Lombard Risk Management Share Discussion Threads

[emmo1210] 13/5/2014 13:37

That policy values the suite of software at zero present value?

[aishah] 13/5/2014 13:31

A snippet from Techinvest on why they sold:
"we were more and more uncomfortable with the treatment of annual R&D costs in the accounts. Admittedly, this didn't break any accountancy rules, but we have a very strong preference for writing off all R&D in the year in which it is incurred, as is indeed the practice of the many North American stocks held in the MFM Techinvest Technology fund."

[cockerhoop] 13/5/2014 12:56

I find it very interesting that the amortisation of the capitalized R&D spend has actually reduced YoY (if you take out the impairment) even though they have capitalised £5.3m.

The whole policy is really aggressive - annual instalments over 5 years starting from when the product is complete. If a product takes 2 years to develop, it'll take 7 years to work through the accounts. IMO thats too long for software.

[pdt] 13/5/2014 12:47

rivaldo - I think you have picked up on the key point that these capitalised costs will reduce as a percentage of revenue. This will mean positive cashflow and with the forming of alliances like the one with Broadridge that cashflow should grow. That will tick that particular box leaving us with a company growing at over 20% on a PE of 6. In an expanding market for their products there must be a chance of a rerating or an offer for the company at some point.

[painter] 13/5/2014 12:45

Rivaldo I always appreciate your posts on many bb's but I can't believe the LRM's statement:

"We expect research and development costs to reduce in the 2014/15 financial year as a percentage of revenues"

The regulations change, the customers want more options? They learn to make them pay else the development costs will be an issue for 3 or 4 years. I have worked in this part of the banking industry and bought here becomes I know the banks will spend the money.

GLA

[woodcutter] 13/5/2014 12:41

Riv

"We expect research and development costs to reduce in the 2014/15 financial year as a percentage of revenues"

I would be looking at it in terms of COS and admin.

lets hope that happens, at present i'm pessimistic.

2012
COS+admin £10241
capitalised £3318
percentage 32%

2013
COS+admin £12786
capitalised £4278
percentage 34%

2014
COS+admin £15934
capitalised £5333
percentage 33%

yoy the capex is roughly the same as a percentage of costs. And it's high and it does need to come down.Nobody would be more pleased than me if they can achieve this capex reduction as i can then get back in and reinvest, i believe in the growth but only with controlled cost.

aimho.

WC

[cockerhoop] 13/5/2014 12:30

Rivaldo,

I read the companies comment regards R&D costs as likely to mean 'while R&D costs will rise in absolute terms they will decrease as a % of revenue'.

Must be a prospect of another placing to 'fund future growth'.

[rivaldo] 13/5/2014 12:23

Paul Scott has as expected commented on the results with the usual comments about cash flow, which I can entirely understand - but then he asks "when are the development costs going to reduce or stop", which indicates he has presumably completely missed today's comment:

"We expect research and development costs to reduce in the 2014/15 financial year as a percentage of revenues"

Here's the link:

hxxp://www.-.com/content/small-cap-value-report-13-may-2014-puri-zyt-camb-lrm-83341/

Factors such as high recurring income, blue chip and growing client lists, fast-increasing regulatory requirements all have to be added into the mix as to valuation for LRM - and the outlook is as bullish as you can hope for:

""Our revenues advanced by 22% continuing the trend of growth of the previous three years. We have now achieved compound revenue growth in the last four years of almost 23% p.a. and it is pleasing to have beaten market expectations on both revenue and profitability. We have entered the new financial year with recurrent revenues at another all-time high of around £8.6m, our highest ever year end level of order book at £5.2m, and with a good sales pipeline. There is continued new European regulation in the UK beyond COREP, such as FINREP and Asset Encumbrance, and also regulatory change in several of the countries in which we operate. Our Alliances programme is starting to become interesting with a number of opportunities being worked on. We have a new product, Compliance Assessor, which looks like a potential source of very useful new revenue. We have invested in a Global Sales Director and are strengthening the Americas operation. Taking all these factors into account the Board believes that the commercial outlook is favourable.""

[emmo1210] 13/5/2014 10:32

Woodcutter - fair point.

Can't see many companies pushing growth like this would have much net cashflow, if growth had stopped it would certainly be a different story.

[woodcutter] 13/5/2014 10:02

Eezy

The amortisation charge will only catch up with the capex charges if they begin to get to a point where the capex begins to reduce which is what you'd expect. BUT the capex charges here continue to grow. However i agree entirely with your general view.

