Runge: Result 2016

Last year was a messy but productive step in this company’s quest to dominate the mining software industry.

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.

Key Points

  • 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.

Table 1: RUL result
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)
Corporate costs 8.9 9.5 (6)
Research and development 10.4 7.7 35
One-offs items 4.4 4.5 (2)
Reported profit -9.3 -5.7 (63)

Looking ahead

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.

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