since
inception.
The idea which spawned the business was that many SMEs are faced with a myriad
of choices of business software, and little guidance on which are the best, and how
to optimize visibility. A critical issue is also that the data is given from an
absolute perspective, with little opportunity to benchmark to competitors.

9 Spokes (the companys name is derived from the nine key disciplines it believes
businesses should follow to be successful) seeks to address these problems by
recommending what it believes to be the best software by industry, and then allowing
key metrics across these to be presented in a single dashboard. This also allows
the business to share the information with their advisor, and also benchmark to
peers. This could also see a tipping point for the company down the track where
benchmarking data can be delivered live, on an industry and country level.

Source: Company Presentation

The company currently has partnerships with more than 50 online software
providers, including the likes of Xero, MYOB and Intuit, and the universe is
something the company intends to grow. 9 Spokes is also partnered with IBM to
provide hosting and infrastructure support, along with the necessary levels of
security. We also believe that this relationship could be the source of cross-selling
partner gains over the longer term.
The companys key channels to market are business to business and white labels
through channel partners, with the latter providing the opportunity to deliver scale
relatively quickly, and at a low acquisition cost. The companys raw product is patent
protected.
9 Spokes does have competitors, and the barriers to entry and not overly substantial,
however as the below grid shows, no rival is in position with a dashboard offering
which provides benchmarking functionality and is in place with channel partners.

Source: Company Presentation

Revenue Streams
A core revenue stream is by way of a margin (approx. 20 percent) from third party
channel partners on a monthly SaaS (software as a service subscription model
basis). The more apps that an SME uses the greater the revenue that flows to 9
Spokes.
The company also receives deployment and license fees from the white label
channel partner with which it has agreements, with a number of blue chip companies
already across the line.
The company sees the scale of the market as significant with 90 percent of all
businesses being SME, and cloud app expenditure growing at a robust
rate. According to Forbes 64 percent of SMEs use 3 cloud apps, and 78 percent of
companies will buy one within the next 2-3 years.

Source: Company Presentation

Validation by blue chip companies

While some might consider 9 Spokes just another tech start-up the key point
of difference is that the company has already received validation from blue
chip partners, (with deals signed and set to go live before year end) both in the
UK and Australia.

Source: Company Presentation

The company sealed an agreement with Barclays bank in the UK in late 2015. The
deal is an exclusive one with the biggest bank in the UK (25 percent market share),
and will give 9 Spokes exposure to part of the banks SME client base, which
numbers around 1.2 million.
The contract is a 3x3 deal (three years initially and a three year rollover) with
Barclays paying upfront fees of A$4 million (we believe around 60 percent of this has
been invoiced to date) to cover development costs. The financial outcome for 9
Spokes will depend on the how rapidly the platform is pushed to Barclays client
base, with a test rollout before the calendar year end, and the number of apps that
are taken up.
A matrix below though shows the potential annual revenue to 9 Spokes on a 20
percent margin, an average price per app of A$28 per month, and the average
number of apps that are purchased. The target total of SME clients over the term of
the contract is 600,000.

Source: Company Presentation

The company also has a non-exclusive white label agreement with Suncorp in
Australia which was secured in April this year. The average app retail price
assumed is A$40 per month, and the company also has an option to roll the offering
out in New Zealand. Suncorp has 770,000 SME insurance and banking customers,
and the estimated year 3 target for the deal is over 30,000 customers.
The company also has an alliance contract with Deloitte Private, and has secured a
channel agreement in both Australia and the UK.
The agreement is exclusive in Australia over the other Big Four advisory/accounting
firms, and 9 Spokes is helping power the Private Connect SME platform. Deloitte
firms in other countries also have the first right of refusal before 9 Spokes can offer
the platform to any of the named big four competitors. Any customers gained through
the agreement are owned by 9 Spokes, and the company also retains the entire
app sales margin.
9 Spokes signed an agreement with Deloitte UK in July which will see the latter
launch its Propel dashboard, a cloud based accounting and analytics service to the
UKs estimated 5.4 million SMEs.
The upshot is that 9 Spokes has three business partner channels which are set to
launch in the December quarter. Minimum monthly recurring revenues of
A$325,000 are expected once all channels are operating. This is in addition to
material milestone payments.
The company is also planning to launch its own direct platform in the UK, the
companys largest market by the end of the year.
To support the overall rollout the company is beefing up its infrastructure, as well as
head count. The last few months have seen the company go live with two data
centres (in the APAC and EU regions), and plans for a further two in the near future.
The company now has around 90 employees (although additions are expected to
moderate from here), with six located in the UK. A notable hire in our view was the
appointment of Phil Sheehan as Head of Alliances. Mr Sheehan managed IBMs

