Carrying sales momentum into FY20

Artec technologies 12 June 2020 Update
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artec technologies

Carrying sales momentum into FY20

Technology

Scale research report - Update

12 June 2020

Price

€3.26

Market cap

€9m

Share price graph

Share details

Code

A6T

Listing

Deutsche Börse Scale

Shares in issue

2.86m

Net cash at 31 December 2019

€0.54m

Business description

artec technologies develops cloud-based software solutions for the recording and analysis of video and audio, in two sectors: video security technology and crime prevention; and broadcast media.

Bull

IP-based, patent-protected technology solutions.

Strong start to H120 with robust pipeline, capitalising on departure of key competitor.

Growing list of reference clients in the security sector across the DACH region.

Moving to a more scalable cloud/SaaS model.

Bear

Scale and growth potential limited by operational and resourcing constraints.

Revenue visibility remains restricted.

Volatile trading history.

Analyst

Richard Williamson

+44 (0)20 3077 5700

FY19 revenues of €2.0m were weaker than management expected due to a small number of material contracts failing to materialise by year-end. However, those contracts did not disappear and investment in sales in FY19 led to a strong start to H120 (management estimates H120 revenues will exceed €1.5m) with momentum expected to continue in H220. Recent trading has highlighted the benefits of a flexible, diversified business, with the security segment (DACH-focused, government contracts) benefiting, while uncertainty is higher in the broadcast segment (international, private sector clients), despite market share gains following the exit of Verizon Volicon. However, COVID-19 uncertainties make forecasting difficult, particularly for Q420, typically the strongest quarter. With net cash of €0.5m, artec remains sufficiently capitalised and, if management can build on a strong H120, we believe there is significant upside to the shares.

FY19 results: Disappointing Q419, benefit to H120

FY19 revenues fell to €2.0m (FY18: €2.9m) due to a shortfall of expected contracts in Q419, as well as clients preferring multi-year rental contracts over upfront sales. This decline in revenues, together with investment in business development and one-off expenses for the July 2019 capital raise, led to an EBITDA loss of €0.16m (FY18: €0.42m profit) and a €0.68m EBIT loss (FY18: €0.03m profit). However, with €0.54m net cash and an equity ratio of 94.5%, artec remains sufficiently well capitalised to benefit from its investment in FY20 and beyond.

FY20 outlook: Resilient business, strong pipeline

FY20 has started strongly, driven by the investment in sales in FY19. In H120, management expects revenues of €1.5m (H119: €0.9m, 65%+ y-o-y growth) with sales momentum carrying through to H220. Although COVID-19 makes forecasting Q420 difficult, artec has a significant new business pipeline in H220 (€2m+), including key federal security clients, with access to emergency funding in times of crisis. Based on strong demand for its services, management expects a significant year-on-year increase in sales in FY20 and a return to profitability.

Valuation: An option on a significant opportunity

Having invested in business development in H219, artec offers an option on management’s ability to scale the business from its current EMEA footprint, seeing the benefit in FY20 and FY21. Although there is no formal guidance, based on strong demand for its services, management expects a significant year-on-year increase in sales in FY20 and a return to profitability.

Historical financials

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

2.5

(0.1)

(0.13)

0.0

N/A

N/A

12/17

1.5

(0.4)

(0.33)

0.0

N/A

N/A

12/18

2.9

0.4

0.01

0.0

N/A

N/A

12/19

2.0

(0.2)

(0.44)

0.0

N/A

N/A

Source: Company accounts

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Video security and media analysis specialist

artec technologies is a specialist technology company, developing innovative solutions for recording and analysing video, audio and metadata on networks and in the cloud. It offers an end-to-end service, including project planning, commissioning, service and support, incorporating both hardware and software solutions.

artec’s technology set is constantly evolving, with its 20 qualified and experienced computer scientists working to innovate and deliver new products into the market (eg TutorialVIS) through R&D.

