SLI Systems had a strong half in the six months to 31 December 2015, with annualised recurring revenue growing 23% (10% on a constant currency basis) to a record NZ$35.6m. Significantly, gross margin increased to 76.4% from 74.7% year-on-year (y-o-y), while the retention rate by value remained steady at 87%. SLI has mapped out a pathway to profitability, noting that it had been cash flow neutral in the first half and that its NZ$5.6m cash on hand was sufficient to bring the company to cash flow break-even.
SLI Systems delivered record annualised recurring revenue (ARR) of NZ$35.6m despite some challenges in the Americas, which account for 64% of revenues. On a constant currency basis, ARR grew 10%, with the 34% generated by the AsiaPacific and European markets offsetting the flat result from the Americas. The company also delivered a record post-IPO gross margin of 76.4% as it managed its costs in the period. SLI recorded neutral net cash flow for the six-month period, but noted that there may be further cash outflows in subsequent periods as it continues its growth objectives.
CEO Chris Brennan has laid out some clear near-term business objectives including returning the Americas to growth and fine-tuning the sales processes, improving the retention rate from current levels of 87% to historical levels of 90% and carefully managing costs so that the company reaches cash break-even with no additional capital required from investors. The recent appointments of Chief Revenue Officer Martin Onofrio and Vice President of Customer Success Gary Schaumburg are key to Mr Brennan’s strategy to increase new recurring revenue while lifting the retention rate and driving better sales growth in the Americas.
Despite recent share price strength, SLI is trading at a 48% discount to our DCF valuation of NZ$2.21/share (unchanged). If we were to apply SLI’s listed peers’ median EV/sales multiple of 2.2x, we would arrive at a valuation of NZ$1.61, which puts SLI at a 40% discount to its peers. A reverse DCF on the current NZ$1.15 share price suggests the market is pricing in an EV/sales multiple (12 months forward) of 1.5x and a compound annual growth rate of 16% for FY16 to FY21 revenues.