Cerillion plc (LON:CER): DirectorsTalk caught up with Harold Evans, Senior Research Analyst, TMT at Singer Capital Markets for his views on Cerillion’s interim results for the six months ended 31 March 2023.
Q1. What stood out for you in H1 results?
Cerillion has delivered a very strong H1, with sales of £20.5m, +27% y/y and EBITDA +38% to £10.0m (~49% margin). Results reflect strong execution against a healthy backlog and also two large existing customer deals, thus driving H1 bookings +40% higher. Indeed these two contracts are worth highlighting as they reflect an acceleration of an established trend, whereby Cerillion’s broad and relevant value proposition is driving ongoing product and service purchases by existing customers.
Q2. What are the H2 prospects?
The company is strongly positioned to deliver against unchanged expectations, which now imply H2 revenues of £17.5m and £6.5m EBITDA.
Q3. Are there any factors that might impact near-term trading?
Two main ones are:
- How H2 revenue could be weighted more towards Services (which takes longer to deliver vs. licence sales) and hence H2 sales could sequentially decline and be at a lower margin.
- The weaker Dollar also presents a revenue headwind.
All this said, we would be surprised if profit does indeed decline by as much as we’ve conservatively assumed and hence we still see upside risk.
Q4. What are your views on Cerillion’s pipeline?
Cerillion’s pipeline now stands at £263m or £65m on a probability weighted basis – up from £51m as at FY22 y/e, driven principally by an increase in ‘existing customer’ opportunities (and notwithstanding two large ‘existing customer’ deals in H1).
This points to an active and healthy customer base and Cerillion’s growing opportunity to drive value through e.g. additional modules, expansions or upgrades, its Evergreen programme and also Managed Services. Furthermore, considering the greater visibility existing customer opportunities afford, this provides particular confidence when considering near-term prospects.
Additionally, the company is also keen to highlight its new customer pipeline – referencing “advanced discussions…expected to close in H2 and beyond”. Combined therefore, prospects continue to look very encouraging.
Q5. How does the pipeline compare to forecasts?
The growing size of existing customer deals is meaningful, such that if Cerillion can land one (or more) meaningful new customers as well, this would likely present upside risk relative to FY24 forecasts.
Q6. Can you provide any more insights on the revenue mix?
While over the short-term revenue mix fluctuates, we expect to see an upward trend in Software revenue as; existing customers continue to purchase additional modules (as this period’s deals highlights) and; larger deals tend to be more weighted towards Software. This upward trend benefits recurring revenue and as well margins.
Q7. Do you have any other thoughts on the financials?
Gross margin increased to 81.5% (PY: 78.5%) principally reflecting the higher proportion of software licence revenue and also a favourable impact from FX. Service gross margins have also been assisted by the trend towards remote delivery (which has become the norm since Covid) as this has enabled Cerillion to grow headcount in cost efficient locations such as India and more recently, Bulgaria.
While we expect a trend towards more Software sales, we’re cautious about how this could translate to further gross margin improvement. This said, if Cerillion ever does decide to outsource service delivery, revenue mix could then shift even further towards Software and thereby further benefit gross margins. We understand that this is an opportunity that CER is considering.
Cash opex grew +24% y/y, but as a % of sales fell from 34% to 33% (and combined with higher GM) EBITDA grew +38% y/y to £10.0m. One contributing factor is that Sales and Marketing costs have not grown in line with revenue. This is thanks to CER’s growing reputation: the company has benefited from in-bound leads as well as outbound. Additionally, because reputation and track record are so critical, there are relatively few vendors for the size of the market and hence marketing spend (to gain visibility) is less critical. Cerillion has also consistently featured in Gartner’s ‘Magic Quadrant’ analysis – one of the most important documents used by prospective customers.
Cerillion plc (LON:CER) is a leading provider of billing, charging and customer management systems with more than 20 years’ experience delivering its solutions across a broad range of industries including the telecommunications, finance, utilities and transportation sectors.
