Q3 group revenues rose by 20% to €92.7m, including an initial two-month contribution from Adesis Netlife, which was acquired on 28 July. GFT says that growth continued to come from regulatory projects as clients favour nearshore vendors over local suppliers. The growth is still predominantly from investment banks on regulatory-driven projects, while digital banking projects in the retail banking sector also helped to drive growth.
Adesis provides IT services to financial institutions and adds expertise in digital banking. It also has offerings in digital communication and marketing. A notable client of Adesis is the Spanish banking group BBVA. Excluding Adesis, Q3 organic growth was 16% (representing 19% for the traditional GFT business and 8% for Rule Financial). Operating margins continued to expand, with Q3 adjusted operating margin lifting to a healthy 11.0%, up from 10.0% in Q2. Operating margins are expected to expand further, as additional efficiencies are made at Rule Financial, including speeding up the training period for new recruits.
For 9M15, group revenue rose by 42% to €271.5m, including a full period contribution from Rule Financial, which was acquired at end June 2014. The growth includes a c 3% currency benefit that largely relates to Rule Financial’s operations in the UK and US. The sale of emagine, the staffing business, was concluded on 30 September and has been excluded from the accounts. Excluding Rule Financial and Adesis, 9M15 organic growth was 22%. Growth was strongest in the UK, Spain, the US and Brazil. The UK is now the group’s largest market, generating 45% of revenues, followed by Italy (14%), Spain (12%), Germany (11%) and the US (10%). Employee utilisation rates in the GFT division remain very strong at 89% across 9M15, which is approaching the maximum attainable after allowing for non-billable time and onboarding/training of new hires.
Exhibit 1: Quarterly analysis
Quarterly analysis |
2013 |
2014 |
2014 |
2014 |
2014 |
2014 |
2015 |
2015 |
2015 |
2015e |
2015e |
€000s |
FY |
Q1 |
Q2 |
Q3 |
Q4 |
FY |
Q1 |
Q2 |
Q3 |
Q4 |
FY |
GFT (continuing) |
174,040 |
55,990 |
58,080 |
58,630 |
68,130 |
240,830 |
68,810 |
71,460 |
69,610 |
71,037 |
280,917 |
Rule Financial |
|
|
|
18,750 |
19,640 |
38,390 |
19,700 |
18,790 |
20,300 |
21,210 |
80,000 |
Adesis Netlife |
|
|
|
|
|
|
|
|
2,810 |
4,273 |
7,083 |
emagine (discontinued) |
90,230 |
21,720 |
20,940 |
21,080 |
22,350 |
86,090 |
0 |
0 |
0 |
0 |
0 |
Other/misc |
15 |
11 |
(1) |
(3) |
2 |
10 |
0 |
0 |
0 |
0 |
0 |
Total revenue |
264,285 |
77,721 |
79,019 |
98,457 |
110,122 |
365,320 |
88,519 |
90,243 |
92,720 |
96,520 |
368,000 |
Cost of materials |
(108,559) |
(29,238) |
(27,879) |
(33,135) |
(34,878) |
(125,130) |
(16,229) |
(14,968) |
(15,329) |
(16,033) |
(62,559) |
Gross profit |
155,726 |
48,483 |
51,140 |
65,322 |
75,245 |
240,189 |
72,290 |
75,274 |
77,391 |
80,487 |
305,441 |
Op costs before depreciation |
(134,881) |
(41,903) |
(43,074) |
(54,871) |
(63,358) |
(203,206) |
(62,735) |
(65,029) |
(65,886) |
(66,790) |
(260,441) |
Adjusted EBITDA |
20,845 |
6,579 |
8,066 |
10,452 |
11,887 |
36,984 |
9,555 |
10,245 |
11,504 |
13,696 |
45,000 |
Depreciation |
(2,246) |
(497) |
(527) |
(577) |
(1,922) |
(3,523) |
(1,222) |
(1,237) |
(1,280) |
(1,961) |
(5,700) |
Adjusted operating profit |
18,599 |
6,083 |
7,539 |
9,875 |
9,964 |
33,461 |
8,333 |
9,008 |
10,224 |
11,735 |
39,300 |
Operating Margin |
7.0% |
7.8% |
9.5% |
10.0% |
9.0% |
9.2% |
9.4% |
10.0% |
11.0% |
12.2% |
10.7% |
Net interest |
(241) |
(181) |
(90) |
(287) |
(457) |
(1,016) |
(313) |
(423) |
(338) |
(926) |
(2,000) |
Edison profit before tax (norm) |
18,358 |
5,901 |
7,449 |
9,588 |
9,507 |
32,445 |
8,020 |
8,585 |
9,886 |
10,809 |
37,300 |
Associates |
(9) |
1 |
(6) |
(1) |
(5) |
(12) |
(4) |
(5) |
(14) |
22 |
0 |
Amortis’n of acq’d intangibles* |
(2,250) |
(590) |
(590) |
(1,530) |
(2,001) |
(4,711) |
(1,136) |
(1,227) |
(1,355) |
(2,582) |
(6,300) |
Exceptionals-acquisition costs** |
(1,000) |
(500) |
(535) |
0 |
(5) |
(1,040) |
0 |
0 |
0 |
0 |
0 |
Exceptionals-earnout adj.*** |
2,420 |
0 |
0 |
0 |
386 |
386 |
0 |
0 |
0 |
0 |
0 |
Profit before tax (FRS 3) |
17,519 |
4,812 |
6,317 |
8,056 |
7,882 |
27,068 |
6,881 |
7,353 |
8,517 |
8,249 |
31,000 |
Source: GFT Group. Note: Includes emagine up to FY14 (differs to company comparatives, which now exclude emagine). *Estimated in Q214 along with the impact on depreciation. **Estimated in Q114 and Q214 along with the impact on operating costs. ***Final Asymo and G2 adjustments are in FY14, and we assume these were in Q414.
