Better visibility

Expert System 9 April 2019 Update
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Expert System

Better visibility

FY18 results

Software & comp services

9 April 2019

Price

€1.52

Market cap

€55m

Net debt (€m) at end FY18

12.6

Shares in issue

35.8m

Free float

73%

Code

EXSY

Primary exchange

AIM Italia

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.4)

25.2

25.2

Rel (local)

(11.5)

9.8

32.3

52-week high/low

€1.8

€1.1

Business description

Expert System has developed and patented technology that extracts useful information from unstructured text using semantic-based techniques. It applies this technology to a number of verticals including enterprise search, customer experience management and big data analytics.

Next events

H119 results

September 2019

Analyst

Katherine Thompson

+44 (0)20 3077 5730

Expert System is a research client of Edison Investment Research Limited

Expert System’s FY18 results were in line with guidance set a year ago, confirming that revenue growth approaching 10% was not at the expense of profitability. Management is maintaining its targets for FY19, expecting revenue growth to accelerate to 15–20% as the market for cognitive computing becomes more mature. The strong FY18 performance gives us confidence in Expert’s ability to achieve FY19 targets. If this strong revenue and profit momentum can be maintained, the stock looks attractively valued.

Year end

Revenue (€m)

EBITDA*
(€m)

EPS*
(c)

DPS
(€)

P/E
(x)

EV/EBITDA
(x)

12/17

27.8

1.7

(18.3)

0.0

N/A

39.2

12/18

30.5

4.6

(1.4)

0.0

N/A

14.5

12/19e

34.8

7.6

3.3

0.0

46.7

8.8

12/20e

38.9

9.8

7.9

0.0

19.3

6.8

Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY18: Revenue and EBITDA meet expectations

Expert reported revenue growth of 9.6% year-on-year for FY18, and expanded EBITDA from €1.7m to €4.6m over the year. The company met the sales and EBITDA guidance it set a year ago, and beat its targets for net income and net debt. Over the last two years, the company has shifted to selling more licences on a subscription basis, with 72% of licence sales in FY18 from subscriptions compared to 41% in FY17. While this typically results in a lower upfront value per contract, it improves visibility and provides an easier entry point for customers.

FY19: Growth outlook maintained

Management expects to be able to achieve the FY19 guidance it set a year ago, which equates to sales growth of 15–20% y-o-y and an EBITDA margin of 21–23%. We have revised our cost estimates for FY19 to reflect the lower cost base in FY18, resulting an EBITDA upgrade of 9% to €7.6m, at the mid-point of the guidance range. The company is about to release the next version of its software, Cogito 14.4, which should allow it to retain its strong position in this fast-moving market.

Valuation: Hitting growth targets key to upside

Expert System trades on an EV/EBITDA of 8.8x FY19e. This is at a discount to all peer groups. Our DCF valuation of Expert System suggests a value of €1.94/share (up from €1.91). Meeting guidance for FY18, both in terms of new business and keeping costs under control, was a positive step for Expert. If the company can maintain the current sales momentum and meet the growth and profit targets it has set for FY19, the valuation discount should start to close. Progress towards net cash generation will also help reduce the discount.

Review of FY18 results

Exhibit 1: FY18 results highlights

€m

FY17

FY18e

FY18a

Diff

y-o-y

Sales

26.1

29.0

28.7

(1.1%)

9.8%

Other income & grants

1.6

1.5

1.8

17.3%

6.9%

Total revenues

27.8

30.5

30.5

(0.2%)

9.6%

Capitalised development costs & changes in WIP

5.0

5.5

5.1

(8.1%)

0.6%

Production value

32.8

36.0

35.5

(1.4%)

8.2%

EBITDA

1.7

4.6

4.6

1.4%

171.1%

EBITDA margin

6.2%

15.0%

15.2%

0.2%

9.1%

D&A

(4.9)

(5.4)

(5.3)

(2.0%)

Normalised operating profit

(3.2)

(0.8)

(0.7)

(20.4%)

(79.2%)

Normalised operating margin

-11.5%

-2.7%

-2.2%

0.6%

9.3%

Amortisation of acquired intangibles

(2.6)

(2.3)

(2.6)

Exceptional items

(0.7)

(0.6)

0.0

Reported operating profit

(6.5)

(3.7)

(3.2)

13.5%

50.3%

Normalised net income

(5.2)

(1.3)

(0.5)

61.2%

90.2%

Reported net income

(8.3)

(3.9)

(3.8)

3.6%

54.7%

Normalised EPS (c)

(18.3)

(3.7)

