FY17/Q118 results summary
Earnings: During 2017 restructuring starts to pay off
In 2017 reported group revenues rose 3.6% to €6.6m. Stripping out revenues from NECDIS and abnormally high revenues from penetration testing (or pentesting, which involves testing software for security flaws) relating to LinOTP in 2017, underlying revenues grew 95% to €5.5m. Underlying EBITDA losses, excluding a €955k loss from IT distribution subsidiary NECDIS, which was sold on 31 December 2017, fell 19.3% to €3.4m.
In relation to earlier management guidance, revenues did not match expectations of figures approaching €10m, although the planned slight reduction in EBITDA loss was achieved. Management reported that 2017 earnings growth was below its expectation, partly due to lower than expected productivity at Binect and slower than expected large customer acquisitions at KeyIdentity.
Nevertheless, the group did perform slightly ahead of management expectations in Q118, helped by faster growth at Binect. Although reported group revenues declined 8.5% to €1.8m, stripping out NECDIS and the above-mentioned high pentesting revenues relating to LinOTP in Q117, annualised underlying revenue grew 27.9% y-o-y. EBITDA losses during the quarter were also cut 71% to €0.3m, reflecting the strong growth in revenues and the impact of high operating leverage in the Binect product family, and cost-cutting in 2017 and Q118.
Exhibit 1: First quarter 2018 results summary
€000s |
Q117 |
Q118 |
Change (%) |
FY16 |
FY17 |
Change (%) |
Revenue |
|
|
|
|
|
|
KeyIdentity |
362 |
353 |
(2.5) |
1,423 |
1,561 |
9.7 |
of which LinOTP |
N/A |
N/A |
N/A |
310 |
853 |
175.2 |
Binect |
1,216 |
1,468 |
20.7 |
4,278 |
4,374 |
2.2 |
Max 21 |
343 |
291 |
(15.2) |
1,637 |
N/A |
N/A |
NECDIS* |
419 |
0 |
(100.0) |
1,742 |
N/A |
N/A |
Eliminations |
(365) |
(307) |
0.0 |
(2,689) |
N/A |
N/A |
Total group revenue |
1,974 |
1,806 |
(8.5) |
6,391 |
6,623 |
3.6 |
NECDIS/pentesting adjustment |
(562) |
0 |
(100.0) |
N/A |
(1,100)** |
N/A |
Underlying group revenue |
1,412 |
1,806 |
27.9 |
N/A |
5,500** |
N/A |
EBITDA |
|
|
|
|
|
|
KeyIdentity |
(581) |
(451) |
(22.4) |
(2,420) |
(2,123) |
(12.3) |
Binect |
(190) |
114 |
(160.0) |
(1,470) |
(836) |
(43.1) |
Max 21 |
(233) |
5 |
(102.1) |
(266) |
(394) |
47.7 |
NECDIS* |
(134) |
0 |
(100.0) |
0 |
(955) |
N/A |
Group |
(1,138) |
(332) |
(70.8) |
(4,156) |
(4,308) |
3.6 |
Cash and cash equivalents** |
2300** |
1,896 |
(17.6) |
677 |
2,322 |
243.0 |
Source: Max 21. Note: *Sold 31 December 2017. **Rounded to €0.1m.
Binect’s year of transition in 2017...
During 2017, Binect’s top-line revenues grew 2.2% to €4.4m and its EBITDA losses fell 43% to €0.8m. Nevertheless, revenues from the most strategically important and scalable segment of its offering – the processing of mail using the Binect product family – tripled to €0.6m. In the less scalable click charge per letter segment, processed mail volume increased 22% to 97.2m units after 30% growth in the previous year. During 2017, Binect laid the groundwork for success in 2018. It intensified its co-operation with Deutsche Post, expanded its partner network and product portfolio and put in place direct sales operations. The group also implemented cost reductions including scaling-down the development team after the creation of more standardised products. Total staff numbers in the business fell 33% to 36.
