GBST to target 'low-hanging fruit'

GBST's interim chief executive Rob De Dominicis kept insisting he could only say so much at this morning's briefing because he's taking his new proposals for the company to the board next week. But in the end he said plenty to provide reassurance to GBST shareholders.

Perhaps most importantly, the project delays that forced the company into last week's profit warning were due to matters outside GBST's control and were likely to resolve in time.

The largest was due to the client undergoing a restructure, which it had hoped would be completed in two months but had now dragged on for four. The team with responsibility for the GBST installation has apparently found itself in some kind of limbo, hampering their ability to proceed. De Dominicis said he was talking daily to this client and was confident there wouldn't be further delays – although he stressed that nothing is certain in this business (as if we needed reminding).

Another project has been held up by the client making an acquisition, the integration of which has apparently made it difficult to proceed. Again, though, De Dominicis said he was confident the installation would go ahead.

When asked what happened to the staff on these projects – whether they remained on full pay with nothing to do – De Dominicis explained that during 2015 the company had been 'quite stretched' working hard on projects and perhaps leaving some of the 'housekeeping work' to one side. Staff on the delayed projects were getting the chance to catch up with some of this.

This is important work – you notice it if you don't keep on top of it – even though it doesn't directly earn revenue. At least when the company is stretched again, it should be operating from a firmer footing.

Cost savings

Of more significance to the medium term, management highlighted that the proposals it plans to take to the board next week will involve a 'refocusing' of the company's cost base away from more speculative markets and towards the 'low-hanging fruit'. In other words, rather than spend money hoping to break into new markets, GBST plans to spend the money developing software where it knows it 'has clients ready to use it straight away'. The idea is that it can then grow incrementally and have a better chance of winning business in the newer markets.

In practical terms, this means the company will be focusing on Australia, the UK and Asia (to a lesser extent) and on its wealth management product (Composer) in particular. If anything, as flagged at the full-year results, development spending on Composer might increase slightly as it works to bring one of the modules up to date. This old software is the reason the company lost a couple of contracts to its competitor Bravura last year, so it's keen to upgrade it. Apparently, it will start rolling out the new software to customers incrementally from next year, and it already has a version it can show to potential customers in tenders.

By cutting expenditure on capital markets products (ie Syn) in more speculative markets (which we take to mean the US, although De Dominicis was careful not to mention it directly ahead of next week's board meeting), management thinks it can cut about $5m off annual costs – amounting to about 6% of the 2015 cost base or about 20% of operating profits.

There was some confusion about the timing of this, with Rob De Dominicis first admitting that the 2016 guidance didn't include the potential for cost savings before chief operating officer Patrick Salis came to his rescue and reaffirmed the guidance numbers, apparently suggesting that the savings might take longer to appear.

Short odds

On the CEO succession, De Dominicis mentioned that the most significant project delay had only come to light in September, which is interesting but does little to illuminate the timing of Stephen Lake's 17 September decision to retire and his 25 September share sale.

De Dominicis wouldn't be drawn on the circumstances of Lake's departure, but noted that the company had communicated carefully with all its clients about the move and had had 'no pushback' from them.

De Dominicis said the search for a permanent CEO should be completed by the end of November or early December. When asked if he was happy to be 'short odds' for the position, he replied – somewhat bashfully – that he was happy, but was not a betting man.

Overall we were impressed with De Dominicis and we look forward to the board rubber stamping his appointment. Along with reassurance on the project delays and the company's future focus, we also look forward to better times ahead for GBST. No doubt it has been suffering from growing pains, but the demand for its products remains strong and management is refocusing its efforts to satisfy that demand more directly. The stock is up 14% since Lake to leave GBST immediately on 16 Oct 15 (Buy – $3.76). BUY.

Note: Our Growth and Income portfolios own shares in GBST.

Disclosure: The author owns shares in GBST.