PROACTIS Holdings PLC (LON:PHD), the specialist Spend Control solution provider, has today announced its audited results for the year ended 31 July 2017.
Following the period under review, the Company acquired Perfect Commerce Group LLC (“Perfect”), which completed on 4 August 2017 and has since positioned PROACTIS as the sixth largest global ePurchasing pure-player by revenue.
* Reported revenue increased by 31% to £25.4m (2016: £19.4m)
* Underlying organic1 growth of 9% (2016: 7%)
* Annualised Contracted Revenue2 has increased by 28% to £22.6m (2016: £17.6m)
* Order Book3 increased by 7% to £28.0m (2016: £26.1m)
* Adjusted4 EBITDA increased by 49% to £7.9m (2016: £5.3m)
* Statutory operating loss was £2.6m (2016: profit £1.9m) due to non-recurring administrative expenses related to the acquisitions
* Adjusted4 earnings per share increased by 25% to 9.0p (2016: 7.2p)
* Strong cash balances of £4.3m (2016: £3.6m)
* Net debt of £0.9m5 (2016: net debt £0.5m)
* Increased proposed final dividend increased to 1.4p per share (2016: 1.3p)
* Strategic acquisition of Millstream Associates Limited, completed 16 November 2016
* Appointment of new CEO, Hampton Wall, following acquisition of Perfect
Note 1: Weighted average growth of all the companies within the Proactis Group at 1 August 2016, ie. excluding Millstream and Perfect (the “Existing Group”).
Note 2: Annualised Contracted Revenue is the Group’s estimate of the annualised run rate of subscription, managed service, support and hosting revenues currently contracted with the Group (“ACR”) as at 31 July 2017.
Note 3: Order Book is the Group’s current contracted revenue as at 31 July 2017 to be recognised in future accounting periods.
Note 4: Before the impact of non-recurring administrative expenses (related to the Group’s acquisition during the year and the post-acquisition integration and re-organisation programmes), amortisation of customer related intangible assets and share based payment charges.
Note 5: Following the acquisition of Perfect Commerce LLC on 4 August 2017, which was financed in part by new debt facilities provided by HSBC Bank plc, net debt has increased substantially to approximately £30m.
Alan Aubrey, PROACTIS Holdings PLC Chairman, commented: “The strong trading and financial performance has set a positive tone for what is set to be an exciting year ahead following the Group’s transformational acquisition of Perfect Commerce post period end.
“Commercial progress was at normalised levels during the year with a strong performance in terms of new names, upselling and customer retention and future performance underpinned with high levels of forward visibility through recurring contracted income. There was a substantial improvement in the rate of profitability, both organically and as a result of the inclusion of the higher margin Millstream business. The acquisition of Millstream was the fifth acquisition in a three-year timeframe and, given the encouraging post-acquisition performance, the Group has, once again, demonstrated its ability to implement optimal integration strategies.
“The Group is now engaged heavily in the integration process with Perfect as it looks to realise the synergistic benefits of the acquisition, with its track record holding the Group in good stead. The Board is encouraged by the early stage progress it has achieved and also by trading in the first months within the Group, which has been in line with its expectations. M&A remains a fundamental part of the Group’s growth strategy with a pipeline of opportunities under review.
“We are also pleased to welcome Hamp Wall to the business as Chief Executive Officer and are confident in his ability to lead the business forward at this exciting time in order to help the Group realise its growth strategy.
“The Group is well positioned for the coming year and the Board looks forward to driving further value for its shareholders.”
The Group continues to deliver on its ambitious long-term strategy of building a Group exhibiting the following characteristics:
– High revenue growth rates;
– Security through absolute scale and high levels of recurring income;
– Profitability; and
– Yield through a dividend policy.
