The strong EBITDA margin (21.1% of revenue) resulted from revenue growth, management of subcontracting, the transformation to the SaaS mode and also no restructuring costs, all offsetting the surge in staff costs related to the recruitment of people with greater expertise to meet customer demand.

H1 18 revenue was released in July 2018. In our Latest on 23/07/2018 (see our comments), we concluded that revenue growth had accelerated above expectations at constant scope in Q2 18 (+6.9%) following the strong increase in Q1 18 (+4.9%).

Prodware has now released its H1 18 results which showed margin improvements.

H1 18 results

Based on revenue of €90.1m (+3.3%, o/w +4.2% at constant perimeter), EBITDA increased to €19m (+8.4%) corresponding to a margin rate of 21.1% of revenue (+1pt). The EBITDA margin improvement was attributable to the management of subcontracting, the transformation to SaaS mode and also no restructuring costs, unlike in H1 17 (€-1m).

The research tax credit due to the deduction of staff costs amounted to €5.2m. As a reminder, we factored in an estimated c.€10m for FY2018.

The current operating result increased to €11.3m (+6.7%), representing 12.5% of revenue (+0.4pt) taking into account the higher depreciation (€-6.9m vs €-6.2m in H1 17) and no reversal in provisions (vs €+0.4m in H1 17).

Operating profit surged to €11.1m (+13.1%), representing 12.3% of revenue (+1.1pt). The comparative basis included a provision of €-0.8m related to the issuance of a free share plan.

Group net profit was €7.6m (+12.5%) after higher net financial expenses (€-3m vs €-2m in H1 17), the share in associates of €0.4m (vs €0.1m) and lower income tax (€-0.7m vs €-1.6m in H1 17).

Free cash flow decreased to €0.8m (vs €5.4m in H1 17) due to the significant increase in capex (€17.7m vs €7.7m in H1 17) including the capitalised R&D investments. The level of capex in H1 18 is not representative of the whole year 2018 as €22-24m is anticipated in FY2018.

Strong EBITDA margin

The EBITDA margin was the result of flat external costs (€-14.5m) reflecting a better management of subcontracting despite the increase in the activities, lower purchasing costs (-4.6% to €-24m) on the back of the development of SaaS revenue, no restructuring charges (vs €-1m in the French-speaking countries in H1 17) and the surge in staff costs (+11.5% to €31.9m) due to a change of the profile of the headcount. While the workforce increased moderately by 1.9% to 1,286 employees on 30 June 2018, the recruitment of more people led to close to a 10% increase in the headcount, notably those with greater expertise, i.e. in consulting, artificial intelligence, digital transformation, amongst others, for which high demand generates wage increases.

Although the EBITDA margin improved by 1pt to 21.1% of revenue in H1 18, it was rather stable compared to the EBITDA margin when restated after the restructuring costs in H1 17 (21.3% of revenue). It is a good achievement nonetheless.

Confidence of management for H2 18

The next release concerns Q3 18 revenue and is due on 13 November 2018. Management is confident of revenue growth at constant scope thanks to the positive momentum in international markets related to Microsoft Dynamics and the good visibility of the activities related to Sage and Autodesk. It is worth knowing that Q4 is a strong quarter for Prodware and represents 30-35% of the group’s revenue.

Our model is under review. There should be no significant change in our 2018 estimates on the back of the H1 18 results.

The disappointing share price performance, -10% ytd, o/w -27% in 3M, may not be linked to the pretty good financial performance of Prodware since the beginning of the year 2018 but to investors’ distrust of technology stocks in a more tense economic environment.