SLI Systems |
Cost savings underpin PBT turnaround |
FY18 results |
Software & comp services |
11 September 2018 |
Share price performance
Business description
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Analysts
SLI Systems is a research client of Edison Investment Research Limited |
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SLI’s results reflect the business’s transitional status. Substantial savings were made to sales and marketing expenditure, which underpinned the company’s first year of profitability. We continue to forecast margin compression in the near term as the business begins its transition to an indirect sales model. Successful implementation of this shift remains the critical determinant of the business’s prospects.
Year |
Revenue (NZ$m) |
EBITDA |
PBT* |
EPS* |
EV/sales |
P/E |
06/17 |
32.0 |
(0.5) |
(0.8) |
(1.8) |
0.4 |
N/A |
06/18 |
34.4 |
4.5 |
4.2 |
6.7 |
0.4 |
4.8 |
06/19e |
34.2 |
2.6 |
2.3 |
3.2 |
0.4 |
9.9 |
06/20e |
34.8 |
1.1 |
0.8 |
1.2 |
0.4 |
27.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
FY18 results: First full year of profit
Boosted by a stronger US$, FY18 revenues rose 7% y-o-y to NZ$34.4m, while the business continued the process started at the interims of aggressively cutting operating costs, which saw a 10% y-o-y reduction to NZ$30.3m. The result was a swing in reported PBT from a NZ$1.6m loss in FY17 to a NZ$4.1m gain in FY18, the first full year of profit since the company’s listing in 2013. Reassuringly, the improved income statement translated into a NZ$3.5m cash boost to the balance sheet, leaving the business with NZ$9.1m net cash at period end.
Forecasts: Margin erosion to lower profits
In addition to introducing 2020 forecasts, we have left our FY19e revenues broadly unchanged. However, we have reduced our operating costs to reflect the cost reduction programme over FY18, although we note that we still predict increases to opex over FY19e and FY20e as the business undergoes its shift to an indirect sales model. As a result, our FY19e EBIT has increased 32% to NZ$2.2m, before falling to NZ$0.8m in 2020e.
Valuation: Tied to business model transition
SLI’s prospects are now tied to the successful execution of the transition to the self-service API (application programme interface) sales model. While the company expects to launch the new products this fiscal year, the continued lack of visibility over growth and cost assumptions is weighing heavily on the shares. While at an acute discount to peers on FY19e figures, the anticipated margin erosion means that the (EV/EBITDA and P/E) discounts dissipate when looking further out. Nevertheless, a 0.4x EV/Sales multiple for FY19e and FY20e means that successful execution of the imminent transition could unlock significant value.
Review of FY18 results and changes to forecasts
SLI reported its first full year of profitability since its listing on the NZX in 2013. Revenue growth of 7% (vs our forecasts of 5%) was flattered by favourable FX swings, as annualised recurring revenues at constant currency were flat year-on-year. This was achieved despite the 10% reduction in operating expenses and employee entitlements, which meant that total opex came in more than NZ$1.1m (3.5%) lower than our expectations. This reduction underpinned a y-o-y swing of NZ$5.7m at the PBT line to a NZ$4.1m profit for the period.
Exhibit 1: Summary of FY18 results and changes to forecasts
NZ$000s |
2018 |
2019 |
2020 |
||||||
Estimate |
Actual |
Variance |
Old |
New |
Variance |
New |
|||
Annualised recurring revenue (ARR) |
33,270 |
33,581 |
0.9% |
34,933 |
33,615 |
-3.8% |
34,623 |
||
Revenue |
33,479 |
34,417 |
2.8% |
34,515 |
34,181 |
-1.0% |
34,849 |
||
Gross profit |
25,607 |
26,369 |
3.0% |
26,526 |
26,309 |
-0.8% |
26,947 |
||
% gross profit margin |
76% |
77% |
0.2% |
77% |
77% |
0% |
77% |
||
EBITDA |
2,662 |
4,456 |
67.4% |
2,042 |
2,583 |
26.5% |
1,089 |
||
Operating profit (before amort.and except.) |
2,396 |
4,185 |
74.6% |
1,692 |
2,233 |
32.0% |
754 |
||
Operating profit margin (%) |
7% |
12.16% |
69.9% |
5% |
6.53% |
33.3% |
2.16% |
||
EPS – IFRS (c) |
2.82 |
6.53 |
131.7% |
1.68 |
2.53 |
50.1% |
0.49 |
||
Closing net debt/(cash) |
(7,119) |
(9,146) |
28.5% |
(7,585) |
(10,436) |
37.6% |
(11,257) |
||
Source: SLI Systems accounts, Edison investment Research
Of the NZ$3.3m opex reductions, the most significant savings were made in the sales (NZ$2.6m, 45% reduction) and marketing (NZ$1.8m, 37% reduction) activities. As previously highlighted, these cost reductions reflect the scaling back of all cost categories not directly linked to new product development.
Due to the flat constant currency revenues and the significant reduction in the sales and marketing teams (which we expect to suppress new business wins in the short term), we have moderated our expectations for revenue growth in FY19e. However, due to the savings in opex in FY18, our normalised operating profit forecast for FY19 has increased by NZ$0.5m to NZ$2.2m. We note that we expect operating margins to become compressed in the near term (5.5pp reduction in FY19e) as costs begin to rise again due to the roll-out of the new API product. Longer term (not shown), successful implementation of the business model transition should enable the re-expansion of margins. In the absence of guidance from management, we see the operating costs line as the key sensitivity to our forecasts. Nevertheless, we expect the company to remain cash-generative through the transitional period.
Cash flow and balance sheet
Driven by the revenue growth and cost reduction programme, SLI managed to increase cash receipts from customers by 4% to NZ$33m, while cash outflows to suppliers and employees declined 5% to NZ$31.2m. These improvements underpinned a net cash inflow of NZ$3.5m (FY17: NZ$1.2m outflow), leaving the company with a strengthened net cash position of NZ$9.1m. This swing meant that management was able to reiterate its commitment to the avoidance of further equity funding.
Operational update: API launch due this fiscal year
As flagged at the interims and the trading update, management now expects the first products under the new business strategy to be launched in FY19, having been pushed back from H218. While the results provided little new information on the work that remains to be completed before the roll-out of the self-service tools can commence, we understand that this is likely to be a two-phase process, with a preliminary release this calendar year and a full-scale launch in the first half of CY19. We maintain our view that successful delivery of these self-service tools (and the development of channel partners) is crucial to the longer-term prospects for the business.
