Connexion Mobility - Conversation with the CEO

Hi,

And welcome to my new article. Initially I covered all the updates on twitter about Connexion, but this will be longer one and more business-wise, than financial wise. I would like to pass my learnings to others. For whom you do not know Connexion, this is my initial write-up. You may need to use translator as it is my last deep dive in Czech language. I am a big fan of the business and its CEO Aaryn, who is a great guy and I enjoy talking to him. Given its cheapness and capital allocation I remain very positive on the stock, however as I mentioned, a certain event would need to happen to increase sizably my position in the portfolio. Connexion remains asymetric bet on the one outcome - getting a vendor status for new OEM. However symetric bet remains with the execution within the GM, which has been very good. So with that, I am leaving this write-up to you, based on my learnings from the conversation and other stuff. It should help you at least, if you are not invested and do not consider it, with gaining additional business knowledge from a honest guy, who cares about building something great and his shareholders.

Here are my questions that I prepared for our conversation. During the conversation we covered much more and got deeper into the business and products. Reading annual report should get you up to speed of understanding them. I think talking financials is generally waste of time for you and the CEO you speak with, if they are covered in the reports and are not super weird or weirdly explained. Much wiser would be to improve as business analyst and get a real understanding of how things really work and what is happenning in the real world.

1. Have the tax issues been resolved as it is mentioned as the main reason why ridehail was not implemented? Are there any other issues?

2. How is the development for Ridehail? Still expecting 1000 dealerships possible?

3. How is Tollaid developing given a strong start being mentioned? What made this product in demand from the beginning? What is the potential here given the “strong conversion rate”?  

4. What are recent developments on Shuttle with quickride? What makes this only “nice to have product” compared to other products? 

5. I can see you are hiring a lot of different positions. What drives this? 

6. What did Mohammad learn from visiting the dealerships? Are there any more features that they would like to add on? 

7. Any news regarding Ford or Volkswagen as I saw them being mentioned? What is exactly meant by supporting their CTP?  

8. How exactly mobilityfund is helping with this? What are they bringing to the team? 

9. Is there anything that you made closer to getting a new OEM? 

10. Even though you don't get paid by utilizing Uveye to your platform, has it led to anything else? 

11. Was there any specific development with the GM related to agreement extension or price adjustments? 

12. What are other players doing? Innovation level against them? TSD? 

13. Rationale behind stopping Loan funded program for employees? Full speed on buybacks? 

Dealerships Potential

Dealership progress is incremental and improving off the low base. They are slowly growing within them (outside GM contract, going more direct) each month. They have large opportunity ahead of them. Right now they are 1-2% of total software cost per dealership and Aaryn thinks they can grow to 3-5%. Now their revenue stands at $200/month per dealership or $2500/per annum. Typical dealership in the United States spend about $150.000 per dealership for software. Dealership pays GM for the software and GM pays Connexion. They think they can earn additional $2500 per dealer. If they spend it on the product outside Courtesy Transportation Program (CTP) it is diversification for Connexion as they started offering products that are not core to the CTP.

Toll Management

How is Tollaid developing given a strong start being mentioned? What made this product in demand from the beginning? What is the potential here given the “strong conversion rate”? 

Toll management is completely reliant on CTP. Toll management helps vehicle owners pay for tolls and also to recover or bill the cost to the right customer. If you take one of the cars and ride through toll, dealership gets a bill for a toll. And dealership will look who got the toll to send the bill to them. It helps to get it done right away. They are expecing strong conversion for this one. They do not share the numbers at this stage, but they are getting the sales. Started selling product last year, but there was a long lead time. There were two conversations with the dealerships. They needed to introduce the product to dealerships. They do not still handle well the user insights to faciliate sales & marketing. Now they have 4000 dealers using the product and total 25.000 users but some of them do not login regularly. They have approximately 13.000 monthly users. Some users do not log in every day. They want to find who the users are (junior manager, senior manager). Marketing team needs to know the person.

Ridehail

Have the tax issues been resolved as it is mentioned as the main reason why ridehail was not implemented? Are there any other issues?

How is the development for Ridehail? Still expecting 1000 dealerships possible?

