Trading Update & New Loan Facility

ServicePower has achieved in-line with expectation revenue of £13.0m for the full year ended 31st December, but EBITDA is lower than expected. The UK technology company reported that it has already signed four new contracts in the new financial year and has a strong pipeline. The company added that it has obtained an unsecured loan of £1.00m for working capital and R&D purposes. At an interest rate of 8% per annum, our view is that the terms of the loan are fair and reasonable. We have updated our forecasts, mainly to reflect lower gross margins, the new loan facility and lower revenue growth expectations. With the shares offering investors exposure to the high-growth mobile workforce and field service management software market, we continue to classify the shares as a growth stock.

Trading Update & New Loan Facility

Revenue grew by 2.4% to £13.0m (FY14: £12.7m) and consisted of product related revenue of £8.1m, up by 12% year-on-year, and professional and managed service revenue of £4.9m, down 12% year-on-year. ServicePower reported that the decline in service revenue is due to a delay in the implementation of a number of professional service contracts and the expiration of a low margin contract. Gross profit remained unchanged at £6.0m (FY14: £6.0m), which is slightly below our forecast of £6.37m and equates to a gross margin of 46% (FY14: 47.5%). Loss after tax increased to £1.1m (FY14: £0.9m) and LBITDA reduced to £0.4m (FY14: £0.5m). Full-year results will be announced on 6th April 2016. ServicePower has signed 16 contracts since the start of July 2015. ServicePower has obtained an unsecured loan to the value of £1.00m. The loan, from Herald Investment Trust plc, will take effect from 8th February 2016 and is repayable in full on 16th December 2016.

Forecasts

We understand that, due to a change in accounting methodology regarding IT infrastructure, SerivcePower is booking more IT costs to COGS, rather than SG&A. Also, the company is working to increase the margin on services, which would have a positive impact on gross margin. We have updated our forecasts to include the loan, a lower gross margin assumption of 49% (from 51%) and slightly lower revenue growth assumptions (see table on next page).

Valuation

Peer company ClickSoftware was acquired for an all-cash price of $438m, equating to an EV/sales multiple of 3.1x and representing a 40% premium to its previous share price. The main risk is a slower than expected uptake in its offerings as it continues to migrate to more of a SaaS model. In addition, we note that the new loan of £1m will require refinancing in December 2016.