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Research: TMT
Expert System’s H120 financial results were affected by COVID-19 restrictions and the start of investment in the company’s new five-year growth plan. So far in H220, the company is making good progress in executing this plan, with funds raised to support the required investment and technology development on track to launch the new end-to-end SaaS platform in Q121.
Expert System |
Laying the foundations for growth |
H120 results |
Software & comp services |
1 October 2020 |
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 H120 financial results were affected by COVID-19 restrictions and the start of investment in the company’s new five-year growth plan. So far in H220, the company is making good progress in executing this plan, with funds raised to support the required investment and technology development on track to launch the new end-to-end SaaS platform in Q121.
Year end |
Revenue (€m) |
EBITDA* |
EPS* |
DPS |
P/E |
EV/Sales |
12/18 |
30.5 |
4.6 |
(1.4) |
0.0 |
N/A |
3.1 |
12/19 |
33.7 |
5.5 |
(1.6) |
0.0 |
N/A |
2.8 |
12/20e |
31.2 |
(0.4) |
(15.5) |
0.0 |
N/A |
3.0 |
12/21e |
32.5 |
(5.7) |
(24.0) |
0.0 |
N/A |
2.9 |
12/22e |
45.7 |
(1.0) |
(17.3) |
0.0 |
N/A |
2.1 |
Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
COVID-19 slows new business in H120
Expert System reported a 19% y-o-y decline in sales in H120, as COVID-19 restrictions made it harder to sign new business in Q220. Combined with increased investment as part of the company’s new five-year strategy (Path to Lead), this resulted in an EBITDA loss of €4.6m compared to €0.4m in H119. Net cash at the end of H120 was €3.8m and was boosted post period end by the €25m raised to fund the Path to Lead plan. While we expect a pick-up in revenues in H2 (partly due to normal seasonality and partly due to fewer COVID-19 restrictions), we have trimmed our forecasts to reflect the sales decline in H1.
Path to Lead on track
In July, the company launched its natural language API (application programming interface) and hired senior management in the US to drive international expansion. It is on track to deliver product updates during the course of Q420 and Q121, building up to the full launch of the end-to-end SaaS platform in March 2021. The company is also rebranding to expert.ai reflecting its desire to democratise the use of artificial intelligence for natural language understanding.
Valuation: Considerable upside if executed well
With the full SaaS platform not scheduled to launch until the end of Q121, the plan calls for significant investment before adoption of the SaaS platform is expected to drive material revenue growth in FY22. Based on a DCF valuation, we estimate that successful execution of the plan (which is targeting revenues of €100m and EBITDA margins of 22% by FY24) could see the stock valued in the region of €4.7 per share. To monitor progress towards the revenue inflection, we look to track the number of users signing up to use the platform, length and frequency of platform usage, conversion rates to paid subscriptions, net dollar retention and contribution from channel partners.
Review of H120 results
Exhibit 1: Half-year results highlights
€m |
H119 |
H120 |
y-o-y |
Sales |
11.87 |
9.57 |
-19.4% |
Grants and other income |
0.81 |
1.10 |
35.0% |
Total revenue |
12.69 |
10.67 |
-15.9% |
Capitalised development costs |
2.76 |
3.11 |
12.6% |
Changes in WIP |
-0.09 |
-0.05 |
-46.4% |
Total production value |
15.36 |
13.73 |
-10.6% |
Staff costs |
9.44 |
10.88 |
15.2% |
Other costs |
6.35 |
7.42 |
16.8% |
EBITDA |
(0.43) |
(4.56) |
953.2% |
EBITDA margin |
-3.4% |
-42.7% |
-39.3% |
Depreciation & amortisation - in-house |
2.53 |
2.82 |
11.3% |
Normalised EBIT |
(2.96) |
(7.38) |
149.0% |
Normalised EBIT margin |
-23.4% |
-69.1% |
-45.8% |
Depreciation & amortisation - acquired |
1.26 |
0.45 |
-64.2% |
EBIT |
(4.22) |
(7.83) |
85.4% |
Net income |
(4.02) |
(3.05) |
-24.1% |
Net debt/(cash) |
5.70 |
(3.82) |
-167.0% |
Source: Expert System
Expert System reported a 16% y-o-y decline in revenue in H120 as COVID-19 restrictions made it more difficult to sign new business. At the same time, the company started ramping up investment in its new five-year strategy (see below for more detail), which resulted in the EBITDA loss expanding to €4.6m from €0.4m a year ago. The EBIT loss also expanded, with slightly higher depreciation and amortisation reflecting the increase in capitalised development costs in recent years. Reported net income included an exceptional gain of €5.1m on the disposal of the stake in CY4GATE during H1.