(1.4)

61.3%

92.3%

Net debt

8.8

12.7

12.6

(1.0%)

42.7%

Source: Expert System, Edison Investment Research

Exhibit 2: Company outlook – March 2018

€m

FY17

FY18e

FY19e

Sales

25.6

28.5–30.0

33.0–34.5

Production value

32.8

35.5–37.0

39.8–41.3

EBITDA

1.0

4.0–5.0

7.0–8.0

Net income

(8.3)

(4.6–3.9)

(1.1–0.1)

Net debt

8.8

13.6–12.9

13.0–12.0

EBITDA margin

3.9%

14.0–16.7%

21.2–23.2%

Source: Expert System

Expert reported sales growth of 9.8% year-on-year, and after the inclusion of other income and grants, reported total revenue growth of 9.6% y-o-y, in line with our forecast. The company noted that subscription licences made up 72% of total licences, up from 41% in 2017. On a geographical basis, the company saw strong growth in Italy (+32%), Spain (+95% y-o-y) and the UK (+64% yoy), and strong demand from US government customers.

Despite capitalising a lower level of development costs than we expected, EBITDA was in line with our forecast, equating to an EBITDA margin of 15.2%. Both staff costs and other operating costs were lower than we forecast, helped by restructuring during the year.

As depreciation and amortisation was slightly higher than forecast, the normalised operating loss was marginally bigger than forecast. Currency gains resulted in a narrower than expected reported operating loss. Net debt at year-end increased to €12.6m (or €12.4m if short-term investments are included). All financial metrics fell within or beat (net income, net debt) the guidance range set by the company a year ago (see Exhibit 2).

Business update

Over the last year, the company continued to strengthen its position in the banking and insurance sectors, signing agreements with Generali, Crédit Agricole, Rabobank and AXA XL Risk Consulting. It has also strengthened its position in the cognitive automation market, formalising its partnership with Blue Prism, a leading robotic process automation (RPA) technology company.

Expert recently launched the latest version of the Cogito platform, Cogito 14.4. This is an evolution of the existing Cogito technology, offering the following enhancements:

Easier customisation of knowledge graphs. Knowledge graphs are made up of 350,000 concepts connected by 2.8m relationships. Users can import targeted knowledge from any source in a few clicks, so that the platform can understand references to real-world entities such as people, companies or locations, and link them to knowledge repositories using standardised identifiers.

RPA connector. For customers using both Cogito software and RPA software, the connector enables RPA bots to intelligently classify and route mainstream cases for straight-through processing and to flag exceptions, suspicious patterns and high-risk cases for review by human operators.

Active machine learning workflow. Cogito software already supported machine learning, enabling users to enrich knowledge automatically from text. The new active learning workflow enables users to visualise the quality of data extraction and provide feedback to the engine, which iteratively retrains the engine to reach the user’s quality goals. This reduces the amount of manual annotation needed.

Outlook and changes to estimates

For FY19, the company stands by the guidance given in Exhibit 2. We have revised our forecasts to reflect the lower cost base in FY18 and we introduce forecasts for FY20. Our EBITDA forecast for FY19 is in the middle of the company’s guidance range, with revenues at the lower end of guidance. We note that the company is seeking shareholder approval for the authority to issue convertibles worth up to €10m to fund future growth. If this is approved and the funds received, we would expect the company to accelerate investment in headcount to drive faster growth.

Exhibit 3: Changes to estimates

€m

FY19e old

FY19e new

Change

y-o-y

FY20e new

y-o-y

Sales

33.3

33.3

0.2%

16.1%

37.4

12.4%

Other income & grants

1.5

1.5

0.0%

(14.7%)

1.5

0.0%

Total revenues

34.8

34.8

0.2%

14.3%

38.9

11.8%

Capitalised development costs & changes in WIP

5.5

5.1

-7.3%

0.9%

5.2

2.0%

Production value

40.3

39.9

-0.8%

12.4%

44.1

10.6%

EBITDA

7.0

7.6

9.2%

64.5%

9.8

28.4%

EBITDA margin

20.1%

21.9%

1.8%

6.7%

25.2%

3.2%

D&A

(5.7)

(5.7)

0.1%

(6.0)

Normalised operating profit

1.3

2.0

48.8%

(394.7%)

3.8

94.1%

Normalised operating margin

3.8%

5.6%

1.8%

7.8%

9.7%

4.1%

Amortisation of acquired intangibles

(2.3)

(2.6)

11.6%

0.0

Exceptional items

0.0

0.0

0.0%

0.0

Reported operating profit

(1.0)

