CREALOGIX Group — Exceptional H1, but a slower H2 is anticipated

Group revenue rose by 28% to CHF35.8m. On a constant currency basis, growth was c 30%, after a c CHF0.3m effect from the fall in sterling. Operating costs rose by a more modest 9%, enabling EBITDA to surge from CHF0.1m in the corresponding period to CHF4.1m. New licence sales rose by 24%, while recurring revenues (support & maintenance plus hosting & SaaS) lifted by 53%. International sales represented 50% of the total, up from 45% in FY16 and 37% in H116.

Licensing fees, which include additional licence sales to existing customers along with very significant support & maintenance revenue, rose by 48% to CHF17.6m. Hosting & SaaS rose by 30% to CHF2.2m, which is lower than we had expected due to the decline in sterling. The bulk of this category represents the UK-based customers the group acquired when it purchased MBA Systems at the beginning of 2015. Services rose by 17% to CHF14.4m and services business will remain very active in H2 on the back of recent licence implementations. Hardware sales slipped by 8% to CHF1.5m as the group remains focused on developing its software revenue.

ELAXY Financial Software & Solutions (ELAXY FS&S) has been performing well. It has boosted the group’s position in digital banking advisory software solutions and expanded its customer base in Germany. The partnership with Fiducia & GAD, which sold ELAXY to CREALOGIX, has been progressing well. CREALOGIX’s front-end advisory solutions are integrated with Fiducia & GAD’s core banking offerings and around one-third of new German customers are derived from the relationship.

Associated undertakings showed a small loss, as losses at 37.5%-owned Qontis outweighed a small profit from 20%-owned ELAXY Business Solution & Services (ELAXY BS&S).

The tax rate was higher than normal, due to the strong profitability, declining tax losses available and a final agreement with Swiss tax authorities concerning the years since 1 July 2012.

The healthy H117 EBITDA on CHF4.1m translated to an operating cash flow (before interest and tax) of CHF2.5m and helped boost the group’s net cash position by CHF1.8m over the six months to CHF5.2m. Additionally, the deferred payment for MBA, which is expected to be paid in FY18, fell below CHF1m to reflect the challenging UK market, and hence the adjusted net cash position rose by CHF3.2m to CHF4.2m. Following the recent share price gain, the outstanding CHF25m convertible bond is comfortably above the CHF104.5 conversion price.

Assuming all the bonds convert, it will require 239,234 new shares to be issued, representing 18.4% of the expanded share capital. Based on pro forma numbers, that would return the group to c CHF22.7m net cash while nearly doubling net assets to c CHF48m. In achieving this number, we have assumed a deferred payment of CHF2.4m for the 20% of ELAXY FS&S that the group does not own. However, we have ignored the 80% of ELAXY BS&S, as this is growing slowly and a purchase decision is at CREALOGIX’s option. CREALOGIX does not record either of these potential ELAXY acquisition costs as liabilities in its accounts as it is not required to do so under Swiss GAAP.

Management is expecting slower licence sales in H2, as disproportionate pipeline sales slipped into H1, and there is a long sales cycle of six to 18 months, or more typically nine to 12 months. Demand remains very healthy in the German market. However, sales in the UK remain frozen following the Brexit vote. Nevertheless, management is very optimistic in the outlook for the UK as banks will have to invest in digitalisation projects. Overall, management says it continues to expect double-digit growth in sales in FY17, and with a higher EBITDA than in FY16.

Management has continued to maintain its medium-term targets, with revenue growth rates of at least 20% and a minimum EBITDA margin of 10% as annual averages. The international side of the business should contribute at least 50% to total sales and the target for the proportion of sales attributable to products is at least 70%. Near-term international growth is largely from Germany, with some growth also expected in the UK, while the group’s position in Asia remains nascent. The Singapore office was established to follow the group’s European customers into the Asian market.

We have maintained our FY17 revenue forecasts, but tweaked the revenue mix, and we have lifted profits to reflect the healthy licence wins and tightly controlled costs. We have conservatively cut our hosting & SaaS forecasts to reflect the uncertainties in the UK market following the Brexit vote. Nevertheless, we still anticipate healthy growth in the UK. We have eased hardware sales as the company focuses on driving software sales. High-margin software licence sales growth should continue to boost operating profitability, and we now forecast the margin to rise to 11.7% in FY19 (previously 10.0%). Our FY17 operating cash flow forecast rises by CHF2.0m to CHF6.4m. We estimate the currency impact from the fall in sterling at CHF0.8-0.9m of revenues for the full year.

We continue to forecast strong growth in software revenues (including hosting & SaaS) of 16% in FY17, 19% in FY18 and 17% in FY19. In all, we forecast revenues to grow by 7% to CHF76.9m in FY18 (previously CHF78.7m) and by 10% to CHF84.4m in FY19 (previously CHF86.2m). We forecast CHF6.0m EBITDA in FY17 (previously CHF4.0m), rising to CHF8.0m in FY18 (CHF7.4m) and to CHF10.9m in FY19 (CHF9.5m). The figures do not include any additional acquisitions.

We forecast operating costs (before depreciation) to rise 9% to CHF52.1m, reflecting a full period from ELAXY in FY17. We note that CREALOGIX expenses all its R&D costs. This leaves the group with an adjusted operating margin of 6.6% in FY17. While noting that margins are difficult to forecast, we are estimating operating margins to rise to 8.9% in FY18 and to 11.7% in FY19 as the group scales up its international revenues.

Associates represent 37.5% of Qontis, which is very difficult to forecast, and 20% of ELAXY BS&S (the ELAXY hosting business), which we expect to generate c CHF0.2m on a full-year basis.

Net interest includes the coupon on the convertible bond, which amounts to CHF594k per year.

Goodwill is amortised over five to 10 years under Swiss GAAP and we are forecasting amortisation of CHF1.7m in FY17 (against CHF2.6m in FY16), falling to CHF1.4m in FY18. The decline is due to goodwill from previous acquisitions having been fully amortised.

We continue to forecast a tax rate of 27% on normalised profits in FY17, easing to 26% in FY18 and to 25% in FY19.

The minority interest represents the 20% outstanding in ELAXY FS&S, which we anticipate will be acquired by CREALOGIX at the beginning of FY21.