An encouraging update released today:
System1 Group issues the following update on trading for the six months to 30 September 2021. The Company will announce its interim results on 30 November 2021.
The first half of the current year (H1) saw a marked increase in sales of automated data products including Test Your Ad. Data products represented 45% of Revenue in Q2, growing from 28% in Q1. Data Revenue in Q2 exceeded Q1 despite a quarter-on-quarter reduction in total Group Revenue. The Group’s H1 Revenue grew 22% on last year to £12.3m.
Q2 Data revenue was better than the Q1/AGM statement had indicated.
Total H1 revenue of £12.3m less £6.5m for Q1 gives £5.8m for total Q2 revenue. 45% of that £5.8m gives Q2 Data revenue of £2.6m and H1 Data revenue of £4.4m — representing 36% of total H1 revenue. SYS1 had previously indicated Data would represent a third of H1 revenue.
Total Q2 revenue of £5.8m is not great given the previous two quarters each registered £6.5m total revenue. But SYS1 is transitioning from bespoke consultancy work to automated Data income and I guess the revenue cross-over will not always balance out. What is important is the more attractive Data revenue is growing quickly:
Consultancy revenue was only £3.2m during Q2 versus £4.7m during Q1 and £5m-plus for Q3 and Q4 of FY 2021. That reduction has meant current profit is running below what I had calculated in this blog post.
Adjusted Operating Costs* grew as planned as the Group continued to invest in automated products, technology and business development, increasing by 10% over the comparable period to £9.0m.
Adjusted Pre-tax Profits are expected to be some £1.3m in H1, approximately £0.9m higher than in the comparable period. Statutory Pre-tax Profits are expected to be £1.3m compared with a loss of £0.4m in the first half of last financial year.
Period end cash, net of borrowings, was £7.3m, compared with £6.5m at end-March 2021.
Adjusted operating costs of £9.0m for this H1 is a little better than I had predicted. My sums in this blog post predicted nearly £9.2m.
Pre-tax profit of £1.3m for this H1 looks about right assuming an 85% gross margin (as per Q4 FY 2021) on the £12.3m H1 revenue (=£10.5m gross profit) less £9.2m of adjusted costs.
But H1 pre-tax profit of £1.3m, or £2.6m annualised, is below my £3.6m full-year guess within this blog post:
I am hopeful this Q2 is SYS1’s profit low point as Data revenue continues to grow and replace the old-style Consultancy work. H2 could provide some clues as to the possible economics of the Data operation, as any incremental revenue/profit during Q3 and Q4 can be compared to that of Q2.
Net cash of £7.3m is up only £0.8m on the year end, which seems a tad light given H1 pre-tax profit of £1.3m. But the Q1 update implied net cash was £7.6m, which we now know to be £0.3m higher than Q2, so SYS1’s cash movements appear significant from quarter to quarter.
We have been delighted by the continuing adoption by both new and existing customers of System1’s repeatable, fast-turnaround and scalable data products as they displace the historic large bespoke consultancy projects that dominated the Group’s activity until H2 last year. We believe that the growth in data revenues signals tangible progress towards our strategic goals, and that these revenues will in due course more than offset the reduction in bespoke consultancy projects as more customers switch to using our automated data products.
In line with previous communications, the Group intends after the interim results announcement to initiate a share buyback programme to repurchase its shares over an extended period, in order to enhance shareholder returns and to satisfy obligations in relation to employee share schemes.
*Adjusted Operating Costs exclude impairment, interest, share based payments, bonuses, severance costs and government support related to the Covid pandemic. Adjusted figures exclude items, positive and negative, that impede easy understanding of underlying performance.
Ah, so SYS1 is indeed expecting Data revenue to “more than offset” Consultancy work, albeit “in due course“.
The mooted buyback is still on, although SYS1 is now mentioning an “extended period” and “obligations” to share schemes. So not quite the ‘pure’ buyback I had hoped for.
(There are of course no buyback “obligations” with share schemes; companies do not have to operate such schemes and do not have to buy back the shares to offset the resultant dilution.)
I am now reluctant to consider the buyback for valuation purposes as the text reads as if the money will be spent over many years to keep a lid on share dilution. Mind you, significant option vesting will only occur if revenue doubles to £45m during the next four years — which if it does ought to support a higher share price anyway.