TXT reported a small year-on-year revenue decline for Q116. While TXT Next showed continued growth, TXT Perform saw delays in the signing of new licences, resulting in a decline in revenues. This was offset by reduced operating expenses. Management sees a more positive outlook in Q2 and maintains expectations for FY16. We leave our forecasts substantially unchanged.
In Q116, TXT reported revenues of €14.4m, a small decline of 1.9% from a year ago. The company noted that customers in the fashion and luxury goods markets delayed or rescheduled new licence agreements, leading to TXT Perform revenues declining 8.3% y-o-y. Licensing and maintenance revenues were down 16.6% y-o-y and we estimate TXT Perform services revenues were down 2% y-o-y. Conversely, TXT Next grew 7.4% y-o-y in Q116, following on from growth of 14% in FY15. The company noted TXT Next won new international customers in Q1. The higher proportion of services revenues reduced the gross margin to 49.3% from 51.6% a year ago. Well controlled operating expenses resulted in EBITDA of €1.4m, marginally down from €1.5m reported a year ago. The high level of trade receivables outstanding at end FY15 reduced as customers paid invoices in Q1, resulting in net cash moving up to €13.7m from €8.3m at year-end.
The company is already seeing a more positive trend in Q216, and maintains its expectations for FY16. The PACE acquisition within the TXT Next division completed as planned on 1 April; this has already been factored into our estimates. Other than factoring in the put/call option in place to acquire the remaining 21% of PACE in 2020/21, our forecasts are substantially unchanged.
TXT trades on a P/E of 16.3x FY16e and 15.0x FY17e based on normalised EPS. This is a discount to global supply chain software vendors and a small premium to European IT services companies, which is reasonable considering the current split of the business. Even after acquiring PACE, we forecast a strong net cash position and a dividend yield above 3% for FY16 and FY17. If TXT is able to successfully integrate and grow the PACE business as well as sell TXT Next’s existing services to PACE’s international customers, we see scope for stronger growth in TXT Next and margin enhancement. For TXT Perform, key growth drivers include the North American business and the recently established Asia-Pacific operations.