Pelatro Plc (LON:PTRO), the precision marketing software specialist, has today announced today its interim results for the 6 months ended 30 June 2018.
Financial highlights
· Revenue up 53% to $2.38 million (H1 2017: $1.55 million)
· EBITDA* increased 42% to $1.47 million (H1 2017: $1.04 million)
· Profit before tax increased 24% to $1.2 million (H1 2017: $972,000)
· Earnings per share 4.4¢ (H1 2017: 5.1¢), reflecting new shares issued pre IPO
· Net cash as at 30 June 2018 $1.6 million (at 30 June 2017: $347,000); approximately $530,000 received from debtors since period end
· Adjustment (credit) to reported profits in first half of approximately $517,000 due to change to IFRS 15 revenue recognition (expected largely to reverse in second half)
* earnings before interest, tax, depreciation, amortisation and exceptional items
Operational highlights
· In April 2018 the Group won its largest contract from the Swedish telco group Tele2, both to implement mViva and to provide managed services for its network in Kazakhstan. This is the Group’s largest contract to date and also provides an opportunity for Pelatro to showcase its capabilities in managed services
Post period end highlights
· In August 2018 the Group announced the acquisition of certain assets (principally customer contracts and products) from the Danateq Group. The acquisition expands Pelatro’s geographic footprint and also broadens the Company’s product suite and underling subscriber base. As a result of the acquisition 32 people from Danateq joined the Pelatro team
· The acquisition also brings two large and well respected telco groups, Telenor and SingTel, as customers
· Pelatro has re-positioned its product offering as a Multichannel Marketing Hub. This has considerably improved the Group’s positioning in the market, with a campaign management solution, a loyalty management solution and an intelligent notification manager, thereby leading to more opportunities for growth
Richard Day, Non-executive Chairman of Pelatro plc commented:
“Since our AIM flotation at the end of last year, we have maintained momentum, with an expanded customer base, a significant acquisition and an enhanced product offering. Our current trading is in line with expectations and we look forward with confidence with a strong pipeline of sales opportunities currently under negotiation.”
Managing Director’s statement
Given the challenges faced by telcos, there is a crying need for advanced technology to assist them to increase revenue and reduce churn. Prominent among the limited options is the possibility to engage with subscribers in a personalised, contextual and relevant manner. This is exactly what Pelatro provides and thus Pelatro’s offering, the Multichannel Marketing Hub, has become a crucial and strategic element for the telcos thereby opening up a plethora of opportunities for Pelatro.
Progress vs strategy
In April 2018 Pelatro announced a major contract win with Tele2, the Central Asian subsidiary of a Western European telco with over 6 million customers. The contract was for the sale and implementation of mViva and also a 12 month consultancy agreement to assist the telco in setting up a Customer Value Management department. The contract is expected to be worth approximately $1.7 million and is the largest entered into by the Company to date. The majority of the fees are expected to be recognised in 2018 (the difference being principally fees for consultancy services to be rendered in 2019).
Total Full Time Equivalent (FTE) headcount has increased by 26 FTEs to 78 as at the end of the period, with a further 32 FTEs added as a result of the Danateq acquisition, due mostly to increased customer volume and activity and an expanding road map of activities.
Pipeline
The Group is focused on building and maintaining a healthy sales pipeline. There are at present over 20 qualified opportunities in the pipeline both from existing and potential customers, including new license sales as well as change requests and other software installations.
Acquisition update
Pelatro is in the process of integrating the acquisition of the business and certain assets of Danateq Pte and Danateq Limited (“Danateq”) which was announced on 30 July, for an initial cash consideration paid of $7.0 million and potential deferred consideration of up to $5.0 million. This was funded via a placing of 8.2 million new ordinary shares at a price of 73p raising approximately $7.9 million before expenses. This was a significant strategic acquisition for Pelatro , doubling the subscriber base covered from 160 million to 325 million and the number of customers from 8 to 12. It also gave the Group immediate entry into Central Europe and is expected to accelerate entry into Western Europe over the next 18-24 months. It also broadened Pelatro’s product suite by the addition of two complementary products that can be sold into the existing customer base of Pelatro and positions Pelatro as a highly credible player in the new Multi-Channel Marketing Hub space.
