Blancco Technology Group — FY17 revenues hit by contract reversals

Blancco Technology Group — FY17 revenues hit by contract reversals

Issues with revenue recognition have led to the reversal of two contracts worth £2.9m in FY17, reducing expected growth from 40% to 29%. We have revised our FY17 estimates accordingly, resulting in a 76% cut to our FY17 EPS forecast. We have withdrawn our FY18 and FY19 forecasts pending clarity on underlying growth rates. The CEO has resigned; interim CFO Simon Herrick will also take on the CEO role until a new CEO is appointed.

Katherine Thompson

Written by

Katherine Thompson

Director

Blancco Technology Group

FY17 revenues hit by contract reversals

Trading update

Software & comp services

12 September 2017

Price

62.5p

Market cap

£40m

Net debt (£m) at end H117

5.9

Shares in issue

64.0m

Free float

95.6%

Code

BLTG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(35.9)

(61.2)

(72.4)

Rel (local)

(36.7)

(60.7)

(74.9)

52-week high/low

308.0p

62.5p

Business description

Blancco Technology Group develops and sells data erasure and mobile diagnostics software. Its headquarters are in the US and it has sales offices in 15 countries around the world.

Next events

FY17 results

3 October

Analysts

Katherine Thompson

+44 (0)20 3077 57300

Bridie Barrett

+44 (0)20 3077 5700

Blancco Technology Group is a research client of Edison Investment Research Limited

Issues with revenue recognition have led to the reversal of two contracts worth £2.9m in FY17, reducing expected growth from 40% to 29%. We have revised our FY17 estimates accordingly, resulting in a 76% cut to our FY17 EPS forecast. We have withdrawn our FY18 and FY19 forecasts pending clarity on underlying growth rates. The CEO has resigned; interim CFO Simon Herrick will also take on the CEO role until a new CEO is appointed.

Year end

Revenue (£m)

Adj. operating profit* (£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/15

15.0

4.0

2.84

5.00

22.0

8.0

06/16

22.4

6.1

5.63

2.00

11.1

3.2

06/17e

28.8

2.6

1.19

2.10

52.4

3.4

Note: * Adj. operating profit and EPS (diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Contracts worth £2.9m reversed

Blancco has announced that it has reversed two contracts worth £2.9m that were booked in FY17. It now expects to report revenue growth of 29% for FY17 (15% constant currency), EBITDA of at least £4.1m and adjusted operating profit of at least £2.6m. We have reduced our revenue forecast for FY17 by 8.5% to £28.8m, resulting in adjusted operating profit of £2.6m and normalised EPS of 1.19p. The company does not expect this to have an impact on the year-end cash balance, although we expect it to reduce operating cash flow in FY18. It has been difficult to assess underlying organic growth rates due to acquisitions, currency effects, the recent provision against overdue receivables and now these contract reversals. We have therefore withdrawn our FY18 and FY19 forecasts pending further information on underlying growth rates when FY17 results are released on 3 October.

CEO resignation

In light of the discovery of the incorrect contract recognition, CEO Pat Clawson has resigned. Interim CFO Simon Herrick will take over the CEO role until a replacement can be found. Chairman Rob Woodward, who had previously announced his intention to step down, has agreed to stay on. The key focus in the short term will be to ensure the smooth running of the business as it currently stands and to verify that revenue on all existing contracts is correctly recognised. In the longer term, it will be important to build a business with sustainable growth and profitable, cash-generative contracts. We would expect a new management team to reassess the cost base in order to match it to the revenue potential.

Valuation: Reflects uncertainty around growth

The stock is down 40% on this news and is now trading at 52x our revised EPS forecast for FY17e. To restore investor confidence in the business, the company needs to clarify underlying revenue growth rates (by business line, and split between recurring and one-off revenues) and how this will affect the cash position over FY18 and FY19. In addition, management appointments for the CEO and CFO roles need to be made. Any repayment of previously provided-for receivables would provide a boost to cash flows.

