Expert System — Fund-raising target achieved

Expert.ai (MI: EXAI)

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Research: TMT

Expert System — Fund-raising target achieved

Expert System has met two key milestones in the execution of its new five-year growth plan, raising €25m from the issue of 9.26m shares at €2.7 per share and launching expert.ai, its NL API (natural language application programming interface). The first supports the investment required to execute the plan and the second is the first stage in the development of the cloud platform.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Expert System

Fund-raising target achieved

Fund-raise

Software & comp services

6 August 2020

Price

€2.86

Market cap

€144m

Net debt (€m) at end FY19

2.8

Shares in issue

50.4m

Free float

75%

Code

EXSY

Primary exchange

AIM Italia

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.5)

(6.3)

10.2

Rel (local)

(2.8)

(17.5)

16.0

52-week high/low

€3.43

€1.52

Business description

Expert System has developed and patented an AI-based technology platform that extracts useful information from unstructured text using a unique mix of natural language understanding and machine learning algorithms and applies it to verticals such as enterprise search, customer experience management and big data analytics.

Next events

H120 results

28 September 2020

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Expert System is a research client of Edison Investment Research Limited

Expert System has met two key milestones in the execution of its new five-year growth plan, raising €25m from the issue of 9.26m shares at €2.7 per share and launching expert.ai, its NL API (natural language application programming interface). The first supports the investment required to execute the plan and the second is the first stage in the development of the cloud platform.

Year end

Revenue (€m)

EBITDA*
(€m)

EPS*
(c)

DPS
(€)

P/E
(x)

EV/EBITDA
(x)

12/18

30.5

4.6

(1.4)

0.0

N/A

26.0

12/19

33.7

5.5

(1.6)

0.0

N/A

22.1

12/20e

33.2

2.0

(10.6)

0.0

N/A

59.9

12/21e

34.4

(5.0)

(22.7)

0.0

N/A

N/A

12/22e

47.7

(0.5)

(16.5)

0.0

N/A

N/A

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

€25m raised to fund growth plan

When Expert System announced its five-year growth plan in June, it outlined its intention to invest in ramping up its sales and marketing capacity in the US as well as the development of its SaaS platform. Management estimated that it would need to raise €25m to fund the company until it reached a cash flow positive position in FY24. Through a combination of an entitlement offer and an accelerated book build (ABB), the company has raised €25m from the issue of 9.26m shares at €2.7 per share (18% dilution). We have revised our forecasts to reflect the cash proceeds and higher share count, with a forecast net cash position of €23.6m at year-end.

First technical milestone reached; senior hires made to drive sales and marketing plans

On 27 July, the company launched expert.ai, its NL API. This enables data scientists, computational linguists, knowledge engineers and developers to embed advanced natural language understanding and processing functionality into their applications. This is the first stage in the development of the full SaaS platform and allows Expert System to offer its technology via a freemium model. Since the funds were raised, the company has hired a chief revenue officer (Colin Matthews) and chief marketing officer (Keith C Lincoln) to help drive the sales and marketing effort in the US.

Valuation: Considerable upside if executed well

With the full SaaS platform not scheduled to launch until the end of Q121, the plan calls for significant investment before adoption of the SaaS platform is expected to drive material revenue growth in FY22. Based on a DCF valuation, we estimate that successful execution of the plan could see the stock valued in the region of €5.0 per share. To monitor progress towards the revenue inflection, we look to track the number of users signing up to use the platform, length and frequency of platform usage, conversion rates to paid subscriptions, net dollar retention and contribution from channel partners.

Changes to forecasts

Exhibit 1: Changes to forecasts

Year end 31 December (€m)

FY20e old

FY20e new

% change

%
y-o-y

FY21e old

FY21e new

% change

%
y-o-y

FY22e old

FY22e new

% change

%
y-o-y

Sales

31.7

31.7

0.0%

0.3%

32.9

32.9

0.0%

3.8%

46.2

46.2

0.0%

40.2%

Other income & grants

1.5

1.5

0.0%

(27.1%)

1.5

1.5

0.0%

0.0%

1.5

1.5

0.0%

0.0%

Total revenues

33.2

33.2

0.0%

(1.4%)

34.4

34.4

0.0%

3.6%

47.7

47.7

0.0%

38.5%

Capitalised development costs & changes in WIP

6.5

6.5

0.0%

8.3%

8.0

8.0

0.0%

22.3%

10.3

10.3

0.0%

29.6%

Production value

39.8

39.8

0.0%

0.1%

42.4

42.4

0.0%

6.7%

58.0

58.0

0.0%

36.8%

EBITDA

2.0

2.0

0.0%

(63.2%)

