Be radically candid.
That’s one of the seven statements that define the culture we’re building here at Jakt. It’s part of what we do internally and externally, with our partners and with each other.
Part of that candidness comes with being vocal about both our successes and our failures. We want to be honest when things go our way, and equally vocal when we have opportunities to learn and improve on our company. You’ll see both in the third-quarter financial results below.
Jakt’s 2017 Third Quarter Results
During the third quarter of 2017 (3Q17), Jakt’s revenue was $372K and 30% below our $550K target. These results compare to $279K during 3Q16, up 33% from the year-ago quarter, and $494K during 2Q17, down 25% sequentially. The sequential revenue decline was driven primarily by one delayed customer project, slated to start during the third quarter and pushed to the current quarter.
Our initial financial plan included the majority of revenue from the customer landing during the third quarter. Excluding the project delay, revenue would have grown 5%-10% sequentially and landed slightly below our target.
Project delays aside, revenue opportunities during the summer months came slower than we anticipated.
Gross margin was 33.1%, 600 basis points below the year-ago quarter and beneath the 2Q17 gross margin of 49.5%. The previously mentioned delayed project resulted in lower team utilization and negatively impacted gross margin. As the result of lower sales and lower utilization, Jakt posted a net operating loss of $10K during the third quarter.
Cash flow from operations was -$21K. Lower margins, slower cash collection, and a one-time expense related to Jakt’s new headquarters caused the cash outflow. Excluding the one-time cost, the cash outflow was $5k. Days sales outstanding was 31 days compared to 28 days last quarter and 23 days during the first quarter of 2017. Capital expenditures at Jakt are minimal. At the end of 3Q17, Jakt had zero debt and $281K in cash on its balance sheet.
Finally, company-wide employee utilization (excluding contract workers) was 54% compared to 51% during the prior quarter and 61% during the first quarter of 2017. Our medium-term utilization goal stand is 75%. Jakt currently has 14 teammates, down from 16 during the prior quarter and up from 14 in 1Q17.
Management Commentary on the Quarter
Two primary challenges negatively impacted our third quarter results. First, we were unable to replenish revenue fast enough to offset a delayed project, decreasing utilization and adversely affecting margins. Second, cash collection slowed during the summer months, increasing DSO and impairing cash flow. Similar to our second quarter commentary on sales, our focus remains on top-of-funnel and conversion.
Our efforts include a more focused approach to content creation and marketing, SEO, and increased attention to strategic partnerships. These efforts are beginning to yield positive results. Deal size has increased in October and visibility is improving. We plan to continue investing in marketing and strategic partnerships during the fourth quarter.
On Cash Flow
We implemented a new process this quarter to improve accounts receivable management moving forward. During September, we shifted our invoicing platform to align with our customer deliverables more closely. We took similar measures across all working capital accounts including accounts payable. We believe our new process is already improving our ability to predict revenue and forecast cash flow. We will also begin utilizing a revolving credit facility to smooth out month-to-month discrepancies in accounts receivable. Of note, Jakt has two legacy receivables with startups which deflate our DSO. Excluding these receivables, our DSO was 20 days during the quarter and has trended below 14 days on average this year.
On Service Offering
Launching innovative digital products and experiences in partnership with our clients remains our primary focus. During the quarter, we continued to see an increase in digital user experience (UX) projects. We saw a similar increase in brand identity work, as an add-on to UX and in many cases as a standalone service. We have ongoing design projects across mobile and web interfaces, and the majority of these projects involve both digital product design and development. Several of these projects contain an artificial intelligence (AI) component or a chatbot. Compared to digital agencies which traditionally offer one or the other, or separate the two offerings (design and development), our process centers on the user journey from end-to-end. We believe this structure allows us to launch products faster and more efficiently. Moreover, it enables us to utilize strategy, data, and research to make more informed decisions across the entire product lifecycle.
We are expanding our knowledge base across new interfaces and started two internal R&D projects during the quarter. Utilizing Apple’s ARKit for iOS, we will launch an augmented reality (AR) application later this year. We also began building our first app on the blockchain. As an organization, we are incredibly excited about the blockchain’s potential. We will continue to invest in understanding its possibilities during 2018. Other areas we are investing in include voice (primarily Amazon Alexa) and AI.
Our customers, which we refer to as our partners, are equally spread between consumer and enterprise. We remain sector agnostic with current projects in real estate, finance, healthcare, and hospitality. Currently, our project base skews toward healthcare applications.
While we are disappointed with our third quarter financial results, we are confident that results will improve this quarter and feel well positioned for 2018. We made several strides during the quarter which we believe will make our business more scalable and predictable moving forward.
Given third-quarter revenue below our expectations, we are lowering our 2017 revenue target to $1.8M from $2.0M. We expect gross margin to normalize at 55%-60% and forecast operating margin between 25%-30%. Jakt is a project-based business and revenue can be unpredictable from quarter to quarter. Key risks include sales predictability and employee utilization.
Over the next 3-5 years, our top priority is to improve our process continuously. Our services aim to make our partners more successful through creative, innovative digital experiences. We are a mission-driven organization that believes in people. Our long-term (10-year) goal is to impact the lives of 100M people through the solutions we create with our partners.
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