Final Results
23/03/2023 07:00
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RNS Number : 9361T Sopheon PLC 23 March 2023
SOPHEON PLC
("Sopheon", the "Group" or the "Company")
RESULTS STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2022
Sopheon plc, the InnovationOps software company, is pleased to announce its
results for the year ended 31 December 2022, together with an outlook for the
current year.
financial Highlights:
· Revenue of $36.8m (2021: $34.4m) in line with market
expectations - and ahead on a constant currency basis
· ARR(1) rose to $24.3m at the start of 2023 from $20.7m a year
before, growth of 17.4%
· Full year 2023 revenue visibility(2) stands at $28.4m (last
year at this time: $25.1m)
· Gross ARR retention at 92% (2021: 95%) - Net ARR retention at
112% (2021: 108%)
· Adjusted EBITDA(3) of $6.9m (2021: $6.2m) also ahead of market
expectations
· Profit before tax $1.3m (2021: $1.2m) after absorbing $2.2m of
M&A related amortization and intangible impairments
· Net cash of $21.1m (2021: $24.2m) reflecting currency movements,
M&A and other factors. The group has no debt and has always had cash
balances spread across multiple global banks.
· Dividend to be maintained at 3.25p per share (2021: 3.25p)
Operational Highlights
· 16 new customer wins (2021: 10) for Accolade, all but one
signed as SaaS, underlining our strategic shift to SaaS for all new customers.
We also converted 13 existing clients (2021: 6) to SaaS. Concluded the largest
order in the company's history with the US Navy, an existing customer,
boosting total contract value signed in the year to over $30m (2021: $22m).
· Integrated two acquisitions - ROI Blueprints, acquired at the end
of December 2021, and Solverboard, acquired in May 2022.
· Launched three software-as-a-service (SaaS) products under the
Acclaim™ banner: Acclaim Ideas (formerly Solverboard), Acclaim Projects
(formerly ROI Blueprints), and Acclaim Products (internally created). The
launch of these new solutions expands Sopheon's addressable market by an
estimated $2bn and boosts the Company's position as the leading software
vendor focused on operationalizing the business of innovation.
· Our balance sheet remains very strong to fuel additional
acquisition and investment. Our recent appointment of Barney Kent, former
chief operating officer of Ideagen plc as a non-executive Director, underlines
our commitment to both organic growth and M&A activities.
Outlook
Andy Michuda, Chairman, commented: "Sopheon delivered solid growth with record
ARR last year, and acquisitions and new products tripled our
multi-billion-dollar addressable market. Our ambition is for Sopheon to double
run-rate revenue every three to four years, with world class margin and
retention metrics. This will require a contribution from acquisitions, on top
of accelerated organic growth. We start 2023 with a strong foundation of ARR,
a stable of new products, and a growing sales pipeline. I look ahead with both
excitement and confidence, anticipating continued delivery this year alongside
rising velocity in our business."
For further information contact:
Andy Michuda (Chairman) Sopheon plc + 44 (0) 1276 919 560
Arif Karimjee (CFO)
Carl Holmes / George Dollemore (Corporate Finance) finnCap Ltd + 44 (0) 20 7220 0500
Alice Lane / Sunila de Silva (ECM)
About Sopheon. Sopheon (LSE: SPE) provides complete Innovation Management
software and expertise to help customers achieve exceptional long-term revenue
growth and profitability. Sopheon's Accolade and Acclaim offerings deliver
unique, fully integrated coverage for the entire innovation management and
product development life cycle. Sopheon's leadership in innovation management
was highlighted in the comprehensive MarketsandMarkets™ report on the
Innovation Management Market where Sopheon was listed in the "Stars" category,
the highest recognition. Sopheon's solutions have been implemented by over 200
customers with over 125,000 users in over 50 countries. Sopheon is listed on
AIM, operated by the London Stock Exchange. For more information, please visit
www.sopheon.com (http://www.sopheon.com) .
(1) ARR is the annual value of all ongoing contracts for SaaS, hosting and
maintenance in force at the measurement date including pending renewals but
excluding confirmed terminations.
(2)Revenue visibility comprises revenue expected from (i) closed license
orders, including those which are contracted but conditional on acceptance
decisions scheduled later in the year; (ii) contracted services business
delivered or expected to be delivered in the year; and (iii) recurring
maintenance, hosting, SaaS and rental streams. The visibility calculation does
not include revenues from new sales opportunities expected to close during the
remainder of the year.
(3)Adjusted EBITDA is defined and reconciled in Note 5 to this report
Sopheon, Accolade, and Acclaim are trademarks or registered trademarks of
Sopheon plc. All other trademarks are the property of their respective owners.
Chairman's Statement
The global economy entered tremendous turmoil in 2022 with conflict, inflation
and stagnation. In this chaotic environment, all companies face an
accelerating and insatiable demand to deliver innovation - the products and
experiences that delight customers, drive revenues and loyalty, and secure
market share.
In one of the most chaotic business environments I've seen in my career, the
opportunity for Sopheon has never been greater. Our InnovationOps software
reduces the chaos and inefficiencies of innovation operations, harmonizing the
discovery, design and delivery of new products and services. Our customers
increase the speed, and reduce the risks and costs, of bringing innovative
products to market. The very products that expand market opportunities and
modernize brands for the future.
Sopheon exited 2022 with two successful acquisitions and grew from a single
product company to a family of four products, tripling Sopheon's addressable
market to almost $3 billion. Sopheon's combined family of InnovationOps
solutions offer a compelling and unique value proposition for companies:
automate and provide a single source of truth to eliminate the innovation
stalls, stumbles and failures that are completely avoidable in even the most
chaotic of times.
Our financial performance illustrates the initial success of our efforts. ARR
increased 17.4% to $24.3m (2022) compared to $20.7m (2021). Top line revenue
rose to $36.8m compared to $34.4m in 2021. At constant currency, revenue would
have exceeded $38m, representing 10% organic growth. Total contract value
(TCV) of all sales closed in the year exceeded $30m up 35% year over year -
with the exceptional outperformance attributable to signing the largest single
deal in our history with the US Navy. Adjusted EBITDA improved by almost 12%,
rising to $6.9m (2022: $6.2m) while taking a $1.6m write down in respect of
technology investments superseded by the acquisitions, as well as $0.6m in
M&A amortization.
