Business model – high recurring revenues
The company licenses its software in several ways:
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Volume based – either per erasure or per terabyte. Customers pay for a set number of erasures or a data volume limit upfront, and renew once this limit is reached. ITADs tend to buy per erasure licence, whereas customers erasing large quantities of data in data centres tend to prefer licensing by the terabyte.
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Subscription licensing. Customers are licensed for a set period of time. This is used by some enterprise customers, and currently only makes up a small proportion of revenues.
The company also generates revenues from professional services, although this is minimal. The chart below shows revenue growth since 2008 on a reported and organic basis.
Exhibit 9: Blancco revenues and growth rates, FY08-16
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Source: Blancco Technology Group, Edison Investment Research
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Contractually recurring revenues make up a relatively small percentage of revenues (subscription licensing), although a larger proportion of revenues are recurring in nature, ie customers use up their volume licences and return to renew. Blancco tracks customer retention by number and value over a trailing 12-month period. In H117, Blancco retained 92% of customers (H116 88%, FY16 91%) and 101% of revenues (H116 126%, FY16 113%).
The company reports revenues from two divisions: Erasure and Diagnostics. The company also reports invoiced sales on a more detailed level, splitting Erasure into Mobile, Active and End of Life.
Exhibit 10: Erasure invoiced sales (£m)
|
H115 |
H215 |
H116 |
y-o-y |
H216 |
y-o-y |
H117 |
y-o-y |
y-o-y constant currency |
Active |
0.2 |
0.6 |
0.9 |
350.0% |
1.4 |
133.3% |
1.1 |
22.2% |
11% |
Mobile |
1.2 |
1.4 |
1.8 |
50.0% |
1.9 |
35.7% |
3.0 |
66.7% |
44% |
End of life |
6.4 |
5.7 |
7.9 |
23.4% |
9.5 |
66.7% |
9.3 |
17.7% |
4% |
Total |
7.8 |
7.7 |
10.6 |
35.9% |
12.8 |
66.2% |
13.4 |
26.4% |
11% |
Reported revenues |
6.8 |
8.2 |
9.9 |
45.8% |
11.7 |
43.0% |
12.5 |
25.5% |
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Source: Blancco Technology Group
The table above shows the split of Erasure invoiced sales on a half-yearly basis. This includes all invoiced revenues, as opposed to only six months of subscription licences, so is generally higher than reported revenues, with the difference allocated to deferred revenues. This gives a better idea of growth rates by device/erasure type. While constant currency growth of 4% in H117 for end of life erasure appears low, the company noted that underlying product sales grew 22% in constant currency, whereas overall revenues show the effect of fewer professional services contracts in H117 (which the company is not actively seeking).
Cost base – headcount increases to moderate
Costs of sale are minimal, consisting of hardware costs and professional services staff costs. Gross margins in H117 reached 97% (FY16 93.1%). Operating costs are split roughly 50/50 between staff costs and other costs. The company hired sales and marketing staff in FY16 and H117 to grow the direct sales effort and to create a team to manage indirect sales, but does not expect to continue to hire at the same rate, particularly with its focus on growing the indirect sales channel. R&D and technical support staff make up a large proportion of headcount and should not need to increase materially from the current level.
H117 results confirm strong organic growth
The company grew revenues 43% y-o-y to £14.2m in H117 (constant currency growth 28%), with Erasure revenue growth of 26% (10% constant currency). The business did not consolidate the Diagnostics business a year ago – this made up 12% of revenues in H117. Adjusted operating profit of £3.6m equates to a margin of 25.3% (H116: 27.6%, FY16 27.2%). Management confirmed that it expects to meet consensus forecasts for FY17 (revenues c £32m).
On a divisional basis (ie before central costs of £0.8m), the Erasure division reported an adjusted operating margin of 32.7% (H116 35.4%, FY16 35.1%), and the Diagnostics division reported a margin of 19.0% (up from 1.8% in H216). The company incurred exceptional costs of £0.3m for restructuring, £0.2m in defending a patent, and £1.3m for acquisitions. Blancco reported an adjusted EPS of 3.90p (continuing operations only) and reported EPS of -7.95p (including the loss from discontinued operations of £2.4m). The disposal of Digital Care in September 2016 was reported within discontinued operations; we do not expect any further impact on financials.
