K3 Business Technology Group (LON:KBT) saw its shares jump in mid-morning trading Monday after it reported a “significant” recovery in profits in its half-year results.
The AIM-listed software firm posted an adjusted pre-tax profit of £1.2mln, swinging from a £3.6mln adjusted pre-tax loss the previous year, while revenues climbed 2.5% to £41.4mln.
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The group also reported a jump in its gross margins to 52.2% from 46.8% the previous year, while gross profits rose 14.3% to £21.6mln, aided by substantially increased contributions from services and software licences as well as a streamlining of operations.
The turnaround is a big reversal of fortune for the group, which last year had to go to investors for an extra £9.2mln in extra funds after it failed to secure several “large” contracts which led to a significant downgrade in its revenue and profit expectations for that financial year and the instigation of a restructuring programme.
In its outlook, K3 said cash flows and profitability would be weighted towards the fourth quarter of the calendar year, driven by “traditionally very high” levels of software licence and support renewals.
Adalsteinn Valdimarsson, K3’s chief executive, said: "Increasing revenues from software products that we have developed in-house remains a core part of the Group's growth strategy, and we remain positive about sales prospects both for our existing products and our newer offering, Imagine, which we formally launched in the first half.
He added: "The second half is our stronger earnings period, reflecting the volume of software licence and support renewals in the final quarter of the financial year. It has started very encouragingly, with a healthy pipeline in place, and this, together with expected high renewals, gives us confidence that the Group will make further progress over the remainder of the year."
The turnaround in fortunes led City broker finnCap to up its target price for the group to 275p from 250p, saying that a Capital Markets Day (CMD) with presentations from major clients such as IKEA and the British Heart Foundation had proved customer appreciation of K3’s service offering in addition to “sustained operational reform and recovery”.
They added: “[T]he CMD reminded us of four core strengths in opportunity: 1) growth in IP related sales momentum, with 7..."ax | is fashion" [a K3 software product] deals signed in the period compared with 7 in the prior 17 months; 2) growth in global accounts, particularly IKEA and the IKEA franchisees; 3) growth derived from the ERP agnostic Imagine modular cloud platform launched this period but having won a major contract already; and 4) the combination of cost of sales / [operating expenses] / [capital expenditure] efficiency in delivering higher margins and cash flow.”
Shares in K3 were up 6.1% at 217.5p.