Ridehail is not reliant on CTP (do not need to be approved by the GM). The problems were largery resolved. In practise there is always risk. It still requires some manual effort on their end and transition is expensive. They are seeing slow start to sales, however they have seen an uptake of sales the last month (last few weeks). They are limited of what they can say because of the partner (I speculate Uber). They have a partner that faciliates the rides. Media agencies said that they will publish actual news, if Connexion will do announcement regarding the product that would mean Connexion has not effective marketing. Relevant market is what they think they can sign - 1000 dealership roughly, if they are successful. Ridehail helps dealers to book ride for the customers. Mainly for bigger cities in the US, not in rural areas. More of the dealers are in rural areas. But volume for concentrated areas matters. With the rides people can get standard and premium versions. With the rideshare you need to use software regardless compared to Shuttle. They are competing here with ridehail software companies. The big companies are Uber, Lyft,… They have their own software and that software is for free! (I appreciate the honesty). Or they can use other business software like RedCap, CDK and Tekion. Last time he told us ridehail will be offered for $150. I ask why does he think they will be able to compete against free software companies if they would charge money for it (remember, they are spending money on it). These three companies are DMS (Dealership management systems). That is were most of software cost for dealership comes from, they are very expensive. Tekion has partnership with Lyft and they provide it for free. CDK has partnership with Uber and Lyft, and they charge between 5-10% of the cost per rides. RedCap is closer to Connexion, they are not DMS, they are independent provider. Sometimes they ask 1$ per trip, sometimes 5-10%. They are very dominant (independent and charging provider!). Tekion is in 1000 dealerships and growing. Tekion provides integration for free, others charge. Connexion charge $150 but might change to take rate. Why choose Connexion? They provide convenice, they have to use the sotfware to run loaner fleet, if they can provide ridehail that means less jumping. When the customer comes in, drop their car, you need take the customer somewhere. They can offer simplest and natural process. The next thing is warrant reinbursment. GM reinburs $7.50 for customers that are under warranty. They need to do validation and legimitation. Dealerships have warranty administrator, to which Connexion provides convenient reporting. The next thing is user analytics. Example. Last month their software picked up unusal behaviour from dealership user. User was booking similar ride every morning to dealership and booking similar ride from the dealership in the evening. Their software can pick up this (fraudulent) behaviour and flag it to the manager, that is value to the manager and manager can deal with it. If the dealership is using Lyft free software, if the customer comes in to the dealership, user would need to go on to Lyft and put it all the customer details (repair order number, adress, PIN,..). If they use Connexion products, if the customer has already all the data in the systems, they do not need talk to him. They are working on combining shuttle and ridehail into the same product. If the shuttle is busy, they might book the ride.

Shuttle

What are recent developments on Shuttle with quickride? What makes this only “nice to have product” compared to other products? 

Shuttle is also not connected to CTP. What makes this product only “nice to have”? Volume that dealership does follow the Pareto principle. “According to Pareto, 80% of the effects stem from 20% of the causes. For example, 80% of the profit comes from only 20% of the products”. Only small number of dealers are resposible for large volume, large number of dealers small volume. These large number of dealers think software is not necessary and will rather use the pen. Important customers they will put into CTP, less important to shuttle. It competes directly to ridehail. One difference is a cost, with the rides there is variable cost vs shuttle is largely fixed cost. Need to buy the van, sign the drivers. They see it as fixed sunk cost. If the rides go up or down, they do not really see it. With rideshare they see it immediately. It is also personal for people to not use shuttle. Why is not a shuttle or ridehail on the CTP? GM pays reimbursment on the program, GM does not mandate any software. They care only about GM branded vehicles, CTP allows GM to put brand new branded vehicles into the hands of the customer, that is why they have this program, it is marketing thing for GM. Ridehail or shuttle does not help the GM.

Hiring

I can see you are hiring a lot of different positions. What drives this? 

Just general growth, not any particular contract. They have very steady incremental growth from GM. Also selling more new products directly to dealers. Constantly improving.

New OEMs

Any news regarding Ford or Volkswagen as I saw them being mentioned? What is exactly meant by supporting their CTP?

Was there any specific development with the GM related to agreement extension or price adjustments? 

Is there anything that you made closer to getting a new OEM? 

There is no new news. Ford and Volkwagen are programs that are available to them, they can sell to dealers. Example Hyundai. Program is exclusively managed by TSD, they cant sell to dealers even directly. Very slow progress. They received telemetry in August. They have not focused much on that. They focus on shorter path to growth (working within GM), before switching attention. Were there any RFPs? Cant talk about that. Company is concentrated. If they would won the RFP, it will have meaningful impact (asymetric pay-off for the stock). What they can say. If there is RFP, they think they have chance to be invited, which was not the case before. Volvo had no program before, did not talk to Connexion, immediately give it to TSD (“very frustrating”) when they started, but are confident now given innovation they would get invited. They choose shorter path now, but also other things. They found way (diversification) to 2 teams within GM, like Employee VPP (vehicle purchase program). It is not related to CTP. The second is CVO (company vehicle operations), internal rental fleet, GM provides vehicles to executives, Connexion helps to manage it. They think there is still significant opportunity within the GM. Then Ridehail, Shuttle… probably the easiest, because of the recognition and what I mentioned above. New OEM is more difficult, because it is new relationship. GM controls the pricing, they cant price up at all. Only through contract extensions, but you dont know whether that can happen, depends. GM has bargaining power.

• How is the mobilityfund helping with that?

