Oleeo: The 4:28pm Results Revealed A Further Earnings Slump As Anonymous Tip-Off Corrects My HMRC Mistake

07 November 2018
By Maynard Paton

Update on Oleeo (OLEE).

Event: Preliminary results for the twelve months to 31 July 2018 published 02 November 2018.

Summary: Publishing results at 4:28pm on a Friday is never a good sign. And sure enough, the recruitment software outfit warned of yet another profit slump. Still, at least revenue inched to a new record as the firm enjoyed greater subscription income. Meanwhile, an anonymous tip-off has set me straight about OLEE’s contract with HMRC — the deal appears not to have been lost after all. All I can do now with this illiquid share is hope for an earnings rebound. I continue to hold.

Price: 220p
Shares in issue: 7,620,054
Market capitalisation: £16.8m
Click here to read all my OLEE posts.

Results:

My thoughts:

* No less than six excuses for a tough 2019

These results were issued at 4:28pm on a Friday — a classic City signal to brace yourself for underwhelming numbers.

Indeed, OLEE (formerly World Careers Network) has warned of tumbling earnings for at least three years now — and this statement was sadly no different.

An ongoing mix of sluggish new sales alongside greater support, development and marketing costs pushed operating profit down 39% to a 14-year low:

Year to 31 July20142015201620172018
Revenue (£k)8,5847,8578,4579,8489,982
Operating profit (£k)2,4311,1551,340772473
Other items (£k)-----
Finance income (£k)4443433918
Pre-tax profit (£k)2,4751,1981,383811491
Earnings per share (p)25.2512.2914.628.155.16
Dividend per share (p)3.503.503.503.503.50

I note operating profit during the second half was extremely weak:

H1 2017H2 2017FY 2017H1 2018H2 2018FY 2018
Revenue (£k)5,1044,7449,8485,0634,9189,982
Costs (£k)(4,434)(4,642)(9,076)(4,674)(4,835)(9,509)
Operating profit (£k)67010277238983473

At least revenue continues to grow — just.

The full-year top line inched 1% higher to set a new all-time record. In addition, the 4% improvement during the second half was better than I had expected — and better than the small decline witnessed at the interim stage.

The following extract was the most encouraging remark within the RNS:

“The slight increase in revenues was underpinned by an increase in ongoing subscription revenues counteracted by lower implementation revenues.”

I have my fingers crossed that OLEE’s software revenue is becoming more predictable following the higher level of ongoing subscription income.

The management narrative revealed no less than six excuses for a tough 2019:

* an uncertain general economic outlook;
* a tough environment for our clients and prospects;
* an extremely competitive market;
* lower than expected new sales;
* known reductions in revenues from the existing clients this year and next, and;
* upward pressure on costs as we seek to grow through additional investments in customer success, marketing and product development;

The long list will mean profits are “expected to be substantially lower in the current year than in the year which has just closed”.

I dare say there is the chance OLEE could report a break-even result for 2019 — or perhaps even a small loss.

Indeed, I wonder whether the firm’s chairman/founder/71% shareholder will begin to reign in the additional costs if profits ever do turn to losses.

I guess there must come a point when all this greater expenditure has to be reviewed… and a judgement call be made on whether there are alternative ways to produce additional revenue by more efficient means.

Anyway, a 3.5p per share annual dividend was declared for the thirteenth year — which might be a stock-market record for the longest standstill payout.

* Anonymous tip-off tells me to check with the Cabinet Office

I must own up to making a mistake about OLEE’s contract with HMRC — the group’s largest customer.

Back in April I ranted about OLEE seemingly losing its deal with the tax office.

You see, I kept an eye on HMRC’s monthly spreadsheets and the spreadsheets for January, February and March made no mention of OLEE.

Given OLEE’s contract with HMRC ran until 31 January 2018, I assumed the agreement had ceased.

However, an anonymous reader — who I suspect is close to OLEE — then tipped me off about a change to the government’s spreadsheets.

(Hint: I welcome all tips-offs, scuttlebutt, corrections and other help! Contact me here.)

Civil-service recruitment expenses are now handled by the Cabinet Office and, from what I can tell, its spreadsheets show £47k monthly payments to OLEE starting from July.

(I am not sure what happened to HMRC’s payments between January and June).

HMRC therefore appears to have renewed its OLEE agreement and — very surprisingly — continues to pay the same £47k monthly fee. Perhaps HMRC was persuaded to maintain its payments by OLEE’s recent rebranding.

Either way, this HMRC tip-off has left me a little more comfortable with OLEE than I was earlier this year.

* Cash flow remains sound but certain ratios are dismal

There is not much to say about OLEE’s accounts.

The greater support, development and marketing costs have left certain ratios looking very dismal:

Year to 31 July20142015201620172018
Operating margin (%)28.314.715.87.84.7
Return on average equity (%)26.211.112.16.33.9

At least cash flow remains sound:

Year to 31 July20142015201620172018
Operating profit (£k)2,4311,1551,340772473
Depreciation and amortisation (£k)88818494113
Cash capital expenditure (£k)(96)(90)(107)(125)(153)
Working-capital movement (£k)(196)(346)1,0931,161(465)
Net cash (£k)8,1718,21910,17211,63111,254

I can live with the 2018 negative working-capital movement given the positive movements during 2016 and 2017.

As always, OLEE’s annual report will reveal the amount of upfront customer payments (or ‘deferred income’) that sit on the balance sheet. This sum can in turn signal the possible trend for revenue for the current year.

Meanwhile, I am pleased OLEE’s expenditure on tangible assets remains relatively modest and that the business continues to write off all software development spend as incurred.

The year-end cash position fell a fraction to £11.3m, or 148p per share, and is equivalent to two-thirds of the market cap. The balance sheet carries no debt and no pension obligations.

(I should add that £7.8m of OLEE’s cash is now held within short-term investments — the details of which should be disclosed in the forthcoming annual report).

Valuation

With earnings currently at very depressed levels and heading towards zero, assessing OLEE’s valuation is not straightforward.

The only real yardstick is the £11.3m cash position, which adjusting for upfront customer payments is probably about £10m. With OLEE’s market cap at £17m, the underlying business could arguably be valued at £7m.

That said, I do keep wondering whether OLEE’s cash hoard is kept to reassure clients and as such should not be deemed as ‘surplus’ funds.

For long-suffering shareholders, the continuing hope of course is that OLEE’s additional costs eventually pay off, revenue regains its momentum and profitability then rebounds.

However, I have given up trying to predict when — or even if — OLEE may return to growth.

I wrote in April that OLEE has taught me a tough lesson about illiquidity — the free float has only a c£1m market value and I just can’t sell without crashing the share price.

Oh well — I remain resigned to keeping OLEE and will continue to yearn for a turnaround. At least I do not need to worry about the HMRC contract for the time being.

Maynard Paton

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Disclosure: Maynard owns shares in Oleeo.

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