REG - Sopheon PLC - Final Results
24/03/2022 07:01
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RNS Number : 8322F Sopheon PLC 24 March 2022
Embargoed Release: 07:00hrs Thursday 24 March 2022
SOPHEON PLC
("Sopheon", the "Group" or the "Company")
RESULTS STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2021
Sopheon plc, the international provider of software and services for
Enterprise Innovation Management solutions, is pleased to announce its results
for the year ended 31 December 2021, together with an outlook for the current
year.
financial Highlights:
· Revenue of $34.4m, ahead of market expectations in the face of
continued COVID challenges, whilst embedding the SaaS transition (2020:
$30.0m)
· ARR(1) rose from $18.0m at the start of 2021 to $20.7m at the
end of the year
· Full year 2022 revenue visibility(2) stands at $25.1m (last
year at this time: $24.5m)
· Gross retention at 95% (2020: 91.5%)
· Adjusted EBITDA(3) of $6.2m (2020: $5.9m) also ahead of market
expectations
· Profit before tax of $1.2m (2020: $1.7m) affected by higher
amortization and share based payments
· Net cash of $24.2m (2020: $21.7m) and the Group has no debt
· Dividend to be maintained at 3.25p per share (2020: 3.25p)
Operational Highlights
· 10 new customer wins of which 9 were SaaS, driving rising
quality of earnings and demonstrating the successful shift to a SaaS model.
Looking forward, the license pipeline for new customers approaching 90% SaaS.
Another six existing clients (2020: 4) were converted to SaaS as part of the
Group's SaaS Uplift program.
· Acceleration of product investment resulted in a higher
delivery pace for enterprise Accolade releases. In parallel, investment in
cloud-native solutions, with a first application targeted at expanding the
Accolade user community. Initial application to launch mid-2022.
· We stepped up marketing programs and investment significantly in
2021 to extend market reach, prospect engagement and ultimately lead
generation. This expanded go-to-market strategy is geared to increase new
customer acquisition, reducing reliance on large customers who require
particular capabilities, and to address a broader target market in order to
improve scalability and predictability.
· The acquisition of ROI Blueprints business added deep project
management capability eliminating the need for customer purchase and
integration of third-party tools in that area.
· Greg Coticchia was appointed CEO during the year, also introducing
new leadership in sales, marketing and product areas.
Andy Michuda, Chairman, commented: "2021 was a year of new leadership, new
processes, new programs, and extensive organizational change, together with
solid financial outcomes and an initial acquisition. With the initiation of
change behind us and the organizational structure and leadership in place,
2022 is very much focused on accelerating and operationalizing the
effectiveness of this change. I believe that the future is bright for Sopheon
and for Sopheon shareholders."
For further information contact:
Andy Michuda (Chairman) Sopheon plc + 44 (0) 1276 919 560
Arif Karimjee (CFO)
Carl Holmes/ Edward Whiley (Corporate Finance) finnCap Ltd + 44 (0) 20 7220 0500
Alice Lane/Sunila de Silva (ECM)
About Sopheon. Sopheon (LSE: SPE) partners with customers to provide complete
enterprise innovation management solutions including software, expertise, and
best practices, that enable them to achieve exceptional long-term revenue
growth and profitability. Sopheon's Accolade(®) solution provides unique,
fully integrated coverage for the entire innovation management and new product
development lifecycle, including strategic innovation planning, roadmapping,
idea and concept development, process and project management, portfolio
management and resource planning. Sopheon's solutions have been implemented by
over 250 customers with over 60,000 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 annual recurring revenue at a point in time, being the value of
recurring SaaS, maintenance and hosting revenue streams normalized to a
one-year period.
(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
Stage-Gate® is a registered trademark of Stage Gate Inc. - see
www.stage-gate.com (http://www.stage-gate.com)
Sopheon® and Accolade® are registered trademarks of Sopheon plc.
