BioHiTech: Model-Shift A Success

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About: BioHiTech Global, Inc. (BHTG)
by: Dallas Salazar
Summary

BioHiTech Global, a cleantech startup I actively follow, is out with its full year financial results.

Trailing twelve months, the publicly-traded (but highly illiquid) startup is showing a continued progression in its transition to more of a “SAAS”-based, long-term, recurring-revenue friendly model.

BioHiTech was able to show effective transition regarding composition of revenues from that of shorter-term to that of longer-term.

With continued scale and continuation of transition to a "SAAS"-like model, BioHiTech should see financials stabilize and improve into follow-on quarters.

BioHiTech Global (NASDAQ:BHTG), a cleantech startup I actively follow, is out with its full year financial results. Trailing twelve months, the publicly-traded (but highly illiquid) startup is showing a continued progression in its transition to more of a "SAAS"-based, long-term, recurring-revenue friendly model. If not clear, it should be noted that this is all well-within the transition plans of the startup which realized roughly 12 months ago that with the addition and expansion of its data-first, data-based, quantifiable ability to prove out its value-prop - BioHiTech is in a unique position to provide clients and prospects with a quantifiable return on investment projection at the initiation of the sales process (via its data-collection and data-expression capacity; more on this later) - that a "SAAS-like" model which offers what I call a "hardware component" would be a much higher-return model for investors longer-term. Again though, when referencing a "SAAS-like" model deployment at BioHiTech I want to be clear in that the "hardware component" is certainly the razor to the razor-blade; everything that BioHiTech does is based on the efficacy of the underlying digestion tech built into its proprietary digesters.

For those unfamiliar, BioHiTech began to transition its hardware-based, essentially hardware-dependent model - again, based entirely on its Eco-Safe Digester (a hardware system that helps transform food waste into nutrient-neutral water that can safely be disposed of via conventional sanitary sewer systems) - roughly 12 months ago. In this transition, BioHiTech realized it would likely not see the net Y/Y revenue growth it had seen since inception as its shift from selling a one-time, big-ticket item (its digesters) to selling recurring but smaller ticket services would mean smaller volume numbers (yes, even at larger scale) were hitting its topline; it was right in this assumption as revenues Y/Y (on increased OPEX) came in roughly flat. So, don't take the flat topline Y/Y as a completely accurate indication of health - it just isn't. But what BioHiTech did expect was to see a composition of revenues shift from being heavily weighted toward "Equipment Sales" to being more balanced toward (and eventually heavily weighted toward) revenue from recurring sources. For full year 2015 revenue from recurring sources as a percentage of total revenue increased to 66% from 50% Y/Y, while Equipment Sales as a percentage of total revenue decreased to 27% from 38% Y/Y. So, again, full year 2015 was a success from this standpoint despite the topline of the young startup remaining flat.

Of course, posting a flat topline while growing into another year of scale means expanding losses on the income statement and drawing down cash on the balance sheet; BioHiTech realized both. But that's where the model-shift and the successful execution of the model-shift should be viewed as the true measure of health- and they were by investors. BioHiTech, subsequent to year end, closed a $2.5 million raise which helps it meet its full year 2016 funding needs (how much of the needs this raise meets will depend on BioHiTech's highly fluctuating, highly variable growth rates - dependent on ability to hire, R&D successes, etc.). But the fact that it was able to execute the raise into a model-shift, I think, speaks volumes about the confidence investors had/have regarding the outlook of the startup; I too think BioHiTech is capable of big things in the immediate/mid-term. As of year-end 2015, BioHiTech's backlog was 90 units and BioHiTech officially breached the 300 units deployed globally mark; with increased scale should come some operating leverage (again dependent on which variable rate of growth the company decides to adopt) as well as some of the nice "freebies" that come naturally within the "laws of larger numbers" (network effect, higher efficacy advertising, brand recognition, etc.). Again though, immediate-term growth will be funding-tethered so any news on the funding front will be hugely meaningful to maturation prospects. Stay tuned here.

But BioHiTech also helped those betting on it (or simply opining on from the outside) by expanding its product umbrella as well. 2015 introduced the expansion of the BioHiTech Cloud (from a capacity as well as an overall technology standpoint) in addition to (what I consider a separate and stand-alone product) the launch of the BioHiTech Cirrus application - a BioHiTech Cloud tethered app that provides data-visual representations of data created by the digesters on-premises. Again, BioHiTech is completely data-first and "all-in" from a data-based value-prop standpoint. It truly believes that showing ROI to those in charge of renewing the subscription of services (READ: CIO, CTO, COO, etc.) will take care of any retention concerns; I believe this too - it just makes sense.

And frankly this is what I like so much about BioHiTech, that it has a quantifiable value-prop that it makes easy to see via its product ecosystem. Its long-life, low-maintenance digesters do the heavy lifting and the actual converting of waste to disposable, nutrient-neutral water while its software based products show what ROI this is creating. BioHiTech doesn't have to sell anything at any point during the sales or retention processes; it simply presents a use case, presents a projected ROI, and ultimately either proves it out or it doesn't. With a consistently growing customer base that is also expanding into greater international penetration from what I gather BioHiTech is making business sense more often than it isn't. Isn't that what every business aspires to prove out?

I'm looking forward to more progress reports from BioHiTech regarding growth and/or its model-shift. I really like the shift toward a "SAAS"-like model here and most certainly would have made the same decision to shift if I was managing the company. While this might have caused some lower visibility for 2015 when reading the financials I think ultimately this positions the company to be a much, much more stable financial story as well as a much higher margin story (with the capital productivity being held at longer durations once reached).

Good luck everybody.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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