Back office optimisation software company eg solutions PLC (LON:EGS) is set to return to sales and earnings growth this year, according to house broker finnCap.
The year to 31 January 2016 was always going to be one in which the company invested for the future, and it started the fiscal year budgeting for a small loss; in the end, thanks to a focus on containing costs, it managed to eke out a small profit before tax of £9,000, versus a profit of £407,000 the year before.
Strip out share based payments of £98,000 (fiscal 2015: £46,000) and the pre-tax profit performance looks better still at £107,000 versus £453,000 the year before.
A decline in profits is not an outcome to be desired, but with the growth opportunities out there to be exploited, management took the decision to invest in the fundamentals of the business.
Revenue rose to £7.60mln from £7.54mln the year before, despite the previous year's turnover being boosted by one-off deals worth £1.1mln.
As finnCap pointed out, annual sales had been stuck at the £5mln range for many years but have now kicked on to clock in at more than £7mln.
Another encouraging signs for loyal shareholders was the improved margin on those sales. In the first half of the year, gross margin was 66% but improved to 77% in the second half, due to the high proportion of software licences sold.
As at 31 January 2016 net cash was £3.2mln, compared to £4.3mln a year earlier following investment in research and development of £1.4mln (2015: £0.85mln).
CHAIRMAN HIGHLIGHTS INCREASE IN ORDER BOOK AND RECURRING REVENUES
"We have had a solid year with a continued increase in our order book and a strong increase in recurring revenues. We have invested in our product and it remains the market leader. This lays solid foundations for the future and we will continue to work to develop our sales and marketing capability to deliver on the clear and substantial market opportunity," said Duncan McIntyre, the technology entrepreneur who counts chairmanship of payments specialist Monitise among his former gigs.
FOUNDER AND CEO SPEARHEADS DRIVE INTO NEW MARKETS
Elizabeth Gooch founded eg solutions and, with McIntyre's help, has rejuvenated the company since returning to the chief executive role, spearheading the company's drive into new sectors.
“We have traditionally targeted financial services in the main. We opened that up with business processing outsourcers, then moving into telcos [telecommunications companies] and utilities, and we continued that theme during the year,” Gooch told Proactive Investors.
The chief executive said the company aims for a gross margin of above 70%, so the strong second half, which pushed the margin for the whole year up to 72%, was an encouraging result.
THE COMPANY STILL LEADS THE SECTOR IT CREATED
The software company pioneered the office optimisation software sector and its heavy investment in research & development underscores its determination to remain the market leader.
In keeping with most of the software sector, the company is increasingly moving to a cloud-based model and catering for workforces where mobile devices – smartphones, tablet computers, et al – are part & parcel of the daily workflow.
The group invested significantly in its product set last year culminating in the launch in September 2015 of the eg mobile and eg forecasting products, both of which were received well, and which have opened up a number of new sales opportunities with new and existing clients.
Clients that use its forecasting, scheduling, real-time work management and operational analytics capabilities, are, when supported by eg's implementation and training services, guaranteed a return on investment in short timescales.
WHAT THE SHARE PRICE DID
Despite the company flagging up that this would be a year of little or no profit, the stock fell 3.2% to 50.83p on the results, giving it a market cap of £11.6mln.
HOUSE BROKER FINNCAP RECKONS THE SHARES ARE HALF THE PRICE THEY SHOULD BE
“The company delivered a strong H2 [second half] performance; sales up 13% YoY [year-on-year] to £4.0mln and software-driven gross margins at almost 80% saw a convincing return to profit of £0.4mln adj. PBT [profit before tax]. That wiped out the H1 loss and left a small but unexpected profit for FY 2016,” said finnCap, eg's house broker.
“Sales had been stuck at the £5m range for many years and are now well established at over £7mln; indeed, they would have been substantially higher this year but for late contract slippage into next year, as revealed in January,” the broker added.
“After a year of investment, with a healthy £3.2mln net cash balance, exciting new Forecasting, Mobile and Cloud offerings and with multiple contract wins from new and existing customers in markets from utilities to local government and financial services, contributing to a £17.4mln order book, we expect a return to sales and earnings growth this year and reiterate our 105p target price,” finnCap concluded.