Chairman's Statement
Our 2021 performance was gratifying both for the strategic progress we made
and for exceeding our financial market expectations despite such an uncertain
economic environment. It is very pleasing to report revenue growth of 14.6%
at $34.4m (2020: $30m) and adjusted EBITDA of $6.2m (2020: $5.9m) along with
15% growth in Annual Recurring Revenue ("ARR") to $20.7m at the end of the
year (2020: $18.0m). Cash grew to $24.2m (2020: $21.7m). In addition to our
financial results, 2021 was a year of unusually high activity and change for
Sopheon. Our new CEO and newly added executive team wasted no time in moving
forward with the company's growth strategy and agenda. As detailed in recent
years, we have continued pursuing our investment path for growth.
At the time of this report, revenue visibility(1) stands at $25.1m (2020:
$24.5m). The consulting services element of visibility is lower than the year
before, due to the nature of deals signed in recent months. As previously
noted, ARR has grown strongly. We are on a journey of transition from a
traditional perpetual software license business to a higher-quality recurring
revenue business, with the goal of delivering more predictable and reliable
growth over the medium term and increased value to our shareholders. In the
shorter term, this transition is naturally weighing on profits as we
accelerate go-to-market investment while simultaneously shifting software
revenue recognition from an up-front to a rateable model.
As announced through the year, along with Greg taking on the CEO role, we have
also strengthened our leadership team with appointments in key marketing,
sales, and product areas. The team has introduced and driven three key
programs to support our strategic direction. As noted above, a core goal
is to increase ARR; as a percentage of revenue, it now stands at 60 percent of
trailing annual revenue compared to 53 percent when we started this journey in
2019. Two initiatives are driving this key program - first, moving our
perpetual customer base to a Software-as-a-Service ("SaaS") through a targeted
cloud uplift program; and second, we have completed the transition of our new
sales go to market approach to a SaaS first model. By value, almost 90
percent of our pipeline for new software opportunities is for SaaS business.
The second key program, equally important to our growth strategy is the
increased investment being made in product, with the expectation to generate
higher rates of growth. Last year, our development organization embraced
fundamental directional, and process change with expectations to step up the
pace of product releases. We are also moving towards a multi-product future,
expanding beyond our enterprise Accolade solution. We have ambitious plans in
the product investment area which will take patience and time. Our goals
here are to:
• Continue to advance our flagship Accolade enterprise
solution and maintain our market leadership. During 2021, three new versions
were released, and we plan an ongoing pace of four per year going forward.
• Introduce new cloud-based applications providing value to
individual and workgroup users in the corporate ecosystem, alongside
Accolade's enterprise value proposition. Initial market introduction of the
first application is planned for mid-2022. These applications are intended
to be stand-alone solutions that solve individual productivity needs in
addition to creating future upsell opportunities for Accolade.
• Rapidly integrate acquired products to support extension
sales generated from acquisitions. This journey is very active with the ROI
Blueprints ("ROIB") acquisition completed in December 2021, and already
playing a material role with both existing and new customer opportunities.
The third key program is our investment in go-to-market strategies and
programs, with the expectation to expand our market reach and generate higher
growth rates. We have stepped up marketing programs significantly in 2021,
tracking metrics for market reach, prospect engagement and ultimately lead
generation. We expect to see continued activity and results in the coming
year. We are also adjusting our strategy to reduce our reliance on a smaller
number of large customers and thereby improve scalability and predictability.
We have previously shared our intention to engage in M&A, so it was very
pleasing to close our ROIB acquisition last December. Integration is under
way with focus on achieving key time-based milestones. We are actively
researching additional acquisition opportunities to improve
time-to-realization for our transformation and growth ambitions.
Outlook
2021 was a year of new leadership, new processes, new programs, and extensive
organizational change, together with solid financial outcomes and an initial
acquisition.
With the initiation of change behind us and the organizational structure and
leadership in place, 2022 is very much focused on accelerating and
operationalizing the effectiveness of this change. I believe that the future
is bright for Sopheon and for Sopheon shareholders.
CEO Review
Both externally and internally, 2021 was a year of change for Sopheon. While I
joined Sopheon in late 2020, it was an honor to succeed Andy Michuda as CEO in
early 2021 and lead Sopheon's continued success through these changes. At the
time, the coronavirus pandemic was continuing to affect all sectors of the
economy. Despite the challenges of a global pandemic and its impact on every
business worldwide and on their related investments in their businesses in
many areas, Sopheon continued to gain net new customers and expand our
relationships with existing customers. Innovation expenditures, even during
times of crisis, proved to be resilient. Market spending in the innovation
management space was estimated to be over $1.026B and growing at a CAGR of
16.9% (Markets and Markets, Innovation Management Market with COVID-19 Impact
Analysis Global Forecast to 2026, September 2021).
