Results to end January 2016 confirm delivery against core strategic targets. A £3.1m equity issue in January 2015 funded investment in software, and in-house sales & marketing capabilities. That enabled eg to (a) launch significant enhancements to its product lines in September and (b) grow the order book across the year, with another £0.3m added in the last two months. That was driven primarily by direct sales, but the creation of new 3rd party partner channels is progressing to plan and could potentially contribute significantly to sales over the next two to three years.
Results summary: 35% growth in recurring revenues
Minimal headline growth concealed a material improvement in recurring revenues, which adds to earnings visibility and quality. Recurring revenues grew 35% y-o-y while the order book of multi-year contracts currently stands at £17.4m, to be recognised over the next four years. The growing base of recurring revenues stood at c £4.7m pa as at the end of the last financial year, supplemented by one-offs including implementation and training fees. The underlying performance of the direct sales team is reflected in 42% CAGR in recurring revenues over the last five years.
The statement drew attention to previously alerted slippage in sales specifically related to three contracts in various stages of completion, all still live and expected to complete this year. These had been expected to make up the shortfall from softer than anticipated contributions from the partner channel of which Aspect Software Inc. is likely to have been a material part. eg announced earlier this month that Aspect had sought bankruptcy protection in the US to give it time to restructure its finances. It reconfirmed that this will not affect earnings forecasts which incorporate only a modest contribution from this source. It (Aspect UK) is also a 9.5% shareholder in eg but has confirmed that it has no plans to seek to dispose of any part of its holding.
Valuation: well below intrinsic value
We maintain our view of intrinsic value at c. 100p/share based upon the operational leverage inherent in a combination of higher recurring revenues and recent shift to higher margin products, underpinned by the certainty provided by the order book. With costs under control and initial investment in product development broadly complete, that structure points to faster growth in adjusted profit and EPS. If we factor in the contributions from new relationships with outsourcers and 3rd party consultancies, we see potential for material growth in the bottom line by the end of the forecast period.