Citadel Group Limited (ASX: CGL) consisted of the provision of software and managed services in the technology sector throughout Australia. The company is considered as a leader in the development and delivery of managed technology solutions. And a large share of revenue comes from long-term managed services and SaaS (software-as-a-service) solutions. The company released an update as on 16th May 2019, about the appointment of Mr Sam Weiss as an Independent Non-Executive Director with effect from 15th May 2019.
The company, as on 17th May 2019, updated investors on the expected revenue and earnings for the year ending 30th June 2019. The management’s view is that the changes to trading expectations have become more certain. Having said that, the Board now is expecting a sales revenue for FY19 to be in the range of $97 million to $104 million. Gross profit margins also are expected to be reduced to ~46%. Expectations for EBITDA stands in the range of $22 million to $24 million for FY19.
The changes in the expectation for FY19 revenue and earnings are based on two factors; (1) Customer-controlled project extensions, which earlier were expected to start in the second half of FY19 but are now expected to commence beyond the first half of FY20. (2) The company is not undergoing the same rise in the fourth quarter of FY19 in customer expenditure as it experienced in the previous years.
Impact of the delays, in combination with the earlier suggested changes in the mix of sales figures from higher margin consulting and managed services business, to SaaS and related software services, which operate at a reduced margin in the short-term prior to scaling out in the medium-term, has witnessed an overall decrease in gross profit as a percentage of revenue to an expected level of 46%.
As the disappointment is clearly visible in terms of short-term results, the management expects the medium-term and long-term outlook to remain strong. These expectations are based on the consistent growth of qualified sales pipeline, especially with regards to the SaaS business.
As charted in the second half of the year, the group intends to become a global software and services company under the Citadel 2.0 strategy. It will mean an inevitable shift in the mix of margin, because the change in the revenue model is embedded.
The traditional form of consulting and managed services for the group was dependent on engaging new large-scale projects to maintain the top line and bottom line. However, the company is now combining its traditional form with a diversified portfolio of SaaS and other software revenue streams. CGL believes that the change in revenue mix along with the introduction of new clients both in Australia and overseas is likely to set the business up for success in the future. The management also expects the company to witness strong growth momentum in FY2020, across all segments of the business.
Looking at the financial performance review for FY18, the statutory total revenue from continuing operations stood at $108.5 million as compared to $98.8 million in FY17. Gross profit also witnessed a rise to $54.3 million from $46.1 million in FY17. NPAT came in at $19.4 million against FY17 result of $15.4 million.
Currently, the stock is trading at a price of $4.390, down ~35% as on 17th May 2019 from its previous close.
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