Independent Software Vendors Programme for 10 years, and could facilitate the
companys ambitions to scale up its client book further.
This also includes the US, where 9 Spokes has conducted preliminary
investigations for developing business. Management have accelerated discussions
with undisclosed major US financial institutions, and certainly getting a big US bank
over the line would be a massive win.
Management and Board
As noted previously, we have met with founders Mark Estall (CEO) and Adrian
Grant, and we were impressed by the companys strategic vision. Another core
attribute of 9 Spokes is that the company has assembled a high quality board, with
significant door opening abilities. Former Telecom New Zealand chief executive
Paul Reynolds is the Non-Executive Chairman, and has extensive experience in the
global telecoms industry, having also been a Board member at BT Group, and CEO
of one of its largest business lines, BT Wholesale. Former Walt Disney and
Ticketmaster executive Wendy Webb is another high profile name.
IPO
9 Spokes has had a short stock market life to date, having only listed in June, raising
A$25 million in new equity capital at a price of A$0.20 per share. The proceeds of
the offer are to be used to scale channels, add further partners, build up the
companys international presence, and grow the companys SME customer base. Of
the A$25 million raised, around $8 million is pegged for software development with a
similar amount for general working capital.
The shares slipped shortly after the IPO, not helped by launching in the midst of the
Brexit vote, and also on the back of some selling by earlier stage seed investors. The
shares have though since stabilised, which is encouraging in our view.
It should also be noted that there are pre-IPO options (expiry date of 30 September
2017) outstanding at prices of NZ$0.18 (28.6m shares) and NZ$0.22 (14.3m
shares), in addition to ESOP (employee share ownership plan) and advisor options
numbering 1.9m and 8.75 million shares respectively. Total diluted capital therefore
totals around 456.6 million shares (versus 403m post the IPO). The company has
though dismissed a claim of an early stage investor seeking to acquire further
unquoted options. That investor chose not to participate in a funding round, so
therefore the companys decision seems reasonable.

Turning to the technicals, on the daily chart support was respected at the 61.8%
Fibonacci retracement of $0.14 (blue set of retracements), which is a bullish
development. In order for the long-term technical outlook to strengthen, a sustained
break above resistance located at $0.16 is required. This is made up of the
September high and the 50% Fibonacci retracement (red set of retracement). Should
this scenario unfold, then the formation of an uptrend would be confirmed, along with
the satisfaction of a 'DOW entry' (which is a method of entering new positions).
Summary
We regard 9 Spokes International as a strong (albeit high risk) play within the fintech
space. The company brings together business software cloud applications for small
and medium sized businesses and integrates them into a smart dashboard. The
company is not your ordinary start-up, having already received validation in the form
of deals signed with three blue chip companies, both in Australia and the UK. Deals
with Barclays, Suncorp and Deloitte Private are set to go live before the end of the
year.
With the revenue line now set to swing into action, and the share price
remaining at a discount to the IPO price of 20 cents, we are now upgrading our
recommendation to a speculative buy.

It is important to note that this is a HIGH RISK recommendation with the

companys revenue generation (let alone earnings) at an embryonic stage. The
company is also a small cap stock, and comes with the associated risks.
Patience should be exercised when buying.
We recommend 9 Spokes International as a buy to Members with a high
appetite for risk.
Disclosure: Spark New Zealand is held in the Fat Prophets Income Model. Spark
New Zealand, Praemium, and OneVue are held in the Fat Prophets Concentrated
Australian and Small & Mid-Cap Models.
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