Exhibit 1: Financial summary

£m

2015

2016

2017e

Year end 30 June

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

15.0

22.4

28.8

Cost of Sales

(0.5)

(1.5)

(2.0)

Gross Profit

14.6

20.8

26.7

EBITDA

 

 

4.2

6.9

4.2

Normalised operating profit

 

 

4.0

6.1

2.6

Amortisation of acquired intangibles

(2.0)

(2.5)

(2.8)

Exceptionals

(2.5)

(2.7)

(2.2)

Share-based payments

(0.4)

(1.2)

(1.7)

Reported operating profit

(0.9)

(0.2)

(4.1)

Net Interest

(0.5)

(0.3)

(0.7)

Joint ventures & associates (post tax)

(0.7)

(0.2)

0.0

Exceptionals

(0.3)

(0.6)

(0.3)

Profit Before Tax (norm)

 

 

2.8

5.6

2.0

Profit Before Tax (reported)

 

 

(2.4)

(1.3)

(5.1)

Reported tax

(0.9)

(0.6)

(0.9)

Profit After Tax (norm)

1.9

4.7

1.7

Profit After Tax (reported)

(3.3)

(2.0)

(6.0)

Minority interests

0.3

(0.7)

(0.9)

Discontinued operations

8.4

(22.2)

(2.4)

Net income (normalised)

2.2

4.0

0.8

Net income (reported)

5.4

(24.8)

(9.2)

Basic average number of shares outstanding (m)

78

72

59

EPS - basic normalised (p)

 

 

2.84

5.63

1.30

EPS - diluted normalised (p)

 

 

2.84

5.63

1.19

EPS - basic reported (p)

 

 

6.97

(34.72)

(15.62)

Dividend (p)

5.00

2.00

2.10

Revenue growth (%)

49.1

28.5

Gross Margin (%)

96.9

93.1

93.0

EBITDA Margin (%)

28.3

30.7

14.6

Normalised Operating Margin

26.8

27.2

9.1

BALANCE SHEET

Fixed Assets

 

 

119.1

67.3

65.8

Intangible Assets

110.2

66.9

65.3

Tangible Assets

6.4

0.4

0.5

Investments & other

2.5

0.0

0.0

Current Assets

 

 

56.2

18.6

17.5

Stocks

9.5

0.1

0.1

Debtors

34.6

8.9

9.1

Cash & cash equivalents

12.1

4.8

8.2

Other

0.0

4.8

0.0

Current Liabilities

 

 

(43.2)

(23.3)

(21.1)

Creditors

(40.5)

(14.2)

(15.1)

Tax and social security

(0.6)

(2.3)

(2.3)

Short term borrowings

0.0

0.0

0.0

Other

(2.1)

(6.8)

(3.7)

Long Term Liabilities

 

 

(9.4)

(13.5)

(15.8)

Long term borrowings

(4.4)

(3.7)

(6.7)

Other long term liabilities

(5.0)

(9.8)

(9.1)

Net Assets

 

 

122.7

49.1

46.4

Minority interests

(0.2)

(1.0)

(0.0)

Shareholders' equity

 

 

122.4

48.1

46.4

CASH FLOW

Op Cash Flow before WC and tax

4.2

6.9

4.2

Working capital

0.8

(0.6)

(0.7)

Exceptional & other

2.8

(12.2)

(4.1)

Tax

(0.6)

(0.6)

(0.9)

Net operating cash flow

 

 

7.3

(6.6)

(1.5)

Capex

(1.8)

(2.5)

(2.9)

Acquisitions/disposals

(2.5)

(7.5)

(1.1)

Net interest

(0.4)

(0.2)

(0.7)

Equity financing

(3.6)

(50.7)

9.5

Dividends

(3.4)

(3.1)

(1.5)

Other

(6.5)

65.1

(1.4)

Net Cash Flow

(10.8)

(5.6)

0.47

Opening net debt/(cash)

 

 

(20.6)

(7.8)

(1.0)

FX

(1.9)

(1.2)

0.0

Other non-cash movements

(0.1)

0.0

0.0

Closing net debt/(cash)

 

 

(7.8)

(1.0)

(1.5)

Source: Blancco Technology Group accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Blancco Technology Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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. This document is provided 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.
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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Blancco Technology Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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