(5.0)

(5.0)

0.0%

(347%)

(0.5)

(0.5)

0.0%

(90.4%)

EBITDA margin

6.0%

6.0%

0.0%

(10.1%)

(14.4%)

(14.4%)

0.0%

(20.5%)

(1.0%)

(1.0%)

0.0%

13.4%

D&A

(6.4)

(6.4)

0.0%

(6.9)

(6.9)

0.0%

(7.9)

(7.9)

0.0%

Normalised operating profit

(4.4)

(4.4)

0.0%

1135.7%

(11.9)

(11.9)

0.0%

168.3%

(8.4)

(8.4)

0.0%

(29.6%)

Normalised operating margin

(13.3%)

(13.3%)

0.0%

(12.3%)

(34.5%)

(34.5%)

0.0%

(21.2%)

(17.5%)

(17.5%)

0.0%

16.9%

Amortisation of acquired intangibles

(0.9)

(0.9)

0.0%

N/A

0.0

0.0

0.0%

N/A

0.0

0.0

N/A

Exceptional items

0.0

0.0

0.0%

N/A

0.0

0.0

0.0%

N/A

0.0

0.0

N/A

Reported operating profit

(5.3)

(5.3)

0.0%

N/A

(11.9)

(11.9)

0.0%

N/A

(8.4)

(8.4)

0.0%

N/A

Normalised net income

(4.7)

(4.7)

0.7%

N/A

(11.7)

(11.5)

(1.9%)

142.8%

(8.8)

(8.3)

(27.6%)

Reported net income

(0.9)

(0.9)

3.9%

6.5%

(11.7)

(11.5)

(1.9%)

N/A

(8.8)

(8.3)

27.6%

Diluted normalised EPS (c)

(11.5)

(10.6)

(7.9%)

N/A

(28.4)

(22.7)

(19.9%)

N/A

(21.5)

(16.5)

(23.5%)

27.6%

Net debt/(cash)

0.4

(23.6)

N/A

N/A

14.2

(10.1)

N/A

(57.2%)

25.6

0.7

N/A

(107%)

Source: Edison Investment Research

Exhibit 2: Financial summary

€'000s

2015

2016

2017

2018

2019

2020e

2021e

2022e

31-December

IT GAAP

IT GAAP

IT GAAP

IT GAAP

IT GAAP

IT GAAP

IT GAAP

IT GAAP

PROFIT & LOSS

Revenue

 

 

19,368

25,057

27,783

30,457

33,712

33,248

34,445

47,699

EBITDA

 

 

1,463

(2,245)

1,711

4,638

5,459

2,011

(4,962)

(477)

Operating Profit (before amort. and except.)

(1,226)

(5,941)

(3,189)

(662)

(358)

(4,426)

(11,875)

(8,361)

Intangible Amortisation

(2,549)

(2,608)

(2,608)

(2,567)

(2,520)

(902)

0

0

Exceptionals

0

0

(700)

0

0

0

0

0

Other

0

0

0

0

0

0

0

0

Operating Profit

(3,775)

(8,549)

(6,496)

(3,229)

(2,878)

(5,328)

(11,875)

(8,361)

Net Interest

213

(156)

(2,191)

97

(123)

(817)

(855)

(855)

Profit Before Tax (norm)

 

 

(1,013)

(6,097)

(5,380)

(565)

(481)

(5,243)

(12,730)

(9,216)

Profit Before Tax (reported)

 

 

(3,562)

(8,705)

(8,687)

(3,131)

(780)

(1,021)

(12,730)

(9,216)

Tax

277

579

348

(650)

(203)

102

1,273

922

Profit After Tax (norm)

(934)

(5,692)

(5,164)

(508)

(607)

(4,719)

(11,457)

(8,294)

Profit After Tax (reported)

(3,284)

(8,126)

(8,339)

(3,781)

(983)

(919)

(11,457)

(8,294)

Average Number of Shares Outstanding (m)

22.8

25.8

28.1

35.8

38.6

44.6

50.4

50.4

EPS - normalised (c)

 

 

(4.1)

(22.0)

(18.3)

(1.4)

(1.6)

(10.6)

(22.7)

(16.5)

EPS - normalised and fully diluted (c)

 

(4.1)

(22.0)

(18.3)

