Getech: 17-Month Results Provide Further Hope Of A Profit Rebound And Decent Share-Price Upside

02 March 2018
By Maynard Paton

Update on Getech (GTC).

Event: Final results for the seventeen months to 31 December 2017 published 28 February 2018.

Summary: A change of year end, various exceptional items, the effect of an acquisition and the company’s own ‘cost base’ definition meant studying these numbers was not straightforward. However, it was clear the geoscience software specialist has returned to profit, while it was also obvious the new boss remains confident about the group’s competitive attractions. Looking ahead, I am still hoping some encouraging revenue talk alongside tight cost controls could one day lead to much higher earnings and decent share-price upside. I continue to hold.

Price: 30p
Shares in issue: 37,563,615
Market capitalisation: £11.3m
Click here to read all my GTC posts


My thoughts:

* I calculate a £229k profit run-rate 

This peculiar 17-month reporting period was always going to involve a fair bit of number crunching.

Thankfully October’s twelve-month figures and February’s trading update meant many of the important numbers would come as no surprise.

In the event, revenue for the 17 months was £10,946k, which looked impressive against the comparable 12-month figure of £7,031k.

However, the top-line comparison was flattered by the 2016 purchase of Exprodat, which brought in extra sales of £2m. Adjust for the acquisition and I calculate like-for-like revenue dropped 15%.

Importantly, GTC returned to profit following the 2016 loss. My earlier sums had projected a £300k annual profit run-rate, although I’m now guessing the figure is in the region of £229k.

This table compares GTC’s 2016 to the various 2017 numbers:

12 months to 31 July 201612 months to 31 July 20175 months to 31 December 201717 months to 31 December 2017
Revenue (£k)7,0317,6703,27610,946
Operating profit (£k)(126)321(34)287
Finance costs (£k)(22)(24)(8)(32)
Other items (£k)819(451)(497)(948)
Pre-tax profit (£k)671(154)(539)(693)
Cost base (£k)(8,048)(7,472)(3,113)(10,585)
Revenue less cost base (£k)(1,017)198163361

The cost-base entries have been derived from this very helpful GTC analysis:

On a 17-month basis, operating profit was £287k while revenue less the cost base was £361k (the difference being due to how various cash movements are reflected as accounting charges). Taking the average of the two and pro-rata to twelve months gives £229k.

What is clear from all of the 2017 numbers is that GTC remains some way off its 2013 profit heyday:

Year to 31 July20132014201520162017*
Revenue (£k)8,0116,5938,6387,0317,670
Operating profit (£k)2,2219691,987(126)287
Finance costs (£k)25325(22)(32)
Other items (£k)---819(948)
Pre-tax profit (£k)2,2461,0011,992671(693)
Earnings per share (p)5.575.215.773.25(0.11)
Dividend per share (p)

(*17 months to 31 December)

* “We target high-margin, repeat revenue growth

GTC’s chairman described the 17 months as having witnessed “a wide-ranging programme of commercial, operational and cultural change”.

In fact, it has become quite obvious that the group’s chief exec — appointed mid-2016 — has brought with him a more shareholder-focused approach.

Certainly GTC’s statements are now far more informative under the new regime, and the latest narrative once again included a few encouraging snippets (my bold):

“We target high-margin, repeat revenue growth”

“At the heart of our Products division lies our inventory of technical data assets. Central to this are our holdings of Gravity & Magnetic data – the global coverage of which is multiple times larger than our closest peer.”

“These data are an essential and cost-effective component of the integrated campaigns of our natural resources customers — both in oil & gas and mining.”

“With the re-subscription rate exceeding 95% for the second year in a row, our install-base also grew — this driven by new customer wins (our customer list expanding by 23%) and existing customers deploying the software more widely within their organisations.”

The above snippets all cover the Products division, which remains GTC’s largest and most profitable department:

Product revenue apparently advanced 24% pro-rata, which I have to admit was very pleasantly surprising. Such an improvement suggests GTC’s oil-industry customers may now be emerging from their two-year hibernation.

Overall, the results commentary re-emphasised to me that there is still a decent business here — albeit one that is currently obscured by a weak Services division and wider client activity that remains well below its peak.

* Useful titbits about tax credits and a possible freehold disposal

This 17-month update confirmed the trading downturn had left various ratios at mediocre levels:

Year to 31 July20132014201520162017*
Operating margin (%)27.714.723.0(1.8)2.6
Return on average equity* (%)59.144.733.313.0(0.4)

(*17 months to 31 December ** adjusted for net cash)

However, the figures did show a healthy working-capital movement after October’s 12-month statement owned up to a customer being late paying a near-£1m bill:

Year to 31 July20132014201520162017*
Operating profit (£k)2,2219691,987(126)287
Depreciation and amortisation (£k)2142403666711,184
Net capital expenditure (£k)(190)(190)(1,364)(856)(1,208)
Working-capital movement (£k)942(1,574)573(448)554
Net cash (£k)4,2493,4233,6941,8881,759

(*17 months to 31 December)

(GTC’s year-end change may lead to less dramatic fluctuations to debtor and creditor levels — see my Comment below).

