In-line With Expectations Trading Update

ServicePower has announced that trading in the six months ended 30th June 2016 has been in-line with management expectations, with revenue increasing by 5% to £6.4m on the comparable six-months earlier (H2 FY15: £6.1m). In addition, the UK technology company has announced a new contract win with an estimated value of in excess of £150k over three years and a contract entension with an estimated value of $1.5m over two years, further supporting our revenue forecasts. We have made one change to our forecast assumptions and that is the proportion of revenue invested in SG&A in FY17 decreases to 47.5% (from 50%), reflecting a higher focus on cutting costs. 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

Gross margin increased by 3 percentage points to 52% on the comparable period a year earlier (H1 FY15: 49%). Cash is unchanged at £0.7m (H1 FY15: £0.7m). The company added that June was both EBITDA and net income positive.

Contract Win

The contract win is with Barron McCann, the independent IT service provider that includes Tesco and Vision Express as its customers, and it relates to ServicePower’s ServiceScheduling route and schedule optimisation offerings. No further financial details were provided.

Forecasts

We are forecasting revenue of £13.6m for FY16, growing to £14.4m for FY17 and £16.2m for FY18. A 49% gross margin would suggest a gross profit of £6.7m for FY16, growing to £7.0m for FY17 and £8.0m in FY18. We are forecasting a decline in the proportion of revenue invested in SG&A to 50% in FY16, decreasing further to 47.5% (previously 50%) for FY17 and 45% in FY18. This translates to an operating loss of £136k and EBITDA of £573k for FY16, an operating profit of £216k and EBITDA of £826k for FY17, and an operating profit of £649k and EBITDA of £1.2m for FY18.

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 to our forecasts is a slower than expected uptake in the offerings as ServicePower continues to migrate to more of a SaaS model. In addition, we note that the loan of £1m will require refinancing in December 2016.