Interim results: Licence wins and strong pipeline
Nine new licences were signed in H1, while seven new clients went live (the group has more than 300 clients and 10,000+ users). The new clients demonstrate a broad diversity of asset classes and geographies. Group revenue slipped by 10%, or 6% on a constant-currency basis, to £14.1m, with FX movements responsible for £0.5m of the reduction. Traditional licence revenues fell by 20% to £2.9m. This reflects £0.2m backlog revenue recognised in the current period compared with £1.9m in the corresponding period, and also as revenue relating to H1 licence wins will largely be recognised in H2. Recurring fees (software rental, support and hosting services) eased by 2% to £7.8m, which continues to reflect the impact of the weak Norwegian krone on the Brady Energy software rental book. On a constant-currency basis, recurring fees grew by 2%, representing 55% of the group total, up from 51% a year earlier. Services revenues slipped by 16% (down 11% at constant currencies) to £3.4m, but the group expects a busy H2, as the new contracts are implemented.
Revenues in EMEA rose by 7% to £10.2m, largely reflecting the renewed momentum in the Energy business. Revenues in the Americas slipped 18% to £3.4m, though Brady is buoyant about the opportunities in the Americas in the Recycling and Commodities areas. Revenues in Asia dipped by 75% (£0.5m), although we note that the group has a strong pipeline in the Asia region. The gross margin improved from 64% to 65%, while operating costs rose by 13% to £8.7m, reflecting increased investment in marketing. Hence, the adjusted operating profit slipped by 79% to £0.5m, as the group operating margin fell to 3.4%.
Exhibit 1: Interims analysis
Half-by-half analysis |
H114 |
H214 |
2014 |
H115 |
H215e |
2015e |
Software licence sales |
3,589 |
3,952 |
7,541 |
2,871 |
4,929 |
7,800 |
Recurring fees (licence rental & maintenance) |
7,933 |
7,915 |
15,848 |
7,799 |
9,429 |
17,228 |
Services fees (consulting and development) |
4,082 |
3,544 |
7,626 |
3,436 |
4,800 |
8,236 |
Total Revenue |
15,604 |
15,411 |
31,015 |
14,106 |
19,158 |
33,264 |
Gross profit |
10,027 |
10,011 |
20,038 |
9,191 |
12,134 |
21,325 |
Selling and administrative expenses* |
(7,670) |
(7,349) |
(15,019) |
(8,705) |
(7,078) |
(15,783) |
Adjusted operating profit |
2,357 |
2,662 |
5,019 |
486 |
5,056 |
5,542 |
Operating Margin |
15.1% |
17.3% |
16.2% |
3.4% |
26.4% |
16.7% |
Interest received |
19 |
39 |
58 |
26 |
14 |
40 |
Edison Profit Before Tax (norm) |
2,376 |
2,701 |
5,077 |
512 |
5,070 |
5,582 |
Share-based payments |
(116) |
(116) |
(232) |
(69) |
(206) |
(275) |
Amortisation of acquired intangibles |
(801) |
(812) |
(1,613) |
(806) |
(807) |
(1,613) |
Exceptional items |
0 |
(2,143) |
(2,143) |
0 |
0 |
0 |
Profit before tax (FRS 3) |
1,459 |
(370) |
1,089 |
(363) |
4,057 |
3,694 |
Source: Brady (historic numbers), Edison Investment Research (forecasts)
Divisional analysis: Brady Energy continues to rebuild momentum
Brady signed two particularly substantial deals with high-quality names, including one of the world’s largest commodity traders and the world’s leading metals recycling company. However, adjusted EBITDA (Edison definition, Exhibit 2) dipped by 79% to £0.8m, mainly since the group did not benefit as much from backlog revenue as it did in H114. We note that revenue recognition occurs on practical acceptance from the client, which can vary in time and adds to the lumpiness of traditional licencing deals.
■
Commodities – this unit was formed through the merger of the group’s UK-based Metals business with its Geneva-based Physicals (mainly soft commodities) unit in 2013. Revenues dipped 14% (15% on constant currency basis) to £6.1m, while the contribution fell by 43% to £1.6m, to give a contribution margin of 27% (H114: 41%). The highlight was signing a leading global commodity company, which Brady won in conjunction with a major systems integrator. A significant slice of the licence component of the deal was recognised in H1, while the service component will be recognised in H2 and beyond. Brady’s solution will be used to support the organisation’s global trading and risk management of its physical and derivatives operations for its refined metals and concentrates businesses, in its worldwide locations across four continents. Brady won the contract in a competitive tender against one of the world’s top two commodity software suppliers. It succeeded as a result of the significant investment it has put into its CTRM product over the last two years – the group’s multi-commodity physical trading solution now handles refined ferrous, non-ferrous and precious metals, as well as concentrates, scrap and recycled metals. Separately, Hedge Manager, a cloud-based solution designed specifically for risk management in today's volatile commodity markets, went live with a major European aluminium producer.