Something else worth noting is the relationship between cash capital expenditure and the aggregate depreciation and amortisation charge.

For this 17-month period, the figures matched closely. But further inspection of the accounting small-print (see my Comment below) shows £1,154k spent on development costs while the relevant amortisation charge came in at £494k. The £660k difference is substantial for GTC’s size, and may one day filter through to the main accounts.

(As the new boss is happy to show all of the intangible expenditure within that cost-base table, I do wonder why such items are not expensed entirely through the income statement as well.)

Although GTC’s main numbers had already been highlighted within earlier statements, this 17-month update did reveal two useful financial titbits.

First, some positive news about tax.

Various credits, refunds and adjustments helped GTC collect £461k from the tax authorities, and further cash tax receipts are expected for 2018. The balance sheet shows current tax receivables at £490k.

Second, a hint about property. GTC’s chairman said:

“We are examining all options regarding our Kitson House office in Leeds.”

I am not surprised by this remark. I asked GTC’s new boss about the freehold in November and he suggested it would be “looked at”.

This RNS says the property was purchased during 2006 for £2.5m, although the 2007 annual report says the cost was £2.8m (the difference probably being the associated purchase expenses). The asset is presently in the books at £2.4m (6.5p per share).

Owning this freehold looks an extravagance to me given the group’s size and recent financial history.

I trust the property can soon be sold to clear the group’s £634k borrowings and bolster the £2,393k cash position. I should add GTC remains free of any pension obligations.


This 17-month statement provided some relatively promising comments about current trading and potential cash flow (my bold):

“It remains early in the year, but our sales pipeline has the potential to exceed 2017 levels. This reflects a Q1 upturn in data sales for frontier regions, and continued growth in the user-base for our software and information products.

This strategic formula has already helped us to cross-sell our products and services, enter new sectors, and access rich seams of new data with significant 2018 revenue potential.

Net of our revenue sharing agreement with the Sierra Leone Government, a single licensing of this dataset has the potential to be a disclosable event for the Getech Group.

“We have begun 2018 by backing our growth ambitions with targeted operational, sales and marketing investment. We do not however anticipate significant upward pressure on FY costs.”

“By broadly maintaining this cost and tax structure, a similar pro rata sales performance… would generate a cash inflow of approximately £0.5 million (post-investment and debt repayments).”

“With c85% of our cost base fixed, each 10% increase in revenue would broadly translate to a £0.6 million increase in free cash flow.”

That final remark is informative, as it suggests an extra £1.1m of revenue would produce additional free cash flow at a margin of more than 50%. So it may not take too much extra Product revenue to see a notable operating improvement.

That said, I would not value GTC on its cited cash flow projections because they do include the aforementioned net inflows from the tax authorities. For what it is worth, I am hoping the business can earn a ‘clean’ £200k to £300k operating profit for 2018 — with my fingers crossed for some upside should extra revenue actually arrive.

Factor in my profit guess, the £1.8m net cash position, the £2.4m freehold and a bit of extra tax money, and the current £11m market cap probably looks about right for now.

Nevertheless, I am hopeful the share price will prove to be a bargain for the longer term — assuming additional revenue does arrive one day and translates into much greater earnings.

Maynard Paton

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Disclosure: Maynard owns shares in Getech.

One thought on “Getech: 17-Month Results Provide Further Hope Of A Profit Rebound And Decent Share-Price Upside

  1. Maynard Paton Post author

    Getech (GTC)

    Publication of 2017 Annual Report

    Credit to GTC for publishing its annual report alongside its results RNS. Here are the main points of interest:

    1) Risks and uncertainties

    I am suprised the Financial Risk has increased:

    The talk in the management narrative is of better working-capital management (see below). Maybe the greater risk relates to the chance of an increase to borrowing costs. GTC’s borrowings of £634k are entirely variable-rate loans with a current rate of 2.04% plus base rate.

    2) Board meetings

    I always look at these board-meeting numbers, just to see if any directors are not pulling their weight:

    I see Mr Edwards once again did not attend every meeting. Perhaps then it is no surprise he is stepping down from the board.

    (Ah — the small-print within Note 6 of the accounts shows Mr Edwards worked a four-day week).

    I am pleased the directors like to talk more about audits and risk than their own pay.

