HeartCore diversifies amid shrinking revenues and worsening operating losses (NASDAQ:HTCR)

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A quick overview of HeartCore companies

HeartCore Companies (NASDAQ:HTCR) released its second quarter 2022 financial results on August 15, 2022, leading to a US dollar-based revenue contraction of 7% year-over-year as the Japanese yen lost 14% of its value against the dollar.

The company provides customer experience management software to enterprise customers in Japan and overseas.

With HTCR delivering deteriorating operating results, losing focus and operating in a depreciating currency environment, my outlook on the stock is a sell.

Introducing HeartCore Enterprises

HeartCore, based in Tokyo, Japan, was founded in 2009 to develop an enterprise platform to improve customer and stakeholder experiences.

The company is led by Founder, Chairman and CEO, Mr. Sumitaka Yamamoto, who was previously employed at BroadVision in Japan.

The company’s main offerings include:

  • Marketing

  • Sales

  • Customer service

  • Content management

  • Integrations

The company acquires customers through its direct sales and marketing efforts and had 877 corporate customers as of June 30, 2022.

The graphic below shows some of the company’s customers:

Company Customers - Partial List

Enterprise Customers – Partial List (HeartCore Enterprises)

HTCR also provides non-customer relationship software products and services.

HeartCore Enterprises Market and Competition

According to a 2018 market research report by ResearchAndMarkets, the global customer experience management market is expected to reach $21.3 billion by 2024.

This represents a projected CAGR of 22% during the period between 2018 and 2024.

The main driver of market growth is the growing need for personalized customer experience.

Additionally, the growth in the use of machine learning promises to deliver greater software value to enterprises by offering recommendations and vertical industry focus.

Major competitors or other industry participants include:

  • Adobe (ADBE)

  • Avaya (AVYA)

  • CA Technologies

  • IBM (IBM)

  • Medals

  • Aon Hewitt

  • Watson Towers

  • SurveyMonkey

  • Qualtrics International (XM)

  • Sprinkler (CXM)

HeartCore’s Recent Financial Performance

  • Total revenue by quarter recorded variable performance as shown in the graph below:

Total turnover over 5 quarters

Total revenue over 5 quarters (looking for Alpha)

  • Gross margin by quarter also produced fluctuating results:

Gross profit over 5 quarters

Gross profit over 5 quarters (looking for Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter have trended much higher in recent quarters:

Sales over 5 quarters, G&A % of turnover

5 Quarter Sales, G&A % Revenue (Seeking Alpha)

  • Operating losses per quarter have worsened significantly in recent quarters:

Operating result for the 5 quarters

5th Quarter Operating Result (Seeking Alpha)

  • Earnings per share (diluted) produced increasingly negative results, as shown in the chart below:

5 quarters of earnings per share

5 Quarter Earnings Per Share (Seeking Alpha)

(All data in the graphs above are in accordance with GAAP)

Over the past six months or so, HTCR’s stock price has fallen 17.3% compared to the US S&P 500 Index’s fall of around 8.6%, as shown in the chart below. below:

26 week stock prices

26-week stock price (seeking alpha)

Rating and other metrics for HeartCore Enterprises

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Rising

Enterprise Value / Sales

1.99

Revenue growth rate

19.9%

Net profit margin

-35.6%

% EBITDA GAAP

-31.5%

Market capitalization

$28,820,000

Enterprise value

$21,450,000

Operating cash flow

-$1,680,000

Earnings per share (fully diluted)

-$0.20

(Source – Alpha Research)

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and EBITDA percentage rate are equal to or greater than 40%, the company is on a trajectory acceptable growth/EBITDA.

HTCR’s most recent GAAP 40 rule calculation was negative (11.6%) in the second quarter of 2022, so the company performed poorly in this regard, according to the table below:

Rule of 40 – GAAP

Calculation

Recent Rev. Growth %

19.9%

%GAAP EBITDA

-31.5%

Total

-11.6%

(Source – Alpha Research)

Comment on HeartCore

In its latest earnings release (Source – Seeking Alpha), covering Q2 2022 results, management highlighted the interest in its new service, Go IPO.

The Go IPO segment will provide advisory services to Japanese companies seeking to list their shares on the Nasdaq capital markets in the United States. This service appears to bear little relation to its core customer experience offerings.

Management is also focusing on potential M&A opportunities “to help augment our growth efforts,” but didn’t provide any details on which growth areas those efforts would focus on.

Regarding its financial results, total revenue fell 7.4% due in part to a 14% drop in the value of the Japanese yen against the US dollar.

Management did not disclose the company’s net retention rate, an important metric providing visibility into product/market fit and sales and marketing effectiveness.

The company generated higher general and administrative expenses due to increased hiring and one-time costs associated with the launch of its tru-Res-12K camera.

For the balance sheet, the company ended the quarter with $12.5 million in cash and $1.4 million in long-term debt.

Over the past twelve months, HTCR has used available cash of approximately $1.7 million.

Looking ahead, management did not provide any guidance on revenue or EBITDA as it appears the company is launching initiatives and service offerings unrelated to customer experience.

The main risk to the company’s outlook lies in its diversification efforts which may lead to a loss of focus and becoming a jack of all trades, master of none, which is common among small Asian companies.

Additionally, the yen’s decline in value against the US dollar could continue as the two countries appear to be taking different approaches to fighting inflation, with the US continuing to raise interest rates, thus attracting capital.

With HTCR delivering deteriorating operating results, losing focus and operating in a depreciating currency environment, my outlook on the stock is a sell.

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