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A Quick Update on Schrole

While the stock price has been flat, a lot has happened since I wrote my last note on Schrole. Specifically:

  1. There has been some controversy over the vesting of performance shares

  2. Strong Performance update in the middle of a pandemic

I'll try to explain the performance share debacle as I understand it: When Schrole went public in 2017, the managing director Rob Graham sold a majority of his stake. He also received the following incentive package to stay on and continue leading the company:

Series A vested. Series B should have vested if you used invoiced sales as a measure of annual sales revenue. The vesting of the Series B Performance Shares was confirmed by the auditor and approved by the board, however then the ASX chimed in insisting that the criteria for vesting the Series B Performance Shares had not been met as revenue referred to revenue as defined by the Australian Accounting Standards Board's (AASB) revenue recognition standard. Going by this measurement, Schrole has fallen short of the Series B Performance criteria.

Note that the main source of revenues for Schrole are annual subscriptions paid by schools and job-seeking teachers. These are lump sum payments, paid on an annual basis. As such, cashflows are more closely aligned with invoiced sales. However, under AASC 15 Schrole only recognizes sales as it delivers on its obligations. As such, in periods of rapid growth AASC 15 sales will lag behind invoiced sales.

I assume what will happen next is that Rob Graham will have to come to a new agreement with the board, under which he will be compensated for at least the partial achievement of the Series B criteria. Next might be a shareholder vote to confirm a new comp package. I'll refer you to this link where the company makes a detailed argument why they believe the Series B criteria referred to invoiced sales (mostly because AASB 15 only became effective December 2019, two years after the Performance Share package was agreed upon). Personally, I think a fair and shareholder-friendly outcome would be one where Rob Graham receives a significant proportion (but not all) of the original award, as Schrole came very close to achieving the milestone even under AASC 15.

The Q4 FY20 update was much more positive and contained many important hints that may not be apparent at first viewing.

Most importantly, Schrole gained +6 paying school customers (and another 14 started what I interpret as free trials) during one of the most difficult periods in the company's history. Regrettably, about 16 customers churned off but the churn rate of 81% actually represents a slight improvement over previous periods. This was achieved during a time when international schools are truly suffering, both due to school closures and a dwindling number of new expats moving abroad for the duration of the pandemic. This is further proven out by the stat that Schrole Advantage user numbers are up 9% over the period, a testament to the increasing number of teachers seeking employment.

Schrole has now made it through its peak renewal period in October and November, where about 34% of annual contracts come up for renewal. We are also beginning to get through 'peak pandemic'. I expect a decent amount of catch-up demand in hiring once overseas travel resumes and schools fully reopen. I still think 2021 should be an interesting year for Schrole.

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