RS2 Software plc - Interim Results

Thursday, August 24th, 2017

On 23 August, RS2 Software plc published its 2017 interim financial statements covering the six months ended 30 June 2017. It is important to highlight that the comparative figures for the six months ended 30 June 2017 have been restated due to adjustments made for the provision of key management personnel post-employment benefits and for the reassessment of revenue recognition criteria.

Performance Overview

During the first six months of 2017, RS2 registered an 8.5% increase in revenue to €10.57 million compared to the re-stated figure of €9.75 million as the decline in licence fees was offset by growing income from service fess as well as managed services.

Cost of sales increased by only 3.6% to €5.63 million even though the Group’s subsidiary in Manila (Philippines) commenced its development and support operations to the Malta headquarters thereby becoming a development support centre as originally planned.

As a result, gross profit improved by 14.7% to €4.94 million with the gross profit margin similarly improving to 46.7% compared to 44.2% in the first six months of 2016.

Administrative expenses increased by 33.7% to €2.04 million as the Group continues to strengthen its administrative functions in support of the planned international growth especially through its offices in the US and Philippines. The announcement noted that these two offices provide a strong foothold in the respective markets from where the Group is able to attract the right customers and strategic partners. Similarly, marketing expenses grew by 20.7% to €0.44 million in line with the Group’s efforts in marketing activities which to date have resulted in a very healthy sales pipeline.

Meanwhile, the income statement was boosted by a 56.7% drop in net other expenses largely reflecting a significant reduction in exchange losses compared to the first six months of 2016. RS2 also reported €0.46 million in capitalised development costs which is almost double the figure registered in the first half of 2016 reflecting the continued commitment of the Group to maintain its proprietary software, BANKWORKS.

Overall, the Group reported a 32.2% increase in operating profit to €2.63 million compared to the re-stated figure of €1.99 million. Excluding the depreciation and amortisation charge of €0.61 million (H1 2016: €0.62 million), the Group’s earnings before interest, tax, depreciation and amortisation (EBITDA) amounted to €6.48 million representing a 23.8% increase over the re-stated figure of €5.23 million for the first six months of 2016.

Net finance costs also declined by 27.6% to €0.13 million largely reflecting the further repayment of  bank borrowings.

Overall, RS2 reported a 38% increase in pre-tax profits to €2.51 million compared to the re-stated figure of €1.82 million for the first half of 2016. After accounting for a tax charge of €1.08 million (H1 2016: €0.47 million) and minority interest of €0.08 million (H1 2016: €0.04 million), the Group’s net profit amounted to €1.51 million representing a 9.1% increase over the previous comparable figure. This translates into an earnings per share of €0.009 (H1 2016: €0.0083).

The Statement of Financial Position as at 30 June 2017 compared to the corresponding figures as at 31 December 2016, shows a 1.2% increase in total assets to €32.2 million reflecting the 113.6% increase in trade receivables to €4.27 million and a 125% increase in loans and receivables from related parties to €2.1 million which were largely offset by the 40% reduction in cash balances to €3.8 million. Total liabilities also increased by 4.9% to €10.5 million mainly due to the significant increase in current tax payable to €2.1 million (compared to €0.96 million as at 31 December 2016) which was partially offset by a further 17.3% reduction in bank borrowings to €2.4 million. Overall, the Group’s equity base contracted marginally by 0.3% to €21.9 million as the profit registered during the period under review was offset by the dividend paid out in respect of the 2016 financial year. This translates into a net asset value per share of €0.128 (Dec 2016: €0.128).

Dividend

Similar to previous years, the Directors did not declare an interim dividend.

Outlook

The Directors reported that during the first half of 2017, RS2 continued to implement its strategy of intensively growing its managed services business line. In this respect, in January 2017, RS2 Smart Processing announced three major agreements with one of the largest acquirers in Europe, a Latin American company and also a Canadian company. Furthermore, the Group has already concluded letters of intent and is in an advanced stage of contract negotiations for the delivery of managed services to clients in Argentina, Australia, UK and Portugal with implementations of these new engagements currently underway. Once completed, the number of live managed services clients will multiply threefold in this part of the Group’s business with revenue streams expected to start materialising in the latter part of 2017.

Additionally, on 10 July 2017, RS2 entered into a strategic alliance with Quattro Processing Services, a global fintech company that specializes in full service payment processing. The purpose of this alliance is for Quatrro to offer an end-to-end hosted credit card processing and acquiring technology platform, for the Banks and Financial Institutions in India by making use of RS2 Software plc’s software BankWORKS.

The Directors also reiterated the Group’s opportunities in the US market as BANKWORKS offers a high level of flexibility and modularity which is lacking in legacy systems currently in use today. Moreover, the Group is also currently actively pursuing new opportunities with partners in Indonesia and Australia to offer mainly managed services solutions. The Directors noted that these markets show significant potential for growth in the payment industry and the Group is well positioned to take advantage of this opportunity.

In line with the Group’s international growth strategy, RS2 appointed a new Chief Technology Officer, Mr Patrick Clarke, who has vast experience in this industry.

In conclusion, the Directors explained that the sales pipeline across the different regions and across the Group’s two business lines (licencing and managed services) is very healthy and conducive to successfully implementing the Group’s expansion strategy.

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RS2 Software plc – Condensed Interim Financial Statements for the six months ended 30 June 2017.

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