2017 has been a transformational year during which the Group grew strongly year on year over the historic reporting period. This was achieved both through its organic performance and by way of its acquisition of Millstream Associates Limited (“Millstream”). The Group’s acquisition strategy was further delivered upon shortly after the end of the reporting period with the completion of the acquisition of Perfect Commerce LLC (“Perfect”), creating the sixth largest procurement solutions company by revenue, globally,
The Board believes that the acquisition of Perfect is an industry relevant transaction which enables the enlarged Group to service any procurement solution need of any customer in any of the main global markets. It has accelerated the Group’s growth plans by several years and creates significant opportunities for revenue based synergies but also significant cost savings. The initial priority is on business integration and the Group is now deeply into the planning and execution phases of this work.
The Group’s growth strategy remains unchanged and is as follows:
– Drive growth in its businesses through the delivery of best in class procurement solutions for its customers. The rate of intake of new names remains high and the Group’s continued commitment to investment in its solutions supports this;
– Retain existing customers through high levels of support and service offerings and, with an energetic approach to the cross-selling of the Group’s widening range of solutions, an opportunity to create even broader and deeper customer relationships;
– Undertake selected M&A based activity with a focus on complementary customer bases, solutions and technology. The Group has completed the acquisition of Millstream during the financial year and Perfect shortly after the financial year end and, cumulatively, six acquisitions within the last four financial years. A very strong pipeline of further exciting opportunities exists but further progress on M&A must be balanced against delivery of the value opportunity resulting from the Millstream and Perfect acquisitions; and
– Open up a vast new opportunity by accessing and offering value added benefits and services to a new customer grouping, the customer supply chain. The Group is focussed on adopting the acquired networking technology and business models within Perfect to access this opportunity having made slower progress than it would have expected to with its own technology over the last twelve months.
Business performance and strategy
The Group’s reported revenues increased by 31% to £25.4m (2016: £19.4m) with the Group’s acquisitions, Due North in the prior year and Millstream in this year, contributing a combined total of £5.4m (2016: Due North alone contributing £1.0m for the six months that it was part of the Group in the prior year). Organic revenue growth was 9%. The Group’s longer term growth performance remains strong with a three year cumulative average growth rate in revenue of 36%.
In the year, the Group’s ACR grew 28% and is now £22.6m (2016: £17.6m) and total forward contracted order book, to be delivered principally over the next five years, grew by 7% and now stands at £28.0m (2016: £26.1m).
The Group secured 54 new names (2016: 63) of which 44 (2016: 46) were subscription deals. The aggregate initial contract value sold was £4.1m (2016: £6.8m) of which £1.2m (2016: £2.2m) was recognised during the year. Average deal value reduced through a mix shift toward lower priced modules within the solution portfolio. The Board is satisfied with the level of new names during the year and expects the mix of modules sold to return to a more normalised mix going forward.
The number of upsell deals sold to existing customers increased encouragingly to 110 (2016: 95).
Whilst the satisfactory volume and value of new business and upsells are good indicators of market traction, the renewal of customer contracts sold in prior years remains of vital importance to the Group’s strategy. Therefore, it is very encouraging that the Group has generally maintained its very high levels of renewal.
The Group’s financial progress continues apace reporting Adjusted EBITDA (Note: definition below) of £7.9m (2016: £5.3m), in line with expectations. As described last year, the Group has realised operational and synergistic cost reductions from its post-acquisition integration plans to deliver improved profitability margins with the Adjusted EBITDA (Note: definition in Chief Financial Officer’s report) margin increasing to 31% (2016: 27%).
The Group has incurred significant non-recurring administrative expenses of £6.8m during the year relating primarily to the acquisitions of Millstream and Perfect. Of this, £1.8m relates to a non-cash loss on a conditional forward foreign exchange contract entered into to give security over the rate at which the Group could purchase US dollars to fund the acquisition of Perfect. This has resulted in the Group reporting a statutory operating loss of £2.6m (2016: profit £1.9m).
