Getech: H1 Revenue Hits A 7-Year Low And For Now My Hopes Rest On A Stronger Oil Price

08 October 2018
By Maynard Paton

Update on Getech (GTC).

Event: Interim results for the six months to 30 June 2018 published 28 September 2018.

Summary: These figures were not as good as I had hoped. The lowest first-half sales for seven years created a not-insignificant operating loss and left cash flow dependent on tax refunds. Still, the geoscience software specialist talked of a stronger second half and I remain hopeful the accounts will eventually showcase the high margins and expanding revenue the directors continue to predict. For the time being, I just have to trust a stronger oil price can one day tempt GTC’s customers to increase their spending. I continue to hold.

Price: 37p
Shares in issue: 37,563,615
Market capitalisation: £13.9m
Click here to read all my GTC posts.

Results:

My thoughts:

* I was not expecting a £522k operating loss

Last week I quickly described these results as “adequate in the circumstances”. But after studying the figures in more detail, I have to admit I am a tad disappointed.

You see, GTC’s previous 17-month results had suggested (at least to me) that annual profit could be running at £200k-plus.

However, this first-half statement owned up to a £522k operating loss.

True, GTC said revenue from its geoscience software was “typically weighted to the second half” and a $0.9m high-margin data sale had just missed the 30 June cut-off.

But I had interpreted a trading update during August to be signalling a break-even performance given the cash position had dropped by only a fraction.

What August’s update did not disclose — and what I had not considered — was GTC’s cash pile being shored up by tax refunds (and credits) of some £608k:

Some other points to consider:

1) H1 revenue of £2.9m was GTC’s lowest since 2011.

2) Completing the aforementioned $0.9m data sale apparently “would have resulted in H1 revenue growth of 16%” — which I calculate to be an extra £489k (although $0.9m translated at £:$1.31 equals £687k).

I am not sure whether this data sale would have offset the £522k loss entirely — despite GTC claiming the data sale would have delivered a “significant expansion in profit”.

3) Revenue for the comparable period of 2017 — the six months to June 2017 — was £3.1m. However, GTC’s 2017 results indicated revenue for the six months to July 2017 was £3.6m.

So a difference of one month to the reporting period can move the top-line — and the year-on-year comparison — significantly.

4) Sales booked for periods beyond this H1 came in at £1.4m versus zero for this time last year.

GTC claimed “a significant increase in the number of customers purchasing multi-year subscriptions to our information products and software”, which I trust bodes well for the second half.

* The building includes a “grand neo-Jacobean style carved wooden staircase and the superb glazed ‘peacock cupola’ dome

Despite those tax refunds (and credits), cash in the bank reduced by £523k after £426k was injected into working capital and £145k was used to pay off some debt.

Net cash finished the half year at £1,389k, which will not last long if this H1 operating loss is continually repeated.

GTC’s freehold office in Leeds was put up for sale this year and is in the books at £2,424k (point 11).

A “number of parties” have seemingly expressed an interest and I hope the building — which includes a “grand neo-Jacobean style carved wooden staircase and the superb glazed ‘peacock cupola’ dome” — is soon sold.

Selling the Leeds office and closing a Henley site will incur exceptional H2 costs of £200k. At least GTC reckons its costs for 2018 — including this £200k — will not exceed those for 2017.

Valuation

Back in March I had hoped the business could earn a ‘clean’ £200k-to-£300k operating profit for 2018. I even had “my fingers crossed for some upside should extra revenue actually arrive”.

I have to admit, I will now accept a break-even performance for the current year — which makes GTC’s present valuation hard to judge.

Right now, the £14m market cap is supported by the aforementioned net cash and property (£1.4m plus £2.4m) alongside the expectation of earnings reviving in time.

Normally I would not waste my time remaining with a business that is struggling to report a profit. However, I can make an exception for GTC because the firm does possess some appealing products.

Indeed, management claims GTC is by some distance a ‘market leader’, while a good proportion of sales are typically high margin and recurring in nature.

True, most of GTC’s software products help companies explore for oil and gas — an activity that has slowed considerably during the last few years. Nonetheless, parts of the group still appear to be performing reasonably well (my bold):

“Demand for Gravity & Magnetic data has continued despite oil price uncertainty but the broader budget constraints of our customers have lengthened the sales cycle.”

“With our Gravity & Magnetics Service line also delivering good staff utilisation and strong profitability in the period, we believe that this underlines our market-leading position in these data products.”

For what it is worth, GTC reckons its customers may be willing to spend more next year:

“The upstream investment environment for our products and service therefore remains volatile but we expect 2019 budgets to set a clearer and more positive path.”

“We enter H2 with a robust sales pipeline”

A significant sale of a Sierra Leone exploration dataset lingers in the background, too.

For now, all I believe shareholders can do is hope the oil price continues to rise…

…and that GTC’s oil clients eventually start to spend greater amounts on exploration software.

Maynard Paton

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Disclosure: Maynard owns shares in Getech.

3 thoughts on “Getech: H1 Revenue Hits A 7-Year Low And For Now My Hopes Rest On A Stronger Oil Price

  1. Maynard Paton Post author

    Getech (GTC)

    Interim results presentation slides

    A useful results powerpoint has become available on GTC’s website.

    Slide 10 is interesting:

    The chart the right suggests there is a 12-month lag between a rising oil price and rising exploration capital expenditure. The prediction for 2019 is that such capex will increase (see my red arrow). Hopefully that prediction should then filter down to greater interest in GTC’s software and services.

