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FELIX GROUP HOLDINGS LTD (FLX) - From Compliance to Cash Flow: Mike Davis on Felix's Procurement Success

• Andrew Musgrave

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Ever wonder how massive infrastructure projects manage their complex network of suppliers, contractors, and compliance requirements? Mike Davis, co-founder and CEO of Felix Group Holdings Limited, pulls back the curtain on this fascinating world in our latest conversation.

Felix has carved out a powerful niche providing cloud-based procurement management solutions for capital-intensive industries. Rather than competing head-on with global procurement giants, they've focused on becoming the specialist platform of choice for infrastructure, property, and mining sectors – a strategy that's paying off handsomely with three consecutive cash-positive quarters and 27% year-on-year growth in enterprise customer revenue.

What makes Felix stick? Their platform becomes deeply embedded within customer operations, integrating with finance systems and standardising how these huge enterprises engage with third parties. With modern slavery legislation, carbon accounting, and sustainability metrics now non-negotiable for major projects, Felix has transformed from a "nice-to-have" into essential business infrastructure.

The company's international expansion is gathering momentum through strategic relationships with industry giants. A renewed contract with CIMIC Group (Australia's largest contractor) potentially opens doors to CIMIC's global parent company, while their agreement with PCL Construction establishes a foothold in Canada and the US. Looking ahead, Felix aims to monetise both sides of its marketplace – a move that could dramatically accelerate growth. 

Andrew Musgrave Host

Welcome back to ASX Briefs, where we bring you direct insights from the innovators driving Australia's listed companies and today we're speaking with Mike Davis, the co-founder and CEO of Felix Group Holdings Limited, a leading provider of cloud-based procurement management solutions through its enterprise SaaS platform and growing vendor marketplace. Mike, thanks for joining me today and welcome to the ASX Briefs podcast. 

Mike Davis Guest

Thanks for having me. Andrew, Great to be here. 

Andrew Musgrave Host

Now, Mike, for listeners that may be unfamiliar with Felix Group Holdings, can you just provide a brief overview of the company? 

Mike Davis Guest

Yeah, can do. Felix is an enterprise software platform. We service customers generally in large industrial sectors what we like to call capital asset intensive sectors, such as infrastructure, large civil infrastructure, property and REIT, mining and resources services sectors, and we're a software platform that runs across the enterprise that effectively provides them a portal to manage all of the thousands of subcontractors, suppliers, consultants, who their business works with. So, we provide the compliance and pre-qualification tools to manage those relationships and then for project teams to manage sourcing events, so send RFQs, tender requests all the way through to awarding and managing of contracts so effectively vendor management and procurement software across the enterprise. And we're really purpose-built for the sectors that we go after. So, we would sometimes compete with larger global procurement behemoths such as SAP's Ariba platform or Coupa or Zycus. But it's Felix's competitive advantage in being specialised for the sectors that we're built for. That's really providing growth and momentum for the business. 

Andrew Musgrave Host

Okay, and the company recently achieved its third consecutive quarter of positive cashflow. So how significant is this milestone for your long-term strategy? 

Mike Davis Guest

I'd say it's really significant for the strategy here and now, obviously being a micro-cap end of the listed market and the environment that markets have been in in the last couple of years. 

We listed the business in January of 2021 and then had quite a strong investment profile in the infrastructure and security and scalability of our solution, which is necessary given the sensitivity of the data we manage in our team, et cetera so that we felt that we were in a position to be a truly sort of turnkey state of readiness for a global tier one customer base. Following that investment and ramping of those teams and the platform, the market sort of obviously changed on a dime and that sort of growth appetite for markets turned to sort of a strong requirement for profitability. So, we really kind of focused our strategy in line with that and getting the business to that position of stability that you mentioned. We've recorded three consecutive quarters of cash flow positive and hopeful of recording a fourth. It has been really important milestone for the business to provide that solid footing and foundation and ability to, I guess, be independent now in our looking forward and what the growth opportunities are is a much stronger foundation for us. So, yeah, that's been a really important milestone for Felix. 

Andrew Musgrave Host

And you've also seen a 27% year-on-year growth in contractor ARR. So, what's been driving that strong customer expansion and retention? 