Integration activities are proceeding well and personnel, customer support and sales activities were transferred to Pelatro on 5 September. The software products themselves are expected to be migrated over the next 8-10 months.
Financial performance
Revenue
Revenue in the six months amounted to $2,376,000, including an amount of $103,000 representing revenue from Post Contract Support (“PCS”) recognised ahead of its contractually due dates under IFRS 15, and an amount of $396,000 in respect of license fees which likewise under IFRS 15 have been recognised ahead of their milestone invoicing dates.
Revenue was split broadly between license fee income of $1,729,000 (including gain share as well as implementation fees of c. $250,000 recognised separately under IFRS 15), change request income of $414,000 and PCS (net of adjustments to spread the income over previous years) of $228,000. A minor amount arose from the resale of hardware.
Cost of sales
Cost of sales represents the costs of the software support, research and development teams in PSPL not otherwise capitalised. Prior to the acquisition of PSPL in December 2017, amounts invoiced to the Group by PSPL included underlying administrative costs as well as costs relating to technical and related services, and hence these were included in cost of sales. Now PSPL is part of the Group, cost of sales excludes administrative expenses which are included instead in the relevant category. Such expenses were approximately $200,000 in FY 2017.
Net cash and trade receivables
Cash generated from operating activities was marginally negative after working capital movements. After repayment of short term debt of $746,000 and capital expenditure of around $1.07m (which was part funded by a secured loan of $254,000), gross cash at 30 June 2018 was approximately $2.1m. Short and long term debt (comprising overdraft facilities and a term loan) was approximately $489,000, giving net cash of approximately $1.6 million (H1 2017: $347,000).
Trade receivables (including unbilled revenue but excluding contract assets recognised under IFRS 15) as at 30 June 2018 were $2,677,000 compared to $1,778,000 at 31 December 2017. Of the balance outstanding at 31 December 2017, some $965,000 was collected in the period under review. In relation to the debt outstanding at 31 December 2017 from the Group’s North African customer, to date some $418,000 of the total amount outstanding from this customer has been paid and a further $280,000 is expected before the year end. This customer is wholly creditworthy and has continued to generate significant change request work during the period ($238,000, with an additional $350,000 expected in the second half of 2018).
Unbilled revenue
As part of its reported debtors balances, the Group may at any one time have significant amounts outstanding representing Unbilled Revenue (“UBR”). This may arise, for example, where Pelatro undertakes work for customers in accordance with contract terms, but the “Go Live” date (which may represent the initial invoicing date) is expected much later in the term of the contract. As is standard practice in the telecoms industry, contractual revenue milestones (and now completion of performance obligation for the purposes of recognition of revenue for IFRS 15) are typically reached much earlier than invoicing milestones and credit terms of 90 days start following the invoice.
Furthermore, Pelatro typically accumulates a volume of completed minor change requests (“CRs”) before formally contracting with the customer to receive a purchase order and invoice accordingly. The process is further lengthened by the need for certain customers to enter into Letters of Credit with correspondent banks; Pelatro views this as sound commercial practice as the customers continue to generate significant volumes of CRs and hence valuable repeating revenue.
Effect of IFRS 15
Pelatro has implemented IFRS 15 “Revenue from Contracts with Customers” (“IFRS 15”) with effect from 1 January 2018. The principal changes resulting from its application are:
(1) recognition of revenue from the sale of a license and its implementation as two separate performance obligations, without reference to contractual invoicing milestones; and
(2) recognition of revenue from post-contract support (“PCS”) over the term of the support (typically 5 years) rather than the actual 4 years over which customers usually pay.