    Maynard

    Reply
  2. Maynard Paton Post author

    Getech (GTC)

    Substantial sale of data and products

    A promising update, albeit one that underlines GTC’s dependence on large contracts.

    Here is the full text:

    —————————————————————————————————————–
    The Getech Group (AIM; GTC), a provider of geoscience and geospatial products and services to companies and governments who use them to de-risk exploration programmes and improve their management of natural resources, is pleased to announce the sale of an integrated suite of geology, gravity and magnetic data and knowledge products.

    The total multi-product sale, made to a leading global oil and gas company, will generate gross income of US$3.2 million; the majority of which will be recognised in the financial year ending 31 December 2018. On this basis, we expect FY 2018 revenue to exceed that delivered in FY 2017 by at least 10% (January to December 2017: £7.2 million). The sale also adds recurring revenue to 2019 via a new customer subscription to our Globe product.

    Getech’s Chief Executive Office, Jonathan Copus, commented:

    “Falling oil prices and exchange rate volatility combined in the fourth quarter of 2018 to create a challenging commercial environment. Against this backdrop the sales cycle lengthened but we were able to work with our customers to match our innovative products and services to their most pressing commercial needs. The multi-product sale detailed above is an example of the success of this collaborative approach and dialogue with our customers continues; the programme of sales campaigns that we launched in H2 2018 now extending into H1 2019.”

    —————————————————————————————————————–

    So, FY 2018 revenue should be £8m and H2 revenue should be approximately £5.1m.

    Assuming the majority of the $3.2m data sale is equivalent to $2.5m, then H2 will comprise of

    * this data sale ($2.5m or £2m);
    * a data sale referred to in the H1 results ($0.9m or £0.7m), and;
    * other sales (£5.1m less £2m less £0.7m = £2.4m).

    More than half of H2 revenue could therefore be dependent on two customers. Not ideal, but I will take this result given GTC’s shaky recent history. I am pleased at least one major oil company continues to spend money on exploration software.

    I am hopeful the extra revenue can bolster free cash flow. GTC’s annual figures said:

    “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.”

    Maynard

    Reply
  3. Maynard Paton Post author

    Getech (GTC)

    Comment on a different website

    I have written a comment in reply to this post on Stockopedia. Here is the full text:

    ———————————————————————————————————————-
    Hi Eric

    Thanks for the good write-up. I have some GTC shares and…

    The products side is truly differentiated. Getech has Gravity and Magnetic data of global coverage “which is multiple times larger than our closest peer.” And for example, Getech’s Globe software has a retention rate over 95%

    …is mostly why I remain invested despite the shaky record of the last few years.

    Being conservative, +10% off £7.2m = £7.9m. Say half drops through to adjusted ebit (there is £200k of relocation costs, genuinely exceptional), and that’s an operating profit of somewhere around £400k – £450k with similar free cash flow, a far cry from the £500k operating loss in the first half of the year.

    I must admit I was sceptical of this projection, but your post has promoted me to revisit what is going on.

    GTC has said:

    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.

    In the H1 results presentation, the “simple profitability formula” was given as total costs of £7m a year with 85% costs as fixed, which would create positive free cash flow if revenue was greater than £7m (pre financing and working capital).

    So with revenue of £7m, fixed costs at 85% are £6m and variable costs are £1m.

    So with revenue moving to £8m for 2018, fixed costs should stay at £6m and variable costs should arguably increase to £1.4m given “each 10% increase in revenue would broadly translate to a £0.6 million increase in free cash flow”.

    That could mean a £0.6m profit 2018 could be on the cards?

    I may have under-estimated GTC’s profitably here. I had been hoping for a break-even performance for 2018. That said, I would have thought if GTC did strike a decent H2 profit — the sums suggest £1m-plus — then the early January trading statement would perhaps have confirmed it.

    Between 2011 and 2015, Getech averaged £1.42m of EBIT and has engaged in counter cyclical M&A since, buying ERCL (a specialist upstream o&g consultancy) and Exprodat (GIS software business) which together were likely >£6m of normalised revenues

    I like the phrasing “counter cyclical M&A” — sounds as if GTC was snapping up bargains! Which certainly was not the case with ERCL — average sales per month dropped from £352k to £113k between 2015 (year of purchase) and 2017. Exprodat has not fared well either, but its software/products appear more robust for shareholders.

    total assets minus total liabilities of £8.51m, >70% of the market capitalisation.

    True, but the view on intangibles is significant here. Are they worth book value? Difficult to know for sure. Amortisation of £400k-plus was charged last year against ‘legacy’ intangibles that will eventually be valued at zero. I think ultimately GTC’s valuation will be supported by positive cash flow/earnings, and perhaps an outside chance of a windfall from the Leeds property sale.

    The other point I would make concerns the new boss.

    My notes say he has been a geologist at Shell, an Oil & Gas equity analyst at Deutsche Bank and the finance director at Salamander Energy. So a pretty heavyweight CV — which does beg the question why he decided to take charge of a struggling AIM micro-cap.

    I like to think he has real conviction about GTC’s software and data. The new leader has done well to cut costs and refocus the business from an academic heritage to one with a greater commercial focus, and I particularly like the cost-base tables and the aforementioned “simple profitability formula” he now provides.

    I think all we need now is more O&G customers buying the software.

    Maynard

    ———————————————————————————————————————-

    Reply

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