Blended perpetual and subscription software licence and services models
The Group continues to offer the blended model of perpetual and subscription software licences, delivered on its Cloud technology platform, as well as associated services. It has strong momentum in the marketplace. Its global business partners are achieving sales momentum of both licence types and the Group is seeing good traction in the United States.
The Group’s position as a leading “best in class” spend control and eProcurement solution provider has been further enhanced by the addition of major new modules, many new features and the introduction of mobile applications for large buying organisations. The solution suite is regularly recognised within the sector for its capability.
Ongoing investment has enabled the Group to move ahead of the competition by offering a truly “end-to-end” suite of software. The Group is in a very strong competitive position and will continue to invest to maintain that position.
Through the acquisition of Millstream (and, latterly, Perfect), the Group has acquired substantial reach into the supplier community. The Tenders Direct service was acquired with Millstream and the substantial business networking capability, The Business Network (“TBN”), was acquired with Perfect. The Board is focussed on realising the value from the commercial and technical opportunities of these specific capabilities in the enlarged Group.
The Group offers a true multi-company, multi-currency and multi-language capability and this remains an essential differentiator as the Group increases its presence across more sectors worldwide. During 2017 deals were sold to customers operating across several continents and many different sectors.
The Group competes on various levels; local vendors, Enterprise Resource Planning (“ERP”) vendors and international procurement vendors and this mix makes for an extremely competitive environment. The “end-to-end” message and tight integration techniques mitigate this and positions PROACTIS as a cost effective solution against both big ticket, consultancy led ERP vendors, international procurement vendors’ solutions and potential multi-vendor software led solutions.
M&A strategy and activity
The Group’s M&A strategy is to acquire businesses that fit a strict selection criteria based around the following principles:
– Consolidation of complementary customer bases and solutions – the procurement space is sufficiently fragmented to offer significant scope for this;
– Organisations with long term customer relationships, ideally contracted with a proven track record of retention and renewal;
– Technology led solutions and service offerings that are complementary to the Group’s existing offering; and
– Technology that is compatible with the Group’s existing technology.
Within this framework, the Group has made five acquisitions between February 2014 and November 2016 and all are integrated as products or services within the Group’s solution portfolio and have compatible technologies.
As described above, the acquisition of Perfect was transformational due to its size and was much more substantial than previous transactions. With integration firmly in mind, the Group looks forward to reporting on the year ahead as the synergies between the two companies continue to be realised, creating a solid foundation for growth.
The Group has a healthy pipeline of acquisition opportunities which is currently under review, however the Board is heavily focussed on realising the value opportunity resulting from the Millstream and Perfect acquisitions in the short-term.
The Group acquired Millstream, a provider of pre-award eProcurement solutions predominantly to suppliers, on 16 November 2016. Details of the transaction are included within the Chief Financial Officer’s report.
Its post-acquisition performance has been encouraging with £3.5m revenue and £1.7m Adjusted EBITDA (Note: definition in Chief Financial Officer’s report) during the 36 week period since completion. Millstream operates a subscription based revenue model and this contributed approximately £4.9m of recurring ACR. Whilst Millstream has a higher rate of churn in the supplier side of its business, it also has a substantial level of buyer side business which has low levels of churn. The blended churn rate is in line with that experienced by the Group.
As described at the time of the acquisition, the corporate integration of Millstream was deferred for a period in order to minimise disruption in the immediate post acquisition period, enabling Millstream to deliver the challenging performance targets that the Group had planned for. This has been achieved and closer integration will now start to move forward. The Board considers that this pragmatic approach to integration is testament to the Group’s ability to identify, execute and integrate strategic and accretive acquisitions that generate shareholder value.
The Group acquired Perfect, a provider of eProcurement solutions, on 4 August 2017. Accordingly, Perfect has not contributed to the performance of the Group during the financial year except for the non-recurring administrative expenses associated with the transaction itself, the committed element of which has been recognised.