More than 90 percent of our new customers signed SaaS contracts in 2022, and
our installed base continues to convert from perpetual to SaaS subscriptions.
We intend to sell all new customers on a SaaS basis and continue converting
existing customers to this model. Although we expect perpetual license sales
to fall in 2023 and 2024, this will be offset by growth in ARR. This will
naturally slow revenue and profit development in 2023 but is expected to
accelerate more predictable ARR growth in subsequent years. We expect this to
come through clearly as we enter 2024, delivering higher growth and
profitability from that point forward.
Our ambition is for Sopheon to then double run-rate revenue every three to
four years, with world class margin and retention metrics. This will require a
contribution from acquisitions, on top of accelerated organic growth, plus
constant improvements in structure, policies, processes, and systems. A
proactive acquisition strategy will continue to add earnings-enhancing
benefits to investors, but also product depth and breadth as Sopheon moves
into a phase of controlled and sustainable growth.
We have an incredible team of employees, our SaaS solution revenue continues
to grow, and our balance sheet remains very strong to fuel additional
acquisition and investment. Our recent appointment of Barney Kent, former COO
of Ideagen plc, as a non-executive Director underlines our commitment to both
organic growth and M&A activities.
We start 2023 with a strong foundation of ARR, a stable of new products, and a
growing sales pipeline. I look ahead with both excitement and confidence,
anticipating continued delivery this year alongside rising velocity in our
business.
CEO Review: A year of Progress and Resilience
2022 was a year of demonstrated resilience and accomplishment for Sopheon. The
company significantly advanced many of the key aspects of its business.
Internally, we continued to deliver against our stated plans to expand our
products and services, through both acquisition and organically, while
significantly progressing to become an enterprise SaaS/cloud company focused
on innovation management and product development. The company also responded
well to the many external global impacts: the 'Great Resignation' in which
companies globally felt the impact of increased departure rates in the wake of
the COVID-19 pandemic; the Russian-Ukraine War and its effects commercially;
customers who experienced major supply-chain chokepoints; climate-exacerbated
natural disasters and political upheavals in many countries where we do
business; and the significant rise of inflation after 40 years at rest.
Despite these challenges, throughout 2022 Sopheon stayed committed and focused
on our strategy and goals. We continued to deliver value to our existing
blue-chip customers and added new premium customers globally. Companies
continued to invest in innovation products and processes to deliver on their
goals of growth, efficiency, productivity, and competitiveness. As a result,
Sopheon delivered on both growth and profitability with a significant increase
in ARR and Adjusted EBITDA, exceeding expectations. These impressive financial
results were achieved alongside major strategic accomplishments. We launched
three new products-two derived from acquisitions absorbed in the year, and the
third developed organically. This enabled us to expand our end-to-end
capability to operationalize innovation, offering immediate value to both
corporate executives as well as their supporting cross-functional teams,
significantly expanding our addressable market. We call this InnovationOps
which is described further below. As a business that has focused on the
business of innovation since our start, Sopheon is uniquely positioned to
deliver on the promise of InnovationOps.
During the year we continued several key themes that I outlined in our 2021
annual report:
· Growth: We exceeded our goals for both ARR and Adjusted EBITDA growth
while achieving 5% revenue growth.
· More: We added to our family of products and services through both
acquisition and internal development. Two acquisitions and new internally
developed products and services help us deliver more value to current
customers and serve new customers and markets.
· Speed: We improved our product development velocity and decreased
time to value for new customers.
· Visibility: Increased investment is paying dividends as we are
becoming better-known in our primary market and as we expand into new markets
with a broadened product set.
· People: We have kept a substantial number of long-standing key
contributors while attracting new talent in all areas of the company.
How were we able to achieve these results?
· Focused on SaaS/cloud sales of our flagship product Accolade. Our
global sales and services teams targeted existing on-premise customers to move
to our cloud offering. Generally, this is mutually beneficial, as most
enterprises have preferred cloud hosting and the SaaS model since 2016. This
transition to SaaS/cloud increases predictability of revenues, offers better
growth potential and delivers greater lifetime value to displace acquisition
costs. Ultimately, this is about better quality of revenue overall, and is
reflected in our 17.5% increase in ARR. Thirteen existing Accolade customers
moved to a SaaS model, and most Accolade customers are now SaaS or cloud
hosted. All new products introduced in 2022-Acclaim Ideas, Acclaim Products
and Acclaim Projects-are native multi-tenant SaaS offerings.
· Broadened our offerings through acquisition and internal development.
Throughout 2022, we filled out our portfolio of products which was critical
for us strategically and competitively. Accolade continues to offer unique,
differentiated value to customers looking to add needed governance to their
innovation processes, manage their strategy/execution processes, and maximize
value from their portfolio of products. As we committed to in 2021, we wanted
to expand value for our current clients and gain new customers through
multiple market offerings. We achieved that in 2022. With the acquisition of
ROI Blueprints, now Acclaim Projects, we address a long-standing competitive
opportunity that lets us deepen our relationship with existing customers and
win more net new business. With Acclaim Ideas, formerly Solverboard, we
address another long-standing market need of managing the discovery process at
the front end of innovation. This allows us access to more prospects earlier
in their innovation journey. Finally, with Acclaim Products we address an
enormous complementary market in product management, a role often responsible
for innovation initiatives. For the first time, we have an offering for
product managers as individuals. The Acclaim product family provides Sopheon a
new and differentiated go to market in 2023.
