Adam Schwab: Nitro rejects $400 million Potentia offer despite rising costs and recorded losses

While the slow-motion global tech market rout continues to play out, another entrant has emerged in the global falling knife catching competition. Previously low-profile Sydney-based private equity firm, Potentia, is betting on Australian ASX-listed but US-centered, Nitro PDF.

Potentia is a semi-reincarnation of Archer Capital’s private equity business and includes former MYOB boss and now Business Council chair, Tim Reed. The firm is separately bidding for embattled payments business Tyro.

Nitro is an Australian version of the ubiquitous Adobe PDF software. In announcing its rejection of Potentia’s bid, Nitro claimed the $400 million offer “does not adequately compensate shareholders for Nitro’s position as one of only two software companies worldwide with a proven enterprise-grade SaaS PDF productivity and e-signing platform, and a uniquely powerful and differentiated solution offering in a fast-growing global market worth $US28 billion”.

‘Enterprise grade’ PDF software sounds slightly curious — it is perhaps questionable whether BHP or Commonwealth Bank workers need an enterprise grade PDF tool, but we’ll take Nitro’s word for it that their product has extra features which aren’t included in the (often free or quite cheap) alternatives. Nitro’s other main product is an eSigning tool, which while very useful, has a huge swathe of competitors headed by the US$11 billion Docusign, alongside of a suite of copycat products which all essentially do the same thing.

The problem for Nitro is that while founder Sam Chandler has built a respected business in a highly competitive sector, it has no real competitive advantages (or what Warren Buffet would call ‘economic moats’), which has led to the business continuing to report increasing losses, notwithstanding consistent revenue growth.

The businesses’ financial results confirm this.

For the six months ending June 30, Nitro delivered solid revenue growth of 36% (and 55% in its subscription business). The problem is, to achieve this growth, Nitro’s costs rocketed. Its operating loss (adding in share based employee costs) jumped from $7.1 million to $9.5 million (total losses for the half were $17 million). So while its revenue continues to grow, its costs are growing at an even quicker rate. This is likely a result of the difficult competitive market Nitro has been forced to operate in.

More concerningly, the business recorded an operating cash outflow of $9.4 million for the half and has $35 million in cash in the bank, less than two years run rate.

In total, Nitro has raised around $189 million in capital and has lost more than $100 million over its lifetime.

One potential area of cost cutting that a private equity owner would likely target is the level of remuneration paid to Nitro’s executive team. Unusually for a founder, Chandler received a relatively generous package of $1.23 million last year.

Chandler’s pay was frugal though compared to the business’ CFO, Ana Sirbu, who received an extraordinary $2.2 million in 2021. Sirbu’s compensation is almost comically high given the business has delivered negative shareholder returns and until the Potentia bid, had a market value of under $300 million.

Nitro shareholders appear to have made their decision though, with Nitro’s share price trading at around Potentia’s bid price and the PE raider owning a 19.89% stake in the business.