Mixed quarter, negatively impacted by a disappointing performance in Terminals

Keyware released its Q2 17 results, with revenues reaching €4,482k, corresponding to a 14.3% decrease yoy. Terminals came in at €2,086k (-18.7% yoy), Authorisations at €2,345k (-11.9% yoy), and the new business unit Software at €51k.

The gross margin reached 53.5%, down 670bp sequentially and 70bp yoy, and the operating margin came in at 7.1%, down 1290bp yoy. Profit before tax came in at €495k, leading to a net result of €338k, which was impacted by €53k of positive results from associated companies.

The company announced in June 2017 the acquisition of the remaining stake in Magellan, the French fintech in which Keyware had acquired 40% of the shares for €4m in Q3 16. The price for the remaining 60% is €6m, paid through own resources and a €4.5m bank loan.

Tough quarter in Terminals

This quarter was marked by what can be called a poor performance in Terminals, as the substantial drop should be compared with the already strong drop from Q2 16 (-21.7%).

The reasons remain the same as in Q1, i.e. a smaller number of contracts signed, and an unfavourable product mix with more cheaper terminals.

Moreover, Germany is not performing as well as expected, to say the least, as the number of contracts signed appears to be below initial expectations, and the growth slower than expected as well.

Unfortunately for Keyware, these headwinds are likely to persist as the measures taken to reverse the trend will need some time to deliver their full effect.

The fastest one should be the increase in the sales team, decided during Q1 but for which the first results should start to appear in Q3. However, for Germany and the product mix, the roots are deeper.

The German market is highly competitive due to strong barriers to entry, so it will be some time before the sales curve accelerates. For the product mix, the company is walking on a razor’s edge: competing with its terminals’ suppliers Ingenico and Worldline, it must find a way to balance its Average Selling Price (ASP), the induced gross margin and the potential acquiring kickbacks from Worldine’s terminals.

On the other side, the update of the PCI-DSS regulation has already triggered the start of an upgrade cycle before the existing terminals become obsolescent, which will favour the company and boost revenues, along with the expected results from the new sales teams.

However, our initial expectation of more than €1m in revenues from Terminals is becoming unlikely, forcing us to a downgrade which will have a substantial impact, as the margins are typically much better in this business.

Growth drivers remain for the long term

The negative performance of the Authorisations business should be minimised in our view: Q2 16 had been truly outstanding, with a +56.9% increase yoy, thus leading to a very high basis of comparison. The transition towards the brokering model appears to be following its course.

The major piece of news is the acquisition of the remaining stake in Magellan. Although the price paid may appear high at first, the company is already bringing in substantial profits, and is displaying appreciable growth: the objective is to double its revenues by 2023, i.e. about €6.5m.

Moreover, the integration will demand minimal costs, as Magellan will operate as an independent business within the company and will bring its expertise as an additional layer to the other businesses.

Combined with the acquisition of EasyOrder, Keyware is therefore building up a substantial software offer, which will act as a clear differentiator among competitors and bring a strong cash generation thanks to the inherent higher margins… although it will more than probably result at first in the dividend being cut to finance the acquisition.

Due to the current negative in Terminals, we are going to trim our expectations as we had computed more than €10m of revenues in 2017.

This is going to have a substantial negative impact on the valuation, as this business is a major driver for margins and cash generation, while the acquisition of Magellan will lead to the removal of the dividend in our model.

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