I agree that, if OCL continue increasing the portion of recurrent revenue as % of total revenue, this would smooth the difference between 1H and 2H profitability, albeit i am not sure how much further they can push it given they are now up to >60% recurring revenue, which seems to be about the level where the software providers top out - companies such as HSN, GTK, TNE etc. all quote recurrent revenue levels around that mark. There's always going to be a non-recurrent element to their revenue base as a nature of the business - where they are contracted to install a customized system, like the $10m IBM / DoD contract announced last year (and then, hopefully, the 2-year contracted revenue leads to many years of recurrent revenue as the DoD is a happy hostage to OCL's installed software and pays for upgrades, maintenance etc.). By the way, this contract-type revenue is structurally favorable to OCL (and other software providers) - the companies pay OCL upfront before the technology is developed, which is why there's a substantial liability on their balance sheet which is "work paid for not yet complete". Pretty nice cash spinner to have your customers pay upfront rather than in arrears....
A feature of the 1HFY17 guidance ($30m rev / $4.8m EBIT) is that it implies a cost base of $25.2m, which is a pretty big step up from where the cost base has been over FY15-16, i.e. $44m p.a. or roughly $22m per half year. I'll be interested to see where that cost base step-up has gone to - the split between growth in distribution and R&D expense growth will be interesting to see as it'll give some indication of the "firmness" of the result. Either way, it's a 16% operating margin - higher than OCL have ever done - so perhaps the business is nearing the turning point where growth in revenues will exceed growth in expenses, although that will largely be driven by management's view on R&D.
Running through FY17 outlook by division, where i broadly get to is as follows - this broadly corresponds with my prior post:
- Keystone: Requires ~$5.5m revenue to break even, given FY16 cost base was $5.4m. 1HFY17 revenue guidance of $2.8m, plus momentum of recent contract wins, will probably see this division turn a smallish profit in FY17 - if they can do $3.2m in 2HFY17 (shouldn't be hard given annualization of contracts signed recently), that gives $6m total revenue on ~$5.5m cost base, i.e. $0.5m profit. The cost base could also come down here as well as management has noted that the cost to acquisition should come down now that the hard work winning the initial financial industry customers has been done.
- Connect: The $0.7m 1HFY17 revenue potentially looked a little soft to me, because they exited FY16 with a June 2016 ARR of $1.4m according to their AGM presentation, meaning that with no new Connect subscribers, they should be doing $1.4m in FY17. What i think may be going on is that the revenue is recognised primarily in the second half, so i'd expect a big skew here and perhaps $1.8-$2m revenue in FY17, which on a ~$3.7m cost base (FY16 cost base) is a $1.5m loss.
- Trapeze: Annualisation of $0.2m for four months' contribution last year is $0.6m this year.
- ECM: Obviously the big swing in the business, and needs to make ~$12.5m EBIT on its own to get the whole business to the ~$12m FY17 i expect. Obviously off to a great start given $25m 1HFY17 revenue (vs. $20m in 1HFY16), which i suspect in part is driven by the IBM/DoD contract work ($10m over 2 years is a big deal) and partly by upgrades of other customers to the newly launched system. FY16 EBIT here was $9.6m and i expect them to need roughly $12m extra revenue at 25% margin to generate the $3m extra EBIT required to get to the $12.5m divisional EBIT, which implies $7m than 2HFY16, or $23.4m+7 = ~$30m revenue. I don't think that's unreasonable given the underlying seasonal skew toward 2H in any event.
We shall see...
OCL Price at posting:
$2.10 Sentiment: None Disclosure: Not Held
(20min delay)
