Q3 constant currency organic revenue growth decelerated to a still respectable 12%, down from 19% in Q2 but above the 8% growth achieved in Q1. The backdrop remains unchanged as strong demand for digitisation projects in the commercial banking sector in Europe outweighed weak Anglo Saxon investment banking markets. Commercial banks require modern digital infrastructure to reduce costs, improve sales strategies and boost customer loyalty. However, investment banks have been deferring IT projects mainly because of poor financial results across the sector and, to a lesser degree, due to the uncertainties created from the Brexit vote. The deferrals have resulted in lower utilisation on the Anglo Saxon markets (c 50% in the US and c 67% in the UK); this continues to weigh on margins, as shown in the Americas and UK segment in Exhibit 1.
Exhibit 1: Revenue and EBITDA per segment
|
Revenue |
Growth |
EBITDA |
EBITDA margins |
€m |
9M15 |
9M16 |
Organic |
M&A |
FX |
Total |
9M15 |
9M16 |
Change |
9M15 |
9M16 |
Americas and UK |
157.11 |
166.24 |
5.9% |
3.8% |
(3.9%) |
5.8% |
15.72 |
11.34 |
(28.0%) |
10.0% |
6.8% |
Continental Europe |
114.37 |
145.62 |
23.5% |
4.3% |
0.0% |
27.8% |
17.89 |
22.10 |
24.0% |
15.6% |
15.2% |
Others |
|
2.42 |
N/A |
N/A |
N/A |
N/A |
(2.31) |
0.56 |
N/A |
N/A |
23.1% |
GFT |
271.48 |
314.28 |
14.0% |
4.0% |
(2.1%) |
15.9% |
31.30 |
34.00 |
9.0% |
11.5% |
10.8% |
UK revenue fell 12% in 9M16 to represent 34% of total group revenues. While this is down from 45% a year earlier, the UK remains the group’s largest market. Around half of UK revenue is billed in sterling, with the balance in euros; UK revenue is closely linked to US revenues as customers’ budgets can move freely. Revenue in Spain jumped 77% to €56.7m, bolstered by a project for Banco Sabadell, which involved the integration of TSB in the UK. Consequently, 60-70% of revenues from Spain are non-recurring, which means this performance is not likely to be sustained. US revenues rose 51% to €41.6m, although this number includes c €10m from two customers that switched their billing from the UK. Revenues from Germany rose by 29% to €39.6m, which is entirely organic. Brazil grew 136% to €12.3m, including the acquisition of Haber Tec.
Exhibit 2: Revenue by country (9M15)
|
Exhibit 3: Revenue by country (9M15)
|
|
|
|
|
|
Exhibit 2: Revenue by country (9M15)
|
|
|
|
Exhibit 3: Revenue by country (9M15)
|
|
|
|
58% of group costs are denominated in euros along with 64% of revenues, sterling represents 17% of costs and 21% of revenues and the US dollar represents 7% of costs and 8% of revenues. Deutsche Bank generates c 40% of revenues but is expected to grow at a slower pace than the rest of the group.
Group headcount rose from 4,493 to 4,749 over the quarter, driven by growth in the group’s offshore/nearshore facilities in Spain, Brazil and Poland. GFT is also expanding its nearshore facility in Costa Rica, where it recently opened new offices, to service the North American markets. The decision to expand the Costa Rican nearshoring operation was due to the similar cultures and the availability of candidates with strong technical expertise.
Management does not expect the US election result to affect the group. There is some concern about exporting services to the group’s nearshore centres outside of the US. However, we note these are highly skilled jobs that might not be possible to fill in the US.
The operating cash outflow (after interest and tax) was €2.0m in the first nine months of 2016, compared with a €20.6m inflow in the corresponding period in 2015. Therefore, the group generated €12.8m of operating cash flow in Q3, compared with €22.5m in the corresponding period. However, we note a project involving the implementation of an Avaloq core banking system for BHF-Bank has grown c 60% to €16m, of which €10-11m remains outstanding. The project has been put on hold due to a dispute between the software vendor and the bank and GFT has recently billed the software vendor for the outstanding amount.
