A recovery in growth remains stubbornly elusive, with falling revenues and rising losses in line with our forecasts. SLI Systems is treading water from a momentum perspective. However, operational metrics provide signs of encouragement, with ARR increasing slightly, and a substantial uptick in client retention rates. As of H218, SLI will employ a more indirect sales strategy, which could improve uptake of the solutions available. Double-digit revenue growth and 10% margins would imply 20% upside.
The FY17 results reflected SLI’s current transitional state. Revenues fell 10% to NZ$32m, while losses before tax increased significantly to NZ$1.6m. Net cash decreased 17% to NZ$5.6m, though the rate of cash burn was substantially lower in H2 than in H1. Operational metrics were more encouraging, with the key annualised recurring revenues (ARR) and customer retention rates nudging up to NZ$31.1m in constant currency and 93%, respectively (FY16: NZ$30.1m, 86%).
Management is expanding its options for getting the SLI technology to market. This will be a two-step process: first, licensing and services revenues will be separated, thereby letting customers use the product without having to pay for maintenance; second, a new API will enable third parties (including channel partners, software resellers and integrators) to take up management of the SLI solutions for their customers. If successful, this should improve both scalability and adoption rates, though we do not expect to see the full effects until FY19.
At a mere 0.4x FY18e EV/sales, SLI continues to trade at an acute recovery rating, to the extent that it may become of a strategic interest. On a fundamental basis, the company clearly needs to return to generating positive earnings and cash flows to deliver upside. DCF analyses imply that the current depressed share price factors in sustained mid-term revenue growth of 10%, with matured EBITDA margins of 7.5%. A recovery to historical revenue growth with 12.5% EBITDA margins could generate more than 60% upside.