We started 2021 with several key objectives:
· to increase the pace with which we deliver new and unique
value to our customers in both product and services;
· to accelerate our transition to a SaaS model for our flagship
product, Accolade, while steadily extending the company's reach towards a more
user-centric product, underpinned by cloud-native, multitenant delivery; and
· finally, to identify and integrate capabilities through
acquired intellectual property.
We achieved all these goals while achieving our financial goals. How?
· Over the year, we continued the movement of customers to a
cloud-hosted solution; all of our new customers were SaaS or hosted, and an
additional six existing on-premise customers were migrated, bringing us to 53%
of our customers in the cloud, and while also investing in a true cloud-native
version of our product.
· We increased our scheduled development pace to four times a
year, delivering three releases of our flagship product Accolade on this new
pace during 2021, along with 10 point releases and more than a dozen new
features. These new capabilities increase value to our customers and allow us
to be more competitive in gaining new customers.
· We defined a clear market strategy based on knowledge from
customers, prospects, sales, and industry analysts, and identified companies
for licensing, partnering, and acquisition. As a result, we accomplished our
first acquisition in many years, ROI Blueprints, and initiated integration
immediately.
Sopheon achieved its financial goals in 2021 despite the many economic
challenges we faced during the pandemic, and we also retooled the company to
invest and prepare for the future. As the great economist and Harvard business
professor Ted Levitt stated: The purpose of a business is to get and keep a
customer. Sopheon continued to do just that in 2021, and will continue to do
so with its people, processes, and products in the future.
Market Trends
Sopheon is a company that continues to transform to meet the promise of the
market it serves: innovation. That has been our journey for the past year. We
continue to understand that, as a provider of innovation solutions, we must
also innovate and even transform our business while building on our foundation
of success. To this end, we have defined and begun to execute on our updated
three-year strategy for Sopheon. This strategy is informed by our customers,
the innovation market, and our people.
Some of the most valuable 'assets' we have are the foundation of our
well-recognized, brand-name customers across many industries; our proven
product; our ability to deliver our innovation and new product development
expertise to make customers successful; and the go-to-market operations that
create awareness and relationships with customers. Moreover, we have a
wonderful team of people. At our core, all 'Sopheonites' (as we call
ourselves) bring this strategy together and drive towards the goals we set.
Sopheon has been and will continue to be a proven and trusted partner for
innovation.
In a poll by MarketsandMarkets, a leading global market research and
consulting company, Sopheon was ranked number one in the innovation management
marketplace. It is tough being number one in any marketplace, but we are, and
we are beating companies that are larger than us. With that said, we realize
the new norm is "constant change," and to continue our position of leadership
and market relevance; we must continue to change. We believe the best time to
examine and adjust an organization's strategy is from a position of strength.
Here are the market drivers we are responding to as we transform our business:
· How customers want to buy has changed. Business to Business (B2B)
buyers are self-educating about products that interest them and demanding
self-service where they experience the product with no assistance from the
company. They do not want to be informed from outbound marketing and set up an
appointment with a salesperson to get educated. At a minimum, it's happening
much later in the sales process.
o According to a survey by the Corporate Executive Board, "On average - and
with little variation among industries - customers will contact a sales rep
when they independently complete about 57 percent of the purchasing decision
process."
· The person making the decision about what to buy is changing.
Decision making - even enterprise decision making - is moving rapidly from the
executive buyer to the 'end user' as an initial purchasing step. The
end-users want to get their hands on the product immediately, either through a
free trial or some type of "freemium" offering - the product itself becomes
the primary driver of customer acquisition ("product led growth" or "PLG").
o Since 2012, according to the OpenView 2020 SaaS Product Benchmarks
Report, the number of US public software companies operating a PLG model grew
from one to 27.