The company closed the half with a net cash position of €3.8m, up from a net debt position of €5.7m a year ago and €2.8m at the end of FY19. During H120, the company benefited from the sale of its stake in CY4GATE for €5.4m and the issue of 1.11m shares, generating gross proceeds of €3m. The company raised a further €25m from the issue of 9.26m shares in July.
Exhibit 2: Sales by geography
€m |
H119 |
H120 |
y-o-y |
Italy |
5.0 |
4.9 |
(2.1%) |
Europe (ex-Italy) |
4.2 |
2.7 |
(35.5%) |
US |
2.7 |
2.0 |
(26.4%) |
Total |
11.9 |
9.6 |
(19.4%) |
Revenue contribution |
|||
Italy |
42% |
51% |
|
Europe (ex-Italy) |
35% |
28% |
|
US |
23% |
21% |
Source: Expert System
The table above shows the split of sales by geography and the decline for each region on a year-on-year basis. Management noted that it was easier to generate business in Italy as it has a well-established customer base there, whereas new business in the US was harder to come by as this relies to a greater extent on winning new customers.
Services made up 43.4% of H120 sales compared to 40.5% in H119. This means that licence-based sales declined 23% y-o-y and service sales were down 14% y-o-y. Recurring licences made up 80% of total licence sales. The company noted that at 10% of sales, business via the channel was at a similar proportion in H120 to FY19.
Update on Path to Lead
In June, the company announced plans to accelerate growth with its Path to Lead growth strategy (see Five year growth strategy unveiled). It has already met two milestones on the plan: raising €25m from the issue of 9.26m shares and launching the expert.ai natural language API. The company has also invested in the sales & marketing function in the US, hiring a chief revenue officer, Colin Matthews, and a chief marketing officer, Keith C Lincoln.
The next target on the timeline is in October when Expert System plans to launch a new version of expert.ai studio and provide a preview of the core capabilities of the SaaS platform. It will also be undertaking a rebranding exercise to raise awareness of the company’s technology, with a new logo ‘Expert.ai’ and strapline ‘Expert.ai makes AI available, makes AI simple, makes everyone…expert’.
Through the remainder of Q420 and into Q121, the company is targeting ongoing enhancements to its technology:
■
November: new features and verticals for the API.
■
December: launch of a commercial offering for the API.
■
January 2021: new verticals and an early adopters programme (EAP) for the platform.
■
March 2021: launch of the full end-to-end SaaS platform.
Outlook and changes to forecasts
In previous years, Expert System has seen much stronger revenues in H2 compared to H1. This is likely to be the case again in 2020, and is likely to be even more pronounced because of the COVID-19-related slowdown in Q2. We have trimmed our revenue forecasts to reflect the lower level of revenues in H120, resulting in reduced EBITDA forecasts.
Exhibit 3: Changes to forecasts
€m |
FY20e old |
FY20e new |
Change |
y-o-y |
FY21e old |
FY21e new |
Change |
y-o-y |
FY22e old |
FY22e new |
Change |
y-o-y |
Sales |
31.7 |
29.7 |
(6.5%) |
(6.2%) |
32.9 |
31.0 |
(6.0%) |
4.3% |
46.2 |
44.2 |
(4.4%) |
42.6% |
Other income & grants |
1.5 |
1.5 |
0.0% |
(27.1%) |
1.5 |
1.5 |
0.0% |
0.0% |
1.5 |
1.5 |
0.0% |
0.0% |
Total revenues |
33.2 |
31.2 |
(6.2%) |
(7.5%) |
34.4 |
32.5 |
(5.7%) |
4.1% |
