Tuesday, 23 June 2009

Kewill Update

(By Philip Carnelley – Tuesday 23rd June 2009 9:45am). Kewill’s results briefing yesterday yielded some interesting trends behind the headlines (see Currencies help Kewill’s revenues but not margins).

First, excluding the £5.6m P&L charge from intangible amortisation (which, by the way, we view as part of the ‘real’ cost of growth by acquisition), operating margins crept up 40bps to 14.1%. However, this increase was mostly due to favourable currency exchange rates; at constant currencies (ccy), pre-amortisation margins were just under flat at 13.6%.

More interesting is Kewill’s transition to a recurring revenue model, particularly software as a service (SaaS). While new licence fees plummeted 38% in the year (46% ccy), SaaS was up 23% to overtake old-fashioned maintenance revenues and professional services as Kewill’s largest single revenue component at 32% of the total. In answer to our questions, CEO Paul Nichols commented that the company had had little difficulty in moving customers onto a SaaS model, as they liked the predictability and the lower upfront costs. For Kewill, the benefits come both from the recurring revenue and lower support costs.

Despite what he called “the most difficult trading conditions for 30 years” Nichols was optimistic about Kewill’s prospects, given the increasing revenue stability from the move towards SaaS. However, we are more cautious than he is about contract deferrals, which in our observation, often don’t maintain their expected value when (or indeed if) they eventually come through. However, new compliance legislation is working in Kewill’s favour, driving an 18% rise in sales (at ccy) in Germany.

Kewill is another example of an ‘industry survivor’, but like many peers has rather moved backwards over the past decade. A quick look at the 2000 Holway Report showed Kewill’s pre-tax profits at £7.2m on £60m revenues, some way away from this year’s £1.4m PBT and £53m revenues. But at least they are still around to fight another day.

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