Redstoneconnect PLC (LON:REDS) Chief Executive Officer Mark Braund caught up with DirectorsTalk for an exclusive interview to discuss their final results, the sale of your Systems Integration and Managed Services business and what the funds will be used for.
Q1: Final results out for the year ended 31st January 2018, they look pretty impressive. Can you run us through the key financial highlights?
A1: We’re very pleased with the way in which Redstoneconnect has performed, this is 2.5 to 3 years on from the restructuring that we’ve been doing and across the board actually, each division has performed quite well.
Overall, revenue was up 15% to £47.6 million, I think the number that we tend to focus more on though rather than revenue is actually gross profit, gross profit generating from our operations, and gross profit was up as well to £13.4 million from the previous year when it was £9.2 million so it was up 45% and of course, profitability, profit is key. Adjusted EBITDA was up 60%, £3.2 million and adjusted PBT was up just shy of 100% at £2.4 million from a previous year at £1.3 million.
Q2: In terms of operational highlights, what were the key points there?
A2: I think it’s just a continuing focus on changing the mix of the business. We stated very clearly when we first started on this campaign that we wanted to move to higher margin, more reliable revenue that comes from recurring revenue business and that’s exactly what we’ve done, it’s not just this year, we’ve done it in the previous year as well.
So, that change in mix of business in terms of increasing the amount of revenue we’ve generated through software which is higher margin, and to a large degree recurring revenue, and focusing on much more complex, higher margin, higher value-add propositions in both the systems integration and managed services arena has allowed us to improve our margins by 600 basis points. We’ve taken the gross margin from 22% to 28% in a 12 month period and that’s basically a reflection of how that change in focus of looking at higher value, higher value-add business in our market has translated into results.
Q3: You also announced the sale of your Systems Integration and Managed Services business, what is the rationale behind the sale?
A3: Well, as I said, we’ve spent the last 2.5 to 3 years realigning the business to a much greater value-add proposition and the business has effectively been operating as three distinct business units, we get involved in buildings from the point of view of designing and installing the networks that enable them to become smart buildings, we managed those networks then through our managed services and then more latterly, we’ve been applying software. For me, it’s the software that brings to life all the users of the technology and the businesses that pay for it, it’s the software that brings to life the reason for that technology being there in the first place. As a result, it attracts higher value, higher margins and ultimately the recurring revenue that we aspire to in terms of the way in which we’re operating the business.
System Integration business deals with some great marquee opportunities and they create very large projects but from a commercial point of view that can generate a level of inconsistency, once you’ve sold a major project, you’ve then got to go and sell another and another one after that. Therefore, the business can be prone to up’s and down’s in the cycle and it’s also extremely cash consumptive so as a business it is a wonderful business, but it is completely different commercial proposition and a different financial model to the other end of the scale which is the software business. The Managed Services business fits somewhere in between.
We’ve made no secret about it that in the medium to long term, we see the software IP that we’ve created as being the main value generator in the business. When you’re dealing with such a complex range of offerings, I think we’ve reached the point of maturity where now we need to focus our energies on the part of the business that’s going to generate the greatest value for customers and for shareholders and that we have been clearly focusing on the software business. So, we’ve reached a point in time where I think the health and strength of the Systems Integration and Managed Services business is at a level by we can exit that business for value for the shareholders.
The company that’s buying those assets, we have been in friendly competition and also more angry competition with for many years, it’s a company that’s well known to us and I think the combination of those two assets, theirs and ours, will create a real powerhouse in that industry which is necessary. As the market matures, the customer base is wanting that business to operate more on an international basis and that creates challenges of its own which really needed dedicated focus.
We think that this bringing together of these 2 companies has done two or three really really good things. One is that it’s created the opportunity for us to exit that business to focus our energies on software and obviously generate the capital for us to do just that, that’s great for our shareholders.
But for our employees and our customers of the Systems Integration and Managed Services business, I think what it also does is it creates strength in that continuing business. Our employees that move with the acquisition are now going to be part of a very large organisation operating in that space with great customers, a great service and quality ethic and great prospects. It does require that level of dedication and that level of investment in that financial model and that doesn’t suit being with the software business moving forward.
Ultimately, that’s the rationale, we want to focus our energies and our capital on growing a highly valuable business, both to customers and to our shareholders in the software business. We believe we’re passing the mantle on, in terms of the Systems Integration and Managed Services business, to a very good management team that can do likewise in that specific market sector.
