H1 results: Total organic revenue growth of 33%
H1 organic revenue growth was 33%, including 3-4% FX tailwind (46% of revenues are from outside the UK) and a c 11% one-off effect from the CSL contract. That leaves underlying growth at c 18-19%, which we understand is at record levels. LEO, Rustici, Preloaded and gomo have been performing exceptionally well and the numbers were slightly ahead of management plans. Over the last year, attention had been focused on delivering the CSL contract, but from early FY17 new business began to pick up pace and the order book remains at record levels. Management has implemented a “co-ordinated selling” strategy to help drive cross sales across the business units. gomo, which is an authoring tool, is an important part of this strategy, as it helps build customer relationships. While it can cost the group short-term revenues, ie, small content creation projects that LEO could handle, it helps introduce larger projects when customers do not have the capacity or technological capability to deliver these more complex projects on their own. gomo revenues grew by c 70% in H117. Rustici has also been growing at pace, and full earn-outs are expected to be paid for this business. While management was anticipating a decline in the legacy SCORM business as the new xAPI standard picks up pace, SCORM business has continued to grow. Preloaded has won several high-profile virtual reality projects and had also been growing at pace. Further, Eukleia has been growing well, and is expected to benefit from the introduction of MiFID II in 2018. As part of LTGs “co-ordinated selling” strategy, Eukleia can offer industrial customers assessments to cover the Modern Slavery Act 2015.
The H117 operating margin dipped to 19.2% from 23.0% in H116, due to the initial inclusion of low-margin NetDimensions, which contributed for three months. The restructuring at NetDimensions has been extensive with the unit’s annualised cost base on target to be reduced by $8m. These savings will begin coming through in H2 and will help bring margins back to normal levels. LTG has shifted its focus away from EBITDA and to EBIT (adjusted operating profit). Recurring revenues were 37% of the total, and are expected to approach 50% in the full year, since c 70% of NetDimensions’ revenue is recurring in nature. The company increased the interim dividend by 29% to 0.09p.
Back in April, management stressed that it was focused on the integration of NetDimensions and near-term attention was on organic growth. However, with NetDimensions now largely integrated, management is on the lookout for acquisitions, with a focus on domain specific expertise, eg pharmaceuticals, or add-on software tools.
Exhibit 1: Half-by-half analysis
£000s |
H116 |
H216 |
FY16 |
H117 |
H217e |
FY17e |
FY18e |
Total revenue |
12,785 |
15,478 |
28,263 |
21,472 |
29,024 |
50,496 |
58,026 |
Opex before depn & amortisation |
(9,916) |
(11,471) |
(21,387) |
(17,527) |
(21,732) |
(39,259) |
(42,508) |
Capitalisation of development costs |
378 |
418 |
796 |
667 |
1,479 |
2,146 |
2,466 |
Adjusted EBITDA |
3,247 |
4,425 |
7,672 |
4,612 |
8,771 |
13,383 |
17,983 |
EBITDA margin |
25.4% |
28.6% |
27.1% |
21.5% |
30.2% |
26.5% |
31.0% |
Amortisation of development costs |
(164) |
(241) |
(405) |
(280) |
(420) |
(700) |
(1,200) |
Depreciation |
(146) |
(174) |
(320) |
(205) |
(375) |
(580) |
(621) |
Adjusted operating profit |
2,937 |
4,010 |
6,947 |
4,127 |
7,976 |
12,103 |
16,163 |
Operating margin |
23.0% |
25.9% |
24.6% |
19.2% |
27.5% |
24.0% |
27.9% |
Associates |
(102) |
(103) |
(205) |
(80) |
(320) |
(400) |
0 |
Net interest |
(155) |
(202) |
(357) |
(339) |
(311) |
(650) |
(650) |
Edison profit before tax (norm) |
2,680 |
3,705 |
6,385 |
3,708 |
7,345 |
11,053 |
15,513 |
Amortisation of acquired intangibles |
(1,536) |
(1,664) |
(3,200) |
(3,042) |
(2,958) |
(6,000) |
(6,000) |
Share-based payments |
(300) |
(305) |
(605) |
(218) |
(482) |
(700) |
(800) |
Exceptional items |
(1,779) |
(1,994) |
(3,773) |
(2,346) |
(1,854) |
(4,200) |
(3,000) |
Profit before tax (FRS 3) |
(935) |
(258) |
(1,193) |
(1,898) |
2,051 |
153 |
5,713 |
Source: Learning Technologies Group (historicals), Edison Investment Research (forecasts).
