Cambridge-based software specialist Amino Technologies (LON:AMO) today put out a mixed trading statement today. The first part simply stated that profits would be lower (without reflecting this was a warning), but the good news was a reaffirmation that the dividend would not be cut and instead, be ‘committed’ to raising it by 10% this year. It’s fair to say the markets didn’t like this one jot: in early trading the shares were down by 30%, resulting in bad news for holders and a double blow as only last week it had given out an RNS of a contract win.
Amino is one of the more exciting companies in recent times to have given a profit warning. They develop and implement software used when one broadcasts TV over the internet, as well as selling IPTV set-top boxes. This is an segment which is seeing a lot of change: for instance the conversion of analogue to digital TV signals, as well as ever increasing internet speeds seeing computers replacing conventional TV sets (perhaps in the future the standard TV will just be a massive tablet, running a variety of apps, even ‘smarter’ than the current crop).
So it is fair to say that the potential market for Amino seems to be uncapped: if there is something that is universal to the world, it would be the TV and internet. Their business is mainly software, which is easily distributable. However, the downside of this seems to be volatility: there will always be a nagging doubt whether in these fast-moving times whether any advantage can be sustained: there are plenty of software providers out there, most ominously Netflex or Amazon, who are driving changes to the way TV is consumed.
That being said, Amino seems to have been a relatively solid performer unlike other technology shares: they report profits, and they also pay dividends. This also was a loved stock by the Stockopedia algorithms, scoring 98 at one stage (although this has dropped back somewhat. It has been a rather bumpy ride for owners,
The company haven’t stated this as a warning, just put out the following statement:
Amino expects adjusted profit before tax for FY2018 to be c.$11.5 million, reflecting an intensification of external macroeconomic headwinds. This has resulted in lower than anticipated orders and higher than expected component price increases in the second half of the year.
Profit before tax for the previous year was $11.2m so this represents a rather small increase. Given that profits have been growing at an average rate of nearly 25% over the past 6 years, this is no doubt a disappointment especially considering the sector we are in.
‘External macroeconomic headwinds’ are elaborated on next:
We have seen customer decisions on orders delayed in the second half because of instability in the economies of certain emerging markets in which we operate, planned trade tariffs in the US which although do not yet impact Amino’s products directly, have created confusion among our customers, and the diversity and depth of change in the industry. In addition, we expect component prices to continue to increase in the near future.
There was some good news, depending on how you look at it:
Cashflow remains strong and net cash at 30 November 2018 is expected to be higher than at 31 May 2018.In spite of the external market headwinds facing the Company in the short term, the Board maintains its current commitment to increase Amino’s dividend by no less than 10% for the full year. The Board also intends to maintain the FY2018 dividend level in absolute terms for a further two years at least.
It was not specified how what this level of cash is, although one may have a good guess. The dividend policy also is generous and could represent a decent yield at the current price, although an intention is not the same as a guarantee.
As mentioned before this has the makings of a good business, historically at least. They are making genuine profits and also accruing cash: it is not a case that everything (and more) has to be spent. The company is debt free, and the cash is slated to be higher than May 18, assuming flat profits the figure for year-end may be around the $18m mark, which is fairly significant compared to the valuation. The figure however is lower than a few years ago, before it made acquisitions.
Net tangible assets are still positive, although there is a heavy amount of intangibles on the balance sheet, ranging from goodwill, trade names, customer relationships. A large amount of research and development costs have been capitalised, but given the proprietary nature of the software this is unsurprising.
There seems to be no danger to the business in the short-term.
No doubt the heavy drop here is motivated by fear. On one side, the business is a good one: it has a formula that is making it money, an increasing cash balance, as well as a theoretical global product. The drop here takes the price almost back to a 2-year low. On valuation terms it doesn’t appear expensively priced, and operationally there would have to be a large decline if the board wants to start tampering with the dividend.
One of the bigger problems is the lack of certainty about what might play out in the next few years. ‘External macroeconomic headwinds’ is not really that much of a help and is a broad description with few specifics. It could be argued that television itself could be a beneficiary of failing economies around the world, and especially IPTV: a lower amount of disposable income makes television watching a more popular activity (which is free), and subscriptions to premium packages are seen as a discretionary spend.
What might be unwritten here is the scale of competition and the nature of changes in the industry. It is quite conceivable that in 10 years time from now (or fewer) people would laugh at the necessity of a set-top box, with everything being built into the TV itself. For instance, an Amazon Fire Stick can hook up to any TV and deliver content that was unthinkable a few years ago.
In part Amino are mitigating this, as their software replicates the box, and they work with cable companies in order to provide the end product to the consumer in a way that protects their own identity, something that perhaps would not be possible by going with a bigger company such as Apple or Amazon.
The big challenge for Amino is staying relevant: it could well be that Apple and Amazon get further penetration into the paid-for TV segment, which then negates the need for any Amino software. In that respect success also depends on the cable companies to be compelling. Clearly Amino can be a big part of that, and if they do they could be a massive success.
Sitting on the fence somewhat, as I don’t have an inclination to where TV might lead us, apart from being increasingly technologically sophisticated. My gut feeling is that this will benefit Apple and Amazon slightly more as they have greater synergies with their other products. 3/5.