...has led to positive EBITDA at the company in Q118
The fruit of the above-mentioned efforts played out in Q118. Total revenues, including mail processing by the Binect product family, grew 21% to €1.5m, boosted by the commencement of direct sales and the launch of the new Binect Enterprise Basic solution in mid-2017. Helped by the growth in revenues and the scalability of the product lines, Binect emerged decisively into positive EBITDA territory, remaining consistently profitable during each month in the quarter and contributing €114k EBITDA to the group. Growth in processed mail volume of Binect’s legacy click charge per letter business continued to slow, rising 12.4% y-o-y to 29.1m.
Exhibit 2: Binect revenues and mail volume
|
Exhibit 3: KeyIdentity revenue structure
|
|
|
|
|
|
Exhibit 2: Binect revenues and mail volume
|
|
|
|
Exhibit 3: KeyIdentity revenue structure
|
|
|
|
KeyIdentity: Scalable LinOTP revenue segment surged ahead in H217
In 2017, sales of the group’s most strategically important product, LinOTP (Linux One Time Password), grew 175% to €0.8m. At the same time, low-margin sales of hardware and labour-intensive consulting revenues (except those supportive of the LinOTP product line) were allowed to decline. This was part of the group’s decision to orient strongly to the LinOTP product and reduce exposure to lower-margin product sales and consulting. As a result, top-line revenues grew by only 9.7% to €1.6m, but the group was able to achieve a 16% decline in employee numbers to 27 and EBITDA losses were reduced from €2.4m to €2.1m.
As can be seen from Exhibit 3, LinOTP revenues doubled between the first and second half of 2017, growing to 62% of total H217 revenues, up from 44% in H117. Recurring revenue share grew likewise, to 79% in H217 from 46% in H117. A key driver was a surge in demand from large corporations, which led to a doubling in average contract size during the year.
In our view, this reorientation towards highly strategically important LinOTP revenues was a notable success for the group. LinOTP generates unique passwords using an open-core model in which its proprietary modules are built around the LinOTP core. As such, LinOTP is a key element of the group’s enterprise MFA platform and a highly scalable SaaS product, with strong recurring revenue and operational gearing potential.
Continued strong trend in Q118 helped by major new insurance client
During Q118 underlying revenues grew 61% y-o-y to €353k after stripping out €143k in abnormally high pentesting revenues for the LinOTP solution in Q17, without which reported revenues fell 2.5%, y-o-y. At €83k per month, recurring revenues accounted for 71% of total revenues for the division.
The strong underlying top-line growth reflected expansion in service contract numbers (up by 43 in FY17 and a further 14 in Q118 to reach 302) and contract sizes over the course of 2017. In addition, the group commenced a major new contact with Basler Versicherung, providing secure portal access for tens of thousands of customers. KeyIdentity has recently introduced an improved demonstration version of the software, which should support sales, is seeing c.100 monthly leads from individuals and has several large customers in the pipeline.
Management earnings guidance: Group EBITDA break-even in 2019
Management published revised earnings guidance for 2018 and 2019 earlier this year, which it confirmed with the publication of its Q118 results, including the following key targets:
■
Revenue of €7m in 2018. This represents a 27% increase based on adjusted 2017 sales of €5.5m excluding NECDIS and the high level of pentesting undertaken for clients on the LinOTP.
■
EBITDA loss of €2.5m in 2018.
■
EBITDA break-even in 2019 (with expectations of EBITDA profits late in the year).
Management states that the guidance is based on an expectation of stable competitive structures and market prices, and a lack of major customer losses.
We see management guidance as achievable
The outlook for this year’s earnings was greatly enhanced by the year-end 2017 sale of NECDIS, which contributed €1.0m to 2017 EBITDA losses. Annualised first quarter 2018 revenues at €7.2m show that the group is already achieving a revenue run rate in excess of the full-year target of €7.0m.
Similarly, Binect’s emergence from losses to an EBITDA profit of €0.1m in Q118 and the 22% y-o-y decline in EBITDA loss at KeyIdentity to €0.4m, combined with strong growth in revenues in the most scalable business areas of both divisions (ie with the strongest operating gearing/margin improvement potential), indicate a likely continuation of lower average quarterly EBITDA losses during the remaining three quarters. Nevertheless, annualising this first quarter EBITDA loss at €1.3m and very conservatively adding in €0.5-0.6m in eliminations (2017: €0.4m) indicates realistic prospects for the group to achieve a full-year EBITDA loss of below €2.0m.