· Introduced new pricing models. Continuing to modernize our business
practices, we simplified our pricing to allow easier selection and consumption
of our Accolade and Acclaim Projects software, streamlining the buying journey
and easing sales processes. We also introduced usage-based pricing, a
consumption-based pricing model in which customers are charged to the extent
they use a product or service, rather than on an arbitrary number of
individual users. Our new models are based on the number of products or
projects a customer manages and have proved popular for customers who want to
reduce surprises associated with user-based pricing. In addition, for Acclaim
Products and Acclaim Ideas product-led software, we display our pricing on our
website and allow online purchasing. Today's B2B buyer is habituated to
transparency. Most buyers want to understand price as part of their
self-discovery journey, and as a result we want to have a frictionless
experience for these end-user offerings.
· Strengthened executive leadership. We strengthened our leadership in
two key areas: product development and marketing. During 2022 we added Peter
Loerincs to head software development and Heather MacIntosh as our Chief
Marketing Officer. Peter has held many roles in his successful career: he has
been a software consultant, developer, development manager, leader of product
management and development, solution architect and business consultant, with
much of this experience directly related to the New Product Development (NPD)
and Innovation space we serve. And different from many in engineering or
development roles, he has been customer-facing, and with some of the most
recognized companies globally. Similarly, Heather Macintosh brings to the CMO
role at Sopheon a diversity of career experience, including sales, business
development, partner marketing, corporate marketing, product management and
more. Heather has served in senior leadership roles most of her career,
helping various technology organizations with complex offerings successfully
scale their businesses.
· Continued customer centricity. As a company, Sopheon values three
attributes: entrepreneurial innovation, team empowerment, and customer
enthusiasm. In this last pillar of our values, customer service plays a
critical role, especially as we continue to move to a SaaS/cloud organization.
SaaS customers can switch more easily to competitive offerings, and it is only
through customer success that retention and expansion can occur. In 2022, we
achieved a Net Promoter Score of 34, which is in the "great" zone and well
within industry norms. Sopheon had a Net Retention rate of 112%, indicating
growth above the 100% industry median. In addition, we achieved a Gross
Retention Rate (GRR)(4) of 92% compared to an industry benchmark of 90%.
Organizationally, we have moved all our post-sales activities including
consulting, services support, and success under one roof with one leader, for
a seamless and optimized customer journey.
Sopheon succeeded in 2022 despite the challenges we faced externally and the
continued changes we made internally. We did this by being disciplined and
staying focused on executing our stated strategy. As the great management
consultant Peter Drucker stated, "The best way to predict the future is to
create it." Sopheon continued to create that future in 2022 and has built a
foundation for future success as it goes to market in 2023 with new products,
new services, experienced leadership, flexible pricing models, and new go to
market execution.
(4)Gross Revenue Retention (GRR), which we have reported for many years, is
the percentage of ARR retained at the end of the year from the customer base
at the start of the year, not counting revenue from new customers, upsells or
price increases. Net Revenue Retention (NRR) is the percentage of ARR retained
at the end of the year from the customer base at the start of the year, not
counting revenue from new customers but including upsells and price increases.
Why is successful innovation elusive?
As the external forces we saw in 2022 continue and market focus returns to profitable growth, innovation and new product development are even more important for long-term competitiveness and financial performance. However, after decades of organizational attention, and with global R&D spending reaching $2.47 trillion in 2022, the following sad truths remain:
· 40-50% of innovation and new product initiatives fail
· 90% of executives are disappointed with their company's innovation
performance
The late Clayton Christensen, who was known for his focus on innovation as a
business consultant and academic, wrote in his book, The Innovator's Solution:
"More than 60 percent of all new product development efforts are scuttled
before they ever reach the market. Of the 40 percent that do see the light of
day, 40 percent fail to become profitable and are withdrawn from the market."
This means that 76% of all NPD efforts fail to make it to market or become
profitable. Similar findings underscore the same level of risk and failure in
innovation. Companies waste a lot of resources and effort for little or no
return. This rate of failure should be unacceptable, regardless of the size of
the company. With companies facing an economic crisis caused by a global
pandemic, any failure rate above 50% is just not acceptable. So, if a company
wants to navigate the crisis and emerge stronger, what should they do? How
can they minimize their failure rate?
And most importantly, why does this continue to be a real, consistent, and
significant problem that must be addressed by businesses that value innovation
and its benefits of growth, efficiency and profitability?
In a recent best practice report, the Product Development Management
Association (PDMA) points to what makes innovation difficult to solve: "Firms
must continually evolve their NPD capabilities just to 'stay in the game' as
the business and technology environments change. No one single practice is
required for greater innovation performance. Rather, the best firms are better
at employing and skillfully combining a variety of NPD capabilities and
practices."
We agree with PDMA's point of view and see organizations still struggle with
challenges that cause chaos and prevent them from achieving their innovation
goals. The following challenges waste trillions of dollars a year in
investment and shareholder value:
- Organizational misalignment
- Disconnected efforts
- Strategy not driving execution down to the individual team member
- Ad hoc tools
- Limited governance to responsibly manage business and commercial
risk
Adding to the challenge of successful innovation are three current market
trends that continue to have a profound effect on companies - digitalization,
sustainability and continuous evolution of customer needs. These trends make
it even more difficult for companies to reign in the turmoil and get their
innovation and product programs on the right track.
Despite the chaos, predictable and repeatable innovation is not an oxymoron.
Sopheon has been working with clients of all sizes and across a wide range of
industries over the last 20 years to address the turbulence, including helping
them to successfully embrace these current market trends.
The road ahead.
Companies are realizing that managing innovation, mandating innovation, or separating innovation into a stand-alone group doesn't generate the breakthrough to incremental innovations needed for long term growth and profitability. They see that in leading corporations like 3M, Hershey and Honeywell, innovation permeates all parts of the organization. To achieve this, companies must learn what it takes to operationalize innovation, just as they have learned from the success of software development and product management organizations as they operationalize their environments through DevOps and ProductOps. Companies see that those same principles can be applied to Innovation through InnovationOps.
The innovation market defines InnovationOps as:
The combination of cultural philosophies, practices, people, and tools that
increase an organization's ability to deliver innovation at scale.