(1.4)

(1.6)

(10.6)

(22.7)

(16.5)

EPS - (IFRS) (c)

 

 

(14.4)

(31.5)

(29.6)

(10.6)

(2.5)

(2.1)

(22.7)

(16.5)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

7.6

-9.0

6.2

15.2

16.2

6.0

-14.4

-1.0

Adj Operating Margin (%)

-6.3

-23.7

-11.5

-2.2

-1.1

-13.3

-34.5

-17.5

BALANCE SHEET

Fixed Assets

 

 

20,301

20,379

18,864

16,655

14,761

14,190

15,748

18,694

Intangible Assets

18,539

18,372

16,944

14,734

13,092

12,790

14,380

17,373

Tangible Assets

916

915

792

715

702

684

652

604

Investments

846

1,092

1,128

1,206

968

716

716

716

Current Assets

 

 

42,588

37,012

37,634

38,004

51,442

81,007

68,766

62,463

Stocks

1,797

627

99

109

59

59

59

59

Debtors

10,228

10,233

12,384

15,792

20,447

21,060

21,060

24,641

Cash

11,249

9,063

11,235

7,883

21,647

50,497

36,982

26,178

Other

19,314

17,088

13,916

14,220

9,289

9,392

10,665

11,586

Current Liabilities

 

 

(20,517)

(22,679)

(19,480)

(21,170)

(22,839)

(23,264)

(24,037)

(28,975)

Creditors

(15,082)

(16,459)

(14,104)

(15,511)

(16,945)

(17,370)

(18,144)

(23,081)

Short term borrowings

(5,435)

(6,219)

(5,376)

(5,659)

(5,893)

(5,893)

(5,893)

(5,893)

Long Term Liabilities

 

 

(22,227)

(18,275)

(17,742)

(18,411)

(22,464)

(24,852)

(24,852)

(24,852)

Long term borrowings

(18,240)

(15,252)

(14,683)

(14,811)

(18,588)

(20,976)

(20,976)

(20,976)

Other long term liabilities

(3,987)

(3,023)

(3,060)

(3,600)

(3,876)

(3,876)

(3,876)

(3,876)

Net Assets

 

 

20,145

16,437

19,276

15,077

20,901

47,082

35,625

27,330

CASH FLOW

Operating Cash Flow

 

 

2,738

2,088

(1,921)

2,583

2,479

1,802

(4,208)

860

Net Interest

(324)

(155)

(626)

(441)

(558)

(797)

(835)

(835)

Tax

(1,576)

0

0

0

0

0

0

0

Capex

(20,045)

(6,378)

(6,321)

(5,830)

(6,749)

(7,020)

(8,472)

(10,830)

Acquisitions/disposals

3,045

46

1,275

(76)

7,496

5,375

0

0

Financing

6,573

4,418

11,178

0

7,084

27,100

0

0

Dividends

0

0

0

0

0

0

0

0

Net Cash Flow

(9,588)

18

3,585

(3,764)

9,753

26,461

(13,514)

(10,805)

Opening net debt/(cash)

 

 

2,839

12,426

12,408

8,824

12,587

2,834

(23,627)

(10,113)

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

0

0

0

0

0

0

0

0

Closing net debt/(cash)

 

 

12,426

12,408

8,824

12,587

2,834

(23,627)

(10,113)

692

Source: Expert System, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Expert System and prepared and issued by Edison, in consideration of a fee payable by Expert System. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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This report has been commissioned by Expert System and prepared and issued by Edison, in consideration of a fee payable by Expert System. 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.

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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.

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United Kingdom

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

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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Media and Games Invest — Scorching Q220, FY20 guidance raised boldly

Media and Games Invest (MGI) is a fast-growing and profitable games and digital media business. In its maiden results following the group’s Scale listing in July, the group has reported a like-for-like increase in Q2 revenues of 97% to €30.0m, with EBITDA up 68% to €6.3m. These results were driven by sustained supernormal levels of demand for MGI’s games in Q220, supported by acquisitions. The group reported preliminary H120 revenues of €56.6m (H119: €28.6m) and EBITDA of €11.6m (H119: €7.5m). Given this performance, management raised its guidance for FY20, with a revised revenue target of €115–125m (growth of 37–49% y-o-y). Management also introduced EBITDA guidance, with FY20 EBITDA expected to be €20–23m (growth of 29–48% y-o-y). These forecasts exclude the impact of any potential M&A in H220. The half-year report is due on 12 August 2020.

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