Mike Davis Guest

Yeah, sure. So, the contractor ARR that we refer to in our materials, that's the enterprise SAS license fee. So, they're the big medium to large enterprises that we sell Felix SAS software into and get embedded. It's generally a three-year contract terms at about $100,000 per annum ACV in at those customers and it really is the core of our growth engine. So, we get embedded at these contractors. They generally expand their use case of Felix and grow their account over time, whether that's adding projects or other operating divisions or geographies, with a view to being truly enterprise in their adoption of Felix. And what happens then is those contractors they onboard and they mandate the use of Felix to their hundreds or thousands or even tens of thousands of suppliers who will be managed and engaged within Felix. So, the I guess the overall vision of our platform ecosystem is have a dual side of marketplace of contractors, of which we've got 72 enterprise customers now and hundreds of thousands and hopefully building towards millions of vendors in the platform. So, our first 72 contractors have driven growth of 115,000 vendors in platform now. 

Now to circle back to your question, the most important part, I guess, about the business model and where we feel like we've got really solid foundations and unit economics to build growth on has been that retention profile, really low churn and expansion profile of the contractors and I think that the standalone value that Felix provides them means that we get deeply embedded in their organisation. They integrate Felix into their finance ERP platform, into their document management system and other compliance tools perhaps. It's mandated use across the enterprise because really what we do is standardise the way that these huge businesses engage with third parties. So, it's been that sort of underpinning foundation and then what we've seen drive, I guess, growth and momentum has been the external operating environment that businesses are operating in. 

So now what might have been seen as a nice to have a few years ago that I guess the supply chain management platform that the business has is now seen as almost a non-negotiable their system and platform that they have visibility, governance and oversight of third parties that they're engaging with. Some of that is being driven by legislation. It could be the Modern Slavery Act coming in which has got compliance requirements now for businesses turning over $100 million and that will move into a stage of penalties for non-conformance. You've got things like carbon accounting coming in and scope through emissions, but large infrastructure projects have sustainability metrics they've got to achieve around local supply and Indigenous supply. So, all of these I guess supply chain kind of operating influences are driving growth and momentum for Felix. 

Andrew Musgrave Host

And you've recently signed a three-year contract renewal with CIMIC, so can you discuss the significance of this renewal 

Mike Davis Guest

Sure, yeah, Cimic Group for those who are not familiar, Australia’s largest contracting group. They've got probably five tier one operating companies within that group CPB contractors, Leighton, Asia, UGL, Thiess and Sedgman. So collectively it's a huge group. And, yeah, they were sort of an early customer of Felix and now we're moving into our third contract renewal with them. So, it's a really significant show of faith from a group of that size into the strategic value of Felix to all of the companies within that group. There was material uplift of ARR in the contract. 

So, yeah, it's really strategically valuable for us and I guess, if you want to draw out a dotted line to the potential bigger picture prize on offer, Cimic Group are a part of the ACS group of companies which is headquartered in Spain and includes some of Europe and North America's largest contracting companies within that group. Cimic is effectively the APAC arm of that group and what we've been doing with the group and the value that we've provided is being seen as global best in class. So, working behind the scenes and a potential opportunity to standardise what we've done with the CIMIC group across that global group, which would obviously be a significant growth catalyst for the company. 

Andrew Musgrave Host

Now your agreement with PCL Construction's solar division takes Felix into Canada and the US. So how do you see the North American market evolving for your platform? 

Mike Davis Guest

Yeah, Andrew, again really important strategic catalyst this contract extension. For those again unaware, PCL, Canada’s largest contractor by some margin, I believe. It's a sort of US $11 billion company, so massive. We've had their what they call their Pacific Rim Division signed and on Felix for the last couple of years. Effectively, that's their Australian arm and we've been assisting them in their large renewable projects that they're entering the APAC market with. Again, what we've been seeing, what we've been doing, has been seen as best in class and that word filtering up to the mothership. So, we've signed an expansion agreement, which is a master services agreement, into the parent co, PCL Constructors Inc. Which effectively now enables us to bolt on any work order with any other geography or business unit within PCL and move quickly like that. So, the first imminent expansion will be with the, as you mentioned, international solar divisions and then hopefully we can move sideways into other Canadian geographies and taking up more of those business units with a view to truly enterprise rollout within PCL. 

How that's again strategically important for Felix is Canada's the next market that we're focusing on outside of ANZ. We really like some of the synergies between the Australian and Canadian market. We think it's a good stepping stone to the larger US market. We've got our first boots on the ground in Canada and growing and sort of on the precipice of converting some of that pipeline that we've been growing. So, like Cimic Group we're in Australia. For us we see PCL as that similar sort of big domino that if we can knock that over, we expect others in the market will follow and it's a big momentum generator. 