For decades, we have been saying that, to perform innovation at scale, an
organization must operationalize innovation by bringing together the following
three areas:
· The people-from team members to executives-across the organization
· The tasks that the people perform across the organization
· The processes that people performing tasks use to ensure
repeatability and predictability
As a result of Sopheon's investment over the past several years, we have
rolled out a differentiated family of software and services that enables
companies to deploy InnovationOps across the organization and enables the
synchronized system to deliver innovation at scale. Each offering is focused
on specific innovation tasks that, when brought together with the people and
processes across the organization, make InnovationOps a reality.
From individual team members to the CEO, we cover the full spectrum of the
tasks that product, innovation, and project professionals must accomplish to
drive innovation across their companies. And the result?
For any company that values their investment in innovation, Sopheon can
provide all the benefits of InnovationOps: a set of products, that together,
creates efficiency that in turn gives innovators better visibility to mitigate
uncertainty, reduce risk and make better decisions. It's the essence of the
benefit Sopheon has delivered for years with Accolade and that is now extended
through our new Acclaim offerings.
Financial Review
Sopheon delivered both strategic and financial progress in 2022, in the face
of tough global economic conditions as well as the short-term pressure from
our own strategy to migrate our business model to a more recurring revenue
basis for higher growth and predictability in future. The Board considers ARR
as the driver for long term growth and shareholder value, and therefore this
is our primary growth metric and focus. Revenue recognition timing differences
between recurring and perpetual license sales inevitably means revenue and
profit are compressed in the short term but contribute stronger and more
predictable performance in the medium term as the book of ARR builds and
improves forward visibility. 2022 saw an acceleration in ARR growth, including
13 existing perpetual customers converting to a SaaS model.
Following are the key financial performance indicators which we prioritize and
track to run the business to achieve our stated business strategy. We are
pleased with the positive development in these metrics, and I discuss them in
more detail in the rest of my report.
2022 2021 2020
ARR(1) at year end $24.3m $20.7m $18.0m
ARR growth year over year 17.4% 14.7% 13.8%
GRR(4) for the year 92% 95% 91%
NRR(4) for the year 112% 108% 103%
Reported revenue $36.8m $34.4m $30.0m
New customer signings 16 10 10
Total Contract Value (TCV) signed in the year $30.1m $22.2m $21.2m
SaaS TCV signed in the year $12.7m $7.6m $6.6m
Gross margin 75% 73% 70%
Adjusted EBITDA $6.9m $6.2m $5.9m
Cash (utilization)/generation before financing activities ($0.9m) $3.9m $2.6m
Cash at year end $21.1m $24.2m $21.7m
Revenue metrics above are focused on our corporate software business, which in
2022 was primarily Accolade and associated consulting. TCV metrics quoted
above include first year maintenance only for perpetual transactions, but the
full multi-year committed value of any SaaS transactions. It is important to
note the significant impact of the very large order with the US Navy,
discussed further below, on TCV performance in 2022.
Trading Performance
Overall revenue on a constant currency basis grew to $38.1m (2021: $34.4m).
Due to strong US dollar appreciation against other currencies, our reported
revenues were $36.8m. As set out in Note 4 to the financial statements, this
comprises $5.5m of perpetual license (2021: $3.9m), $8.8m of consulting
services (2021: $10.4m) and $22.5m of recurring SaaS and maintenance (2021:
$20.0m). A comparatively quiet year for consulting following delivery of a
substantial deployment with LG in 2021, was almost exactly offset by a
stronger perpetual performance, largely driven by a contract signed with the
US Navy. These events disguise the very real operational progress that is
demonstrated by the growth in the recurring line and more importantly by the
very strong growth in ARR by year end.
The US Navy is structured as an enterprise perpetual license together with
long term maintenance and consulting commitments, with the payment profile
spread evenly across the five-year period. Of the total deal value,
approximately $4.1m was recognized as perpetual license fees in 2022 and the
majority of this amount remains in receivables. A further $4.1m of
maintenance, $2.7m of consulting and $0.3m of notional interest will be
recognized over the five-year period. Even if the US Navy order were excluded,
total TCV booked matched the previous year and the amount of SaaS nearly
doubled. Our strategy is to accelerate and deepen this trend, and looking
forward, we intend that all new license sales will be SaaS where possible.
Conversions to SaaS increasingly include customers that already use Sopheon
for hosting, who wish to access new SaaS only solutions such as Acclaim
Projects, or to access new pricing models. In most cases, such orders are
accompanied by an uplift in ARR as the customers expand the footprint of our
software in their business. During the year, 13 customers moved from perpetual
to SaaS, compared to six in 2021 and four in 2020. This pattern is underlined
by the steady improvement in our NRR metric, which we are exposing for the
first time this year.
A 2022 report by SaaS Capital indicates that median GRR and NRR for B2B
vendors selling larger ticket enterprise software are 95% and 105%
respectively. Sopheon performs well on both counts and shows a rising NRR
trend, key to future growth dynamics.
Product, Seasonality and Geography
We continue to expect the sensitivity of revenue to calendarization to come
down as our recurring revenue rises more steeply. However, due to the impact
of the US Navy perpetual transaction this was not the case in 2022, with the
second half of the year accounting for 58 percent of revenues (2021: 52
percent and 2020: 54 percent).
Revenues to customers in our core markets of North America and Europe,
addressed by our direct sales teams, were 68 percent and 28 percent of total
respectively (2021: 60% and 31%) again reflecting the impact of the Navy
transaction. After relatively strong years for perpetual and consulting
business in the Asia-Pacific region in 2020 and 2021, revenues outside our
core regions fell back to 4 percent (2021: 9%). Our activities in the Pacific
region continue to be managed through partnership channels. The revenue
performance disguises some new SaaS signings in the territory, and we believe
this region represents a growth opportunity for Sopheon.
The vast majority of revenue continues to come from the Accolade solution.
However, as noted in the Chairman's statement, Acclaim Projects was
instrumental in concluding nine transactions in 2022, representing TCV signed
in excess of $4m, and is playing a key role in our forward pipeline.