The company operates in two market segments with separate products, based around the same core technology: video security (MULTIEYE) targets state security agencies and public authorities in the DACH countries, while media analysis systems (XENTAURIX) targets the European and international broadcast media sector. TV and radio stations, IPTV and cable operators use XENTAURIX as long-term video recorders for legal proof of broadcasting (compliance). TV stations also use the system to create video clips for their media libraries and to analyse TV viewer ratings.

artec offers a buy, build, partner approach to technology. As well as developing its own IP, artec also partners with third-party software vendors to bolt on established solutions to its MULTIEYE and XENTAURIX platforms. Third-party modular technologies integrated with its platforms include number plate recognition, facial recognition, sentiment analysis, ratings analysis, video fingerprinting and centralised administration of mobile systems. The platform also incorporates artificial intelligence (AI) from Finnish AI specialist Valossa.

Customers typically sign long-term (three- to four-year) contracts with the software installed on-site. artec also offers a pay-as-you-go (PAYG) cloud-based model, where customers upload videos to artec’s cloud-based platform for analysis. The PAYG solution involves minimal investment from the customer, whereas in-house solutions typically require a tender. artec anticipates monthly revenues in the range of €1–25k per PAYG customer as against typical one-off implementation of €0.1–1.5m. Monthly recurring revenues are attractive as they offer predictability and aggregate revenues over a multi-year period tend to be higher than for one-off sales but, as was seen in FY19, revenues can be adversely affected in the short term.

FY19 results

FY19 revenue fell to €2.0m (FY18: €2.9m) due to a shortfall in expected contracts being signed in Q419, as well as clients preferring multi-year rental contracts over upfront sales. In FY19, cloud-based recurring revenues grew to represent 12.5% of overall sales. Despite this, the short-term decline in revenues, together with the FY19 investment in business development (including recruitment, marketing and event attendance) and expenses of €0.1m related to the €1m July 2019 capital raise, led to an EBITDA loss of €0.16m (FY18: €0.42m profit) and an EBIT loss of €0.68m (FY18: €0.03m profit). Based on a change to its five-year forecasts, the company also suffered a reversal in deferred tax treatment in FY19, with a non-cash tax charge of €0.52m (FY18: €0.015m benefit), meaning that the overall loss for the year was €1.2m (FY18: €0.042m profit).

Despite a relatively weak performance in FY19, artec has an equity ratio of 94.5% and, with net cash of €0.54m, the business remains relatively well capitalised to benefit from the opportunities in FY20 and beyond.

FY20 has started strongly, driven by the investment in sales in FY19. In H120, management expects revenues of at least €1.5m (H119: €0.9m, 65%+ y-o-y growth) with sales momentum carrying through to H220. Although COVID-19 makes forecasting Q420 difficult, artec has a significant new business pipeline in H220 (€2m+), including key federal security clients (multi-year, multi-million-euro government contracts), with access to emergency funding in times of crisis.

Although not in a position to offer formal guidance for FY20, management believes the business is proving itself in difficult economic times. Management is confident in the outlook for the business and is investing in product development, business development and recruitment to ensure that the business remains well placed to benefit from future opportunities. Based on strong demand for its services, management expects a significant year-on-year increase in sales in FY20 and a return to profitability. While recent margins have been negative, it is instructive to note that artec achieved an 18.4% EBIT margin in FY15, with revenues of €3.5m. Based on this high-water mark, if the company is able to increase revenues with its current staffing and cost base, we believe it should be able to achieve positive EBIT margins and return to profitability.

Exhibit 1: Financial summary

€000s

FY14

FY15

FY16

FY17

FY18

FY19

HGB

HGB

HGB

HGB

HGB

HGB

INCOME STATEMENT

Revenue

2,436

3,469

2,475

1,462

2,936

2,010

Operating profit (loss)

108

637

(415)

(776)

33

(683)

Operating margin

4.4%

18.4%

(16.8%)

(53.1%)

1.1%

(33.4%)

Pre-tax profit (loss)

108

636

(414)

(782)

28

(677)

EPS (€)

0.24

0.22

(0.13)

(0.33)

0.01

(0.44)

DPS (€)