Andrew Musgrave Host

Okay, now just touching on customer success and platform adoption. So, you've seen impressive net revenue retention of 105%. So, what features or capabilities are resonating most with customers as they expand the usage of Felix? 

Mike Davis Guest

Yeah, I think that Felix's secret sauce is being really optimised for the sectors that we work with and the way that those bit large, geographically diverse and often project-led businesses operate and how our functionality supports that. But then how we bolt together that supply chain management piece with the procurement workflows. What we're seeing in the current environment is that more and more customers are leaning towards a slightly smaller initial use case. Just getting contracts done in the current operating environment is hard. Everything's taking more time. I'm sure you and your listeners are seeing that everywhere across the board. So, part of what's driving momentum and our advantage is that supply chain thematic being really in focus for Felix. But just in terms of reducing the barriers to entry, to contract conversion and shortening the sales cycle, we might see a slightly smaller use case and then, as we get embedded, earn trust and have a demonstrable value case within the organisation. 

What we see them doing is expanding Felix to other operating divisions. So, we might start with, say, a construction division of a tier one and then expand to their utilities and infrastructure services division. Or we might start with a particular geography, whether that's a state or a country and then it rolls out further or just more projects within that business uptake in Felix. It could also be that they start with only licensing the vendor management module and then, as we get embedded, they bolt on the downstream procurement module. So that gives a little bit of insight into some of those sort of expansion vectors that we've got and we're really seeing, I guess, a pleasing trajectory of most of the customer base are expanding their use case of Felix once we get initially embedded. 

Andrew Musgrave Host

And just with that strength, particularly in the mining and the resources sector, how do you see the opportunity from this sector evolving? 

Mike Davis Guest

It's really topical, Andrew, because by the time your listeners are listening to this, we should have put out a sector deep dive on the ASX and on our Investor Hub portal, which really unpacks some of the growth and momentum that we've been seeing in the mining resource sector and what our product market fit is like. And then as we look forward, not only in the domestic market but how that translates into the global mining and resources sector and how that could play out. And it's been really exciting for us. And I think obviously there are different minerals and resources that have their own markets and some of those have had significant growth. That plays well into Felix because we see those miners expanding and then the services contractors contracting to those larger miners Also that means growth for them. So, it's that kind of supply chain ecosystem within that business as it's expanding that Felix really gets in there and supports that. 

Andrew Musgrave Host

The vendor marketplace is continuing to scale rapidly, so can you please highlight the opportunity for Felix regarding the strategic goal of monetizing the vendor marketplace in the medium term? 

Mike Davis Guest

Yeah, I sort of touched on the overarching strategy of the dual sided marketplace at the start, and central to that theme is our ability to, in time, deliver value and monetise the vendors. We won't ever monetise them just for joining and connecting the contractors who onboard them, but it's something that we're sort of actively moving towards because if you do the back of the envelope calcs on ARR upside potential, if we were to have a nominal subscription fee to the numbers of vendors that we've got engaged in the marketplace, you can see that that's where the real hockey stick potential for Felix is in terms of a growth and ability to have a step change in the growth rate. So, it's significant and something that we're actively moving towards. 

Andrew Musgrave Host

Okay, Mike. Now just to wrap things up if we fast forward two years, what does the success look like for Felix, both domestically and internationally? 

Mike Davis Guest

We certainly want to have the sort of green shoots that are coming through in terms of international inflection now, some cornerstone customers embedded down. I mean in key markets has already got Canada and South Africa, so yeah, more cornerstone customers embedded and delivering value in those markets so that our pipeline and customer growth is starting to take shape in those markets. We've had really strong validation in the domestic market today, but we want to get in there and prove our mettle on the international stage and, I think, meaningful inroads into the vendor side of the opportunity as well. If we tick those big boxes, andrew, I think that'll be sort of transformational for Felix. 

Andrew Musgrave Host

Okay, Mike. Well, it's been great to chat today to get an update on all the company activities and we look forward to further updates from Felix Group Holdings in the upcoming months. 

Mike Davis Guest

Pleasure. Thanks for having me. 

Andrew Musgrave Host

That concludes this episode of ASX Briefs. Don't forget to subscribe and we look forward to catching you on our next episode.