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Update: FY16 trading in line
K3 expects to report FY16 results broadly in line with market expectations. Trading was encouraging during H216, with a good level of contract wins in the final months of the year. Net debt has reduced over the year, although is higher than we forecast, partly due to a major retail customer going into administration close to year-end. We make no changes to estimates, pending FY16 results on 13 September.
Flash note: UK visitor attraction software acquisition
K3 continues to strengthen its position in the visitor attractions and leisure sector with the acquisition of Merac, a UK-based supplier of electronic PoS and management systems, for up to £1.45m in cash. The deal brings a roster of UK customers as well as adding to the company’s portfolio of own-IP solutions.
Update: Scandinavian retail software acquisition
K3 is acquiring DdD, a Danish point-of-sale (PoS) solution provider, for up to €10m/£7.9m. The company is raising £12.8m (net) from the issue of 4.1m shares to fund the deal and future product development. The acquisition adds proprietary retail software and should be complementary to K3’s existing retail software solutions. The deal also expands K3’s presence in Northern Europe and offers cross-selling potential.
Outlook: Adjusting to the cloud
K3 reported H116 results in line with management expectations. Revenue growth was limited by currency and the shift to consumption-based licensing, but adjusted operating profit increased 25% y-o-y with margin expansion to 12.2%. Good progress has been made with the strategy to increase own-IP software sales, build out the reseller channel and grow the hosting business, although the impact of the shift to consumption-based licensing leads us to reduce our revenue and EPS estimates.
Update: On track
K3’s strategy to develop and sell more own-IP software progressed well in H116, with the expanding partner channel delivering several major orders. Significant growth in profitability year-on-year was in line with management expectations, while net debt was reduced by 14% h-o-h. The company believes it is on track to meet market expectations for FY16; we leave our forecasts unchanged pending interims in mid-March.
Update: Expanding its reach
FY15 results confirmed that both business divisions continue to grow. Recent software sales have generated higher service revenues with a short-term impact on margins. To more efficiently exploit its own-IP solutions, K3 is focused on expanding its international partner channel. This should drive a higher proportion of software and support revenues in the longer term, reducing the impact of lower-margin services revenues. The stock continues to trade at a discount to its peer group.
Update: FY15 in line, with strong cash management
K3 expects to report FY15 results broadly in line with market expectations, while net debt has fallen faster than we forecast. The company is making good progress with its strategy to grow its own-IP business, which should support revenue and margin growth in the medium term. K3 is planning to report full year results in mid-September.
Update: Broadening the managed services offering
The bolt-on acquisition of Willow Starcom strengthens K3’s hosting and managed services business, providing additional hosting capacity and expertise. The company expects the deal to be earnings accretive in its first full year of ownership. We have revised our forecasts to reflect the deal, with FY16 revenue and EPS increased by 3.0% and 2.5% respectively.
Outlook: Investment in own IP drives growth
K3 continues to generate strong revenue growth, seeing good demand for its “ax│is†retail product combined with growth from Microsoft Dynamics NAV, SYSPRO and Sage X3 solutions. To support ongoing growth in higher-margin, own-IP licence sales, the company continues to invest in expanding its international reseller channel and in bolstering its staffing in areas where there have been resource constraints.
Update: Growth on track
Trading in H115 was in line with management expectations, with continued interest in K3’s new Microsoft Dynamics AX solution and improving demand for SYSPRO and Microsoft Dynamics NAV solutions. K3 continues to build its international reseller channel and in H115 saw the first sales of its new AX solution through this. We make no changes to estimates but highlight that if trading continues to be as strong in H2, there is scope for upgrades.
Update: In fashion
K3 reported strong revenue growth in FY14 as demand recovered in the majority of its business lines. The company is seeing strong demand for its ax|is solution in the UK and has started to sell the solution through its International division. Support from Microsoft and discussions with global system integrators highlight the opportunity outside of Europe.
Update: New product strategy paying off
K3’s full year trading update confirms that the company expects to report FY14 results in line with expectations. Following on from the pick-up in orders in H114, the company has seen continued strong demand for its “ax│is†solution, with several new orders signed in Q414. Stronger trading has resulted in higher working capital requirements and hence higher than expected net debt at year end, but management is confident that this should reduce through the course of FY15.
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