Gross Margin
Gross margin was 75 percent, compared to 73 percent in 2020, itself an
increase over the year before. Gross margin is calculated after deducting the
cost of our consulting organization - both payroll and subcontracted; costs
and charges associated with our hosting activities, some license royalties due
to OEM partners and costs and credits relating to certain indirect taxes. As
before the change in margin last year was driven largely by the dynamics of
our services organization. Lower revenues meant that consulting represents a
smaller proportion of the overall margin mix; furthermore, not all departing
staff were replaced.
Research and Development Expenditure
Headline R&D expense shows a large jump from $7.3m to $10.6m. However,
this includes two non-operational items being (i) a $1.6m write down of
previously capitalized costs, as further described below; and (ii) $0.6m in
amortization of intangible assets added through the ROI Blueprints
acquisition. Excluding these items, and factoring in the impact of
capitalization, actual spend on R&D rose from $8.6m to $10.2m or from 25%
to just under 28% of revenue. These are undoubtedly high by historic standards
but reflect the major investment being made in the Acclaim product family
alongside continuous improvements to Accolade as well as upward cost pressure.
Average headcount in this area has remained broadly flat but has been
supplemented extensively by subcontracted resources. Further details of
capitalization and amortization of R&D expenses is described in Note 9.
Sopheon had embarked on the development of a next-generation platform for new
cloud-based applications prior to our recent M&A transactions. In light of
both acquisitions and other factors, the group revisited its original
approach. As a consequence, a 100% impairment has been made against the
capitalized costs associated with the cloud platform development, amounting to
$1.6m, included in research and development expense and subtracted from
adjusted EBITDA.
The amount of 2022 research and development expenditure that met the criteria
of IAS 38 for capitalization was $5.2m (2021: $4.3m) offset by amortization
charges of $3.4m (2021: $3.0m) and an impairment of $1.6m (2021: $nil).
Capitalized costs in 2022 are largely attributable to the group's investment
in the Accolade 14.2, 14.3, 15.0 and 15.1 versions, as well as the more
nascent Acclaim solutions, in particular the former ROI Blueprints offering,
Acclaim Projects, which has had a positive impact on sales performance as
noted above.
Other Operating Costs
Staff costs continue to represent over 80 percent of our cost base. Sopheon
has a relatively mature and highly qualified blend of staff, reflecting the
professional and intellectual demands of our chosen market. We ended 2022 with
178 staff and 18 full time offshore subcontracting resources (2021: 167 and
18). In addition, further R&D offshoring was conducted on a project
deliverable basis, mainly to support one of the Acclaim solutions. Salary
pressures continued during 2022, and we experienced significant staff churn as
the "great resignation" impacts continued. While this contributed to cost
savings against plan, the majority of leavers were replaced by year end, and
we have seen this pressure fall off as we closed the year. Average headcount
for the year was 172 compared to 165 the year before. In 2021 we had modified
the corporate bonus scheme applicable to all non-sales staff in the company,
adding a material element of ARR goal to our historical focus on Adjusted
EBITDA; the ratio was increased in 2022, and was fully achieved. In spite of
these upward pressures, compounded by increases in individual pay requirements
in technical roles, staff costs were broadly flat year over year thanks mainly
to the impact of the strong USD on the reported costs of our European
employees.
Overall non-payroll costs increased by approximately $1m before exchange,
interest, tax and depreciation. There were three main components of the
increase being travel and related costs, expanding marketing programs, and
infrastructure costs associated with the SaaS migration and Acclaim
investments.
Taking a functional view, specific comments regarding consulting operations
and research and development costs are noted above. Overall costs in the
sales and marketing area look flat on a headline basis but this would have
shown an increase due to higher marketing program spend, were it not for
strong USD rates. Administration costs - which include infrastructure costs -
have reduced by approximately $0.5m. This area includes all other overheads,
office costs, regulatory and compliance costs, depreciation, and operational
exchange movements, as well as the full impact of the notional charge for
share option grants, which is allocated entirely to this caption. The
majority of the fall came from exchange gains in Sopheon plc arising from GBP
weakness, as well as lower rental costs due to reduced office footprints,
offset by higher infrastructure costs.
With regard to foreign exchange, historically the group has aimed to
incorporate a natural hedge through broadly matching revenues and costs within
common currency entities, reducing the need for active currency management.
In recent years this has become somewhat less balanced as our cost base has
become increasingly USD driven, while revenues remain roughly two thirds USD
and one third EUR/GBP. This has led to a build-up of EUR balances pending a
reversal of the current USD strength.
Results and Corporate Tax
Adjusted EBITDA is a key indicator of the underlying performance of our
business, commonly used in the technology sector. It is also a key metric
for management and the financial analyst community. This measure is further
defined and reconciled to profit before tax in Note 5. The combined effect
of the revenue and cost performance discussed above has resulted in Sopheon's
adjusted EBITDA performance for 2022 rising to $6.9m, from $6.2m in 2021.
The increase in profit before tax was more muted at just over $0.1m, due
mainly to the incidence of higher amortization charges, rising to $1.3m (2021:
$1.2m).
The tax charge of $2.2m (2021: $0.4m) reported in the income statement is made
up of $1.9m (2021: $nil) of deferred tax movements arising mainly from the
impact of legislation that has accelerated consumption of accumulated tax
losses in the USA as further described in Note 7, and $0.3m (2021: $0.4m) of
actual current tax. The movement in deferred tax has reduced the group's
recognized deferred tax asset to $0.6m (2021: $2.6m) of a potential total
asset of $8.9m (2021: $11.7m).
Altogether this leads to a loss after tax of $0.9m (2021: profit of $0.8m).
This has also resulted in loss per ordinary share on a fully diluted basis of
8.28 cents (2021: 7.47 cents profit).
Dividend
The board is pleased to maintain Sopheon's dividend at 3.25 pence per share
for the year ended 31 December 2022 (2021: 3.25p). We believe this level
strikes the right balance between a business going through a complex SaaS
transition, while still delivering positive revenue growth, cash generation
and balance sheet strength. Subject to approval by the company's shareholders
at the annual general meeting scheduled for 8 June 2023, the dividend will be
paid on 7 July 2023 with a record date of 9 June 2023.