47.7 |
45.7 |
(4.2%) |
40.6% |
Capitalised development costs & changes in WIP |
6.5 |
6.5 |
0.0% |
8.3% |
8.0 |
8.0 |
0.0% |
22.3% |
10.3 |
10.3 |
0.0% |
29.6% |
Production value |
39.8 |
37.7 |
(5.2%) |
(5.1%) |
42.4 |
40.5 |
(4.6%) |
7.3% |
58.0 |
56.0 |
(3.5%) |
38.5% |
EBITDA |
2.0 |
(0.4) |
(121%) |
(108%) |
(5.0) |
(5.7) |
14.5% |
1233% |
(0.5) |
(1.0) |
102.0% |
(83.0%) |
EBITDA margin |
6.0% |
-1.4% |
(7.4%) |
(17.6%) |
(14.4%) |
(17.5%) |
(3.1%) |
(16.1%) |
(1.0%) |
(2.1%) |
(1.1%) |
15.4% |
D&A |
(6.4) |
(6.4) |
0.0% |
(6.9) |
(6.9) |
0.0% |
(7.9) |
(7.9) |
0.0% |
|||
Normalised operating profit |
(4.4) |
(6.9) |
55.1% |
N/A |
(11.9) |
(12.6) |
6.0% |
83.5% |
(8.4) |
(8.8) |
5.8% |
(29.7%) |
Normalised operating margin |
(13.3%) |
(22.0%) |
(8.7%) |
(20.9%) |
(34.5%) |
(38.8%) |
(4.3%) |
(16.8%) |
(17.5%) |
(19.4%) |
(1.8%) |
19.4% |
Amortisation of acquired intangibles |
(0.9) |
(0.9) |
0.0% |
N/A |
0.0 |
0.0 |
0.0% |
N/A |
0.0 |
0.0 |
N/A |
|
Exceptional items |
0.0 |
0.0 |
0.0% |
N/A |
0.0 |
0.0 |
0.0% |
N/A |
0.0 |
0.0 |
N/A |
|
Reported operating profit |
(5.3) |
(7.8) |
45.7% |
N/A |
(11.9) |
(12.6) |
6.0% |
N/A |
(8.4) |
(8.8) |
5.8% |
N/A |
Normalised net income |
(4.7) |
(6.9) |
46.6% |
N/A |
(11.5) |
(12.1) |
5.7% |
75.1% |
(8.3) |
(8.7) |
27.8% |
|
Reported net income |
(0.9) |
(3.1) |
236.6% |
N/A |
(11.5) |
(12.1) |
5.7% |
N/A |
(8.3) |
(8.7) |
27.8% |
|
Diluted normalised EPS (c) |
(10.6) |
(15.5) |
46.6% |
N/A |
(22.7) |
(24.0) |
5.7% |
(54.9%) |
(16.5) |
(17.3) |
5.3% |
27.8% |
Net debt/(cash) |
(23.6) |
(21.3) |
-9.8% |
N/A |
(10.1) |
(7.1) |
-29.7% |
(66.6%) |
0.7 |
4.0 |
474.4% |
(156%) |
Source: Edison Investment Research
Exhibit 4: Financial summary
€'000s |
2015 |
2016 |
2017 |
2018 |
2019 |
2020e |
2021e |
2022e |
||
31-December |
IT GAAP |
IT GAAP |
IT GAAP |
IT GAAP |
IT GAAP |
IT GAAP |
IT GAAP |
IT GAAP |
||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
19,368 |
25,057 |
27,783 |
30,457 |
33,712 |
31,192 |
32,481 |
45,683 |
EBITDA |
|
|
1,463 |
(2,245) |
1,711 |
4,638 |
5,459 |
(426) |
(5,679) |
(963) |
Operating Profit (before amort. and except.) |
(1,226) |
(5,941) |
(3,189) |
(662) |
(358) |
(6,864) |
(12,593) |
(8,848) |
||
Intangible Amortisation |
(2,549) |
(2,608) |
(2,608) |
(2,567) |
(2,520) |
(902) |
0 |
0 |
||
Exceptionals |
0 |
0 |
(700) |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
(3,775) |
(8,549) |
(6,496) |
(3,229) |
(2,878) |
(7,765) |
(12,593) |
(8,848) |
||
Net Interest |
213 |
(156) |
(2,191) |
97 |
(123) |
(821) |
(859) |
(859) |
||
Profit Before Tax (norm) |
|
|
(1,013) |
(6,097) |
(5,380) |
(565) |
(481) |
(7,685) |
(13,452) |
(9,707) |
Profit Before Tax (reported) |
|
|
(3,562) |
(8,705) |
(8,687) |
(3,131) |
(780) |
(3,436) |
(13,452) |
(9,707) |
Tax |
277 |
579 |
348 |
(650) |
(203) |
344 |
1,345 |
971 |
||
Profit After Tax (norm) |
(934) |
(5,692) |
(5,164) |
(508) |
(607) |
(6,916) |
(12,107) |
(8,736) |
||
Profit After Tax (reported) |
(3,284) |
(8,126) |
(8,339) |
(3,781) |
(983) |
(3,093) |
(12,107) |
(8,736) |
||
Average Number of Shares Outstanding (m) |
22.8 |
25.8 |
28.1 |
35.8 |
38.6 |
44.6 |
50.4 |
50.4 |
||
EPS - normalised (c) |
|
|
(4.1) |
(22.0) |
(18.3) |
(1.4) |
(1.6) |
(15.5) |
(24.0) |
(17.3) |
EPS - normalised and fully diluted (c) |
|
(4.1) |
(22.0) |
(18.3) |
(1.4) |
(1.6) |
(15.5) |
(24.0) |
(17.3) |
|
EPS - (IFRS) (c) |
|
