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Research: TMT
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.
Expert System |
Better visibility |
FY18 results |
Software & comp services |
9 April 2019 |
Share price performance
Business description
Next events
Analyst
Expert System is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
EV/EBITDA |
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
|
|
Research: TMT
Themission’s FY18 results were in line with the trading update, with good top-line growth (buoyed by the Krow acquisition), higher operating margins and a balance sheet strengthened by the £3.0m profit on the sale of BroadCare in November. Cash flow should comfortably cover future earn-out commitments. The appointment of James Clifton (of in-house agency bigdog) as group CEO should help to drive further collaboration across the 28 offices, with more cross- and up-selling to the low-churn, blue-chip client base. The valuation remains at a sizable discount to peers.