Cash, Facilities and Assets
Net cash at 31 December 2022 amounted to $21.1m (2020: $24.2m).
Approximately $4.7m was held in USD, $14.3m in EUR and $2.1m in GBP (2021:
$5.6m, $15.4m and $3.2m respectively). The reduction in net cash is due to
several factors:
(a) Cash utilization before financing was $0.9m (2021: generation of
$3.9m) primarily reflecting a significant increase in receivables due to two
factors. The majority of this increase can be explained by the extended
payment terms associated with the US Navy enterprise agreement leading to
$3.6m being included within the $4.1m contract asset recorded within
receivables. Second, our recurring contract renewal dates concentrate in the
final quarter of the year and the success in adding more SaaS agreements this
year has further accentuated this issue, also leading to a higher trade
receivable balance at year end than in the past.
(b) Investing activities including M&A, capitalized development costs
and equipment was $0.3m higher than the year before, and net financing costs
including dividends, interest and share issue proceeds was $0.2m higher.
(c) As noted above Sopheon holds considerable EUR as well as GBP cash
balances, which due to currency movements, fell in value by approximately $1m
in USD terms over the course of the year.
The group has no debt (excluding notional debt from the adoption of IFRS
16). However, we maintain our good relationships with our financing
partners, with potential established for funding arrangements in connection
with corporate activity if required.
Intangible assets stood at $13.1m (2021: $12.0m) at the end of the year.
This includes (i) $8.3m being the net book value of capitalized research and
development (2021: $8.1m) (ii) the net book value of acquired technology and
IPR of $1.7m arising on the acquisition of ROIB (2021: $2.3m); and (iii) an
additional $3.1m (2021: $1.6m) being goodwill arising on acquisitions,
including $0.6m for ROIB arising in 2021 and $1.5m for Solverboard arising in
2022.
As stated above in our discussion of research and development costs,
capitalization and amortization have historically been broadly in balance;
however, recently capitalization has accelerated as we have expanded our range
of product offerings, and amortization has yet to catch up. Nevertheless,
due to the $1.6m impairment noted above booked against the capitalized costs
associated with internal cloud platform development prior to our recent
acquisitions, in 2022 the net total of capitalization, amortization and
impairment was broadly in balance.
With respect to the acquisition of Solverboard, we have estimated
approximately 29 percent of the contingent consideration will become payable
during the earnout period, resulting in a total net acquisition cost being
recorded of $1.5m which is all treated as goodwill.
IFRS 16 requires lessees to recognize a lease liability that reflects future
lease payments and a "right-of-use asset" in all lease contracts within scope,
with no distinction between financing and operating leases. This has resulted
in net book value of right-of-use assets of $0.5m (2021: $0.8m) and
corresponding lease liabilities of $0.5m (2021: $0.8m) at 31 December 2021.
Notional amortization and interest charges in connection with the above
recognized in the income statement were approximately $0.5m (2021: $0.7m).
Consolidated net assets at the end of the year stood at $29.6m (2021: $31.3m),
a decrease of $1.7m and including net current assets of $15.6m (2021:
$15.7m).
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2022
2022 2021
$'000 $'000
Revenue 36,787 34,356
Cost of sales (9,068) (9,416)
Gross profit 27,719 24,940
Sales and marketing expense (11,064) (10,991)
Research and development expense(1) (10,536) (7,329)
Administrative expense(2) (4,787) (5,293)
Operating profit 1,332 1,327
Finance income 79 (34)
Finance expense (62) (66)
Profit before tax 1,349 1,227
Income tax expense (2,226) (410)
(Loss)/profit for the year (877) 817
Earnings per share - basic (8.28c) 7.83c
Earnings per share - diluted (8.28c) 7.48c
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2022
2022 2021
$'000 $'000
(Loss)/profit for the year (877) 817
Other comprehensive expense
Exchange differences on translation of foreign operations (1,562) (734)
Total comprehensive (loss)/income for the year (2,439) 83
(1 ) Research and development expenditure in 2022 includes an exceptional
write down of $1.6m, as set out in Note 9, and a further $0.6m of acquisition
related amortization.
(2) The 2022 tax charge includes $1.9m of deferred tax movements and $0.3m of
actual current tax as set out in Note 7.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 2022
2022 2021
$'000 $'000
Assets
Non-current assets
Property, plant and equipment 584 605
Right-of-use assets 450 752
Intangible assets 13,073 11,950
Deferred tax asset 625 2,557
Other receivables 19 19
14,751 15,883
Current assets
Contract assets 4,085 222
Trade and other receivables 14,788 12,960
Cash and cash equivalents 21,121 24,193
39,994 37,375
Total assets 54,745 53,258
Liabilities
Current liabilities
Contract liabilities 16,501 13,505
Trade and other payables 7,606 7,668
Lease liabilities 271 474
24,378 21,647
Non-current liabilities
Lease liabilities 193 305
Other payables 549 -
742 305
Total liabilities 25,120 21,952
Net assets 29,625 31,306
Equity
Share capital 3,248 3,219
Capital reserves 11,247 10,500
Profit and loss account and translation reserve 15,130 17,587
Total equity 29,625 31,306
CONSOLIDATED CONDENSED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2022
2022 2021
$'000 $'000
Operating activities
(Loss)/profit for the year (877) 817
Adjustments for non-cash and financing items 9,161 4,877
Movements in working capital (2,700) 4,391
Net cash from operating activities 5,584 10,085
Investing activities
Finance income 79 1
Purchases of property, plant and equipment (401) (435)
Development costs capitalized (5,207) (4,271)
Acquisition of business (753) (1,450)
Share purchases by EBT (155) -
Net cash used in investing activities (6,437) (6,155)
Financing activities
Issue of shares 249 648
Lease payments (522) (686)
Finance expense (38) (56)
Dividends paid (408) (460)
Net cash used in financing activities (719) (554)
Effect of foreign exchange rate changes (1,500) (901)
Net (decrease)/ increase in cash and cash equivalents (3,072) 2,475
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2022
Share Capital Capital Reserves Translation Reserve Retained Profits Total
$'000 $'000 $'000 $'000 $'000
At 1 January 2021 3,133 9,398 702 16,922 30,155
Total comprehensive income for the year - - (734) 817 83
Issue of shares 86 562 - - 648
Share-based payments - 540 - 340 880
Dividends paid - - - (460) (460)
At 1 January 2022 3,219 10,500 (32) 17,619 31,306
Total comprehensive income for the year - - (1,562) (877) (2,439)
Issue of shares 29 531 - - 560
Share-based payments - 371 - 390 761
Share purchases by EBT - (155) - - (155)
Dividends paid - - - (408) (408)
At 31 December 2022 3,248 11,247 (1,594) 16,724 29,625
NOTES
1. Basis of Preparation
The financial information set out in this document does not constitute the
Company's statutory accounts for the years ended 31 December 2021 or 2022.