(0.6)

-37.7%

80.9%

3.8

N/A

Normalised net income

0.6

1.2

88.9%

329.7%

2.8

141.5%

Reported net income

(1.5)

(1.1)

-21.3%

69.8%

2.8

346.8%

Diluted normalised EPS (c)

1.7

3.3

88.2%

329.3%

7.9

(141.5%)

Net debt

12.8

11.9

-7.0%

(5.8%)

9.3

(21.9%)

Source: Edison Investment Research

Valuation

The majority of Expert’s direct competitors are private companies or subsidiaries of large companies such as IBM or Micro Focus. We have compared Expert’s valuation and operating metrics to peers operating in the natural language processing, big data analytics, enterprise search and information management markets, as well as to Italian software and IT services peers.

Based on EV/sales, Expert is trading in line with Italian peers and at a discount to all other peer groups. On an EV/EBITDA basis it is trading at a discount to all peer groups. On a FY20e P/E basis, Expert is trading at a small premium to Italian peers, in line with enterprise search and information management peers and at a discount to data analytics peers. Meeting guidance for FY18, both in terms of new business and keeping costs under control, was a positive step for Expert. If the company can maintain the current sales momentum and meet the growth and profit targets it has set for FY19, the valuation discount should start to close. Progress towards net cash generation will also help reduce the discount.

Our 10-year DCF analysis values the company at €1.94/share, up from €1.91. We forecast a 7.6% revenue CAGR from FY18 to FY28, with EBITDA margins rising to 28% by FY28. Assuming the company continues to capitalise development spend, we forecast capex/sales reducing to 10% by FY28. We use a WACC of 9% and long-term growth of 3%. A 1% increase in the WACC results in a valuation of €1.58/share, while a 1% decrease results in a valuation of €2.44.

Exhibit 4: Peer group valuation metrics

Y/E

Market cap (€m)

CY EV/S

NY EV/S

CY EV/ EBITDA

NY EV/ EBITDA

CY P/E

NY P/E

CY sales (€m)

CY EBIT margin

CY EBITDA margin

Sales growth NY

EPS growth NY

Natural Language Understanding

 

 

 

 

 

 

 

 

Expert System

Dec

55

1.9x

1.7x

8.8x

6.8x

46.7x

19.3x

34.8

5.6%

21.9%

11.8%

141.5%

Nuance Communications

Sep

4,909

3.6x

3.4x

12.1x

12.2x

15.2x

14.0x

1,866

26.5%

29.7%

3.9%

8.0%

Big Data Analytics

Splunk

Jan

16,629

8.2x

6.8x

50.0x

36.1x

76.7x

57.3x

2,220

14.0%

16.4%

21.6%

33.7%

Tableau

Dec

9,617

7.4x

6.3x

50.3x

34.5x

75.7x

57.6x

1,366

12.8%

14.8%

18.9%

31.3%

Teradata

Dec

4,451

2.5x

2.4x

13.4x

11.1x

29.6x

21.8x

2,034

11.5%

18.4%

2.6%

35.9%

Average

6.0x

5.1x

37.9x

27.2x

60.6x

45.6x

12.8%

16.5%

14.4%

33.6%

Enterprise search and information management

OpenText

Jun

11,922

4.3x

4.1x

11.4x

10.6x

14.1x

13.0x

2,892

34.2%

34.8%

5.2%

8.5%

IHS Markit

Nov

18,884

6.2x

5.8x

15.6x

14.4x

21.5x

19.1x

4,448

23.9%

25.6%

6.0%

12.8%

CommVault

Mar

2,494

3.4x

3.1x

19.3x

14.9x

34.5x

26.3x

719

16.1%

20.0%

8.1%

31.5%

Average

4.6x

4.3x

15.4x

13.3x

23.4x

19.4x

24.7%

26.8%

6.4%

17.6%

Italian software & services

TXT e-solutions

Dec

119

1.3x

1.2x

11.7x

10.1x

39.4x

32.7x

46

7.6%

8.6%

7.7%

20.5%

Exprivia

Dec

65

0.5x

0.4x

5.9x

5.5x

10.5x

7.0x

625

4.5%

5.0%

3.4%

50.0%

Piteco

Dec

88

4.4x

3.6x

9.7x

8.6x

13.0x

10.8x

24

N/A

N/A

21.4%

20.0%

Reply

Dec

2,136

1.8x

1.6x

12.7x

11.5x

20.5x

18.4x

1,167

12.7%

12.9%

9.2%

11.2%

Average

2.0x

1.7x

10.0x

8.9x

20.8x

17.2x

8.3%

8.8%

10.4%

25.4%

Source: Edison Investment Research, Refinitiv (as at 4 April)


Exhibit 5: Financial summary

€'000s

2015

2016

2017

2018

2019e

2020e

31-December

IT GAAP

IT GAAP

IT GAAP

IT GAAP

IT GAAP

IT GAAP

PROFIT & LOSS

Revenue

 

 

19,368

25,057

27,783

30,457

34,814

38,932

EBITDA

 

 

1,463

(2,245)

1,711

4,638

7,629

9,795

Operating Profit (before amort. and except.)

