Last Friday evening, RS2 Software plc published its 2011 financial statements revealing a strong operational performance with a 17.2 per cent increase in revenue to a record figure of €8.8 million. At the time of the publication of the interim results, RS2 had announced that it had sold four new licences of its BankWorks product during the first half of 2011 to new customers in the US, Germany, Greece and Philippines. During the second half of 2011, RS2 benefitted from additional service income following the new installations of BankWorks in late 2010 and early 2011 apart from the customary annual retainer income from their clients related to maintenance fees and other services included in their agreements. Despite a 48 per cent increase in administrative expenses to €1.4 million, RS2 reported a 47 per cent hike in pre-tax profits to €2.4 million – the second highest profitability after the record level of €2.9 million in 2008.
Shareholders could be somewhat surprised at the decision taken by the directors last week not to recommend the payment of a dividend- Edward Rizzo
However, after-tax profits dropped by 16 per cent over 2010 but this was solely due to a different impact of the tax situation from one year to the next. While the 2010 financial performance of RS2 was substantially boosted by tax credits of just under €1 million, RS2 suffered a net tax expense of €100,000 during 2011. In last week’s announcement, the company clarified that the tax charge does not represent cash payments made during the year towards income tax but this is only the result of the application of specific accounting rules.
Furthermore, RS2 once again stated that it continues to enjoy a favourable tax scenario with investment tax credits which are calculated as a percentage of the investment undertaken by the company during the year. These tax credits are available to reduce the income tax payable in each year, and any amount not utilised by the end of a specific year is carried forward to the next year. In fact, RS2 reported that it still has an outstanding balance of €2.6 million of tax credits which will be used to relieve future income tax payable. This balance will continue to increase in the coming years as the company undertakes further investment in its BankWorks software as well as its new property in Mosta.
Notwithstanding the substantial improvement in the operational performance of the company, shareholders could be somewhat surprised at the decision taken by the directors last week not to recommend the payment of a dividend “so as to utilise the funds to finance the investment in the proposed transaction processing and managed services worldwide”. Companies normally skip dividends due to a weak financial performance and challenges being faced as a result of a weak outlook or industry dynamics. However, the situation at RS2 Software is exactly the opposite, with the company focused on additional investment required for the roll-out of new services to expand the business further on a global scale. In fact, this is the first time since the 2008 IPO that a dividend is being skipped.
At the upcoming annual general meeting being held on 12 June, shareholders should be given further details on the amount of the investment required for the launching of such services on a global scale and the business potential that exists for the company in these new areas of activity.
The company did provide details of the progress at the new head office in Mosta with the first phase well underway comprising the core development centre, the project management team and the finance, administration and marketing departments. The administrative area is already in use while the completion of phase one is expected by the third quarter of this year. Moreover, in order to provide the infrastructure necessary for the new services (transaction processing and managed services) RS2 stated that it is already planning the second stage of the property development. No further details, however, on the amount of investment required for the second phase and the timeframes for completion were provided in last week’s announcement.
Surprisingly, the directors are proposing a bonus share issue of one new share for every 15 shares currently held. This is a small share issue in the context of the overall capital structure of the company and will be funded through the capitalisation of €500,000 from the share premium reserve. Shareholders who appear on the register as at May 11 (these will include buyers up to Tuesday May 8) will be eligible for the bonus shares. This bonus share issue will be put forward for approval at the next annual general meeting along with other resolutions including a proposal to increase the authorised share capital of the company.
The authorised share capital is expected to be increased from the current level of 40 million shares of a nominal value of €0.20 per share (equivalent to €8 million), to 50 million shares of a nominal value of €0.20 per share (equivalent to €10 million). The rationale behind this increase in the authorised share capital has not yet been clearly explained. The proposed issue of 2.5 million new bonus shares can be accommodated with the present level of authorised shares, so presumably additional unissued shares are being created to accommodate other requirements in the future.
An update on developments at the US subsidiary Transworks was also provided last week.
Following the investment made by RS2 of circa €750,000 in 2009, this company in the US suffered losses for the last three financial years. However, it was revealed that Transworks has now finally managed to secure sponsorship by a prominent bank in the United States which will enable the company to start offering its processing services to new clients as from the second half of 2012. The sponsorship by the American bank will enable Transworks to gain access to the networks of the major card processing companies such as Visa and MasterCard, which is a fundamental step forward to be able to start offering transaction processing services for clients.
A further important announcement made last week related to the purchase of the rights of the BankWorks product for the Scandinavian market for a cash consideration of €3 million financed through additional bank borrowings. The agreement with this related party had been raised at last year’s annual general meeting. In the IPO Prospectus published in May 2008, it had been revealed that NEPS I/S had the exclusive rights to promote, market and sell Bankworks in Scandinavia.
NEPS I/S was owned by the chairman of Rs2 Reinhold Schaffter and one of RS2’s clients Xponcard which had later been taken over by a larger company called Oberthur Technologies. The acquisition of these rights should provide further scope for RS2 to achieve wider penetration of BankWorks in Scandinavia. Moreover, profit margins could be enhanced on savings of commissions previously paid to NEPS on an annual basis. These savings are expected to start showing up from 2012.
After two successful financial years following the setback in 2009 arising from the 2008 international banking crisis, details provided in last Friday’s announcement indicate that RS2 seems to be at an interesting juncture in its business cycle with the commencement of operations at its US subsidiary drawing closer and the further investment in Malta which will enable it to provide additional services. These developments are likely to alter the company’s business model in future years with additional income generation based on overall transaction volumes from some of RS2’s clients.
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Mr Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.