LON:VELA | . | AnonymousUser37607

3rd May '14

Have now reviewed the Admission Document – as noted previously the big data theme is one that I find interesting and therefore I really wanted to like what I read with Rosslyn. However, at this stage I cannot get comfortable with the business.

As a general comment the Admission Document is light in several key areas – for example, no management discussion of the trends in the financials which I found surprising, the main cost line ‘Administrative expenses’ is not clearly broken out in detail which is not ideal for a loss-making business, strategy section is thin, use of proceeds could also have been more specific in my view.

Placing

	£m
Net Proceeds	8.7
Less:	(1.2)	Expand sales force
	(1.5)	Continue to invest in product development
Total Proceeds Remaining	6.0	“general working capital purposes”

For “general working capital purposes” read this as continuing to fund the operating losses – this is important and I will come back to this point.

Clients and Revenue

	31/03/11	31/10/13	# Net Clients Added	Time Period – Months	Months to Add a Net Client (Average)
# clients (period end)	26	44	18	31	1.7

Note that the number of clients is disclosed at the period end and not as an average throughout the relevant period (average clients would more closely match reported revenue). In any event on average it has been taking 1.7 months for Rosslyn to add a ‘net’ client.

£m

31/10/12

6 Months

30/04/13

12 Months

31/10/13

6 Months

31/10/13

LTM

Revenue

0.93

1.84

1.02

1.92

Note the above may not sum due to rounding differences as the LTM is calculated from the actual disclosed figures.

Therefore, an approximate / indicative level of revenue per client is £44k i.e. LTM revenue of £1.92m divided by 44 clients at the period end. It is an approximation as the average clients throughout the period is not disclosed. Also note that for the year ended 31/03/11 revenue was £1.296 million and clients at the year end was 26 – approximate level of revenue per client £50k.

Costs

£m	31/10/12 6 Months	30/04/13 12 Months	31/10/13 6 Months	31/10/13 LTM
Cost of Sales	(0.10)	(0.24)	(0.19)	(0.33)
Admin Expenses	(1.51)	(3.27)	(2.50)	(4.26)
Of which:
- Employee Costs	(0.88)	(1.95)	(1.22)	(2.28)
- Share Based Payments	-	-	(0.22)	(0.22)
- R&D	(0.25)	(0.53)	(0.27)	(0.55)
- Other	(0.38)	(0.79)	(0.79)	(1.21)

As noted above the main cost line ‘Administrative expenses’ is not clearly broken down in the Admission Document so the above table is based on extracted figures from the notes. I have calculated the ‘Other’ category as the difference between total admin expenses and employee, share based and R&D costs - includes depreciation, amortisation, rentals, auditors’ remuneration, provision for impairment on trade receivables (was not able to fully reconcile this to the expenses in the notes).

Approximately, 59% of the expenses (excluding cost of sales) is employee costs and R&D only accounts for c. 13% of expenses (also note that there is little in the way of amortisation charges so the expensed R&D does appear to broadly indicate the level of product ‘investment’).

Note that going forward the total cost of the Director’s base salary and pension contributions, excluding bonuses, is £678k (4 Executive, 3 Non-Executive). This represents or is equivalent to:

35% of total LTM revenue
15.5 ‘average clients’ i.e. 35% of the total client base as at 31/10/13

The ongoing nomad fee of £60k per year is equivalent to 1.4 ‘average clients’.

Operating Loss

£m

31/10/12

6 Months

30/04/13

12 Months

31/10/13

6 Months

31/10/13

LTM

Operating Loss

(0.68)

(1.67)

(2.67)

On an LTM basis the operating loss was £2.67 million.

If the R&D expenses are taken out of this – i.e. assume the £1.5 million from the placing will fund the R&D for the time being - then the adjusted operating loss is £2.12 million.

