Cerillion plc (LON:CER) published their annual results for the 12 months ended 30 September 2022. DirectorsTalk caught up with Harold Evans, Senior Research Analyst, TMT at Singer Capital Markets for his views.
Q1. Were Cerillion’s FY22 results in line with the company’s October update?
Yes, results were comfortably in line with October’s update: Cerillion delivered +26% y/y sales growth to £32.7m (PY: +25%) whilst maintaining its class-leading PBT margins at 35%, such that underlying PBT grew +28% to £11.6m. This translated to £9.9m free cash flow (FCF), after 100% cash conversion.
Cerillion materially beat consensus notwithstanding an unusual £1.8m bad-debt provision. Management has confirmed this phenomena is not a widespread problem, nor one that’s expected to repeat in FY23. As such, if we consider this as an exceptional/one-off Cerillion’s underlying FY22 EBITDA margin was actually 46%, which is ahead of our consensus expectations for FY23 – currently looking for a 41% EBITDA margin.
Q2. What’s your view on future demand for Cerillion’s solutions?
With Cerillion providing the mission critical software component of multi-year (and sometimes government-backed) infrastructure investments decisions, we think demand is likely to be more
resilient than many other areas of the software and IT services market. As a result, in all likelihood, Cerillion will continue to be a strong outperformer. Supporting this too, we highlight how a £45m y/e backlog largely underpins FY23 growth expectations…and in addition, a very healthy pipeline could convert to a record FY23 billings performance and in turn this would strongly underpin FY24 estimates. We think this resilience, revenue visibility and rapid growth is a rare and formidable combination.
Moreover, Cerillion’s latest product releases included a major update to the Wholesale Gateway module. So far this product has been very successful in Denmark with existing CSP customers promoting this business model. As such we see how adoption could well expand throughout Europe, thus representing yet another growth angle.
Q3. Has the trend towards Cerillion wining larger deals continued?
Yes. The trend toward larger deals has materially benefitted growth and reflects how Cerillion’s SaaS-based solutions are gaining adoption, as CSPs (both large and small) are increasingly recognising the commercial and operational benefits of buying a product (and not customised/bespoke solutions). Note too, deal size has also grown as a result of customers increasingly buying Cerillion’s ‘end-to-end’ BSS/OSS suite (and not individual modules from different vendors, as was previously common). A good example is Cerillion’s record £15m contract with a relatively small operator: Cable & Wireless Seychelles. This trend towards more modules per customer and larger customers means deal value could continue to grow. Meanwhile an additional benefit of larger customers is greater upsell potential – both in terms of Services and Software, either through demand for additional products/modules or upgrading to a Managed Service contract. The latter grew +71% in FY22, evidencing exactly this.
Q3. How do you see the company in terms of fair value?
We expect £11.8m of free cash flow in FY24 so lift our target price to £14/share ~3% FCF FY24 yield.