  Mainly assisting them at OEM level and also introducing to other commerical partners. They do not helping with dealership sales. They have started working with Isuzu in North America, but not big revenue item. They started testing rental program for their trucks - mobilityfund introduced them. They are testing Connexion’s software and their programs. It is not the CTP, only paid rental program. If you are business and have fleet of trucks, trucks need to be repaired, so you need to give rental truck. It is general network what makes mobilityfund valuable. They run the VC fund and also do consulting. They consult purchaser of software (OEMs, other organizations, who are willing to use software or invest in software companies). Example: Green energy companies. It can bring Connexion to conversation and present an option.

Uveye

It is being tested with couple of dealerships. Then can be launched more broadly. Connexion dont get paid, but fund partly the cost. User experience is the main goal. There is no return on capital. It is for marketing. But it is also deepening the relationship with GM and contract extension should be more likely (ends in approximately 2 years, GM needs to be as happy as possible). They think this is very important for GM to see. They are investing a lot more now than 2 years ago and they can see that. Not only that they are happy but also increases their engagement. If there would be no investment, GM would stop investing as well. Connexion can show them opportunities which can catch their interest. Further they have long list of potential commerical partners (about 140) with which they speak with. Some start-ups, some breakeven, some have been around forever. There are lots of companies that they can do business with, but the cost is important thing. Right now, they focus on what they have.

DMS Integration

This was not my question, but we got to it. DMS integration is very expensive and very important to the dealers given the high cost. They made integration with 3 already. Is it package? Good point. They want to sell ConnexionPro subscription. 5 ways to grow the business. 4th is to sell within the dealers - low hanging fruit. Connexion needs a product sold to dealers not reliant on CTP. Having a billing relationship with dealership directly can solve their problem for price increases (less reliant on loaner fleet can help them here to raise prices). They should be able to sell ConnexionPro to every delaership, because every dealership uses DMS. DMS Integration supports CTP software, Shuttle software, Ridehail. Question is how much they will pay for it. This will be my follow-up for next time. Need to understand this whole DMS integration better.

Cost of development for these products

Do you estimate cost of these products before if they “are nice to have” (could make them burn money on investment). For some products they held off development. Shuttle was pretty cheap, because of the third party which created the software, integration was very cheap. Ridehail was more expensive, the reasons they pushed button here: One is either they would get the partnership with ridehail company or competitor would get it. The second is that they acquired a team of employees which serviced different user base and the program was shut down (product called placie). The software engineers were based in Melbourne where Connexion is and it was opportunity for Connexion, who knew that even if they did not build ridehail product, they would still be a use for the team anyway because they were hiring. Since then couple things went against Connexion. One of them was time. Was in discussions with Ridehail supplier, one of the question was how long will take to inegrate. They could do the work fast as a small company. Timing was controlled by Ridehail supplier. They wanted to finalize in two months. Towards the end of the process they started to talk to dealers about it. Reaction of dealers was good and ridehail supplier started to delay things (how common with big companies?). “Death by thousand cuts”. They did not say anything. If they would they would focus on different projects and stop talking to dealers about it. They see it all the time with automotive manufactures which are very slow. Aaryn was surprised. Usually you tell customers to take the time. But ridehail supplier is a partner and Connexion is paying them. That damaged reputation with dealerships. But they finally have it and dealers are using it and product works. The only problem is not having enough dealers. It was costly for Connexion. Needed to get employees focus on something else. Now they are more careful of what they develop without products being pre-sold. They can register for demos.

What did Mohammad learn from visiting the dealerships? Are there any more features that they would like to add on? 

Lets go to happier question. Found Mohammad on linkedin. They learnt how different each dealership is run and how difficult is to sell into retail environment. Dealerships are selling physical product. There is pretty broad sophisticated spectrum of users. There is still significant manual process in dealerships using pen and papers, which is opportunity for Connexion to automate. They understand now more better how important the user base is. Delaership is split into two sides. Selling side and service side. CTP is on service side. On the selling side you have managers. CTP is assigned by junior manager that is managing CTP. For smaller dealerships you have senior manager who manages CTP because of the lack of people. For larger dealerships, junior manager. Some dealerships have their own software engineers, some dealerships do not care what software is and living in the past. They want to work out how to handle that. Any new features? Constantly building out product roadmap from their visits. Paid rental. They are testing it out today. Something like Herz in Europe. GM is interested but do not expect any revenue tomorrow. GM wants to get new GM branded cars on the road. One way is to sell it. One way is to rent it. They ran renting programs like almost all the OEMs but it did not work. (It did not work for them but it might for us, laughing). The way they look at it, that they really focus on fixed cost vs variable cost. For dealerships it is fixed cost (managers, RE,..). For rental business, they mostly have the same fixed costs, the biggest difference is marketing. The dealers markets differently for selling cars vs renting cars, so it does not work. One way to work around it? For dealers cant do certain deals on their own. Example. OTA (booking.com), if you are rental company you can put cars on the booking.com. They dont want to business with one dealership. In theory Connexion would be able to do that because they can coordinate the dealers and they want to put them on booking.com. How much risk is GM willing to take to put new vehicles into that business? For rental operation because of fixed cost, it is mostly of utilization of the vehicles. 50% burning money, 75% break-even, 90% profits. What Connexion proposes, instead of doing standalone fleet, they would rather start with courtesy fleet and present it to OTAs. It should be low cost testing idea if dealerships would list their vehicles. But also dealers are sensitive to not having enough cars (focus on CTP customers), to adress that concern it is important for them to have alternative CTP options. “If you get too many booking for your cars, we have shuttle or ridehail, if booking offers too many cars, we can stop the offering there.” I said him that is very innovative and fresh for such a small company to find new ways working out.

