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There are such minute differences between developing new software products in risk management and compliance that effectively are replacing existing products and developing new functionality in existing products that I personally believe expensing development costs is generally the better approach. Is the software development occurring in genuinely new products ?
It's good news that H1'13 was weak - that means that the upcoming H1 will look even better in comparison. There is no "should" about it as regards capitalising R& D, especially if the matching revenue is set to come through in the future. There are arguments that they could be extra-prudent and do so, but that's another matter. As it is, most companies abide by the standard accounting rules, as LRM do, and capitalise until appropriate to match.
Thanks for the update. Problem is that the first half 2013 was quite weak with EBITDA (when capitalising R&D) being just 0.1 million, while if one actually expensed R&D (which they should be doing), then EBITDA loss was 2.4 million. So trading ahead of an underlying 1st half loss is hardly inspiring. Did anyone attend the AGM and get a better feel for the outlook?
Excellent AGM statement today - particularly liking the "recent new licence wins and additional new orders", with trading ahead of last year and on target for current year forecasts: Http://www.investegate.co.uk/lombard-risk-mngment--lrm-/rns/agm-statement/201407090700097981L/
Good day to Mr Rivaldo, Thank you for the Hardman update. I write from across the pond and would not have found the update on my own. I just see an attractively priced share and a company that is run by an individual who has very ample reasons to operate the company in a manner which will enable the share price to rise. Fundamentally, I like very much the niche which LRM occupies. Regards, Robbie
Hardman have today issued their July monthly newsletter, and it includes an upgrade in the forecasts for LRM. Plus the AGM is coming up on 9th July, and judging by the outlook in the finals it should be pretty good: Http://www.hardmanandco.com/sites/default/files/research_papers/July%20Monthly%202014_0.pdf?utm_source=Email+Campaign&utm_medium=email&utm_campaign=29208-236220-July+Monthly+14 "Lombard Risk reported good results on 13th May, profits and revenue ahead of expectations. The AGM will take place on 9th July. It posted a record backlog stood at £5.2m (+18%). FY14 featured a signing of a number of Tier 1 banking clients and strong expansion in Japan. Revenue growth: All FY14 22% revenue growth achieved was organic (up from 18% organic prior year). 2H14 came in strongly, at 44% up on previously record half year. 2H14 revenue was £13.1m vs a full year FY13 of £16.8m. There was an element of ‘catch-up’ from H1, nonetheless the backlog (order book revenue to come from orders in hand) at year end leads us to raise estimates. Lombard Risks fulfils mandatory regulatory requirements for its financial sector clients and regulation rises (though there were delays to the regulator implementing a key stage until next month). Revenue from alliances should start to become meaningful. Upgrade to revenue numbers: FY14 achieved £20.4m (£19.0m estimated). We raise sales FY15E 6% to £22.5m. 61% is recurring revenue plus the order backlog, a strong ratio. Indeed in FY14 there was a strong focus on entirely new business so order book conversion and underlying trend of repeat work and projects should do well in FY15E. We also have strong anticipation based on extending FY14 ‘beach-head’ wins for growth in North America and Japan. Upgrade to profit numbers: FY14 achieved £4.4m; had estimated £3.8m. We upgrade FY15E from £4.6m to £5.0m. With gross margins near 100% and high investment for growth in FY14, we see EBITDA margins expanding FY15 from 29.0% FY14 to 34.7% FY15E. This (allied to software amortisation conservatively rising from £1.6m to £2.8m) translates to a rise in PBT to £5.0m, 14% growth on FY14 just reported. So as costs were taken on (technology product development) in FY14, EBITDA rose 12% but we estimate a 32% rise in FY15E. Investment for the future: Technology spend stood at £7.1m, up from £4.5m in FY12."
My fellow shareholder has confirmed he will be unable to attend this year, and the earlier time makes it impractical for me to arrive before the meeting starts. However, I will do my best to get there before 1015, and hope not to miss anything interesting.
Yes, Millfield, it is really me and I recall our haddock and chips conversation at last year's meeting. I expect to be there this year in my capacity as a shareholder. I hope you change your mind! In some respects I was sorry to leave. There are plenty of good people at the company, with several decent recent additions on the board and in sales. But the time came.....
If that really is you Paul, I must say I was sorry to see you go and was even considering whether or not to attend the AGM this year. However, as they changed the start time from 1430 to 0930, that made up my mind. My annual haddock and chips at the Founders will now be consigned to history.
Ok thanks for reply, good answer.
Lol; elegantly put! I was not given the boot; I simply resigned for my own personal reasons, but timed it so that I could prepare the year end announcement and leave everything clean.
Why were you given the boot? Not up to it?
To answer questions on previous posts from earlier this year, I have not sold any of my 2.96m shares. Bestest.
WH Ireland have just sent out the June issue of their monthly investment circular, and amongst their recommendations are LRM, so hopefully this will generate some interest: Http://assets.wh-ireland.co.uk/downloads/whs/2014_06.pdf "UPDATE: LOMBARD RISK (LRM) Legislation driven growth Share price: 11p | Market cap: £29m A stellar second half has helped compliance software specialist Lombard Risk Management deliver results ahead of expectations. In the year to 31 March 2014, revenues jumped 22% to £20.4m, as pre-tax profits increased 13% to £4.4m. Lombard sells software which is largely mandatory for financial services companies to use. It has signed 34 new contracts for its COREP (Common Reporting) package and the well established COLLINE collateral management software recently secured a significant deal with a Tier 1 bank. The record order book is £5.3m, and recurring revenues are at a high of £8.6m. Though the shares have proved lacklustre, the outlook is positive with profits for 2015 expected to nudge £5m for EPS of 1.56p. Consolidation in this sector of the market would suggest the valuation of Lombard looks anomalous."