The implementation of IFRS 15 has not affected the revenue recognition of income from change requests, revenue gain share contracts or managed services.
With regard to (1) above, the effect of the recognition of revenue from the sale of licenses and the associated implementation as two separate performance obligations has had:
(a) no effect on prior years, as all contracts were either complete as at 31 December 2017 or the contractual amount due on completion of implementation was broadly similar to the deemed value of the implementation carried out; and
(b) In the period under review, given that the transfer of the license for the Tele2 contract referred to above had taken place, albeit that implementation was not complete, the Group has recognised approximately $936,000 of revenue relating to the transfer of the software itself, and will recognise a further $100,000 on completion of implementation (being the value attributed as a “standalone” selling price of the implementation services). These figures are net of approximately $80,000 being an adjustment to reflect the payment terms of the contract, which will be recognised over the life of the contract as interest income. This change of revenue recognition will not have a material effect on the full year results for 2018.
With regard to (2) above, the Group typically provides 5 years of PCS but does not charge for the first year. This contractual structure is now recognised for revenue purposes as income accruing over the 5 years of service provision; accordingly the contractual amounts due in years 2 to 5 are in effect “discounted” and the difference recognised in year 1. The effect of this is:
(a) to accelerate the recognition of revenue where the PCS is charged at a deemed “market rate”; and
(b) to defer the recognition of revenue in the limited cases where the contractual PCS charge is lower than a market rate (the difference being deducted from the license fee)
The net effect of such adjustments is (i) a retrospective adjustment of $18,000 (credit) to reserves to take into account the financial effects of its implementation for periods prior to the current year (i.e. revenue would have been $18,000 greater than reported); and (ii) if the results for H1 2018 had been reported under the Group’s previous accounting policies, revenue and profits would be $512,000 and $517,000 lower respectively (though this difference is not expected to have any effect on the full year results).
Further information on the effects of implementing IFRS 15 is given in Note 10.
Expenditure on non-current assets
Expenditure on non-current assets of $1,068,000 comprises capitalised development costs of $763,000 and expenditure on tangible assets of $305,000. Capitalisation of intangibles as a percentage of the underlying costs in the Group’s software development subsidiary was approximately 68%. The capitalisation of development costs has resulted in an intangible asset in the statement of financial position of $1,452,000 (net of amortisation; at end H1 2017: $529,000).
Current trading and outlook
We have full visibility of $4.9m for FY 2018 of contractual revenue from pre-acquisition contracts and the contracts acquired from Danateq are performing according to our expectations. With regard to 2019, we are in substantive discussions with a number of telcos, existing customers and new, with regard to further mViva licenses as well as a significant volume of Change Requests and contracts for the Group’s enhanced range of products including Loyalty Management Solution, Emergency Credit, Data Monetisation and so on. Already contracted revenue for 2019 is $2.4m and our strong pipeline supports our expectations of further growth.
Our experience to date suggests that, once we make an initial sale into a new telco group, we have a greater ability to sell our mViva product to other subsidiaries in the same group. The Group’s largest ever contract win from Tele2 both enables us to market more effectively to other members of that telco’s group as well as establishing our credentials in managed services. Furthermore the acquisition of customer contracts and products from Danateq brings Telenor and Globe Philippines as customers.
Consequent to this acquisition our product portfolio has expanded sufficiently to make us a credible player in the Multichannel Marketing Hub space. This is a significant step as it opens up a plethora of opportunities – from being a single product company, Pelatro has transformed to a multi-product organisation offering a suite which is fast becoming crucial for the telcos. We believe that Pelatro is about to witness a point of inflection owing to the increasing need for personalised, contextual and relevant engagement with subscribers and our ability to fulfil that need.
A consequence of this scenario is the large number of potential opportunities in our pipeline. This pipeline has opportunities from existing customers for new products and enhancements, along with those from potential customers. All these developments underpin our confidence that we will continue to grow at an attractive pace in the years ahead.