Statutory accounts for the year ended 31 December 2022, which were approved by
the directors on 22 March 2023, have been reported on by the Independent
Auditors. The Independent Auditors' Reports on the Annual Report and
Financial Statements for each of 2021 and 2022 were unqualified, did not draw
attention to any matters by way of emphasis, and did not contain a statement
under 498(2) or 498(3) of the Companies Act 2006.
The Annual Report (including the statutory financial statements) for the year
ended 31 December 2021 have been filed with the Registrar of Companies. The
Annual Report (including the statutory financial statements for the year ended
31 December 2022) will be delivered to the Registrar in due course, and are
available from the Company's registered office at Dorna House One, Guildford
Road, West End, Surrey GU24 9PW and are available today from the Company's
website at www.sopheon.com/financial-reports/
(http://www.sopheon.com/financial-reports/) .
The financial information set out in these results has been prepared using the
recognition and measurement principles of UK adopted International Accounting
Standards in accordance with the requirements of the Companies Act 2006. The
accounting policies adopted in these results have been consistently applied to
all the years presented and are consistent with the policies used in the
preparation of the financial statements for the year ended 31 December 2021,
except for those that relate to new standards and interpretations effective
for the first time for periods beginning on (or after) 1 January 2022. There
are deemed to be no new standards, amendments and interpretations to existing
standards, which have been adopted by the Group that have had a material
impact on the financial statements. Approximately two-thirds of the Group's
revenue and operating costs are denominated in US Dollars and accordingly the
Group's financial statements have been presented in US Dollars.
2. Going Concern
The consolidated financial statements have been prepared on a going concern
basis. The directors have at the time of approving the financial statements, a
reasonable expectation that the company has adequate resources to continue in
operational existence for the foreseeable future.
The Covid-19 pandemic, Brexit and the war in Ukraine have so far had limited
impact on the business, and the board believes that the business is able to
navigate through the continued challenges of these events due to the strength
of its customer proposition, statement of financial position and the net cash
position of the group. However, these conditions continue to create
uncertainty and have had a widespread impact economically, with potential for
causing delays in contract negotiations and/or cancelling of anticipated sales
and an uncertainty over cash collection from certain customers. As a
consequence, the group has carried out detailed forecast stress testing in
order to consider how much forecasts have to reduce by in order to cause cash
constraints, and also to consider the likelihood of this scenario occurring.
This assessment has also included the group's actual cash holdings as of the
date of the approval of the financial statements and financing alternatives
available to the group. Overall, these cash-flow forecasts, which cover a
period of at least 12 months from the date of approval of the financial
statements, foresee that the group will be able to operate within its existing
facilities. Nevertheless, there is a risk that the group will be impacted more
than expected by reductions in customer confidence if global economic
sentiment deteriorates. If sales and settlement of existing debts are not in
line with cash flow forecasts, the directors have the ability to identify cost
savings if necessary, to help mitigate the impact on cash outflows.
Having assessed the principal risks and the other matters discussed in
connection with the going concern statement, the directors have a reasonable
expectation that the group has adequate resources to continue in operational
existence for the foreseeable future and settle liabilities as they fall due.
For these reasons, they continue to adopt the going concern basis of
accounting in preparing the financial information.
NOTES
3. Segmental Analysis
All of the Group's revenue in respect of the years ended 31 December 2022 and
2021 derived from the design, development and marketing of software products
with associated implementation and consultancy services, as more particularly
described in the Chairman's statement. The business is seen as one cash
generating unit and operates as a single operating segment. For management
purposes, the Group is organized geographically across two principal
territories, North America and Europe. Information relating to this
geographical split is outlined below.
The information in the following table relates to external revenues location
of operations. Inter-segment revenues are priced on an arm's length basis.
Year ended 31 December 2022
North
America Europe
Total
$'000 $'000
$'000
Income Statement
External revenues - by location of operations 25,756
11,031 36,787
Operating profit before interest and tax
1,809 (477) 1,332
Profit before tax
1,871 (522) 1,349
Finance income
95 (16) 79
Finance expense
(33) (29) (62)
Depreciation and amortization
(4,455) (391) (4,846)
Adjusted EBITDA
6,914 25 6,939
------- ------- -------
Balance Sheet
Fixed asset additions
240 161 401
Capitalization of internally generated development costs 5,208
- 5,208
Total assets
30,780 23,965 54,745
Total liabilities
(17,108) (8,012) (25,120)
-------
------- -------
Year ended 31 December 2021
North
America Europe
Total
$'000 $'000
$'000
Income Statement
External revenues - by location of operations 21,088
13,268 34,356
Operating profit before interest and tax
3,092 (1,765) 1,327
Profit before tax
3,055 (1,828) 1,227
Finance income
1 (35) (34)
Finance expense
(38) (28) (66)
Depreciation and amortization
(3,543) (430) (3,973)
Adjusted EBITDA
7,397 (1,217) 6,180
------- ------- -------
Balance Sheet
Fixed asset additions
304 131 435
Capitalization of internally generated development costs 4,271
- 4,271
Total assets
29,930 23,328 53,258
Total liabilities
(15,023) (6,929) (21,952)
-------
------- -------
NOTES
3. Segmental Analysis (continued)
Revenues attributable to customers in North America in 2022 amounted to
$24,953,000 (2021: $20,434,000). Revenue attributable to customers in the
rest of the world amounted to $11,834,000 (2021: $13,922,000) of which
$10,468,000 (2021: $10,765,000) was attributable to customers in Europe.