The group’s pipeline of new business includes several large retail banking projects, including a digital banking project in Italy and a large project for Banco Sabadell, which involves integrating the acquired TSB in the UK into Sabadell’s IT infrastructure. The latter project is expected to involve c 100 consultants. Hence GFT expects FY16 growth to be driven by retail banking, with stronger growth in Germany, Italy and Spain, while growth in the UK and US investment banking sector is expected to slow.
Q3 cash flow was unusually strong, with net debt falling by €9.9m to €55.2m, as the group resolved issues with some slow-paying customers. Headcount grew by 476, or 14%, over the quarter to 3,897. The growth includes c 273 from the acquired Adesis and the group is on target to finish the year with 4,000 full-time employees. The Adesis acquisition added a development centre in Mexico, with c 77 employees, which puts the group in a better position to service clients in the Mexican market.
In late October, Deutsche Bank, which generates c 40% of GFT’s revenues, announced a significant retrenchment, including plans to cut its workforce by c 35,000 and it is closing operations in several countries. Deutsche Bank’s plans are not expected to significantly impact on GFT, although the group could potentially lose c €1.5m of business in Brazil. We also note there has been a trend among European investment banks to downsize their operations. Again, this is not expected to impact on the group, and cost-cutting in financial institutions could potentially result in additional IT outsourcing.
In July, GFT signed a two-tranche €80m five-year syndicated loan agreement to refinance short-term loans used to finance the Rule Financial acquisition. The loan is also being used to finance the Adesis acquisition and €75m has been drawn. The loan currently pays EURIBOR +115bp (linked to GFT’s debt levels), and with EURIBOR currently negative, the current interest rate on the loan is 1.15%.
We have upgraded our FY15 revenue (by c 2%) and EBITDA forecasts (by c 1 %) in line with management guidance. We have spread the upgrades across GFT continuing business, GFT Rule and Adesis, which management expects to generate €7m revenues in FY15. We note that GFT is seeing ongoing strong demand from its core customer base driven by rising compliance requirements and digitisation in banking. Further, the group benefits from strong outsourcing trends in banking, and its cost-effective nearshore facilities give it a significant competitive advantage over local players. We have amended our cost forecasts, with gross margins rising, and operating expenses also increasing. Overall, operating margins rise by 10bp in FY15, 20bp in FY16 and FY17, and 30bp in the longer term, for the purpose of our DCF assumptions.
Our FY16 and FY17 revenue forecasts rise by 2%, while EPS rises faster, mainly due to operational gearing. We have edged up our FY15 tax rate to 28%, mainly due to the increased US business, and maintain the rate at 27% thereafter (based on normalised PBT), as GFT benefits from the favourable tax regime in Spain, relating to the exporting of services and R&D tax credits.
The high level of capex in FY15 relates to refurbishments at the new Stuttgart HQ, and capex is expected to fall back from FY16 to broadly match depreciation. We have eased our depreciation forecasts, and increased amortisation forecasts, in line with management’s guidance.