2012
capex £3318K
profit £2505

2013
capex £4278K
profit £3714

2014
capex £5333
profit £5154

And this is for products which are supposedly in operation in the market.

I'm not knocking LRM i was previously a holder but there comes a point were the development must diminish and the cash flow becomes real and there's little sign of that yet. I don't doubt at all that there's a substantial market here and i would re-invest if they could get their costs under better control.

I've held a number of software companies in the past and it's sad to say the issue of capitalisation of development has been a constant problem with all of them. I'm sure there are many where this isn't an issue particularly those who write off much of the development in the early stages.

I've come to the conclusion that they are for the most part only worth trading on a TA basis around reversal points on the back of good/bad news. They are not imv long term investments, unless you strike lucky.

I still hold SPA who also had results out today and i'm considering my postition there too. Although my reasons for buying SPA were very different and it was only a very small punt. Here, in the past, i held quite a reasonable holding and fortunately sold for a profit.

aimho

WC

[simon gordon] 13/5/2014 09:43

Tech Market View seem to be focused mostly on the growth angle when they cover UK tech stocks.

The factor that drew me to the story was the Broadridge alliance, I'll see how that goes for the remainder of 2014. Share might re-rate if they start landing some substantial contracts in America. It ain't cheap, it ain't expensive. Probably fairly priced.

[eezymunny] 13/5/2014 09:30

That's not "Wall St" touting EBITDA as a valuation guide is it Simon??? I see no mention of cash flow there ;)

[emmo1210] 13/5/2014 09:29

For me, it has to be taken in the context of the regulatory deadlines that have to be met. Lombard MUST have the modules ready before the deadline or risk loosing to other vendors, as once customers are lost, they're lost for good.
I see it that it is critically important that as much R&D is spent now to have these s'wares ready and lock in these clients and that the capitalising is not unfair, after-all up until 2011 they had capitalised no costs at all, which is hardly reasonable to value their main asset at nothing at all.
Also note that the 'pre-capitalisation' costs table was also present in previous year report so certainly not as if the company is attempting to gloss over anything.
The rising revenue is enough to satisfy me that the increased investment is warranted.
We will see this year what the Broadridge tie up will bring.

[simon gordon] 13/5/2014 09:22

Tech Market View - 13/5/14:

Lombard Risk – hard work paying off

Figures for the full year to March for Lombard Risk, the provider of regulatory compliance solutions, showed the benefits of a broader product range and an expanded customer list, together with an absence of regulatory delays such as those that plagued first half results, see here. Revenue for the year totalled £20.4m, up 22%, in line with the average for the past four years. The second half was up 45%, to £13.1m.

Full year EBITDA reached £6m, margins shading to 29% (from 31.5% in 2013) as sales and implementation resources were built up. UK customers revenue almost doubled to £12m. Sales revenue outside the UK generally stood still, with a decline in EMEA, but non-UK regions are expected to provide substantial growth in the current year, with many new customers having been signed up and resources strengthened, particularly in the US.

The Regulatory Compliance division (47% of group) delivered 34 new contracts for its Common Reporting ("COREP") solution, lifting customer numbers here to 67. The Risk Management division (53% of group) secured a major contract with a Tier1 UK bank and has a strong pipeline. Progress is being made in Japanese domestic markets and in the US, where LRM's solution will be incorporated into Broadridge's portfolio to investment management firms, see here. Partnership deals will play an increasing role.

The tidal wave of new regulation will not slacken in the current year. Market participants will continue to search for standardised solutions, such as those provided by Lombard Risk, rather than develop their own. Additionally, the company's success in bringing on new customers underwrites future growth, as customers buy additional functionality and extend the use of the compliance platforms throughout their operations. We would look for continued top-line and profits growth.

[eezymunny] 13/5/2014 09:13

Woodcutter the amort charge will catch up with the capex over the forthcoming years (reducing profitability) but at the end of the day all that really matters is cash flow and for now, for me, it still doesn't justify the valuation. Others may disagree or believe that cash flow will improve. Good luck to them, the top line growth is pretty impressive.

[cockerhoop] 13/5/2014 09:10

Woodcutter,

The proportion of capitalized R/D compared to total technology spend just seems too high to me. i.e. £5.3m out of £7.1m. Testing, Support and Maintenance only £1.8m?.

[woodcutter] 13/5/2014 09:10

It looks very much to me that they're releasing a pre packaged type software product to clients who then decide it doesn't quite fit with their existing systems so they then have to go in and tweak the package to get it to integrate with the clients systems, might be unfair but it doesn't look good.

