A move to a SaaS model gives greater revenue visibility and makes the company less susceptible to demands for discounts on big licence renewals.
It is well known in the software world that such a transition usually involves taking a step back in order to take two step forwards, and Brady’s half-year results reflected this, but the company said full-year results are expected to be in line with market expectations.
The group said in its half-year results for the first six months of 2017 that it has already booked 93% of expected full-year revenue.
Revenue in the first half of the year eased to £13.18mln from £14.76mln the year before, but a decline in revenue is often seen in companies that switch from a one-off, up-front licence renewal model to a pay-as-you-go recurring revenue model.
Under the previous one-off licence model, the revenue recognised in the first half (H1) would have been roughly £1mln higher than reported.
Revenue from the legacy licences model fell to £937,000 from £1.51mln, reflecting the timing of renewals and the focus on recurring revenue as the business strategy moves towards a software-as-a-service (SaaS) model.
Brady said that recurring revenue, which rose to £9.03mln from £8.91mln the year before, now accounts for 68% of total sales, up from 60% in the same period of 2016.
Underlying earnings (EBITDA) before exceptional items were negative, at £880,000; the year before, EBITDA before exceptional items was £2.04mln.
The loss before tax widened to £3.51mln from £122,000 the year before, as £607,000 of exceptional charges (2016: £251,000) were taken in addition to the regular amortisation changes relating to acquisitions, which this time round came to £1.71mln (2016: £1.60mln ).
Cash at the end of the reporting period stood at £5.04mln, versus £6.40mln the year before.
“Whilst our H1 results reflect the natural consequence of our transition process away from the legacy licence model, the actions we have taken in the first half of the year coupled with the actions we will undertake in the second half will allow the business to scale efficiently and deliver significant improvements in profitability in 2018 and beyond,” said Ian Jenks, executive chairman of Brady.
The company’s results are traditionally weighted more to the second half, and this will be the case this year, even while the company makes the transition to a SaaS model, but once this year is over the nature of the recurring revenue model means there should be a more even weighting between the halves.
Even so, the company conceded that market conditions in the first half of the year had been challenging.
“As of today, 93% of the full year revenue target is either contracted or is a renewal of an existing contract, leaving 7% to be closed out by the year end. Our cost base is in line with management’s expectations to the half year and is expected to be in line with market expectations for the full year,” Jenks said.
Speaking to Proactive Investors, Jenks said the company’s transitions changes are well understood by the market, and that nothing in today’s figures should really have surprised them.
“It’s about telling them what you are going to do and then doing it,” Jenks said.
“By 2018 we should see a substantial reduction in our cost base,” he added, as the company moves to a much more efficient operational model.
Previously, the company had nine or 10 “monolithic stacks”, each of which could conceivably have operated as independent entities.
The new “multi-tented” approach enables the software solutions provider to join the dots with what it calls the “Brady framework” – system architecture that makes it easier to add new functionality to an existing product and integrate third party software more easily.
Perhaps most intriguingly, Brady can now more easily harvest anonymised data – which is to say it has insight into what its companies are doing but not the identity of the company that is doing it or the partner it is doing it with – which makes comparative analysis much easier.
As Jenks put it, the switch in emphasis is from merely automating processes to automating and optimising those processes.
Jenks said customer feedback has been positive, and that in his view the company is moving faster through the transition process to a SaaS model than many other companies that have embarked on a similar path.
The shares eased 2.6p to 67p in the morning session, perhaps reflecting the slightly scary increase in the reported losses.
As chief financial officer Martin Thorneycroft noted in the phone conversation with Proactive Investors, most of the increased losses are non-cash items.
Jenks noted: “Yes, we would have have a larger top line and a boost to the bottom line had the new recurring revenue deals signed this year been done on the old model, but this way the deals will provide half a million a year forever.”
Well, that’s assuming that Brady continues to support its customers well but as Jenks admits: “If you don’t do that, you deserve to lose the business.”