Does the market simply look for small caps with cash earnings as this one has top line growth and intellectual property yet trades at less than 1.5 times 2014 revenue
Good stuff in this new article - "significant upside": Http://www.shareprophets.advfn.com/views/5540/lombard-risk-management-ceo-catch-up "Lombard Risk Management – CEO Catch Up By Steve Moore — Monday 19 May 2014 Following results from Lombard Risk Management (LRM) last week, I have now managed to catch up with CEO John Wisbey. The issue of capitalisation of R&D spend versus reported profit is one he has frequently had to deal with – with him again noting that the company is following adviser guidance in reporting as it does. A reported pre-tax profit of £4.42 million for the year ended 31st March 2014 compared to £4.22 million more than depreciation + amortisation of capitalised investment and the company is, I understand, generating free cash on an underlying basis. The balance sheet looks solid enough and, although current opportunities will see the company continue to invest, Wisbey pointed to the results announcement statement that “we expect research and development costs to reduce in the 2014/15 financial year as a percentage of revenues”. This supports my view that there will be growing free cash generation here and Wisbey was unsurprisingly, in the context of all-time high recurrent revenues, a highest ever year-end order book and continuing international financial industry regulatory change, confident in outlook. Last seen, house broker, Charles Stanley, was reviewing forecasts, though a move towards reporting £5 million of profit looks realistic for the current year. At a current 10.75p-11.25p, Lombard is capitalised at sub £30 million and, as previously noted, the growth being recorded and positive outlook provide confidence and a trade sale looks the likely end-game outcome. At such a point metrics such as multiple of revenues likely come into play and there looks to remain significant upside on such a basis."
Interesting new Edison note on SOG which shows up LRM's low relative valuation: Http://www.edisoninvestmentresearch.com/research/report/statpro-group24 "The stock trades on c 23.1x our FY14 EPS, which partly reflects the heavy investment in the new cloud products. The rating falls to 19.4x in FY15 as the group’s new cloud products begin to have an impact on earnings. Alternatively, the shares trade on c 1.6x our FY15 EV/sales and 10.4x EV/EBITDA; this compares favourably with the group’s larger US investment management software peers, which trade on 4.4x sales and 12.1x EV/EBITDA. Meanwhile, our selection of US SaaS companies trade on 5.2x FY15 EV/sales and 35.0x EV/EBITDA." LRM trades on just 1.4x historic sales - presumably much less for the current year - and only 4.1x historic EV/EBITDA. SOG's figures above relate to prospective sales and EBITDA, let alone the US comparatives... As noted previously: "AIM listed FFastFill (which had many similarities to Lombard) was taken over last year by a subsidiary of its majority shareholder ION Group on a multiple of c.6.2 times historic revenues and 4.5 times projected revenues - a common valuation measure within the sector. Apply the FFastFill buyout multiples to Lombard and a price range of between £103.4 million and £84.6 million, or 44.5p to 36.4p per share, can be implied."
Good results today guys!
It's previously been noted that LRM are actually extremely cheap on multiples attributed to the sector. And the below is calculated on prior year revenues - the latest historic revenue figure is £20.4m, which lifts LOM's valuation potential on an equivalent basis to £126.5m: "AIM listed FFastFill (which had many similarities to Lombard) was taken over last year by a subsidiary of its majority shareholder ION Group on a multiple of c.6.2 times historic revenues and 4.5 times projected revenues - a common valuation measure within the sector. Apply the FFastFill buyout multiples to Lombard and a price range of between £103.4 million and £84.6 million, or 44.5p to 36.4p per share, can be implied."
Good post. Believe he had just under 3 mio when he left. No way of knowing what he still holds but even if he still retains his entire shareholding its only about 1 pct of the shares in issue. Regards
LRM are at the stage of massive expansion prospects which require huge investment in product development. Tom Winnifrith and others have made this an issue by stating that these costs should be written off as overhead, but really that does not make sense. If Ford make 1000 cars each costing £3000 in time and materials, do they write off £3m as overheads or treat them as stock for sale valued at either cost or inferred market value. I suspect both their auditors and the tax authorities would squawk if they tried the former. Likewise a software firm will spend considerable sums creating products which, once produced, may be sold time and time again with recurring revenue from licence and support fees. Obviously a portion of development cost must be allocated to product maintenance, but development which adds value should be capitalised and written down over the inferred period of the product’s life, which may be many years. Obviously a turkey would written down immediately. Once the major developments are complete, these costs will dwindle, but the products will remain on the shelf ready to sell without further cost apart from sales effort, plus installation and training, but I believe the latter two can be chargeable extras. When this happens LRM is certain to explode into sudden and massive profitability, provided the products remain at the forefront of their field. Current sales and order volumes suggest this is likely for the foreseeable future, although progress in the important Americas market is disappointing. Looking at the Directors Dealings history on this site does not help to properly track Paul Tuson’s holdings. It is impossible to ascertain how many he had when he resigned, or how many he has left. If he still has a lot and intends to sell, this may hold back the SP a little for a while.
Hopefully soon , very soon. !
http://www.stockopedia.com/content/small-cap-value-report-16-apr-2014-zzz-lrm-rstr-82719/
For those who haven't yet seen it... http://www.shareprophets.advfn.com/views/3344/2014-tip-of-the-year-number-3-lombard-risk-management-at-a-135p-offer
Good point you made. Don't know if Tuson sold his shares and it is unlikely be reported as only just over 1 pct of company. Between them Wisbey and Mccormick have about 110 mio, so with FIL and HH all together that accounts for over 50pct of the 260 mio in issue. Certainly few shares being traded at the moment.