Exhibit 3: Quarterly analysis
Quarterly analysis |
2015 |
2016 |
€000s |
Q1 |
Q2 |
Q3 |
Q4 |
FY |
Q1 |
Q2 |
Q3 |
Q4e |
FYe |
GFT (continuing) |
88,510 |
90,250 |
89,910 |
98,370 |
367,040 |
94,086 |
105,669 |
100,848 |
97,601 |
398,204 |
Adesis Netlife |
|
|
2,810 |
3,610 |
6,420 |
3,300 |
3,750 |
3,090 |
6,406 |
16,546 |
WG Systems (Habber Tec) |
|
|
|
|
|
|
1,220 |
2,320 |
1,710 |
5,250 |
Other/misc |
0 |
0 |
0 |
50 |
50 |
0 |
0 |
0 |
0 |
0 |
Total revenue |
88,519 |
90,243 |
92,720 |
102,030 |
373,510 |
97,386 |
110,639 |
106,258 |
105,717 |
420,000 |
Cost of materials |
(16,229) |
(14,968) |
(15,329) |
(15,963) |
(62,489) |
(14,614) |
(15,963) |
(15,080) |
(17,343) |
(63,000) |
Gross profit |
72,290 |
75,274 |
77,391 |
86,067 |
311,021 |
82,772 |
94,676 |
91,178 |
88,374 |
357,000 |
Op costs before depreciation |
(62,735) |
(65,029) |
(65,886) |
(71,853) |
(265,504) |
(72,554) |
(83,285) |
(78,717) |
(75,874) |
(310,430) |
Adjusted EBITDA |
9,555 |
10,245 |
11,504 |
14,213 |
45,517 |
10,218 |
11,391 |
12,461 |
12,500 |
46,570 |
Depreciation |
(1,222) |
(1,237) |
(1,280) |
(1,415) |
(5,154) |
(1,356) |
(1,405) |
(1,538) |
(1,301) |
(5,600) |
Adjusted operating profit |
8,333 |
9,008 |
10,224 |
12,798 |
40,363 |
8,862 |
9,986 |
10,923 |
11,199 |
40,970 |
Operating Margin |
9.4% |
10.0% |
11.0% |
12.5% |
10.8% |
9.1% |
9.0% |
10.3% |
10.6% |
9.8% |
Net interest |
(313) |
(423) |
(338) |
(630) |
(1,703) |
(344) |
(503) |
(440) |
(813) |
(2,100) |
Edison profit before tax (norm) |
8,020 |
8,585 |
9,886 |
12,169 |
38,660 |
8,518 |
9,483 |
10,483 |
10,386 |
38,870 |
Associates |
(4) |
(5) |
(14) |
(8) |
(30) |
(15) |
22 |
4 |
(12) |
0 |
Amortisation of acquired intangibles* |
(1,136) |
(1,227) |
(1,355) |
(2,387) |
(6,105) |
(1,467) |
(1,522) |
(1,380) |
(1,500) |
(5,869) |
Exceptionals - other |
0 |
0 |
0 |
0 |
0 |
0 |
(421) |
0 |
0 |
0 |
Profit before tax (FRS 3) |
6,881 |
7,353 |
8,517 |
9,774 |
32,525 |
7,036 |
7,563 |
9,107 |
8,874 |
33,001 |
Source: GFT (actuals), Edison Investment Research (forecasts)
GFT expects increasing demand for solutions to digitize business processes will lead to further growth in the Continental Europe segment. The company anticipates that investments in projects to implement regulatory requirements will continue despite Brexit. However, growth in earnings is slightly lower than hoped due to the devaluation of sterling and lower utilization in the Anglo-Saxon markets.
We have maintained our forecasts, although we have eased the tax charge from FY17. We forecast a higher tax charge in Q416 and beyond as tax benefits in Spain have been exhausted. Hence our forecasted tax rates are 26% in FY16 (unchanged), 30% in FY17 (from 31%) and 29% in FY18 (from 30%). This pushes EPS up by 1% in each of FY17 and FY18. The Q4 mix is likely to differ slightly from Exhibit 1, as Adesis Netlife has been performing below expectations, while Habber Tec is beating them. Nevertheless, our forecasts are for Q4 continuing revenues (including Adesis Netlife) of €104m, which is unchanged sequentially over Q2 and €2m above the corresponding period in 2015.
Exhibit 4: Presentation of GFT and Edison definitions, based on GFT guidance
|
Actual |
Actual |
GFT guidance |
Edison numbers |
€000s |
FY14 |
FY15 |
FY16e |
FY16e |
Group revenue |
279.235 |
373.507 |
420.000 |
420.000 |
Profit measures |
|
|
|
|
GFT |
38.268 |
48.857 |
|
|
Holding company |
(4.081) |
(3.370) |
|
|
(A) Operating profit (GFT definition) |
34.187 |
45.486 |
46.570 |
46.570 |
Add back: exceptional items, misc |
1.040 |
0.000 |
0.000 |
0.000 |
Add back: associates |
0.012 |
0.030 |
0.000 |
0.000 |
Adjusted EBITDA (Edison definition) |
35.239 |
45.516 |
46.570 |
46.570 |
(E) Normal depreciation |
(3.365) |
(5.154) |
(5.600) |
(5.600) |
Adjusted operating profit (Edison definition) |
31.874 |
40.362 |
40.970 |
40.970 |
Total net interest |
(1.015) |
(1.703) |
(2.100) |
(2.100) |
Profit before tax norm (Edison definition) |
30.859 |
38.659 |
38.870 |
38.870 |
(B) Earn-out accruals |
0.309 |
0.000 |
0.000 |
0.000 |
(C) PPA order book (amort of acquired) |
(1.675) |
(0.931) |
(0.070) |
(0.070) |
(F) PPA amortisation (amort of acquired) |
(3.036) |
(5.174) |
(5.800) |
(5.800) |
Exceptional items, misc |
(1.040) |
0.000 |
0.000 |
0.000 |
Associates |
(0.012) |
(0.030) |
0.000 |
0.000 |
EBT (GFT definition) |
25.406 |
32.524 |
33.000 |
33.000 |
(D) EBITDA (GFT definition) (A+B+C) |
32.821 |
44.555 |
46.500 |
46.500 |
EBIT (GFT definition) (D+E+F) |
26.421 |
34.227 |
35.100 |
35.100 |
Source: GFT, Edison Investment Research