On this basis, to achieve breakeven at the operating levelrequires, all other things being equal:

92.5 ‘average clients’ in total (equivalent to revenue of £4.04 million)
This represents an increase of 110% over the total client base as at 31/10/13 i.e. 44 clients

The next key question then is how long this might take. Based on the disclosure in the Admission Document the average time it has been taking to gain a ‘net client’ is 1.7 months (as above):

To add a net 48.5 clients (i.e. 92.5 – 44) at this rate would take nearly 84 months or about 7 years
This would be to hit breakeven at the operating level
Even if the pace of adding net clients quickens to say 1 per month – this still means it takes 48 months, unless the average spend per client materially increases

The company will be aiming to sell more services into larger companies or make additional sales into other divisions of large companies so not all of this would need to come from a strict interpretation of adding a new client. It may be that the company is confident in being able to rapidly speed up the process of adding new clients or cross-selling.

However, for me it did raise a big question mark over how long it will take this business to achieve breakeven.

In the 6 months to 31/10/13 the top 10 clients accounted for 55% of total revenue – if this is applied to the LTM revenue the estimated contribution of the top 10 clients would be c. £1.06 million, an average of £106k. Perhaps this really is the key – once a larger company becomes a client try to sell as much as possible into that entity. Note that this also means that the remaining 34 clients contribute c. £25k of revenue on average. What is the distribution of spend by clients?

A portion of the use of proceeds (£1.2 million) is set aside for expanding the sales force – this will add to the cost base but it may be that the £1.2 million from the placing will essentially pay / fund all of the extra headcount, at least in the near term. It is not stated over what time period the £1.2 million will be utilised. Hence, I have made no attempt to add in any additional expense from this into the calculations above.

Working Capital

The company has a net £6 million from the placing for working capital. LTM operating losses are £2.12 million (excluding R&D, as I have assumed that this can be funded for the time being with the £1.5 million set aside from the placing). Based on this current ‘burn-rate’ rate this would last around c. 34 months (£6 million divided by £2.12 million).

The Admission Document mentions that since the last disclosed balance sheet of 31/10/13 a further £971k of new equity was raised. However, it does not state or make clear how much cash the business had immediately prior to the placing i.e. not able to figure out what the very latest ‘burn-rate’ and whether any of the £971k remains available to the business or it has all been spent.

Other Issues

A quick summary in no particular order.

Customer attrition?

Customer attrition has, in the Directors’ opinion, been low with buyers usually remaining with Rosslyn and renewing services at a higher average monthly subscription cost.

No more is mentioned on this – what is the average length of time a client remains a subscriber? i.e how ‘sticky’ to the product are clients. The addition of 18 net clients in c. 31 months would suggest an element of churn.

Strategy

I would have liked to have seen a more extensive road-map on how the company is going to grow and how it plans to achieve this. Refer to page 15 of the Admission Document. It is underwhelming.

Trade Receivables

The Company counts many high pro?le customers amongst its client base including Xerox Business Services, Babcock Corporate Services Limited, BG International Ltd, 3M United Kingdom plc, Rexam plc and Coca-Cola Enterprises, Inc. The Company has dealt with approximately 14 per cent. of the companies within the FTSE 100 as at March 2014.

As at 31/10/13 impairment provision of £48k on trade receivables of c. £229k i.e. 21%.

Given the “high profile customers” it does raise a question as to what is going on with trade receivables. Refer to Note 12 on page 47 and 48. Also seems to be a persistent trend of overdue trade receivables.

Director’s Costs (see above)

Can the scale of the business really sustain that level of senior executive and non-executive director costs at the present time?

How much IP does the business really have?

There is one patent pending, intangibles on the balance sheet are tiny (would have expected to see more on this), use of open source software etc.

Relationship with QlikView?

Rosslyn has a partnership with QlikView since 2011 relating to the Visualisation piece of the Rosslyn offering. Not much disclosure on how this works – does Rosslyn pay a licence fee to QlikView? Does this explain some of the other costs?

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