Cash flow & balance sheet: Higher cash balances after equity issues in 2017
In 2017 Max 21 experienced €3,154k in operating cash outflows and made an additional €0.8m investment outlays. This was funded by €6.3m in equity issues: €4.3m in H117 and €2.0m in early September 2017. In addition to enabling the repayment of €0.7m in debt, it enabled the group to finish the year with €2.3m in cash reserves, up from €0.7m at end-2016.
Long-term financial debt fell during the year from €2.5m to €1.2m, resulting in a turnaround from net debt of €1.8n to a net cash balance of €1.1m. (We note that a restatement of the 2016 balance sheet prevents a reconciliation of the debt repayment data in the cash flow statement and the 2016 and 2017 balance sheets.)
The company did not publish debt or cash flow data for Q118. Nevertheless, EBITDA losses shrank dramatically from the quarterly average of €1.1m in 2017 to €0.3m, indicating a likely improvement in operating cash flows. No further equity issues took place and cash reserves fell by €0.4m to €1.9m.
Exhibit 4: Financial summary
€000s |
Dec-15 |
Dec-16 |
Dec-17 |
Income Statement |
|
|
|
Revenue |
3,308 |
6,391 |
6,623 |
Cost of materials |
(1,367) |
(2,665) |
(2,151) |
Payroll costs |
(2,084) |
(6,537) |
(6,027) |
EBITDA |
(1,358) |
(4,156) |
(4,308) |
Write-down in value of business |
0 |
0 |
(10,998) |
Depreciation and amortisation |
(529) |
(1,868) |
(2,061) |
Operating profit |
(1,887) |
(6,024) |
(17,366) |
Financial net |
(29) |
(1,264) |
575 |
Profit Before Tax (as reported) |
(1,916) |
(7,288) |
(16,791) |
Net income (as reported) |
(1,520) |
(7,508) |
(16,456) |
EPS (as reported) (€) |
(0.16) |
(0.61) |
(1.02) |
Dividend per share (€) |
0.00 |
0.00 |
0.00 |
Balance Sheet |
|
|
|
Total non-current assets |
27,253 |
26,220 |
12,920 |
o/w intangible |
21,546 |
25,708 |
12,675 |
o/w tax losses c/f |
0 |
0 |
0 |
Total current assets |
3,910 |
2,380 |
3,531 |
o/w cash and cash equivalents |
1,616 |
677 |
2,322 |
Total assets |
31,163 |
28,600 |
16,451 |
Total current liabilities |
3,066 |
2,715 |
2,253 |
o/w Creditors |
1,375 |
1,127 |
532 |
o/w tax debt |
132 |
302 |
181 |
o/w other debt |
1,560 |
1,287 |
1,540 |
Total long term liabilities |
3,061 |
4,052 |
2,451 |
o/w LT Financial debt* |
1,749 |
2,520 |
1,248 |
o/w deferred Tax |
1,312 |
1,532 |
1,203 |
Shareholder equity |
25,035 |
21,832 |
11,747 |
Net debt/(cash) |
1,693 |
3,129 |
466 |
Cash flow |
|
|
|
Net cash from operating activities |
(612) |
(3,991) |
(3,154) |
Net cash from investing activities |
(6,165) |
(1,342) |
(808) |
Net Cash from financing activities |
4,256 |
4,393 |
5,607 |
o/w Equity financing |
3,434 |
4,610 |
6,295 |
o/w Debt financing |
822 |
(216) |
(688) |
Net cash flow |
(2,520) |
(940) |
1,645 |
Cash & cash equivalent end of year |
1,616 |
677 |
2,322 |
Source: Max 21. Note: *A non-interest bearing financial instrument recognising Max 21’s liability to make an earn-out payment to former KeyIdentity shareholders in 2021. Restatement of 2016 accounts affects reconciliation of 2017 debt and stated cash flows.
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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
|