This acquisition has positioned PROACTIS to leverage Perfect’s extensive international capabilities which sees it serve approximately 150 customers (largely Tier 1), with over 1.3 million users across more than 80 countries, 20 languages and 100 currencies. Previous to this, PROACTIS was pre-dominantly UK based, with a limited US presence, and its customers were Tier 2 businesses. However, now, the Board believes that the Group can become a leading provider of spend management solutions globally, from scaled operations in each of the main global markets of the United States, the United Kingdom and in mainland Europe.
This acquisition, which is expected to be earnings enhancing in first full financial year of ownership, has dramatically changed the Company’s profile and has accelerated PROACTIS’ strategy. Benefits include:
– An increased scale, geographic footprint, customer opportunity, and solution set
– Combined group delivering c.£55m of revenue, >85% recurring (based on historic financial information)
– Meaningful and multiple commercial and operational efficiencies
– Expected net annualised cost savings of approximately £5.0 million
– Significant cross-sell / up-sell opportunities; and
– Strengthened supplier commerce opportunity through The Business Network, its own proprietary supplier network which has approximately 970,000 suppliers connected to it. Those suppliers are able to use The Business Network to collaborate with and transact efficiently and electronically with their customers.
The enhanced solution set arising through the combination and the increased reach into the new territories to both Tier 1 and mid-market customer segments offers a solid platform to continue to execute the Group’s growth strategy.
The supplier commerce opportunity
The Group has a strategic objective of accessing and providing value added services to a new customer group, being the suppliers of its 1,000 customers. The Group’s focus is to create many mutual benefits that both the buyer and supplier can realise through the Group’s networking technology, including:
– Near paperless trading;
– Improvement of efficiencies in the administration of supplier records; and
– Transparency of the status of a purchase invoice in the approval and payment cycle,
with a view to, ultimately, providing accelerated payments to suppliers through an innovative application delivered over the networking technology. Additionally, this approach is expected to encourage electronic trading, which is currently poorly adopted, creating efficiencies within the buy/sell transaction process. These efficiencies will be realised by the suppliers through a greater level of convenience in the trading relationship with their customers and significantly reduced costs whilst also creating new commercial opportunities. These benefits and efficiencies will be charged through a non-tariff based, low cost software subscription.
The technology and commercial model acquired through the acquisition of Perfect is much more advanced than the Group’s own equivalent technology and the Board believes that the realisation of the opportunity will be de-risked through the adoption of this technology and commercial model.
Summary and outlook
The activities during the year have culminated in the transformation of PROACTIS into a truly global leader in the multi-billion-dollar eProcurement solution market. The Group has continued to execute its strategy and has grown substantially with a satisfactory rate of organic growth across reported revenue, ACR and order book. Plus the period under review saw it deliver further inorganic growth, which demonstrates our ability to successfully integrate and expand our offering, through its acquisition of Millstream, which has performed encouragingly post completion.
Client retention remains high and the Group’s solutions are being deployed more deeply and widely within the customer base through an impressive rate of upsell activity, which bodes well for the year ahead. This revenue is being delivered efficiently and profitability is very strong with high operating margins.
Over the coming year, the Group will continue to drive organic growth whilst realising the value opportunities provided by the acquisitions of Millstream and Perfect, which are substantial both in respect of geographic reach and an enhanced solution set. Initial progress on cost savings related to the integration of the Group with Perfect are encouraging and the Group is on track to meet its objective of delivering annualised savings of £5.0m by 31 July 2018 with more than £2.5m being delivered at the date of this report.
The Group’s opportunity to access and deliver value added services to a new customer grouping, the suppliers of its 1,000 customers, has moved more slowly than expected but the acquired technology and commercial acumen of Perfect gives the Board confidence that this opportunity can be realised in the short-medium term. The scope for growth in this part of the group’s business is extremely exciting.
The Board is very pleased with the Group’s sustained level of growth and momentum and is confident that the Group in a strong position to continue and accelerate even further.