Rosslyn Data Technologies (LON:RDT)
High growth; cash flow breakeven this fiscal year
RDT’s proprietary software addresses a large growing market in data analytics. Its success is demonstrated by the historic (FY16E) exit sales run-rate being 80% higher than the installed base at the start of FY16. New business from new customers delivered circa £1m incremental revenue in FY16, 38% of the start FY16 contracted revenues. Contract sizes are growing and costs of new customer acquisition falling, so an inflection point has been reached operationally. Financially the key inflection point is the anticipated move to cash flow positive and profitable trading before the end of the current fiscal period in 2017.
► Strategy: RDT launched its ‘big data’ analysing software two years ago and sales traction is strong. FY16 was exited at £4.8m annual run rate compared to its start FY16 installed base £2.6m. It is still in cash flow losses, which we estimate turning to run-rate profits during FY17.
► Robust model: The model is SaaS, so, given the early stage and strong investment, break even before end FY17E is a solid achievement. Business wins are from the direct salesforce and from partners (Microsoft, PwC etc). Contract size is growing; pipeline timing improving and renewals 95%.
► Risks: This is a loss making business, revenues derived from its proprietary RAPid product. We estimate the balance sheet will comprise a modest amount net cash at the time cash flow turns positive. Contract wins follow development and other costs, however growing sales success starts to create a virtuous circle.
► Valuation: For a business with a disruptive product whose benefits are clearly measurable to customers and approaching cash flow breakeven within one year, a valuation near 1x sales is modest and below many in the peer group.
► Investment summary: Historic (FY16E) exit sales run-rate is 180% of the start FY16 installed base. RDT has disappointed market expectations in the past. This is far from uncommon in fledgling, disruptive technology businesses. This is now set on an established and more readily quantifiable growth path. SaaS structure heightens certainty of future income and growth is driven by a number of sources.
Executive summary
Rosslyn Data Technologies (LON:RDT) provides analytical services through a Cloud platform, delivered through SaaS. Its principal and dominant product is its RAPid platform.
This was developed from 2012 and fully launched in 2014, building on a six-year history at first analysing spend and costs data sets for customers. The business’ gross profits are rising well, now, with top line momentum now achieved. It is delivered in a financially highly predictable way, through SaaS (software as a service).
With customer numbers now rising significantly, on three year SaaS contracts, the visibility to cash flow breakeven inflection point later in FY17 is high, we consider.
The 38 customers at time of IPO (two years ago), now number 168. RAPid and its ancillary services provide the overwhelming majority of Group revenue. It solves client needs regarding interrogating clients’ analysis of the interaction with their own customers. What might have taken the customer’s IT department months to solve, the smart data technologies that sit on the RAPid platform enable users to reduce this time to a number of days.
The 1) service, 2) typical contract profile, 3) competition and 4) route to market are well established. See further analysis of each point, below and overleaf.
Financials: 45% run rate sales growth this fiscal year.
RDT exited FY16 at a revenue run-rate of £4.8m, we estimate. At this current run-rate, we estimate RDT (whilst investing significantly for growth) is loss making. We estimate revenue of £6.0m FY17E, with an exit run-rate of £7.0m. At this exit rate, the company would be generating profits. No development has been capitalised.
We estimate net cash £0.45m end April 2017 balance sheet, by which time cash flow will have turned positive.
Note the 5th May trading update, see page 11. New business from new customers delivered circa £1m incremental revenue in FY16. This is a healthy 38% of its £2.6m contracted revenues from the installed base at the start of FY16. Bear in mind this 38% (estimated) was achieved from part year contributions of those new customers. In FY16 in addition, we believe the revenue from existing clients over and above the start year run-rate was £0.2m. New client revenue added £0.6m annualised run rate as regards new clients won in the past six months. We anticipate the annualised run rate to be in excess of this from new clients won in the coming six months.
The opportunity: and how RDT addresses it.
The already large and growing size of the opportunity (US$16.5bn Gartner projected by 2018) and the superior functionality and value of RAPid are clear. As with most disruptive offerings, there is a cash outflow to surmount before any marketing and development invested generates returns. RDT is not running now at monthly profitability. The opportunity is the positive profile and sales RDT has established with many Fortune 500 clients whose ‘big data’ analytical requirements are huge.
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