4. Revenue from contracts with customers
All of the Group's revenue in respect of the years ended 31 December 2022 and
2021 derived from continuing operations and from the design, development and
marketing of software products with associated implementation and consultancy
services. The following table provides further disaggregation of revenue in
accordance with the IFRS 15 requirement to depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by economic
factors.
2022 2021
$'000 $'000
Perpetual software licenses
5,536 3,931
Consulting and implementation services
8,796 10,390
Maintenance, software subscriptions and hosting
22,455 20,035
------- -------
36,787 34,356
------- -------
Perpetual licenses are recognized at a point in time. Consulting and
implementation services, and maintenance, subscription and hosting services,
are recognized over time.
5. Adjusted EBITDA
Adjusted EBITDA, which is a company specific measure, is defined as earnings
before interest, tax, depreciation, amortization and employee share-based
payment charges is an important measure, since it is widely used by the
investment community. It is calculated by deducting net interest receivable
of $17,000 (2021: adding back net interest payable of $100,000) and adding
back depreciation and amortization charges amounting to $4,846,000 (2021:
$3,974,000) and employee share-based payment charges of $761,000 (2021:
$880,000) to the profit before tax of $1,349,000 (2021: $1,227,000).
6. Share-Based Payments
In accordance with IFRS 2 Share based Payments, an option pricing model has
been used to work out the fair value of share options granted by the Group,
with this being charged to the income statement over the expected vesting
period and leading to a charge of $761,000 (2021: $880,000). Where an option
vests in multiple instalments, each instalment is treated as a separate grant
with its own vesting period. The entire expense is recognized within
administrative expenses.
7. Income Tax
The income tax expense of $2,226,000 (2021: $410,000) comprises current tax
expense of $294,000 and deferred tax expense of $1,932,000 (2021: Nil). The
current tax expense represents German corporation tax payable by Sopheon GmbH
and US state taxes payable by the Group's US subsidiaries.
The movement in the deferred tax asset reflects amendments to US Code Section
174 which now requires taxpayers to charge their research expenditures and
software development costs to a capital account. Capitalized costs are
required to be amortized over five years (15 years for foreign costs). This
has led to a significant acceleration of the utilization of US unrelieved
trading losses in 2022, and also resulted in a change in timing difference
arising from the capitalization and transfer of development investments.
NOTES
At 31 December 2022, tax losses estimated at $46.2m (2021: $54.2m) were
available to carry forward by the Sopheon group, arising from historical
losses incurred. These losses have given rise to a deferred tax asset of $1.4m
(2021: $2.6m), offset by a deferred tax liability arising from capitalization
of internally generated development costs of $0.7m (2021: $nil) and a further
potential deferred tax asset of $8.7m (2021: $9.1m), based on the tax rates
currently applicable in the relevant tax jurisdictions. Of these tax losses,
an aggregate amount of $8.1m, representing $1.7m of the potential deferred tax
asset (2021: $8.7m and $1.8m respectively) represents pre-acquisition tax
losses of Alignent Software, Inc. The future utilization of these losses may
be restricted under Section 382 of the US Internal Revenue Code, whereby the
ability to utilize net operating losses arising prior to a change of ownership
is limited to a percentage of the entity value of the corporation at the date
of change of ownership.
8. Earnings per Share
The calculation of basic earnings per ordinary share is based on a loss of
$877,000 (2021: profit of $817,000), and on 10,594,000 (2021: 10,442,000)
ordinary shares, being the weighted average number of ordinary shares in issue
during the year. The profit attributable to ordinary shareholders and the
weighted average number of shares for the purpose of calculating the diluted
earnings per ordinary share are the same as those used for calculating the
basic earnings per share for 2022. This is because the 840,887 share options
to subscribe for ordinary shares would have the effect of reducing the loss
per share.
9. Intangible Assets
In accordance with IAS 38 Intangible Assets, certain development expenditure
must be capitalized and amortized based on detailed technical criteria, rather
than automatically charging such costs in the income statement as they
arise. This has led to the capitalization of $5,207,000 (2021: $4,271,000),
and amortization of $3,386,000 (2021: $2,997,000) during the year.
On 18 May 2022 the group announced the acquisition of Solverboard, a
cloud-based business, based in the UK and specializing in the front-end of
innovation management. Initial consideration comprised £500,000 in cash and
£250,000 in shares issued at £6 per share. An additional, contingent
deferred earn-out of up to £1.55 million may be payable over two years,
linked to Annual Recurring Revenue ("ARR") targets. The contingent deferred
consideration may be satisfied by the issue of up to £900,000 in shares
issued at £6 per share, with the balance in cash. The initial consideration
of £750,000 ($931,000) has been allocated to goodwill. The contingent
deferred consideration has been assessed at a fair value of £445,000
($549,000) and has also been allocated to goodwill.
Prior to the acquisitions of ROI Blueprints (in December 2021) and of
Solverboard, the group had embarked on its own development of a
next-generation platform for new cloud-based applications. In the light of
both acquisitions and other factors, the group has revisited its original
approach. As a consequence, a full impairment provision has been made against
capitalized historic development costs associated with the group's own cloud
platform development, amounting to $1.6m, which is included in research and
development expense.
10. Cautionary Statement
Sopheon has made forward-looking statements in this press release, including
statements about the market for and benefits of its products and services;
financial results; product development plans; the potential benefits of
business relationships with third parties and business strategies. These
statements about future events are subject to risks and uncertainties that
could cause Sopheon's actual results to differ materially from those that
might be inferred from the forward-looking statements. Sopheon can make no
assurance that any forward-looking statements will prove correct.
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