    3) Substantial shareholders

    I still can’t fathom why GTC lists only shareholders owning 10%-plus:

    Every other company seems to use 3%-plus for their reports, which is the level for an RNS holding notification. Maybe GTC’s annual report disclosure is based on one of those an AIM ‘do what you want’ guidelines.

    4) IFRS15 revenue recognition

    Here is a reassuring snippet about the new revenue/contract accounting practice:

    Some software groups may find their reported earnings scuppered by IFRS 15, as the new regulation tightens up the recognition of longer-term contract income.

    5) Staff and director pay

    Not often you see this type of comment about pay cuts in an annual report:

    I see average staff numbers were to cut from 118 to 95 during the year, and now stand at 84:

    The average pro-rata staff cost for 2017 was £56k, which compares to £47k for 2016 and is probably distorted by redundancy payments. An encouraging stat is average revenue per head, which for 2017 pro-rata was £81k and compares to £62k for 2016. That said, revenue per head was £114k at its 2013 peak.

    The new boss is being paid a fair whack at £250k:

    His £250k is double what the previous chief exec collected. However, various executive departures meant the total £825k director wage bill for 2017 is pro-rata equal to £589k spent during 2016.

    6) Research and development expenditure

    This note shows R&D expensed to the income statement at £916k:

    Pro-rata for 12 months and this expensed R&D dropped almost 40% from 2016.

    This next note shows how much R&D was capitalised on the balance sheet:

    During the 17 months, GTC spent £1,154k entirely on ‘development costs’.

    However, amortisation of those development costs was £494k — giving a difference of £660k. A further £455k of amortisation was charged against other intangibles, to give a total amortisation charge of £949k.

    So while the total £949k amortisation charge is quite close to what is being capitalised (£1,154k), I don’t think that will always be the case. Some of the other intangibles will, within the next two years, will be written down to zero (or close to zero), and then that £660k difference will start to show up in the main accounts.

    At present, a £660k difference between R&D being capitalised and R&D being amortised is a significant bookkeeping decision and makes all the difference between an accounting profit and loss.

    7) Trade receivables and deferred income

    The change of year end from July to December has had a notable effect on certain working-capital entries.

    The finance director’s report says:

    The reduction in the Group’s Trade and Other Receivables over the period reflects the combined benefit of strengthening and streamlining of our revenue collection process, and the Group Accounting Reference Date no longer being co-terminus with the Globe subscription billing cycle.

    Overall, Trade and other receivables reduced by £1,250,000 (2016: £1,491,000 reduction). Through improvements to the revenue collection process, we are achieving quicker collection of debtors and, we have recovered £45,000 in debts that were previously provided for, however, we have made an additional provision for debtors amounting to £163,000 during the period.

    During AP 2017 Getech reshaped the Globe product to more closely align its evolution with our customers’ day-to-day needs. One step to achieving this was to move from a 3-year product cycle, to an annual product cycle. Reflecting this new commercial formula, Deferred Income balances have reduced and this is a contributing factor to the reduction of Trade and Other Payables by £1,092,000 (FY 2016: £1,165,000 reduction).”

    (I can’t recall ever seeing the phrase “being co-terminus” in an annual report before.)

    Essentially trade receivables (money owed to GTC by clients) and deferred income (money paid upfront to GTC by clients for services not yet delivered) should now be less significant (and I therefore hope less concerning) given the year-end does not coincide with a major product billing cycle.

    This is the trade receivables note:

    And here are the associated ‘past due’ amounts

    Trade receivables of £1,424k represent 18% of the pro-rata 2017 revenue. Past years have seen that percentage anywhere between 20% and 40%.

    Meanwhile, past-due-but-not-impaired trade receivables represent 6% of total trade receivables. I am pleased the figure has returned to within its traditional single-digit range, after 2016’s comparable came in at 15% and looked a tad ominous for a year when revenue decreased.

    Turning to deferred income:

    Deferred income of £653k represents 9% of 2017 pro-rata revenue. Comparable figures for the previous five years were all 17% or above.

    8) Tax

    I hardly ever look at these taxation notes. They are often too complicated for me, and any companies with aggressive accounting policies — evidence perhaps by declaring tax in the income statement but not paying any to the authorities — can be spotted using other financial measures.

    That said, it is worth looking at these notes if a company is claiming significant tax refunds. GTC received a fair whack during 2017:

    I have no idea how these R&D credits are calculated, but a few hundred £ks a year is worth the HMRC paperwork.

    9) Options

    The potential dilution from options is 7.6%:

    10) Large clients

    Prior to 2016, GTC’s revenue was regularly supported by a handful of large clients. Recent acquisitions though have diversified the top line and once again no customer created 10%-plus of revenue:

    Around a third of revenue continues to come from the USA.

    11) Freehold property

    Here is confirmation of the freehold book value:



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