Organic growth and encouraging returns in maiden results

Crimsonwing plc published its full-year results to March 31, 2008 following approval during a board of directors' meeting held on July 29.

The directors declared the payment of a net interim dividend of €0.01 per share for full year ending March 2009 but no final dividend was declared in respect of the year to March 31, 2008. The interim dividend is payable on September 1 to those shareholders as at close of trading last Tuesday.

The key highlights are:

• revenue up 34.7 per cent to €9.6 million;
• substantial organic growth in the Netherlands;
• continued client base expansion including leading high profile international companies;
• gross profit of €5 million (margin of 52 per cent);
• pre-tax profit of €0.9 million;
• shareholders' funds rise to €4.1 million; and
• pre-tax return on equity of 27.7 per cent.

The Crimsonwing Group generated total revenue amounting to €9.6 million during the 12 months ended last March 31, representing a 34.7 per cent increase when compared to the €7.1 million of the previous year but 1.1 per cent lower than the directors' projections at the time of the initial public offering in November 2007. The growth in revenue was mainly driven by the substantial organic growth at Crimsonwing BV, which recorded a 46 per cent increase in its revenues. Crimsonwing is expanding its customer base and rolling out new services resulting in increasingly diversified revenue streams. In fact, the dependence on Crimsonwing's top customer, Morrisons, dropped to 30 per cent during the year under review from 39 per cent in the comparative period last year. Moreover, the group's top 10 clients contributed 78 per cent to total revenues, down from 93 per cent in FY 2007.

Furthermore, the company's investment programme in the latest technologies and human resources allowed it to reduce its over-reliance on income generated from older technologies. In fact, as at March 2008, the company estimates that older technologies accounted for only 5 per cent of total revenues compared to 25 per cent in the previous year. This is a very important indicator because it is these new technologies that are expected to drive revenue growth in the future as customers continually update systems and therefore seek the company's services to implement and service these new technologies.

Direct costs increased by 54.2 per cent to €4.6 million, mainly due to a rise in licence sales, additional vendor consultancy and one-time consultancy fees on the acquisition of Peracto (UK). These increased licence sales generate very healthy commissions to the company and are therefore directly related to turnover.

Gross profit amounted to just below €5 million and grew by over 20 per cent compared to March 2007. Margins remain very healthy at 52 per cent of revenue.

Administrative expenses rose by 34.5 per cent to €4.1 million on increased staff costs as the company's staff complement continued to increase as business expands. This resulted in an operating profit of €0.9 million (18.4 per cent lower than the comparative period and 25 per cent lower than the directors' projections). Earnings before interest, tax, amortisation and goodwill (EBIDTA) dropped 21.8 per cent to €0.9 million.

Crimsonwing plc accounts are in euro, but 75 per cent of revenues for the year were derived from the United Kingdom in sterling. With growing euro-denominated expenses and expanding sterling revenues among other revenue streams, the group is vulnerable to sterling/euro exchange rate movements. The 14 per cent decline in the aforementioned exchange rate (from £0.69 per €1 to £0.80 per €1) negatively impacted the group's revenues by €0.5 million and profits by €0.375 million during the period under review. As a result, Crimsonwing registered profits which, although very healthy and encouraging, came in lower than IPO expectations solely on account of this exchange rate volatility. In fact, the Crimsonwing Group registered a profit before tax of €0.9 million, 23 per cent lower than forecast.

Crimsonwing accounted for a tax charge of €0.09 million representing a marginal tax rate of 9.4 per cent. After accounting for taxation and profits attributable to minority interests, the company registered a profit after tax of €0.8 million, a 23.1 per cent decline when compared to last year's level of €1.1 million. Earnings per share, based on the weighted average number of shares in issue following the increase in share capital, amount to €0.04, compared to €0.06 in March 2007.

From a balance sheet perspective, shareholders' funds increased considerably to €4.1 million from the previous year's level of €2.5 million, signifying a net asset value per share of €0.158. During the year ending last March 31, the company recorded a strong return on equity of 19.7 per cent and a likewise positive return on assets of 14.6 per cent.

The company is debt-free and will only be incurring debt as from July 1 (the current financial year) following the acquisition of a third company in the space of one year, Netherlands-based VDA. This debt will amount to €1.5 million and will finance 79 per cent of this acquisition. The balance will be paid from cash flow and retained earnings.

Netherlands-based VDA boasts over 60 clients, acquired and largely retained over its 16-year history. The clients hail predominantly from the media and publishing sector. Approximately 30 per cent of the company's annual revenues are recurring through maintenance and support contracts in place with some of its established clients. Among these clients, VDA handles the fourth largest cable TV company in the Netherlands CAIW, GroupM - the parent company to WPP media agencies and 20 other companies operating within the radio and TV sector.

VDA is expected to bring some significant and immediate benefits to the Crimsonwing Group, namely:

• establishing critical mass in the Dutch market;
• increasing Dutch-speaking professionals able to support the growing Dutch market;
• strengthening further the group's presence in the broadcasting and media sector;
• generating increasing EUR-denominated revenues from a wider client base thereby counteracting the currently larger GBP-denominated revenues; and
• contributing profitably to bottom line in the short term.

Crimsonwing BV, Promentum (51 per cent owned by Crimsonwing) and VDA will operate from common premises generating synergistic benefits as a result of reduced occupancy and senior management costs, shared R&D expenditure and a reduction in contracting costs following transfer of common duties to the Malta-based solutions centre. This one-stop shop is expected to generate a combined turnover of €6.5 million this year alone. The immediate cost savings are expected to reach €180,000 to €200,000 per annum and these savings should immediately filter through to the bottom line in the current financial year.

Crimsonwing's maiden results as a listed company confirm its growth potential in a booming sector which is likely to continue to experience further growth in the coming years. Although the results under review fell slightly short of the company's forecasts, this shortfall does not emanate from operational shortcomings but only from exchange rate fluctuations.

• Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd

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