Volume 1 - Rejected by the MicroCapClub - Litix SpA

A fun little idea for a (hopefully) brief series where I post my failed MCC submissions. This was my first submission so I didn't really have expectations of getting in first time. Enjoy.

Last month I submitted my first MCC submission. I, as expected, did not get in first time but nevertheless enjoyed learning to write a bit more concisely than I normally do. I have a tendency to post more deep dive content as of late, so trying to summarise one of my favourite ideas into just over a thousand words was an interesting challenge for me. Just a brief disclaimer before the pitch that this series in no way means to discredit or upset anyone who is a member of, or involved with MCC. It’s a bit of fun and a way to hopefully encourage more to not be disappointed if they did not get enough votes to be accepted. Often times, if you have invested a lot of time in understanding a business, it may be hard to communicate the opportunity in this kind of format. Speaking to people with no knowledge of a business when you have a vast amount of knowledge can also be a difficult task. Regardless, the process has helped me to think more about the companies I am interested in and how to better organise my thoughts. As always, I am an Idiot on the internet, please do not take any of this as financial advice. Hopefully you enjoy the pitch.

Litix SpA

Ticker: LTX.MI

Price: 1.25 EUR

Fully-diluted Shares Outstanding: 6.69 Million

Market Cap: 8.4 Million EUR

Cash: 0.6 Million EUR

Summary

Litix, valued under €9 million, went public in 2024. The company specializes in producing statues and sculptures using advanced robotics and proprietary software for the art, museum, and architectural industries. Additionally, they sell the same robotic solutions with proprietary CNC software to artists and stonework labs. Litix has a competitive edge in scale, production times, and versatility, operating in an industry with high barriers to entry and excellent customer feedback. Customers report that Litix's technology significantly improves their operations.

Business Segments

Torart focuses on creating sculptures and contemporary art using robotics and advanced technology. This division serves customers who cannot afford to build their robotic labs, allowing the group to profit from both internal production and external sales through outsourcing. Torart is the oldest business segment.

The Robotor division designs anamorphic robots and software for multi-axis milling. Robotor modifies Kuka robotic arms for specialized stone milling, offering solutions to external stonework labs that risk obsolescence without such modernization. Robotor developed proprietary software named OR-OS which significantly reduces the barriers to use these advanced robotics. This is possibly Robotor’s biggest advantage as it allows non-technical employees (i.e. artists) to take advantage of technology that previously needed to use clunky generalised solutions developed by the likes of Autodesk which would require hours of training to use and significantly impact your business during its adoption.

Aivox is a new 60% owned subsidiary that integrates additive manufacturing (3D printing) with Robotor’s subtractive capabilities, targeting complex manufacturing needs. This division is positioned to expand into challenging design sectors by combining innovative approaches.

Advantages and Market Position

Litix benefits from being based in Carrara, Italy, a hub for high-quality marble and a strategic location due to the history attached to the area. Prominent artists like Jeff Koons, Zaha Hadid and BarryXBall have utilized Litix for their projects, highlighting the company’s reputation and versatility. Litix’s ability to operate robots 24/7 gives it a significant advantage over traditional workshops, enabling scalability and efficiency unmatched by competitors. The company dominates its niche, compelling competitors to purchase its Robotor solutions, further solidifying its market position. Litix benefit from both their own art production growth and from the growth of competitors who are forced to purchase their Robotor solutions due to their inability to invest in designing their own robots and software. If these labs need to invest in a robotic solution, my research has shown that it makes little sense to invest in products from another company with one artist going as far as to say you would ‘be stupid to buy from anyone else’ and that they have begun to ‘dominate’ this niche.

Catalysts

OR-OS Software Increased sales:

Litix’s proprietary OR-OS software simplifies CNC machine operation for otherwise complex 6 axis robots, making it accessible to artists without technical expertise. The automation of tool-path mapping enhances ease of use, lowering barriers to entry. This software could enable Litix to expand beyond stonework into general CNC manufacturing, significantly increasing its total addressable market (TAM). For instance, 6-axis machines, while currently costlier than 5-axis machines, offer up to 75% faster production for advanced shapes. Lowering software complexity and costs could make 6-axis solutions viable for broader markets. I spoke to a customer in the architectural stonework segment who said that Robotor have completely transformed their sculpture capabilities due to their ability to program quickly and reduce their processing times, showcasing OR-OS’s value.

