On 18 April, RS2 Software plc published its preliminary financial statements for the year ended 31 December 2016.
During the period under review, RS2 registered an 11.7% drop in revenues to €17.2 million from the record figure of €19.4 million in the previous comparable period. The decrease in revenue is attributable to the implementation of the Company’s strategy to shift more business towards managed services and away from licensing business which tends to inflate revenues on recognition. Indeed, processing fees generated by the managed services business increased by 24%, reflecting additional revenue from new and existing clients in the form of implementation and transaction fees.
Despite the drop in revenues, costs of sales increased by 2.2% to €10.3 million (2015: €10.1 million) reflecting its efforts to continue servicing its current client base and being able to take on potential new client opportunities. In this respect, RS2 continued to invest heavily in human resources (operations staff complement grew by an average of 11%) and infrastructure.
Furthermore, administrative expenses also increased by 43% to €3.6 million when compared to 2015 largely reflecting the setting up of new offices in the United States and the Philippines. Additionally, following the 68% surge in marketing and promotional expenses incurred in FY2015, these rose again by a further 45% during 2016 to €0.8 million as RS2 increased its efforts at penetrating new foreign markets in line with its strategy of global expansion which are also contributing directly to the Group’s business pipeline and translating into new clients. RS2’s performance was also negatively impacted by unfavourable foreign currency movements amounting to €1.4 million mainly as a result of the weakening of the Pound Sterling against the Euro.
During the period under review, RS2 recognised a net amount of €0.7 million in impairment losses on trade receivables which resulted from default and/or doubt on the recovery of receivables accumulated over the past few years. Notwithstanding this, the Group reiterated that it maintains a strong client base as it continues to widen its client portfolio by attracting new clients from different regions across the globe.
As a result, RS2 registered an operating profit of just €0.84 million compared to €6.55 million in the previous comparable period. Excluding the depreciation and amortisation charge of €1.29 million (FY2015: €1.69 million), the Group’s earnings before interest, tax, depreciation and amortisation (“EBITDA”) amounted to €2.13 million compared to €8.28 million in FY2015.
During 2016, RS2 reported a net finance income of €0.04 million compared to a net finance cost of €0.13 million in 2015.
Overall, pre-tax profits slumped to €0.88 million from €6.43 million in 2015. After accounting for a tax charge of €0.43 million (FY2015: €1.61 million) and minority interest, the Group’s net profit amounted to €0.58 million compared to €4.83 million in the previous financial year. This translates into an earnings per share of €0.004 (FY2015: €0.03).
The Statement of Financial Position shows a 9.4% decrease in total assets to €31.9 million mainly due to lower levels of accrued income (-€1.21 million), trade receivables (-€1 million) and cash balance (-€0.85 million). Similarly, total liabilities dropped by 11.1% to €10 million mainly reflecting the declines in borrowings (-€0.59 million) and total tax liabilities (-€1.02 million). Accordingly, the Group’s total equity decreased by 8.6% to €21.9 million (31 December 2015: €23.9 million) which translates into a net asset value per share of €0.139 (31 December 2015: €0.163).
Dividend & Bonus Issue
The Directors recommended a final net dividend of €0.01 per share representing a 36.7% decline from the €0.0158 dividend per share paid out in respect of the 2015 financial year. Shareholders as at close of trading on Wednesday 17 May 2017 will be entitled to receive this dividend on Thursday 22 June 2017 subject to shareholders’ approval at the upcoming Annual General Meeting scheduled to be held on Tuesday 20 June 2017.
The Directors also recommended a bonus share issue of 1 new share for every 12 shares held which will be funded through the capitalisation of €0.79 million of reserves. Shareholders as at the close of trading on Wednesday 17 May 2017 will be eligible to receive the bonus shares.
In their commentary to the preliminary statement of results, the Directors warned that due to the different inherent characteristics of revenue recognition between license and managed services, the Group may experience lower revenues and profitability in the interim period until stabilisation occurs. Nonetheless, RS2 has also been successful to conclude further agreements towards the end of 2016 and in the beginning of 2017, revenue from which is expected to be realised during 2017 and beyond.