■
Brady Energy – this unit’s customer base is predominantly Nordic utility companies that use the software for trading and hedging their electricity exposure, as well as other business processes. There is no exposure to petroleum and the business unit has been extending its customer base across Europe and into Africa. The business model in the Energy business unit is largely rental. Revenues slipped 7%, but rose 7% on a constant currency basis, to €. 5.6m, while the contribution margin jumped by 410bp to 16.8%. Six new contracts were signed in H1, including four new clients, and two migrations from legacy applications. A major regulatory change in the Nordic power market – Nordic Imbalance Settlement (NBS), will require the harmonisation of systems across the three Nordic countries. This provides a good near-term growth driver and Brady is developing the functionality for NBS with 24 clients participating in a beta project. There has been significant investment in functionality for the gas market through the delivery of additional product functionality for a major asset-backed trading client in Continental Europe. The division continues to advance its adoption of new technology, with both extensions to a web portal developed last year and deployed at a number of clients, and a new data warehouse module to provide additional and easily accessible data for management and/or web reporting.
Exhibit 2: Divisional breakdown and reconciliation of EBITDA definitions
|
H114 |
H115 |
H115 |
|
Revenues |
Contribution |
Margin |
Revenues |
Contribution |
Margin |
Revenues |
Contribution |
Margin |
|
|
|
|
Constant exchange rates |
Actual exchange rates |
|
£000 |
’000 |
% |
£000 |
£000 |
% |
£000 |
£000 |
% |
Commodities business unit |
7,149 |
2,898 |
40.5 |
6,063 |
1,639 |
27.0 |
6,129 |
1,646 |
26.9 |
Energy business unit |
5,964 |
757 |
12.7 |
6,375 |
1151 |
18.1 |
5,572 |
934 |
16.8 |
Recycling business unit |
2,491 |
864 |
34.7 |
2,214 |
381 |
17.2 |
2,405 |
409 |
17.0 |
Group total |
15,604 |
4,519 |
29.0 |
14,652 |
3,171 |
21.6 |
15,604 |
2,989 |
19.2 |
Amortisation of acq'd intangible assets |
|
(801) |
|
|
|
|
|
(806) |
|
Central and shared costs |
|
(2,278) |
|
|
|
|
|
(2,572) |
|
Operating profit before exceptionals |
|
1,440 |
|
|
|
|
|
(389) |
|
Add back: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
297 |
|
|
|
|
|
279 |
|
Amortisation of capitalised development |
478 |
|
|
|
|
|
488 |
|
Amortisation of acquired intangibles |
|
801 |
|
|
|
|
|
806 |
|
EBITDA (Brady definition) |
|
3,016 |
19.3 |
|
|
|
|
1,184 |
7.6 |
Deduct: amortisation of capitalised development |
(478) |
|
|
|
|
|
(488) |
|
Add back: share-based payments |
|
116 |
|
|
|
|
|
69 |
|
Adjusted EBITDA (Edison definition) |
|
2,654 |
17.0 |
|
|
|
|
765 |
4.9 |
Source: Brady. Note: H115 data shown in both H114 (ie constant exchange rates) and H115 exchange rates.
■
Brady Recycling – revenues slipped 3%, or 11% on a constant currency basis, to £2.4m. The licence component of the contract win with Sims Metal Management has been included in the H1 numbers, while significant services revenues are expected in H2. In July, it was announced that Sims, the world’s largest recycling company, had selected Brady to further support the management of its global recycling operations. The roll-out begins in Australia, where a previous version of Brady’s software is being upgraded, and is likely to lead to the first sale of Brady Recycling software outside Brady Recycling’s core North American/Australasian regions. This decision fits with Sims global strategy to consolidate operations onto a single platform, to provide better visibility, optimize efficiencies and facilitate decision making across the Sims group, The Brady solution, backed by its team of experts in the recycling space, will assist and support its key strategic goals; to streamline, optimise and grow. Through the implementation of a global solution, Sims will benefit from having enterprise-wide visibility, timely actionable financial reporting, efficient management of positions and opportunities across the group, along with standardised operational and audit controls. On the development front, a mobile (PDA) based hand-held inspection device went live, with the aim to target over 1,000 client sites.
Acquisition of ScrapRunner
Brady has acquired ScrapRunner for c $2m (c £1.3m) on an asset basis, involving a $1.8m initial payment, $100k after one year and $100k after two years. ScrapRunner provides GPS tracking systems designed specifically for the scrap metal/recycling industry. Based in Jacksonville, Florida, ScrapRunner has six employees. Brady Recycling had partnered with ScrapRunner over a number of years, so it knows the business well. ScrapRunner generated revenue of $2m in FY14, of which 62% was recurring, with an operating profit of $694k (c 30% margin), indicating a price of less than 3x historical operating profit. However, Brady intends to invest significantly in marketing, which will pull margins back significantly in the short run. The aim is to market the product more aggressively with the c 1,600 recycling companies in North America, and creates an excellent cross-selling opportunity for Brady, enhancing its offerings, enabling it to sell larger deals. Historically, ScrapRunner operated a traditional licencing model, but it is now shifting to a SaaS model. While this is relatively small acquisition, it highlights the potential to create value through acquisitions.