Premium & Innovation level to competitors

What are other players doing? Innovation level against them? TSD? 

TSD have exclusive position with OEMs, Dealerware do not, but are anyway preffered supplier. Aaryn says that they have done amazing job. But given no exclusivity, they do not have the ability to go to dealers and offer these new innovative features. Connexion is still the least expensive, but difficult comparison because of the different fees structure (cant share number of vehicles under CTP, which are charged). Dealerware is presenting as premium solution. (Go to their website, that is how we would like to look like). TSD has been around the longest, so probably charge a big premium too, they are very trusted. General sense is that there is not much innovation within TSD, because they are largest and are around for the longest. TSD was recently sold to Reynolds & Reynolds - the oldest DMS, not spending much on innovation, not concerning. Dealerware is younger, quite focused on managing fleets of vehicles (vehicle subscriptions, paid rentail,..). Connexion more interested in ways to work with OEMs and other partners like the ridehail, where they can deploy certain programs at sccale across other use cases (shuttle, ridehail). TSD has Hyundai, BMW, Honda, Stellantis, Subaru,.. Dealerware works with other OEMs like Ford, Toyota, Volkswagen, Audi,.. but they are not exclusively appointed. Dealerware has better potential to innovate than TSD. Then there are smaller companies than Connexion with limited resources to innovate in meaningful way with other partners and OEMs. Smaller companies can innovate better but if they dont have OEMs, partners dont want to work with them.

Capital allocation

Rationale behind stopping management getting shares now under the Loan funded program? Full speed on buybacks? 

Starting with the Autozone. Aaryn does not know the case, how even with low revenue growth but meaningful buybacks can be wonderful investment. He will passed it to the Board. He gives me back Autonation’s buyback case. For those who did not know, the company started to buy back shares recently like crazy. They stopped early this year with Loan Funded Share plan. It stays only with people they hired before, it is not for a new employees. It was used initally for retention purposes. Structure was that someone would need to be with the company at least for 7 years (I talked about it in my write-up). Wage inflation was very high, wages on average for employees were below market. Retention was a big risk. They lost 2 software developers 3 years ago. In both cases was hired by AWS, one by other software company. They paid 2-3x more than Connexion was paying them. It was problem for Connexion so they crated Loan funded share program. Employees wouldnt capture the value if they walk away. It worked very well, but now switched it off, because it dilutes. Now implementing the buyback as much as they can. There are some restrictions about how much they can buy (trading windows, about 1/3 of the volume). Needs to stay balanced with all the other needs, based on opportunities. Depends always on the yield. Calculated the options and compared against earnings yield. M&A is also in play but have not found that would make sense. Ending the conversation with mentioning a book “Outsiders” and that I hope Aaryn would once have a place there that he deserves.

My thoughts

I think they are doing good job, but the growth will probably be slower going forward (I estimate around 5-7%), so the buybacks should be really accretive. Dont forget that a software company like Connexion is growing mainly within P&L (growing the team and also expensing all the R&D incurred, which is not common). Connexion could be much more profitable than they are today, but they are constantly innovating and finding ways to grow within more direct approach (outside CTP). Expanding outside GM will be probably hard, so I understand the discount the company is trading at, even though if something good (or bad) happens in the next 5 years, it will be greatly asymetric, so one needs to manage the risk properly. Gaining TSD’s OEMs might be hard because they are reputable and exclusive vendor. Gaining Dealerware’s OEMs might be also hard, because they are innovating too. But who knows. They are deepening the relationship with the GM and even pushing for them to invest, which should make extending the contract in 2026 more probabilistic. But good and bad things happen in investing. I am managing the risk here, but I highly appreciate Aaryn and what is he trying to build. For this investment to work at this price, buybacks and even slow growth are enough to be worth it when.

he presentation is not an investment recommendation. It is for educational purposes only.

Thank you for your criticism, feedback or discussion,

Jacob

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