SLI’s results reflect the business’s transitional status. Substantial savings were made to sales and marketing expenditure, which underpinned the company’s first year of profitability. We continue to forecast margin compression in the near term as the business begins its transition to an indirect sales model. Successful implementation of this shift remains the critical determinant of the business’s prospects.
Boosted by a stronger US$, FY18 revenues rose 7% y-o-y to NZ$34.4m, while the business continued the process started at the interims of aggressively cutting operating costs, which saw a 10% y-o-y reduction to NZ$30.3m. The result was a swing in reported PBT from a NZ$1.6m loss in FY17 to a NZ$4.1m gain in FY18, the first full year of profit since the company’s listing in 2013. Reassuringly, the improved income statement translated into a NZ$3.5m cash boost to the balance sheet, leaving the business with NZ$9.1m net cash at period end.
In addition to introducing 2020 forecasts, we have left our FY19e revenues broadly unchanged. However, we have reduced our operating costs to reflect the cost reduction programme over FY18, although we note that we still predict increases to opex over FY19e and FY20e as the business undergoes its shift to an indirect sales model. As a result, our FY19e EBIT has increased 32% to NZ$2.2m, before falling to NZ$0.8m in 2020e.
SLI’s prospects are now tied to the successful execution of the transition to the selfservice API (application programme interface) sales model. While the company expects to launch the new products this fiscal year, the continued lack of visibility over growth and cost assumptions is weighing heavily on the shares. While at an acute discount to peers on FY19e figures, the anticipated margin erosion means that the (EV/EBITDA and P/E) discounts dissipate when looking further out. Nevertheless, a 0.4x EV/Sales multiple for FY19e and FY20e means that successful execution of the imminent transition could unlock significant value.