Outlook: Bookings ahead of plan and several deals at advanced stage
While H1 numbers were below target, this related to timing issues and H1 sales were good in light of market conditions, with bookings ahead of plan. Overall, the group has 80% of FY15 revenues in the bag, meaning it needs to find c £6m of new business in H2 to make up the difference. The group has a strong pipeline, and several significant new licence opportunities are at an advanced stage. As is typical with an enterprise software vendor, Brady normally has a high level of activity in Q4, including from customers using their budgets to purchase additional licences. Also, given the high development spend in recent years, the group has more off-the-shelf software, which does not require further development, and can be sold with 30-day customer acceptance. Hence, sales of this software has faster revenue recognition.
While some customers in the commodities sector clearly are suffering from lower commodity prices, Brady is not seeing any significant slowdown in its markets. These businesses have a continued need to invest and maintain their IT systems. Further, while falling commodities prices hurt producers, they are beneficial to traders and manufacturers who also purchase the group’s software. Additionally, falling commodity prices can force producers to drive through efficiencies, which can involve them upgrading or replacing their in-house software with Brady’s software.
Exhibit 3: H115 revenue breakdown by type, region and business unit
|
|
|
|
|
|
Forecasts: P&L maintained
We expect ScrapRunner to add c £0.4m revenues in the final four months of FY15, rising to £1.5m in FY16, with operating margins of 20%. We are conservatively assuming that the benefits from ScrapRunner are neutralised by FX movements, including the Norwegian krone, which has fallen by c 9% since January. Hence we are maintaining our P&L forecasts. We have added the $2m cost of ScrapRunner to the balance sheet, and amended for equity issuance and the dividend payment. We now forecast the group to end FY15 with net cash of £11.2m (previously £11.6m) which rises to £14.1m (£14.6m) a year later.
Revenue (£000s) |
2011 |
2012 |
2013 |
2014 |
2015e |
2016e |
Licence revenues |
3,394 |
6,357 |
4,031 |
7,541 |
7,800 |
8,138 |
Recurring fees (software rental, hosting and support) |
9,790 |
14,491 |
16,629 |
15,848 |
17,228 |
18,798 |
Services and development |
5,971 |
7,288 |
8,695 |
7,626 |
8,236 |
8,689 |
Group revenue |
19,155 |
28,136 |
29,355 |
31,015 |
33,264 |
35,625 |
Growth (%) |
72.3 |
46.9 |
4.3 |
5.7 |
7.3 |
7.1 |
Cost of sales (before dev cost capitalisation) |
(10,047) |
(11,466) |
(12,333) |
(11,850) |
(12,819) |
(13,394) |
Capitalisation of development costs (net) |
724 |
1,403 |
1,214 |
873 |
879 |
429 |
Gross profit |
9,832 |
18,073 |
18,236 |
20,038 |
21,325 |
22,660 |
Gross margin (%) |
51.3 |
64.2 |
62.1 |
64.6 |
64.1 |
63.6 |
Selling & administrative expenses |
(6,591) |
(13,149) |
(15,766) |
(15,019) |
(15,783) |
(16,367) |
Adjusted operating profit |
3,241 |
4,924 |
2,470 |
5,019 |
5,542 |
6,293 |
Operating profit margin (%) |
16.9 |
17.5 |
8.4 |
16.2 |
16.7 |
17.7 |
Growth (%) |
75.8 |
51.9 |
(49.8) |
103.2 |
10.4 |
13.6 |
Net interest |
68 |
64 |
29 |
58 |
40 |
80 |
Profit before tax (norm) |
3,309 |
4,988 |
2,499 |
5,077 |
5,582 |
6,373 |
Amortisation of acquired intangibles |
(616) |
(1,276) |
(1,613) |
(1,613) |
(1,613) |
(1,613) |
Share-based payments |
(269) |
(345) |
(313) |
(232) |
(275) |
(300) |
Exceptional items |
(326) |
(2,563) |
794 |
(2,011) |
0 |
0 |
Profit before tax |
2,098 |
804 |
1,367 |
1,221 |
3,694 |
4,460 |
Tax charge |
(162) |
(345) |
(250) |
(762) |
(837) |
(1,115) |
Profit after tax |
1,936 |
459 |
1,117 |
459 |
2,856 |
3,345 |
Adjusted EPS (p) |
5.8 |
6.1 |
2.8 |
5.3 |
5.7 |
6.3 |
P/E – adjusted EPS (x) |
15.6 |
14.7 |
32.6 |
17.1 |
15.7 |
14.4 |
Source: Brady (historic numbers), Edison Investment Research (forecasts)
