IDOX : Progressive Note – Idox – Long-term value generation becomes clearer

8 June 2023

Strong results provide clarity

Idox has reported a strong set of half year results for the six months ended 30 April 2023. Revenue grew by 8% to £35.8m from £33.2m in H1 FY22 and adjusted EBITDA of £12.1m was 10% above H1 FY22's figure of £11.0m. Recurring revenues grew broadly in line with the headline revenue figure, while the adjusted EBITDA margin was slightly ahead at 34% (H1 FY22: 33%). The half saw Idox move from net debt of £6.7m at end-FY22 to net cash of £1.1m as at 30 April, representing something of a milestone in management's transformation of the group. Order intake grew, with the overall figure of £52m being a 23% increase in H1 FY22. Against a backdrop of the impressive H1 performance and building orderbook, having delivered to expectations in the first half, management expects the full year to be in line with its previous expectations.

Land, Property & Public Protection performed well, with further good progress in Idox

Cloud and Local Authorities and with the recent acquisitions showing strong traction. The

Assets division delivered an encouraging level of revenue growth, while the decline in

Communities revenue was not unexpected given the lack of elections in the UK or Malta.

New divisional structure

These results are the first that Idox has reported based on its new divisional structure. Put in place in November 2022, this realignment was designed to set Idox's businesses more in tune with the customers they serve and the nature of the solutions they require. Management commentary thus far suggests that benefits are already being seen, with improvements to customer service and more effective sales. On the evidence of these results, we believe that the new structure makes it easier to understand the nature and performance of the operations.

Divisional structure

Source: Idox

8 June 2023

As with LPPP, non-recurring revenues showed stronger growth, improving by 19% at £2.4m. Recurring revenues were flat overall.

The lower revenues at Transport and iFit fed through into lower margins and a weaker overall adjusted EBITDA performance.

Communities

In contrast to LPPP and Assets, Communities saw an improvement in recurring revenues (£4.7m, up 7%), but a decline in non-recurring revenues (£2.5m, down 45%). Set against H1 22, when there were major election events in both the UK and Malta, the decline in revenues is not unexpected. The revised divisional structure makes the cyclical nature of this business more evident, although we note that elections in the markets that Idox serves are recurring in their nature.

However, Idox has been preparing for future work with the Department for Levelling Up, Housing and Communities (DLUHC) and Central Government, and the statement suggests that, with the launch of Idox Elections Cloud Services and a likely UK general election, FY24 should be a busy year.

Although divisional revenues declined 19%, the adjusted EBITDA result was little changed at £2.6m.

Cashflow

As a significant milestone on Idox's transformation journey, H1 FY23 saw the group move from net debt (£-6.7m as at end-FY22) to net cash (£1.1m as at 30 April 23).

As a percentage of adjusted EBITDA, the cash generation from operating activities was a very healthy 148%, up from 122% for H1 FY22. However, the nature of the business and the customer base leads to the group normally having a negative working capital cycle. The first half usually sees strong billings and cash generation, and this would appear to have particularly been the case this year with the increased level of re-signs and renewals. We expect the full-year net cash figure to be slightly lower than current levels and forecast good annual cash generation going forward.

M&A - not necessary but could be very nice to have

The statement moves rapidly on from consideration of the cash position to how Idox is positioned to make further acquisitions and its financial firepower. Idox has additional bank facilities in place of £35m and a £10m accordion. Although the £11m listed Maltese bond falls due for repayment in 2025, we would expect a similar level of overall additional debt finance to be available following that.

The statement confirms that the M&A pipeline is strong and good progress is being made on a number of opportunities. M&A is not a prerequisite of growth for Idox but with the scale of its potentially addressable markets, most notably for LPPP, accretive transactions are likely to be warmly received by investors.

Outlook positive and confident

The outlook statement is positive and the group has good visibility on what remains of FY23 and across into FY24. Management expects FY23 results to be in line with its previous expectations, and we are not adjusting our forecasts.

8 June 2023

Conclusion

Idox has come a long way with the current management and these results suggest that the team can take it much further still, delivering long-term shareholder value growth through strong execution, increasing recurring revenues and building the business.

Now flying - developing and growing core software businesses

Source: Idox

Although there may be wider economic concerns, these results demonstrate the resilience of Idox's businesses. Furthermore, the new structure has provided improved insight into the longer-term opportunities that the businesses offer. Following these results, we believe that investors can have increased confidence in the management's objective of mid-single- digit organic growth over the medium term, with additional growth from bolt-on M&A.