(1,226)

(5,941)

(3,189)

(662)

1,951

3,786

Intangible Amortisation

(2,549)

(2,608)

(2,608)

(2,567)

(2,567)

0

Exceptionals

0

0

(700)

0

0

0

Other

0

0

0

0

0

0

Operating Profit

(3,775)

(8,549)

(6,496)

(3,229)

(616)

3,786

Net Interest

213

(156)

(2,191)

97

(654)

(654)

Profit Before Tax (norm)

 

 

(1,013)

(6,097)

(5,380)

(565)

1,297

3,133

Profit Before Tax (reported)

 

 

(3,562)

(8,705)

(8,687)

(3,131)

(1,269)

3,133

Tax

277

579

348

(650)

127

(313)

Profit After Tax (norm)

(934)

(5,692)

(5,164)

(508)

1,167

2,819

Profit After Tax (reported)

(3,284)

(8,126)

(8,339)

(3,781)

(1,142)

2,819

Average Number of Shares Outstanding (m)

22.8

25.8

28.1

35.8

35.9

35.9

EPS - normalised (c)

 

 

(4.1)

(22.0)

(18.3)

(1.4)

3.3

7.9

EPS - normalised and fully diluted (c)

 

(4.1)

(22.0)

(18.3)

(1.4)

3.3

7.9

EPS - (IFRS) (c)

 

 

(14.4)

(31.5)

(29.6)

(10.6)

(3.2)

7.9

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

7.6

-9.0

6.2

15.2

21.9

25.2

Adj Operating Margin (%)

-6.3

-23.7

-11.5

-2.2

5.6

9.7

BALANCE SHEET

Fixed Assets

 

 

20,301

20,379

18,864

16,655

14,010

13,701

Intangible Assets

18,539

18,372

16,944

14,734

12,102

11,821

Tangible Assets

916

915

792

715

702

675

Investments

846

1,092

1,128

1,206

1,206

1,206

Current Assets

 

 

42,588

37,012

37,634

38,004

40,067

43,870

Stocks

1,797

627

99

109

109

109

Debtors

10,228

10,233

12,384

15,792

18,003

20,523

Cash

11,249

9,063

11,235

7,883

8,609

11,204

Other

19,314

17,088

13,916

14,220

13,347

12,033

Current Liabilities

 

 

(20,517)

(22,679)

(19,480)

(21,170)

(21,732)

(22,406)

Creditors

(15,082)

(16,459)

(14,104)

(15,511)

(16,073)

(16,746)

Short term borrowings

(5,435)

(6,219)

(5,376)

(5,659)

(5,659)

(5,659)

Long Term Liabilities

 

 

(22,227)

(18,275)

(17,742)

(18,411)

(18,411)

(18,411)

Long term borrowings

(18,240)

(15,252)

(14,683)

(14,811)

(14,811)

(14,811)

Other long term liabilities

(3,987)

(3,023)

(3,060)

(3,600)

(3,600)

(3,600)

Net Assets

 

 

20,145

16,437

19,276

15,077

13,935

16,755

CASH FLOW

Operating Cash Flow

 

 

2,738

2,088

(1,921)

2,583

6,956

8,925

Net Interest

(324)

(155)

(626)

(441)

(630)

(630)

Tax

(1,576)

0

0

0

0

0

Capex

(20,045)

(6,378)

(6,321)

(5,830)

(5,600)

(5,700)

Acquisitions/disposals

3,045

46

1,275

(76)

0

0

Financing

6,573

4,418

11,178

0

0

0

Dividends

0

0

0

0

0

0

Net Cash Flow

(9,588)

18

3,585

(3,764)

726

2,595

Opening net debt/(cash)

 

 

2,839

12,426

12,408

8,824

12,587

11,861

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

0

0

0

Closing net debt/(cash)

 

 

12,426

12,408

8,824

12,587

11,861

9,266

Source: Expert System, Edison Investment Research

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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