A year of strategic and product progress

Today’s FY22 results reflect a year of significant progress, with revenue and EBITDA coming in above the market expectations prior to the January update. Sopheon completed two acquisitions and launched three products, broadening its family of InnovationOps solutions and expanding the addressable market to $3bn. FY22 also saw Sopheon’s largest single deal to date: the $11m US Navy contract. Revenue of $36.8m was 7% ahead of $34.4m in FY21, or $38.1m on a constant currency basis, representing 10% organic growth. The outlook statement shows management as confident and on the front foot. As momentum builds for the twin-pronged approach for Acclaim and Accolade, revenue and profit could rise dramatically in FY25 and beyond. Enterprise value is currently only c.1.5x FY23E revenue and would appear to us to not yet reflect this potential.

A year of strategic and product progress

Today’s AGM trading update, covering the period from 1 November to date, confirms that Idox continues to perform well, having made an encouraging start to the financial year and with excellent visibility on revenues for FY23. The robust story and positive outlook we have seen growing in recent years looks set to continue.

Trading well, with no signs of turbulence

Gamma’s results for the year ended 31 December 2022, released today, are in line with expectations and guidance, and show a strong performance with 8% growth in revenue (£484.6m vs FY21 £447.7m), 10% improvement in adjusted EBITDA (£105.1m vs FY21 £95.4m) and 12% increase in adjusted diluted EPS (71.8p vs FY21 64.0p). Cash generated by operations was up by 10%, resulting in year-end net cash (pre-leases) of £92.5m (FY21 £49.5m). Trading in the UK, in both the Indirect and Direct businesses, was strong, with Germany leading the way in Europe. The impressive and consistent progress, and notable drive on investment in technology, suggest to us that Gamma’s recent derating is unjustified.

Continuing UK growth drives profit and cash

FDM Group plc

Aferian on Friday provided an update on current trading, reaffirming the previous commentary around the FY22 outcome and describing strong early momentum in FY23 for the 24i (software) business. However, customer destocking in the Amino (devices) business has been more prolonged than previously expected and previously signalled. Management now expects FY23 revenue and adjusted EBITDA to be ‘substantially below its original expectations’. We withdraw our FY23 estimates in advance of further detail at the time of the FY22 results, which appear likely to be delayed as the group works with its banks to ensure compliance with future covenant tests. We note that the group ended FY22 with net cash of $4m, that cost savings of some $5m have been implemented, and that management still expects a ‘positive material adjusted EBITDA’ for FY23.

Hardware-related headwinds persist

Beeks Financial Cloud Group, the cloud computing, connectivity and analytics provider for financial markets, has delivered impressive H1 23 results, in our view. Revenue growth (+35% YoY) and margin expansion (underlying EBITDA +48% YoY) were highlights of the release, with financial performance benefitting from recent investment in the platform and product set. The group made strong operational progress during the half, and commentary on the outlook is positive. Overall, we believe the announcement will maintain confidence in the Beeks growth story.

Operational progress continues in H1 23

ZOO has announced a significant new contract with a major Hollywood studio to support the continued global roll-out of the customer’s direct-to-consumer streaming service. This further demonstrates both ZOO’s quality as a services vendor and the leading position of ZOOstudio within the market. In our view, ZOOstudio is a strategically important offering that allows ZOO to become ‘part of the furniture’ once adopted. Client dependence on the technology then translates into competitive advantage and differentiation for ZOO. We make no changes to numbers at this stage but will look to review estimates at the FY23 trading update, due in early April. However, we view this important contract win as a clearly significant milestone towards ZOO’s $400m longer-term revenue target.

Second high-profile client for ZOOstudio

Idox’s results for the year ended 31 October 2022, released on Thursday 26 January, showed a strong performance in line with guidance given in the November trading update. Revenue of £66.2m was an increase of 6% on FY21, driven by strong growth in the public sector business; within this, recurring revenues grew by 12% to £40.5m. Adjusted EBITDA of £22.5m, up by 15% from £19.5m in FY21, was at an improved 34% margin (FY21: 31%) driven by operational improvements, acquisitions and mix. Year-end net debt of £6.7m was reduced slightly (FY21: £8.1m), impacted by Covid VAT deferrals, tax payment timings and acquisition payments. Following this strong FY22 performance and guidance that the start of FY23 has been encouraging, we leave our FY23 and FY24 forecasts intact and introduce estimates for FY25, retaining our forecast of double-digit organic growth for the year ahead – growth that could well be augmented by further acquisitions.

Flying start to FY23

Instem has delivered a positive trading update for the year to 31 December 2022, reporting c.28% revenue growth and a £13.7m closing (gross) cash position. Profitability also saw a material improvement, with FY22 adjusted PBT expected to be in line with our £7.6m forecast (+53% YoY). The order book remains ‘strong’ and management commentary on the outlook is positive. We make no changes to estimates and believe the update will maintain confidence in the Instem growth story.

Impressive growth in FY22

Sopheon’s trading update for the year ended 31 December 2022, issued today, shows a strong performance at the revenue level, in line with market expectations, and adjusted EBITDA comfortably above expectations. Net cash of $21m is in line with our estimate, down on last year principally because of the currency movements on Euro and Sterling deposits and the extended payment terms on the US Navy contract announced in July, as well as M&A payments. ARR at the year-end is expected to have been $24.3m. With this strong growth in SaaS, Sopheon has announced that it is ceasing to sell perpetual licenses to new customers – a significant strategic and operational milestone on Sopheon’s path to being a globally scaling SaaS business. We have adjusted our FY23 forecasts down to reflect this but introduce FY24 forecasts with a strong bounce back in revenue and profit.

Getting in step for the SaaS jump forward

Tern has announced an update on its portfolio activity. Individual companies are gaining commercial traction, with configuration work turning to repeat licencing and significant year-on-year growth in recurring revenue contracts. Third-party investments and uplifts in value are critical proof points that Tern’s model is delivering. The first Series B round was successfully completed in August 2022 for FundamentalVR. Tern also strengthened its own balance sheet with two fundraises in the latter part of 2022, underpinning its focus on shareholder value and protecting its position as portfolio companies increase market penetration and garner strategic interest. The IoT space is buoyant, demonstrated this week by Cognizant Technology Solutions acquiring IoT software engineering business Mobica. We see significant value creation from Tern’s hybrid VC model and organic growth potential, with management looking at well-timed exits that maximise value ‘when the market conditions are right’.

Portfolio update highlights inflexion point

Kape’s trading update for the year ended 31 December 2022, issued today, shows that it has been a year of considerable progress and achievement at both operational and financial levels. Pro forma Adjusted EBITDA is expected to be ahead of guidance, with revenue at the top end of guidance. ExpressVPN integration has also exceeded expectations. With a restructured balance sheet and considerable financial firepower, Kape looks set to continue its growth charge forward into FY23 and beyond.