HTCR - HeartCore Enterprises Diversifies Amid Revenue Contraction And Worsening Operating Losses

Summary

• HeartCore Enterprises recently reported its Q2 2022 financial results.
• The firm provides customer experience software and unrelated products and services in Japan.
• HTCR has produced contracting revenue on a US dollar basis and worsening operating losses as it seeks to diversify into businesses unrelated to its core.
• Given a slowing economic environment, loss of focus, increasing operating losses, and little management communication, my outlook for HTCR is a Sell.

A Quick Take On HeartCore Enterprises

HeartCore Enterprises ( HTCR ) reported its Q2 2022 financial results on August 15, 2022, producing 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 producing worsening operating results, losing focus, and operating in a depreciating currency environment, my outlook on the stock is a Sell.

HeartCore Enterprises Overview

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

The firm is headed by founder, Chairman, and CEO Mr. Sumitaka Yamamoto, who was previously employed at BroadVision in Japan.

The company's primary offerings include:

• Marketing

• Sales

• Customer service

• Content management

• Integrations

The firm acquires customers via its direct sales and marketing efforts and had 877 enterprise customers as of June 30, 2022.

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

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

HeartCore Enterprises' Market & Competition

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

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

The main factor driving market growth is the increasing need for personalized customer experience.

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

Major competitive or other industry participants include:

• Adobe (ADBE)

• Avaya (AVYA)

• CA Technologies

• IBM (IBM)

• Medallia

• Aon Hewitt

• Towers Watson

• SurveyMonkey

• Qualtrics International (XM)

• Sprinklr (CXM)

HeartCore's Recent Financial Performance

• Total revenue by quarter has performed variably according to the chart below:

• Gross profit by quarter has also produced fluctuating results:

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

• Operating losses by quarter have worsened markedly in recent quarters:

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

(All data in above charts is GAAP)

In the past approximately six months, HTCR's stock price has dropped 17.3% vs. the U.S. S&P 500 index' fall of around 8.6%, as the chart below indicates:

Valuation And Other Metrics For HeartCore Enterprises

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

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

HTCR's most recent GAAP Rule of 40 calculation was negative (11.6%) as of Q2 2022, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On HeartCore

In its last earnings release (Source - Seeking Alpha ), covering Q2 2022's results, management highlighted the inbound interest from its new service, Go IPO.

The Go IPO segment will provide consulting services to Japanese firms seeking to list their shares on Nasdaq capital markets in the U.S. This service appears to have little relation to its core customer experience offerings.

Management is also focused on potential M&A opportunities 'to help augment our growth efforts,' but provided no specifics on what areas of growth that effort would focus on.

As to its financial results, total revenue dropped 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 & marketing efficiency.

The firm produced higher SG&A costs due to increased hiring and one-time costs associated with the launch of its tru-Res-12K camera.

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

Over the trailing twelve months, HTCR has used free cash of approximately $1.7 million.

Looking ahead, management provided no revenue or EBITDA guidance while it appears the company is launching non-customer experience-related initiatives and service offerings.

The primary risk to the company's outlook is its diversification efforts which may result in losing focus and becoming a 'jack of all trades, master of none', which is common among small Asian companies.

Furthermore, the loss in value of the Yen versus the US dollar may continue, as the two countries appear to be pursuing different approaches to battling inflation, with the U.S. continuing to raise interest rates, attracting capital in the process.

With HTCR producing worsening operating results, losing focus, and operating in a depreciating currency environment, my outlook on the stock is a Sell.

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