|
(14.4) |
(31.5) |
(29.6) |
(10.6) |
(2.5) |
(6.9) |
(24.0) |
(17.3) |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
EBITDA Margin (%) |
7.6 |
-9.0 |
6.2 |
15.2 |
16.2 |
-1.4 |
-17.5 |
-2.1 |
||
Adj Operating Margin (%) |
-6.3 |
-23.7 |
-11.5 |
-2.2 |
-1.1 |
-22.0 |
-38.8 |
-19.4 |
||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
20,301 |
20,379 |
18,864 |
16,655 |
14,761 |
14,190 |
15,748 |
18,694 |
Intangible Assets |
18,539 |
18,372 |
16,944 |
14,734 |
13,092 |
12,790 |
14,380 |
17,373 |
||
Tangible Assets |
916 |
915 |
792 |
715 |
702 |
684 |
652 |
604 |
||
Investments |
846 |
1,092 |
1,128 |
1,206 |
968 |
716 |
716 |
716 |
||
Current Assets |
|
|
42,588 |
37,012 |
37,634 |
38,004 |
51,442 |
78,924 |
66,078 |
59,544 |
Stocks |
1,797 |
627 |
99 |
109 |
59 |
59 |
59 |
59 |
||
Debtors |
10,228 |
10,233 |
12,384 |
15,792 |
20,447 |
21,060 |
21,060 |
24,641 |
||
Cash |
11,249 |
9,063 |
11,235 |
7,883 |
21,647 |
48,172 |
33,981 |
22,896 |
||
Other |
19,314 |
17,088 |
13,916 |
14,220 |
9,289 |
9,633 |
10,978 |
11,949 |
||
Current Liabilities |
|
|
(20,517) |
(22,679) |
(19,480) |
(21,170) |
(22,839) |
(23,264) |
(24,083) |
(29,230) |
Creditors |
(15,082) |
(16,459) |
(14,104) |
(15,511) |
(16,945) |
(17,370) |
(18,189) |
(23,336) |
||
Short term borrowings |
(5,435) |
(6,219) |
(5,376) |
(5,659) |
(5,893) |
(5,893) |
(5,893) |
(5,893) |
||
Long Term Liabilities |
|
|
(22,227) |
(18,275) |
(17,742) |
(18,411) |
(22,464) |
(24,852) |
(24,852) |
(24,852) |
Long term borrowings |
(18,240) |
(15,252) |
(14,683) |
(14,811) |
(18,588) |
(20,976) |
(20,976) |
(20,976) |
||
Other long-term liabilities |
(3,987) |
(3,023) |
(3,060) |
(3,600) |
(3,876) |
(3,876) |
(3,876) |
(3,876) |
||
Net Assets |
|
|
20,145 |
16,437 |
19,276 |
15,077 |
20,901 |
44,999 |
32,892 |
24,156 |
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
2,738 |
2,088 |
(1,921) |
2,583 |
2,479 |
(639) |
(4,884) |
579 |
Net Interest |
(324) |
(155) |
(626) |
(441) |
(558) |
(797) |
(835) |
(835) |
||
Tax |
(1,576) |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Capex |
(20,045) |
(6,378) |
(6,321) |
(5,830) |
(6,749) |
(7,020) |
(8,472) |
(10,830) |
||
Acquisitions/disposals |
3,045 |
46 |
1,275 |
(76) |
7,496 |
5,492 |
0 |
0 |
||
Financing |
6,573 |
4,418 |
11,178 |
0 |
7,084 |
27,100 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
(9,588) |
18 |
3,585 |
(3,764) |
9,753 |
24,137 |
(14,191) |
(11,085) |
||
Opening net debt/(cash) |
|
|
2,839 |
12,426 |
12,408 |
8,824 |
12,587 |
2,834 |
(21,303) |
(7,112) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
12,426 |
12,408 |
8,824 |
12,587 |
2,834 |
(21,303) |
(7,112) |
3,974 |
Source: Expert System, Edison Investment Research
|
|
Research: TMT
Media and Games Invest (MGI) has successfully completed its placing, announced on 29 September 2020, issuing 25m new shares at a price per share of SEK12.00 (€1.14/share) raising proceeds of SEK300m (c €29m). The placing price represents a c 10% discount to the two-day volume weighted average price. It increases the number of shares in issue by c 21% to 117.1m. Gross proceeds from the placing will be used to finance acquisitions of new franchises, game publishers and development studios, as well as to invest in organic growth. MGI expects to complete its dual listing on the Nasdaq First North Premier Growth Market in Stockholm on or around 6 October 2020.