(€000s) |
FY15e |
FY16e |
FY17e |
|
Old |
New |
Old |
New |
Old |
New |
Existing GFT revenues |
276,333 |
280,917 |
295,400 |
300,300 |
310,170 |
315,315 |
Rule Financial revenues |
79,000 |
80,000 |
84,451 |
85,520 |
88,674 |
89,796 |
Adesis Netlife revenues |
6,667 |
7,083 |
17,104 |
18,173 |
17,959 |
19,082 |
(A) Total GFT revenues |
362,000 |
368,000 |
396,955 |
403,993 |
416,803 |
424,193 |
Growth (%) |
(0.9) |
0.7 |
9.7 |
9.8 |
5.0 |
5.0 |
Gross profit |
296,370 |
305,441 |
324,303 |
334,467 |
340,518 |
351,190 |
Gross margin (%) |
81.9 |
83.0 |
81.7 |
82.8 |
81.7 |
82.8 |
Total operating expenses |
(258,170) |
(266,141) |
(277,033) |
(285,402) |
(289,280) |
(298,009) |
(B) GFT contribution (Edison assumptions) |
45,999 |
47,099 |
56,215 |
58,010 |
60,903 |
62,846 |
Margin (%) |
12.71 |
12.80 |
14.16 |
14.36 |
14.61 |
14.82 |
(C) Central costs (Edison assumptions) |
(7,799) |
(7,799) |
(8,946) |
(8,946) |
(9,665) |
(9,665) |
Adjusted operating profit (B+C) |
38,200 |
39,300 |
47,270 |
49,065 |
51,238 |
53,181 |
Operating profit margin (%) |
10.6 |
10.7 |
11.9 |
12.1 |
12.3 |
12.5 |
Growth (%) |
12.9 |
16.1 |
23.7 |
24.8 |
8.4 |
8.4 |
Net interest |
(2,200) |
(2,000) |
(1,800) |
(1,750) |
(1,400) |
(1,400) |
Profit before tax (norm) |
36,000 |
37,300 |
45,470 |
47,315 |
49,838 |
51,781 |
Amortisation of acquired intangibles |
(6,000) |
(6,300) |
(4,500) |
(5,000) |
(4,500) |
(5,000) |
Profit before tax |
30,000 |
31,000 |
40,970 |
42,315 |
45,338 |
46,781 |
Taxation |
(9,720) |
(10,444) |
(12,277) |
(12,775) |
(13,456) |
(13,981) |
Net income from discontinued businesses |
461 |
461 |
0 |
0 |
0 |
0 |
Net income |
20,280 |
20,556 |
28,693 |
29,540 |
31,882 |
32,800 |
Adjusted EPS (c) |
101.6 |
103.8 |
126.1 |
131.2 |
138.2 |
143.6 |
P/E – Adjusted EPS |
|
28.4 |
|
22.4 |
|
20.5 |
Source: Edison Investment Research
GFT Group has increased its FY15 revenue guidance by €6m, or 1.7%, to €368m, along with profit guidance, as shown in Exhibit 3, which also reconciles the company’s definitions with ours. Notably, our adjusted EBITDA and GFT EBITDA for FY15 differ by the amount of the PPA order book amortisation. The GFT division’s utilisation rate is expected to remain at 89% for FY15.
Management notes that the group’s total revenue compound annual growth rate (CAGR) over 2005-15, based on FY17 guidance, is estimated at 17%, while the underlying organic CAGR over the same period is 12%. The corresponding figures for EBT are 21% and 20% respectively, while EBITDA would be significantly higher still.
Exhibit 3: Presentation of GFT and Edison definitions, based on GFT guidance
€m |
FY13 |
FY14 |
9M15 |
FY15e |
|
|
|
|
Prev GFT guidance |
New GFT guidance |
Group revenue |
264.285 |
365.320 |
271.480 |
362.000 |
368.000 |
Profit measures: |
|
|
|
|
|
GFT |
21.780 |
36.904 |
33.180 |
|
|
emagine |
1.306 |
1.923 |
0.000 |
|
|
Holding company |
(3.257) |
(2.819) |
(1.504) |
|
|
(A) Operating profit (GFT definition) |
19.829 |
36.008 |
31.676 |
44.500 |
45.000 |
Add back: exceptional items, misc |
1.110 |
1.040 |
0.000 |
0.000 |
0.000 |
Adjusted EBITDA (Edison definition) |
20.939 |
37.048 |
31.676 |
44.500 |
45.000 |
(E) Normal depreciation |
(2.246) |
(3.523) |
(3.739) |
(6.300) |
(5.700) |
Adjusted operating profit (Edison definition) |
18.693 |
33.525 |
27.937 |
38.200 |
39.300 |
Total net interest |
(0.136) |
(1.015) |
(1.095) |
(2.200) |
(2.000) |
Profit before tax norm (Edison definition) |
18.557 |
32.510 |
26.842 |
36.000 |
37.300 |
(B) Earn-out accruals |
2.322 |
0.309 |
0.000 |
0.000 |
0.000 |
(C) PPA order book (amort of acquired) |
(1.657) |
(1.675) |
(0.372) |
(1.500) |
(1.000) |
(F) PPA amortisation (amort of acquired) |
(0.593) |
(3.036) |
(3.718) |
(4.500) |
(5.300) |
Exceptional items, misc |
(1.011) |
(1.040) |
0.000 |
0.000 |
0.000 |
EBT (GFT definition) |
17.618 |
27.068 |
22.752 |
30.000 |
31.000 |
(D) EBITDA (GFT definition) (A+B+C) |
20.494 |
34.642 |
31.304 |
43.000 |
44.000 |
EBIT (GFT definition) (D+E+F) |
17.655 |
28.083 |
23.847 |
32.200 |
33.000 |
