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Lombard Risk Management plc: THE INVESTMENT CASE

Lombard Risk Management unlocking revenue

The top line was driven primarily by the strong growth of the company's Risk Management and Trading Software Division
Lombard Risk Management unlocking revenue
INVESTMENT OVERVIEW: LRM The Big Picture
The company develops risk management solutions for the financial services industry

The turnaround at risk management and collateral solutions provider Lombard Risk Management PLC (LON:LRM) is going even better than expected, despite hitting a speed bump in 2017.

In April, it raised guidance on revenues, underlying profits and its cash position, and in May, the numbers confirmed the improved performance.

WATCH: Lombard Risk confident of converting record pipeline of opportunities in second half

Turnover in the 12 months to 31 March of £34.3mln was up 44.8% from £23.7mln the year before and at the upper end of its revised guidance range of £34mln-£34.4mln.

All companies are chasing recurring revenues these days, but especially software houses and technology platform providers, and encouragingly Lombard saw recurring revenue rise 21.0% to £12.4mln from £10.2mln the year before.

There is clearly life left yet in the old licence-based model, however, as revenue from new licences and renewals soared 113.7% to £11.6mln from £5.4mln the year before.

Underlying earnings, or EBITDA, came slap bang in the middle of the revised guidance range at £2.6mln, up from £2.1mln the year before.

The provider of risk management software to the financial services industry said the top line was driven primarily by the strong growth of the company's Risk Management and Trading Software Division.

READ: Lombard Risk Management house broker leaves forecasts unchanged despite "surprisingly challenging" first half

After an excellent fiscal 2016/17, the first half of the current fiscal year proved to be "challenging".

Revenue in the six months to the end of September fell 16.4% to £12.7mln from £15.2mln in the same period last year, mostly because of a temporary fall in services revenues and some delays in the signing of new contracts.

The decline in revenues meant underlying earnings, or EBITDA, turned negative at £3.5mln after a positive out-turn of £1.5mln the previous year.

Despite that, management left full-year guidance unchanged. "Converting our strong visible pipeline will be crucial to us meeting market forecasts," said chief executive Alastair Brown.

"However, with the size and quality of our pipeline at an all-time high, we remain confident this can be achieved. During the period strong foundations have been put in place, with an improved salesforce, a new development centre in Birmingham, and a renewed effort to target new business as well as extant cross-selling opportunities. We expect delivery of a strong second half will enable the company to meet its stated objectives of being cash generative."

The target is to achieve cash profitability within two years of the fund-raising

After raising £8.3mln via a placing and open offer of shares, Lombard was able to plough money into its core products as well as funding a development centre in Birmingham.

"The Lombard Risk two-year plan to achieve cash profitability was predicated on unlocking revenue growth by investing in both product and employees,” said chairman Philip Crawford.

The company's cash management has been “particularly encouraging”, following the focus on debt collection and working capital management, he added.

Broker backs-up management's confidence

In a note to clients on Lombard Risk, Lorne Daniel at house broker finnCap said: “It is important that the operational accomplishments over the last 18 months are not lost in the gloom of an under-performing half: sales have moved up to a different level since 2016; operations are now truly global with growing success in Asia; a new development centre has been set up; and a partnership has been formed with Oracle."

Previously, the broker had observed: “The new management team has more than delivered in the first of the two year plan to transform LRM into a profitable and cash generative, leading-edge software supplier to the global financial services industry. That plan is predicated on the belief that development costs were not too high for the size of business, but rather the business was too small for the proper investment required to develop regulatory and compliance solutions for Tier-1 banks.”

Funds raised are being used to step up sales to a more sustainable level, finnCap, asserted, and this, in the broker’s view, will allow the operational gearing of a software business to deliver profit and cash.

Agile product

The company is a market leader in bank regulatory reporting software, while it also has a second string to its bow with its collateral management offering.

Its flagship AgileREPORTER product enables the company to keep the regulators and compliance officers happy, while also providing key information for company management.

“You don’t win gold medals for being brilliant at regulatory reporting, but you could be put out of business for not doing it correctly and in a timely fashion,” chief executive Alastair Brown told Proactive Investors in an interview last year.

Collateral management

Turning to collateral management, it is simply the process of monitoring, tracking and valuing the funds put up as collateral for a trade, such as highly geared derivatives position.

The Lehman collapse of 2008 revealed how financial institutions are bound together and affected by default on these often huge transactions, and also how woefully monitored the transactions were.

So, the push since then has been to tighten up the processes with technology such as Lombard Risk’s.

Lombard’s COLLINE product has one major competitor, but Brown said that in many cases the true competitor is each bank’s in-house system.

The big theme this year has been industry partnerships, such as: a hook-up with Smart Communications to combine the pair’s market-leading software offerings to provide an integrated documentation and asset tracking package; an alliance with Elixium on an integrate repo solution; and a partnership with DTCC-Euroclear Global Collateral Ltd to drive further improvements in collateral management operations.

The year is not yet done, so expect more of these deals, as the company seeks to embed its platforms in the workflows of more customers.

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Lombard Risk Management plc Timeline

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