Supply-chain software specialist Sopheon (LON:SPE) suffered a large fall in its share price today as it revealed that contract delays alongside a change of focus trimmed half-year revenues to $13.7m to $15.9m a year before. The share price reaction to this was interesting: initially opening at 650p, there has been a marked recovery since:
The share price is still rising, and almost touching 790p an hour after the photo was taken, so anyone who bought in immediately would have seen some excellent gains. On the whole however, this behaviour would not guarantee you a profit. As our result show, even buying in at the absolute low point of the first hour (which would require a time-machine in reality) would see you ahead by a measly 0.86% (making the assumption that dividends and buying fees cancel each other out).
In the bigger picture, Sopheon’s share price has massively increased over the past year and a bit, going from around 350p at the start of 2018 to 1350p inside of a year. Since reaching that high, it has been a story of slow decline. As with most technology shares that are growing, it has been very expensive to buy.
Sopheon really is a business for the times. A software producer which specialises in product portfolio management, it uses a proprietary platform called Accolade to house various tools to organise information which may be of help to decision makers in organisations. It’s success is most evident by the very large number of big companies that have signed up to use its services.
This comes in a morning RNS ‘Trading Update’. We cut to the bad news straightaway:
The Board expects first half revenues to be approx. $13.7m compared to $15.9m in 2018. As we have always stated, our licensing model has been predominantly perpetual and consequently the precise timing of deal closure plays a significant role in periodic revenue recognition. Our sales pipeline includes a large number of opportunities where we are strongly positioned and that we remain confident have a high probability of closing in the balance of the year.
For a growth company, any slowdown is likely to be perceived poorly for the market, no matter how much ‘jam tomorrow’ is given with it. This is made worse by the fact that only a month ago they put out a statement re-iterating their confidence in meeting expectations.
The delays are quantified into profits:
The delay to some of these licences has been reflected in profitability for the first half. EBITDA for the first half is expected to be approximately $2m (2018: $4.1m).
And also for revenues:
Accordingly, the Board believes that revenue for the full year will be at similar levels to last year. To reiterate, the Board believes this shift reflects a change to procurement behavior and the associated revenue recognition, rather than a change in expected commercial momentum. Our strategic shift to a SaaS model will drive recurring revenue and shareholder value, and the Board remains confident that Sopheon is well positioned to deliver on the long term opportunity.
An updated brokers note (available on Research Tree) agrees with this, and estimates revenues at $33.5m (vs $33.9m a year before). With visibility of revenue for the full year at $24m, there is not much scope for more delays, otherwise we could be facing another profit warning in a few months citing the same reasons.
There is a lot to like about Sopheon: as it rightly points out it is a mature business. Its revenues are growing at a sustainable clip and it is consistently profitable:
Note how today’s warning clips the growth forecast to zero for this year, and profits also decline. But in a very basic sense, their margins are very good and they generate real cash, which has contributed to an increasing cash pile, which is now starting to be paid out to shareholders with a progressive dividend policy. The free cash flow per share last year was 72 cents, which absolutely dwarfs the payout, so there seems little reason to think why this dividend is in any type of danger, especially if the company continue their growth after the blip.
All is also well on the balance sheet. There is no net debt, and a surplus cash balance on the books. With a lack of big acquisitions, there are also few intangible or goodwill balances existing here, and thus tangible asset value is positive. Capex also remains at a stable level and has decreased as a proportion of free cash.
It should be noted that the company may be undergoing change forced upon it by its clients: it used to be the case that software is sold by licence, and there is a greater move towards software as a service (SaaS). The effect on revenues may be unclear, save for that companies can choose to pay for their software every month instead of a one-off cost. From a breakdown of last years revenues, it shows that Sopheon makes more from extra services provided as opposed to the main product:
Another risk inherent in the company is customer concentration. With its target client being large firms with activities broad enough to justify the product, a delay in any can have a big effect on revenues (the crux of many warnings). In the last report, the largest customer was worth 11% of revenues.
What was an expensive share has gotten quite a lot cheaper over the past couple of years. If you managed to get in early, the price was about half of what it was a year ago. In short, the reasons for this are obvious in that the rate of growth has slowed down dramatically, to zero for this year.
So the opinion on whether this is value or not depends on the opinion on the outlook for the company, as the price still reflects that there will be growth ahead. Both forecasts for this year and the next have been trimmed. On one side the board have focused and delivered. There has been no desire to chase acquisitions (although this remains on the table). The cash position and profitable nature of the company means that although plans have been set back a bit, this should not be any distraction.
The bear case could be whether new competition could eat Sopheon’s lunch. A consistent theme in their commentary is the nature of disruptors. It seems unlikely at this point whether something could come from nothing, but the future would be more uncertain for software companies than it would be for the blue-chips who they supply.
I feel that the share price has taken a deserved set-back today, but longer term this could be a winner as tightening macro conditions means even incremental improvements are important. 4/5.