Forecasts – strong profitable growth
Exhibit 11: Divisional forecasts (£m)
|
FY16 |
FY17e |
FY18e |
FY19e |
Year-on-year growth |
FY17e |
FY18e |
FY19e |
Erasure revenues |
21.66 |
27.60 |
33.12 |
38.09 |
27.4% |
20.0% |
15.0% |
Diagnostics revenues |
0.73 |
3.82 |
4.78 |
5.73 |
425.0% |
25.0% |
20.0% |
Total revenues |
22.39 |
31.42 |
37.89 |
43.82 |
40.3% |
20.6% |
15.6% |
Erasure adjusted operating profit |
7.59 |
8.92 |
10.87 |
12.82 |
17.4% |
21.9% |
17.9% |
Diagnostics adjusted operating profit |
0.01 |
0.65 |
0.86 |
1.15 |
N/A |
32.4% |
33.3% |
Central costs |
(1.52) |
(1.67) |
(1.83) |
(2.02) |
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Total adjusted operating profit |
6.09 |
7.90 |
9.89 |
11.95 |
29.7% |
25.3% |
20.8% |
Erasure adjusted operating margin |
35.1% |
32.3% |
32.8% |
33.7% |
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Diagnostics adjusted operating margin |
1.8% |
17.0% |
18.0% |
20.0% |
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Total adjusted operating margin |
27.2% |
25.1% |
26.1% |
27.3% |
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Source: Blancco Technology Group, Edison Investment Research
In FY17, we assume continued strong organic growth in the Erasure division, boosted by positive currency effects and a small additional benefit from a full year of Tabernus revenues (acquired September 2015). In FY18 and FY19, we forecast double-digit organic growth, driven by growth of mobile and active erasure. The Diagnostics division was consolidated from January 2016. We factor in the fully ramped up US MNO contract in FY17 and assume additional smaller contract wins in H217, FY18 and FY19. Based on the H117 margin achieved by the Erasure division, we have assumed a small increase over FY18 and FY19, although margins remain below the levels achieved in FY15 and FY16 (>35%). The Diagnostics division reached a margin of 19% in H117. We have taken a cautious approach to margins for this division – if Blancco manages to win more contracts similar to the large US MNO contract, there could be material upside to our forecasts.
Capex – development costs and software
The majority of capex arises from capitalising development costs, with smaller amounts for tangible assets and software used internally. We forecast total capex of £2.85m in FY17 and £2.75m FY18, including capitalised development costs of £2.0m in FY17 and £2.1m in FY18. By the end of H117, the company had capitalised a total of £4.6m of development costs, with accumulated amortisation of £1.2m.
Acquisitions – earn-outs and minority interest buyouts
The company has deferred and contingent consideration outstanding for three acquisitions: Blanco Sweden – £1.1m payable in H217; Tabernus – $2m/£1.6m payable in FY19; and Xcaliber – £1m payable in FY17, £1m payable in FY18 and £0.9m payable in FY19.
The company has also been actively buying out minority interests (Exhibit 12). The two largest joint ventures are Mexico (now 70%) and Japan (51%). Combined, these make up c 30% of revenues. The company is unlikely to increase its stakes in these two investments any further, as its partners are crucial to the success of the ventures. The material contribution from these investments explains the large minority interest deduction.
Exhibit 12: Minority interest buy-outs
Date |
JV |
Increase in ownership |
Cost |
Paid when |
Aug-16 |
Blancco Australia |
From 51% to 100% |
A$0.1m/£0.1m |
H117 |
Sep-16 |
Blancco SEA |
From 51% to 70% |
$0.2m/£0.2m |
H117 |
Oct-16 |
Blancco France |
From 51% to 100% |
Up to €0.2m |
€0.1m H117, €0.1m H118 |
Feb-17 |
Software Blancco SA de CV Mx |
From 51% to 70% |
$1.2m/£1m |
£0.5m H118, £0.5m H218 |
Feb-17 |
Blancco Canada |
From 51% to 100% |
C$0.2m/£0.1m |
H217 |
Source: Blancco Technology Group
Working capital depends on licence terms
On smaller volume-based contracts or subscription contracts, Blancco tends to receive cash upfront. However, as Blancco is selling more to large enterprises, extended payment terms are becoming more common. This is particularly evident at the end of H117, where trade debtors were inflated by an amount of £2.2m owing from one customer (a contract with the Mexican government where Blancco is sub-contractor to IBM). The company expects to receive payment in Q417. We note that operating cash flow includes outflows of £10.9m in FY16 and £1.9m in FY17e for discontinued operations (reported within Exceptional & Other cash flows on p16).
At the end of H117, the company had net debt of £5.9m, made up of gross cash of £3.3m and £9.2m used of its £11.5m debt facility. The facility expires on 31 October 2019. We forecast that the company reduces this to £4.6m by the end of FY17. We forecast that the company will generate positive cash flow in FY18, reducing net debt to £0.3m by the end of FY18 and returning to net cash of £5.3m by the end of FY19.
The company has stated that it has a progressive dividend policy. The FY16 dividend totalled 2.0p. The company has announced a 0.70p half-yearly dividend and with a typical split of 1/3:2/3, we forecast a full year FY17 dividend of 2.10p (+5% y-o-y). We assume modest growth in the dividend in FY18 and FY19 (5% each year).