Expert System — Laying the foundations for growth

Expert.ai (MI: EXAI)

Last close As at 21/11/2024

1.51

−0.10 (−6.21%)

Market capitalisation

79m

More on this equity

Research: TMT

Expert System — Laying the foundations for growth

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.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Expert System

Laying the foundations for growth

H120 results

Software & comp services

1 October 2020

Price

€2.30

Market cap

€116m

Net cash (€m) at end H120

3.8

Shares in issue

50.4m

Free float

75%

Code

EXSY

Primary exchange

AIM Italia

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(15.3)

(23.6)

(21.3)

Rel (local)

(12.8)

(22.5)

(9.2)

52-week high/low

€3.43

€1.52

Business description

Expert System has developed and patented an AI-based technology platform that extracts useful information from unstructured text using a unique mix of natural language understanding and machine learning algorithms and applies it to verticals such as enterprise search, customer experience management and big data analytics.

Next events

FY20 trading update

January 2021

Analyst

Katherine Thompson

+44 (0)20 3077 5730

Expert System is a research client of Edison Investment Research Limited

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*
(€m)

EPS*
(c)

DPS
(€)

P/E
(x)

EV/Sales
(x)

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


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Level 4, Office 1205

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NSW 2000, Australia

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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