Vislink has announced that FY16 performance will be materially below previous estimates because of weakness in the hardware division (VCS). Management has instigated a restructuring of this division, accelerating the transformation of the group into one where two-thirds of operating profits are derived from software activities. Progress executing this transformation should prompt a partial recovery in the share price.
VCS division underperforming
VCS sales during H116 were below management expectations for a combination of reasons discussed later, which were specific to this division. Management expects this divisional underperformance to continue into H216. In addition, H116 sales from the software division, Pebble Beach Systems (PBS), were below management expectations, though since this was related to contract decisions slipping from Q2 to Q3, and activity levels are strong, management expects the division to meet its expectations for the full year. We revise our estimates accordingly.
Acceleration of transition to software and services
Recognising structural changes in the global broadcast industry management had already prioritised investment on PBS and cut VCS costs. In response to the H116 issues, management is substantially accelerating this transformation, initiating a radical restructuring of VCS and streamlining the hardware product portfolio. This is expected to result in annualised cost-savings of £1-2m (we model £1.0m, primarily benefiting FY17) and a £6-9m non-cash impairment of IP and write-down of inventory (we model £8.0m total exceptional costs, falling in FY16). Management is also reviewing the dividend policy with a view to conserving cash.
Valuation: Post restructuring upside
We expect the group to emerge in a much better shape following the extensive VCS restructuring. With a greater proportion of revenues derived from the software division, the group should benefit from higher gross margins, better earnings visibility and better cash conversion. Crucially, investment will be focused on those sectors which are actually benefitting from the cost pressures affecting the global broadcast industry, ie, software for broadcast contribution and hardware for IPbased content transmission over private networks. Newsflow confirming that the restructuring programme is succeeding should prompt a partial recovery in share price to our indicative value of 22p (previously 54p).