Prodware is making progress with its strategy to refocus the company on profitable business lines and cloud-based solutions. This is reducing revenues in the short term but should ultimately result in higher recurring revenues and more sustainable profitability. We have revised our forecasts to reflect current trading and the transition to subscription-based revenues. On our reduced forecasts, Prodware continues to trade at a discount to peers; growth in recurring revenues combined with margin expansion should start to narrow this discount.
Prodware reported H116 revenues 7.2% lower than a year ago (5.3% in constant currency), reflecting the disposal of a business, weaker bookings in France and the transition to SaaS-based business. Lower staff costs helped maintain the EBITDA margin, although higher amortisation resulted in a 29% decline in EBIT y-o-y. The Q3 revenue update confirms that while 9M16 revenues declined 7.3% y-o-y, SaaSbased revenues continue to show strong growth.
With the logistical problems that negatively affected demand in France in H116 substantially resolved, the company expects to see better order intake in H216. We have reduced our FY16 and FY17 revenue forecasts to reflect H116 trading as well as the company’s conscious effort to move away from unprofitable business lines. We have also lowered our staff cost assumptions, which reduce the impact of lower revenues on profitability. After factoring in higher net interest expense on the restructured debt, we reduce our normalised EPS forecasts by 51% in FY16 and 63% in FY17.
Even after our reduction in estimates, Prodware trades at a discount to peers on all metrics. In our view this reflects its higher gearing and the impact of its transition to a subscription-based business model. While this transition is likely to weigh on profitability in the short to medium term, it should result in a business with a higher level of recurring revenues and more sustainable profitability, and in time should enable Prodware to trade at multiples closer to its peer group.