WC

[cockerhoop] 13/5/2014 09:06

EM,

The cash inflow of £1m includes a almost £3m placing so is in effect a £2m outflow without going cap in hand to the shareholders (again!).

[woodcutter] 13/5/2014 08:59

yep sadly continued capitalisation of development costs greater than profits at £5.3m so no cash generated at all. You can't keep issuing equity in order to give the shareholders a dividend it's not acceptable.

I sold at the interims, principally because of the constant yoy capitalisation of development. At some point you've got to turn that into cash.

i've been monitoring closely and had hoped to return today to see significant progress on cash generation but i've now removed LRM from my watch list.

The debate over capitalisation of development is a tough one. In an industrial environment the machinery capex is usually expected to be at or near the depreciation level.

In the software sector it appears you can capitalise as much or as little development as you consider appropriate. Recently i set a rule for software companies that after initial early stage development costs i'd only invest if the future labour capitalised was close to the equivalent of amortisation, or at worst 1.5 times.

The balance sheet intangibles continues to grow as a result of this, it's unaccpetable and misleading investors imv.

LRM's amortisation is £1.22m so it off my radar now i'm afraid.

aimho

woody

definition of early development costs:
the cost to get the software to a point where the product is released into the market. All future costs should be upgrades.

[painter] 13/5/2014 08:14

Capexing of dev't costs - £5.3m.

A lot of expense in bedding new customer + keeping up with regulation changes.
This will be the case for the next 2-3 years, this year against 8.6m of reoccurring revenue + 22% in growth. Looks ok to me.

[rivaldo] 13/5/2014 08:09

Terrific results on the face of it, well ahead of forecasts for PBT and EPS.

The "Year-on-year trends" table is certainly revealing! Kudos to LRM for fronting up about capitalisation etc.

But the market looks forward, and it's obvious that LRM is a company with growing and large prospects and markets.

And they specifically say "We expect research and development costs to reduce in the 2014/15 financial year as a percentage of revenues".

There's a balance to be struck between appreciation of the huge investments they've been making and the point at which those investments produce returns. The Outlook statement couldn't be better:

"Outlook

The Board looks forward to the forthcoming year with continued optimism. The unrelenting macro-regulatory environment in the financial industry persists. This, together with the addition of the sales drive and the healthy £5.2m order book of contracted licence and professional services, gives the Board comfort of further growth progression."

[cockerhoop] 13/5/2014 08:01

They do include a handy table this time to show they're not making any cash :-)

[eezymunny] 13/5/2014 07:50

The usual very high capexing of dev't costs - £5.3m this time! And as usual very little cash generated. They really should stop this and give a clearer picture IMO.

[cwa1] 13/5/2014 07:50

Results out, sound decent on first glance:-

Highlights
-- Revenues GBP20.4m (2013: GBP16.8m), of which second half GBP13.1m (2013 : GBP9.0m)
-- EBITDA GBP6.0m (2013: GBP5.3m)
-- Profit before tax GBP4.4m (2013: GBP3.9m)
-- Cash at end of period GBP2.9m (2013: GBP1.9m) with net cash(1) of GBP2.3m (2013: GBP0.2m)
-- A further 34 contracts signed for COREP, of which 16 are new names
-- Significant sale of COLLINE(R) to a Tier 1 bank in December 2013
-- FY 2015 opens with record year end revenue order book in place
-- Final dividend 0.045p per share (2013: 0.040p per share) recommended to shareholders
-- The Board continues to view the future with optimism

(1) Cash less total bank borrowings. Bank borrowings were GBP0.7m (2013:GBP1.7m)

Chief Executive Officer, John Wisbey, commented on the results:

"Our revenues advanced by 22% continuing the trend of growth of the previous three years. We have now achieved compound revenue growth in the last four years of almost 23% p.a. and it is pleasing to have beaten market expectations on both revenue and profitability. We have entered the new financial year with recurrent revenues at another all-time high of around GBP8.6m, our highest ever year end level of order book at GBP5.2m, and with a good sales pipeline. There is continued new European regulation in the UK beyond COREP, such as FINREP and Asset Encumbrance, and also regulatory change in several of the countries in which we operate. Our Alliances programme is starting to become interesting with a number of opportunities being worked on. We have a new product, Compliance Assessor, which looks like a potential source of very useful new revenue. We have invested in a Global Sales Director and are strengthening the Americas operation. Taking all these factors into account the Board believes that the commercial outlook is favourable."