Had you only scanned the headline numbers, last year would like another tough one for mining software business RungePincockMinarco. A $9.3m loss was marred by further write-offs and redundancies.
Under the hood though, a very different business is taking shape. We described this quiet transformation in Runge pivots from mining to software on 19 Jul 16 (Hold – $0.46) and the latest result confirms the trajectory. Despite a messy result, Runge’s quest to dominate the mining software industry continues apace.
Weak licence sales
A big year of R&D investment
FY17 earnings depend on new licence sales
The strategy is a sound one, built on prioritising long-term domination over short-term profit maximisation. Employment classifieds site Seek’s investment in Chinese job site Zhaopin shows the way. When a big opportunity emerges, play the long game and make the most of it. Runge’s long-term focus was clear in this result. With 30% of software revenue directed to research and development (R&D) and all but $240,000 of it conservatively expensed, this is a company keen to establish a wide, deep moat.
The good and the bad
Had it wanted to do so, management could have pulled a few levers to increase reported profits, including lower R&D expenditure and higher levels of capitalisation. That would have made the result look prettier, but at the cost of long-term growth potential. Too many companies are overly concerned with satisfying the short-term demands of flighty investors. It’s good to see one as well placed as this not succumbing to the pressure.
As for the result itself, recurring maintenance revenue rose 9%. At 45%, it is now the largest component of software revenue. With 41% of licence sales for enterprise products and 31% for new products, the R&D investment appears to be paying off. That said, licence sales undershot April’s downgraded guidance range by $200,000, partially offset by an additional $100,000 from software consulting. Apparently, one large client deferred its purchase, emphasising how lumpy revenue can be for licence software businesses.
With positive operating cash flow (before one-off items), Runge managed to fund its R&D from cash flow and buy back $2.8m in shares. Not bad. Net cash ended the year at $18m, although that figure will now be lower after the July payment for its purchase of iSolutions. Even the lousy advisory and GeoGAS businesses chipped in with marginally positive contributions, a result of lower costs and industry stabilisation.
|Year to June ($m)||2016||2015|| /–
|Software licence revenue||11.8||15.9||(26)|
|Software maintenance revenue||15.0||13.7||9|
|Software consulting revenue||6.6||7.7||(14)|
|Advisory & GeoGAS revenue||23.5||29.4||(20)|
|Research and development||10.4||7.7||35|
So, what’s next? Ideally, even higher revenue and even lower costs. iSolutions will make a full contribution in the coming year, boosting software revenue by 30%. And with corporate costs down to $9.1m and a further $1.4m of annual savings expected, the company’s cost base has never been so lean.
For Runge to hit our $8m operating earnings estimate (before depreciation and amortisation), an additional $4.1m of licence sales are required. That’s one important milestone but there are others. A successful integration of iSolutions is crucial, with the first combined product release expected in the second quarter. And after signing its first global framework agreement with a tier one miner (our guess is BHP), Runge expects to secure another in the coming year. That might do it, aided by its numerous partnerships, including ISA-95 and the individual agreements with Modular Mining and Schneider Electric.
Runge is an exciting prospect but the execution risk is real. Unless the price dips below $0.40, and we truly hope it does, continue to HOLD.
Disclosure: The author owns shares in RungePincockMinarco.