Software Licensing:

Licensing OR-OS software separately from Robotor machines could open new revenue streams. With licenses priced at €5,000-€20,000 annually, software licensing could generate significant margins and cash flow. For example, selling 50 licenses annually could yield €500,000, representing 6.5% of the current market cap. Furthermore, licensing software to non-Robotor users could facilitate expansion into untapped geographic and industrial markets. In theory, this is possible as Robotor units using OR-OS are based on Kuka or ABB robot arms which are the 2 leading manufacturers for robotic arms. In the long term, a shift to a SaaS model could be a possibility. Given their customers reliance on their software and services, this would create a very strong and stable subscription base given their advantages over competition making switching to another software unlikely.

Major Deals:

Recent contracts underscore the potential for growth. For example, Litix secured a €550,000 deal for its largest sculpture to date for an organisation in India, representing 7% of its market cap. The company is also announced they are exploring ‘major’ agreements in China, Saudi Arabia and the US, which could further boost revenues. In H1 of 2024, Robotor sold as many units as they did in the whole of 2023. None of this news has caused any reaction in the stock, due to how unfollowed it is. The global nature of these agreements highlights their competitive advantages.

Competition

Torart offers unmatched end-to-end support for artists, compelling competitors to adopt Robotor solutions. Several labs and architectural firms already own Robotor units, reflecting the industry’s reliance on Litix for modernization. They have also had success selling into non artistic areas with Henraux, an Italian architectural stone firm purchasing 3 Robotor units for their production and providing great feedback. An American company, Monumental Labs, also in the architectural space, also use a Robotor unit, with plans to expand their operation with more in future. Competition for Litix mainly comes from unadapted CNC robotics which are not a viable threat to their machines given the costs and inferior software. While other manufacturers produce 6-axis machines, Litix’s combination of hardware, software, and post-purchase support creates a competitive advantage. For example, partnerships with Kuka ensure access to parts and engineering support, addressing a major pain point for customers in the art sector.

Valuation

Despite its impressive operational metrics—29% ROIC, 66% gross margins, 22% operating margins, and 16% net margins - Litix trades below its IPO price with a P/E ratio of around 10 and an EV/EBITDA of 8. The market undervalues its potential, viewing Litix as a niche manufacturing company without growth prospects. However, successful expansion into general CNC sales and potentially a SaaS shift could dramatically improve margins and valuation. With annual software subscription costs up to €20,000, increased software adoption could transform Litix’s earnings quality. A move to subscriptions would make this even more transformative.

Risks

Dependence on Kuka and ABB:

Robotor machines heavily rely on hardware from Kuka with around 80% of Robotor units being from Kuka and 20% from ABB. While Kuka’s support network mitigates risks, Litix remains dependent on these manufacturers for parts and service. This reliance could pose challenges if these partnerships face disruptions. However, Litix offsets this risk by customizing robots and offering unique software and support, which smaller labs cannot replicate cost-effectively. There is also no incentive for Kuka to encourage direct to consumer sales of generalised robotics to Litix’s customers.

Expanding Beyond Expertise:

Plans to enter industries like boat hull production, woodwork, and concrete pose risks. Unlike stonework, where Litix has deep expertise, these industries may lack the same competitive advantages. However, the company plans to mitigate this by partnering with experts in these niches, replicating its Torart knowledge for other sectors. The CEO is confident that starting in the complex stonework sector positions Litix well for ‘less demanding’ applications of their technology.

Conclusion

Litix offers a compelling investment case due to its diversified growth potential across three avenues:

1. Continued expansion of the Torart division, undercutting traditional workshops.

2. Increasing Robotor sales and also expansion into a broader CNC offering, significantly expanding the TAM.

3. Expanded Licensing the OR-OS software, unlocking high-margin SaaS revenue.

Each of these growth paths is independent, reducing reliance on any single initiative for success. With impressive operational metrics and significant room for growth, Litix is undervalued and positioned for long-term success in an industry where it is very hard to disrupt.

If you have a further interest in learning about Litix, I have over 10,000 words of deep dive research and industry expert interviews available to paid subs. Thanks for reading!!!