I should also add that, quite importantly, there is a link between what the software does and the technology that our Systems Integration business designs and installs. In other words, there are customers that are going through the process of putting smart infrastructure into their building that want software and likewise, there are customers that want software that need then smart infrastructure. We’ve retained a relationship through the arrangements that we’re proposing with Excel where they will be a favoured partner of the software business and as such, there are skills and resources and sales channels within that business that will open up opportunities, and will continue to open up opportunities, for our software business. Likewise, our software business will pass opportunities to the Excel Redstone business as we move forward because those will become opportunities that will be generated by the software business as a standalone operation.
Q4: I think you’ve already alluded to this but what will Redstoneconnect do with the funds exactly?
A4: Basically, invest them in becoming a large, and I hope, dominate force in the workspace management and occupancy analytics arena. I think it’s important that people understand this market has been one that we’ve been focused on for a couple of years, it was quite small when we first began that process and it is growing at a pace. We’re talking in our circulars about the market occupancy and analytics growing from about 1.5 billion in the last 12 months at a compound annual growth rate of 25% which is quite impressive.
What we’ve experienced is, when we started on this journey a couple of years, there were a very very small number of customers that I would call early adopters, they’re engaging in the software tech and beginning to see some results. I think in the last 2 years, and certainly talking to you now, the number of customer that we’re engaged with, talking to, about how our technology can help them is exponentially larger, all of a sudden, the world seems to be waking up to this gap in their analysis of how real estate is being used, that is where our technology impacts. It’s a very fragmented market, there are lots of players in there, there are some with large holistic solutions that deal with real estate but don’t quite deal with workplace analytics and there are others who deal with more siloed functions such as simple meeting room management or visitor management.
Our technology is very much a holistic proposition on one platform, we call it OneSpace which actually bridges the divide between those two areas and as such, they provide critical functions to help an organisation move forward. I want to remind everybody what those three things that our customers are typically looking for:
The first thing is employee engagement. Employee engagement, often talked about as being employee wellbeing, has become a critically important feature now of talent in this century and what you have is a change in the dynamics at work. 5 years ago, 10 years ago, when offices were being designed that are being used right now, the level of mobility and agile working just didn’t exist, it now does and therefore what you’ve got is real estate that really isn’t fit for purpose. People are trying to understand how do I change that and how do I engage with the workforce that’s much more mobile now, it’s not typical for people to necessarily sit at the same desk 8 hours a day, 5 days a week, they’re a lot more mobile than that. So, by providing the tools, the navigation tools, to be able to work your way around the offices that you work in, to be able to find your colleagues, to be able to find quiet spaces, to be able to book facilities and so on and so forth, these are tools that engage with the workforce and enable them to be effective and productive when they come into the work environment. So, that’s the first benefit, it’s about employee engagement.
The second is very much more fiscal, if you like, in terms of the benefit and trying to drive the ROI and that is to do with occupancy. In today’s world where you’ve got mobility, in the way I’ve described having moved from where the natural workplace dynamic was, there’s plenty of evidence to suggest that the utilisation of workspaces in offices today, in the western world, are running at around 50%. This is the second most expensive line item on most companies PnL, real estate, and it’s running at a 50% level of efficiency, when you go into large customers as I do you will often see many desks that are just empty, and it isn’t because they haven’t got people, it’s because those people are working in other spaces in the building. So, understanding how a building is being used, how the space is being used, is really critical to then redesigning it, re-configuring it to make it much more productive and effective. The benefits are either you save a lot of money by reducing the amount of space you occupy, or you change that space to make it much more engaging and much more enjoyable to come to work. There’s a lot of case studies, look at our website you’ll see some case studies, that show the gains here are very material.
The third component is, especially when combined with smart technology that allows discrete control of devices within a given building, you can now take that pattern of work, that real-time information about how a building is being used and use it to fine turn the way in which the building is actually being managed and controlled, switching off or switching on discreet lighting, heating and ventilation and so forth. As a result, again, there are case studies on our website with one of our customers which demonstrates the energy saving above and beyond switching to energy saving components is material.
So, those are the three key benefits, we see the market beginning to wake up to the idea that they need this workspace management and occupancy analytics technology, we’ve got a great platform, but we need to go further.
The two things we need to do is to continue to drive functionality to make it ultimately very usable and configurable to operate within the customer set, not just at an enterprise level where a lot of our business is today but to productise it and make it available to small/medium size customers where it’s still relevant, we ourselves use the technology to help us have efficient real estate. The second thing is that we need to expand our market footprint and we’re going to do that through a combination of two things, one is we’re grow ourselves and marketing efforts, that won’t only be through direct selling, we have an exciting plan for building channels and we’re beginning that process right now, they’ll be more news about that in the coming months. Finally, through targeted acquisitions, we intend to focus our energies on building a fast-growing, highly unique and compelling proposition in the software space and our priority is to make that a SaaS-based proposition that would generate high margins and long-term reliability of income through recurring revenue streams.