0.00

0.00

0.00

0.00

0.00

0.00

BALANCE SHEET

Total non-current assets

1,797

1,461

1,959

2,196

2,433

2,614

Total current assets

566

1,827

1,905

1,312

1,713

1,322

Total assets

2,363

3,288

3,864

3,508

4,146

3,936

Total non-current liabilities

-

(57)

(71)

(83)

(93)

(73)

Total current liabilities

(276)

(202)

(90)

(523)

(174)

(145)

Total liabilities

(276)

(259)

(161)

(606)

(267)

(218)

Net assets

2,087

3,029

3,703

2,902

3,879

3,718

CASH FLOW

Net cash from operating activities

227

963

(290)

208

(136)

169

Net cash from investing activities

(331)

(506)

(706)

(595)

(617)

(700)

Net cash from financing activities

104

(218)

989

154

798

1,023

Net cash flow

(1)

239

(7)

(233)

45

492

Cash & cash equivalent end of year

1

240

233

0

46

538

Source: artec technologies accounts

artec currently reports under the accounting regulations of the German Commercial Code (HGB). Although no final decision has yet been taken, management is considering reporting its financials under International Financial Reporting Standards (IFRS), in addition to HGB, to help provide international investors with a clearer view of the company’s financial position.

Business review: Diversified and resilient

Demand for artec’s services has remained robust due to its diversified business model: focusing on security solutions for government clients in the DACH region, while also offering scalable cloud/SaaS solutions to the media sector internationally. Despite the impact of COVID-19, the company has continued to operate at full capacity (with no furloughing of staff/short-time working), invested in business development and hired a senior AI specialist.

The domestic and international sales initiative, started at the end of FY19, has started to deliver returns, with the company announcing that it had received new orders of €400k+ from a number of well-known media companies for the year to 6 April 2020. Further interest has been received from clients in the Middle East, including Qatar and Oman, although new business in the Middle East can be difficult to finalise in the absence of face-to-face meetings. Altogether, artec has a significant new business pipeline for H220 (€2m+), with multi-year, multi-million-euro contracts expected to be awarded in H220, including key federal security clients, with access to emergency funding in times of crisis. The company has also started to invest in inventory to ensure it can fulfil client orders in case of any prolonged supply chain issues in Asia.

In FY19, approximately 60% of artec’s business was in video security, with 40% in media and broadcast. Video security revenues are highly localised and defensible but, in our view, the media business has greater growth prospects over the medium term, driven by adoption of artec’s cloud solution and market share gains from the departure of Verizon Volicon. However, in FY20 we expect the 60/40 revenue split to persist as the more challenging economic environment favours the more defensive characteristics of the security business.

Highlighting the modular and flexible nature of artec’s technology solution, it has launched a series of evolutionary new products in FY20, attracting new clients:

MULTIEYE NEXT: a market-leading, client-operated video management system, including AI-based video analysis, and encrypted recording and transmission for the private sector. The system supports multi-monitor operation as well as a fully automated video display wall. In partnership with an international infrastructure and security company, artec received its first order to equip situation centres for highway monitoring in Slovakia. Further contracts with this same partner are in the pipeline.

MULTIEYE BOS Manager: artec developed MULTIEYE BOS Manager for situation centres and security control centres (‘BOS’ in German). The first client to use the solution, a federal authority, has been trialling it since Q120 and artec has recently received a follow-on order worth c €400–500k to roll out the platform more widely in FY20.

TutorialVis: artec has reconfigured proven hardware and software components from its existing video surveillance and transmission systems to enable a tracking camera solution for educational use. This is controlled by an intuitive PC/tablet interface to facilitate interactive online experiments and lessons delivered via for example Microsoft Teams, Skype or Zoom, allowing the teacher/lecturer to move freely around the room while remaining on-screen to the audience. artec is currently bidding with a partner on a multi-million-euro tender to support multiple European higher education institutions, including universities in London and Dublin. The solution will also shortly be offered in a number of German federal school tenders.

Despite the challenging economic environment, artec has a robust pipeline of new business in both broadcast and security segments, including multi-year, multi-million-euro contracts with key federal security clients. As such, management remains confident in the outlook for the business.


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Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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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.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

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