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

"The quality of the contract pipeline is now completely different," CEO Alastair Brown told Proactive Investors, after management made critical changes to the leads generation process

Compliance jigsaw
The global pipeline is up 44% since the beginning of the financial year.

Lombard Risk Management PLC (LON:LRM) will need to pull out all the stops in the second half to meet full year expectations.

With a record pipeline of prospective new business, management is confident that it can make up lost ground after a challenging first half for the global provider of collateral management and regulatory reporting solutions. 

READ: Lombard Risk Management unlocking revenue

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

Annually recurring revenue continued to rise, however, climbing 4.9% to £6.4mln from £6.1mln the previous year.

Sales bookings for the period were down 21.9% on the previous year, with software licence bookings down 63.6%.

The order book of contracted revenue was unchanged at £9.2mln.

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.

Losses before tax widened to £5.9mln from £0.1mln.

Cash at the end of the period was £0.4mln, down from £6.9mln from a year earlier, reflecting the significant investment the company has made in the business.

READ: City broker says Lombard Risk is undervalued as it kicks off with a ‘buy’

Speaking to Proactive Investors, chief financial officer Nigel Gurney said the company had plenty of headroom with a completely untapped banking facility of £4.5mln.

He also noted that “cost mitigation” initiatives will start to feed through in the second half of the year.

Alastair Brown, chief executive officer of Lombard Risk, said: "We recognise that this has been a challenging first half for Lombard Risk”.

“A number of opportunities we had hoped to secure in the period remain in the pipeline as market distractions such as MiFID II caused companies to delay on committing to new projects. This leaves us much to do in the second half, and converting our strong visible pipeline will be crucial to us meeting market forecasts,” he said.

"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 sales force, 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. We believe this positions Lombard Risk well for the future and we look forward to updating the market on progress during the second half of the financial year,” he added.

Lessons from first half

Speaking to Proactive Investors, Brown said some hard lessons had been learnt in the first half, and conceded that the company had been too focused on converting existing pipeline opportunities and had not been building up the new business pipeline.

“We've had to rethink the way we build lead pipelines. We've industrialised lead generation and are now achieving lead generation in a sustainable way,” Brown said.

Asia was the first region to benefit from the changes, as management had been aware of problems coming down the turnpike, and the Asia franchise “is now firing on all cylinders”.

“We've won our first mandate with a Taiwanese bank, and we've broken into Australia, where we've been working with industry participants ahead of the new Australian Prudential Regulatory Authority regulations due to come in force,” Brown said.

Europe has its own new set of regulations on the way in the form of MiFID II, the EU's financial instruments directive, and although regulatory changes are generally good news for a company whose product helps clients navigate the regulatory minefield, MiFID II appears to be a double-edged sword for Lombard, with companies delaying on committing to new projects.

Changes made in Asia are clearly paying off and the expectation is that management initiatives will pay off similarly in North America and EMEA (Europe, Middle East and Africa).

“The business is always second half weighted, but this year we need it to outperform the first half more than usual to hit our targets – a 32/68 split – but we've had years like that before,” Brown asserted.

House broker leaves full-year forecasts unchanged

House broker finnCap said the first half of the financial year was “surprisingly challenging” but noted that management has sufficient visibility and confidence in the pipeline to reaffirm guidance for the company’s full-year growth and profit expectations.

“A poor six months hampered by a fall in service revenue and contract delays does leave a mountain to climb in the second half, but the company feels it has sufficient momentum given the £9.2mln contracted order book and record pipeline to achieve a demanding target,” .finnCap's Lorne Daniel 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,” Daniel added.

In an interview with Proactive Investors' Andrew Scott, Brown said the fact that its partnership with Oracle unexpectedly failed to generate a contract win for its flagship AgileREPORTER product in the year was “very disappointing”.

Brown said it has a great relationship with Oracle, but collaboration with such a huge partner effectively means the junior partner becomes hostage to the other partner's business cycles and Lombard “had effectively lost a half-year” in North America as a result of this.

In keeping with the board's own guidance, finnCap left its forecasts unchanged for the current year.

Shares in Lombard plunged by a third in the morning trading session on Wednesday.

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Lombard Risk confident of converting record pipeline of opportunities in...

Lombard Risk Management plc's (LON:LRM) Alastair Brown and Nigel Gurney tell Proactive they'll need to pull out all the stops in the second half to meet full year expectations. With a record pipeline of prospective new business, management is confident that it can make up lost ground...

on 25/10/17

5 min read