The company has introduced new information that reveals how revenue breaks down by nature. This is very helpful given that the group operates a range of business models. The content category represents the group’s core content creation business, including LEO, Preloaded and Eukleia. Software licences is primarily Rustici’s and NetDimensions’ annual licences. Hosting and SaaS is gomo and NetDimensions’ “Secure SaaS” business. Platform development is predominantly the customisation of the Moodle open-source platform for customers. Other non-e-learning is the face-to-face training business of Eukleia.
Exhibit 2: Revenue breakdown by nature
£000s |
FY16 |
H116 |
H117 |
Change H117 over H116 (%) |
e-learning revenues |
Recurring |
Non-recurring |
Recurring |
Non-recurring |
Recurring |
Non-recurring |
Recurring |
Non-recurring |
Content |
|
14,118 |
|
6,109 |
|
9,935 |
|
63 |
Software licences |
6,630 |
949 |
2,792 |
487 |
4,798 |
598 |
72 |
23 |
Hosting and SaaS |
689 |
8 |
309 |
0 |
2,878 |
5 |
831 |
N/A |
Support & maintenance |
|
574 |
|
330 |
179 |
258 |
|
(22) |
Consulting |
|
853 |
|
440 |
|
472 |
|
7 |
Platform development |
|
1,419 |
|
572 |
|
1,406 |
|
146 |
Other |
|
1,147 |
|
856 |
|
322 |
|
(62) |
Totals |
7,319 |
19,068 |
3,101 |
8,794 |
7,855 |
12,996 |
153 |
48 |
Total e-learning |
26,387 |
11,895 |
20,851 |
75 |
Other non-e-learning |
1,876 |
890 |
621 |
(30) |
Total group revenue |
28,263 |
12,785 |
21,472 |
68 |
Source: Learning Technologies Group
There was significant change to the balance sheet over the H1 period as the group acquired the enterprise LMS software provider NetDimensions for £53.6m in cash and funded the acquisition with a share placement. We note NetDimensions has a significant net cash position. There have also been additional acquisition payments, primarily for Rustici, which have been expensed through operating cash flow, as required by IFRS. There were estimated outstanding acquisition liabilities of £9.3m as at 30 June, which includes £1.5m “squeeze out” of NetDimensions minorities that was paid after the period end. The balance of these acquisition liabilities is contingent on incremental revenue growth in 2018 and 2019. In March 2017, LTG announced a new debt facility with Silicon Valley Bank, comprising a £10m term loan and a £10m revolving credit facility, both of which are available to LTG for five years. Hence, the group has financing available to make tuck in acquisitions with £11.5m cash on the balance sheet.
Exhibit 3: Adjusted net debt position
£000s |
31/12/15 |
31/12/16 |
31/6/17 |
Cash & bank balances |
(7,305) |
(5,348) |
(11,498) |
Short-term borrowings |
0 |
3,252 |
1,922 |
Long-term borrowings |
0 |
10,582 |
15,663 |
Net debt (cash) |
(7,305) |
8,486 |
6,087 |
Outstanding acquisition liabilities |
1,249 |
10,700 |
9,300 |
Adjusted net debt (cash) |
(6,056) |
19,186 |
15,387 |
Net assets |
25,144 |
30,710 |
73,768 |
Adjusted net debt/equity |
(24.1%) |
62.5% |
20.9% |
Source: Learning Technologies Group