· Customers want to purchase for very specific capabilities that solve
more immediate problems. Customers care about the quality and velocity with
which you deliver useful product features and experiences through digital
means. The better you are at this, the more satisfied your customers will be.
o In the article "The Death of Big Software" while tightly bundled,
standardized software made some sense back in the day, it makes little or no
sense in the era of digital transformation where disruptive business
processes and business models are seen as necessary paths to
competitiveness.
· And specifically in our market of innovation, two major trends are
happening:
o Innovation processes are changing. We have traditionally focused on
automating the Stage-Gate® process as a core competency for our customers.
However, we recognize that there is a bureaucracy governing Stage-Gate
processes that can impede speed and agility. Companies -even our traditional
physical product customers in consumer-packaged goods and chemicals-have
discovered that newer 'Agile' methods lead to improved project speed,
decision-making, and communication. Stage-Gate has become less prominent as a
process to automate because speed is more important today. New digital tools
have sped up innovation, the lessons of Stage-Gate have been learned, and
companies are now looking to make their innovation process faster and less
rigid.
o Digital/ Software tools are coming into our market. All companies are
becoming software companies. In 2011, Marc Andreessen famously wrote a
prescient claim that "software is eating the world." His prediction was that
software companies would disrupt traditional industries, and since then, we've
seen industries transform, and companies fold in response to Amazon, Netflix,
Airbnb, and more. We are seeing early-stage companies with point products in
product development coming into our markets and appearing at our customers as
they hire software developers to work in their businesses.
As the market leader, Sopheon recognizes these trends and is responding. We
see many opportunities for us in these changes to the innovation market.
Our Response
So how do we respond to these? Sopheon has put together the following
three-point strategy, supported by five "action" themes. Our three-point
strategy to meet the market needs is:
1. SaaS/Annual Recurring Revenue Focus
The SaaS model is an approach in which a business makes profits by offering
cloud-based capabilities to clients. Customers can access SaaS applications
over an internet network remotely, from any device and place, which can be
more advantageous than traditional software business models. In these
situations, the software provider is responsible for building, installing,
configuring, and updating the application. When using the SaaS model,
companies provide cloud applications to customers on a subscription payment
basis. Organizations follow a SaaS framework to reduce costs, increase
accessibility, improve customer satisfaction, and expand their financial
success. Sopheon has transitioned 10 of its on-premise customers to the SaaS
model, and we have also completed the shift to go-to-market with Accolade
foremost as a SaaS service for new customers. Combined with a high gross
retention rate of 95 percent and a high Net Promoter Score (NPS) of 45, we are
already starting to see the benefits from the SaaS business model of greater
financial stability, high scalability, and predictable revenue leading to
better quality of earnings. This transition will continue in 2022.
2. Filling out the product roadmap
Last year, our development organization embraced fundamental directional and
process change with expectations to step up the pace of product releases while
also moving the company towards a multi-product future, reducing our reliance
on Accolade alone. We have ambitious plans in the product investment area
which will take patience and time. Clearly, our flagship Accolade enterprise
solution underpins our business, and we will continue to invest and extend it,
maintaining our market leadership. During 2021, three new versions of Accolade
were released, and we plan an ongoing pace of four releases per year going
forward.
In parallel, we will introduce new cloud-based applications providing value to
individual and workgroup users in the corporate ecosystem, alongside
Accolade's enterprise value proposition. Initial market introduction of the
first application is planned for mid-2022. Our gateway to the PLG approach,
these applications are intended to drive lead generation for Accolade, as well
as being stand-alone solutions that solve individual productivity needs.
Integration with Accolade itself will be an essential element of these
applications.
In addition, we have defined areas where licensing, partnering, or acquisition
can strengthen our market position, drive competitive differentiation, reduce
customer acquisition costs, increase retention and customer lifetime value,
and create the opportunity for more revenue per customer. This past year we
improved our competitive position by acquiring ROI Blueprints. ROI Blueprints
is a SaaS project and portfolio management product enabling customers to
manage project schedules, costs, resources, risks, and deliveries easily and
effectively. This has long been a capability that customers have asked for and
a capability we would formerly have to deliver through third-party
integration. We expect that ROIB will add revenue and increase our overall
competitiveness. Finally, it also fits well into our plans for a future
end-user-focused offering in this space.
3. Pursuing new go-to-market strategies to expand market reach
Sopheon has a well-defined marketing strategy for our industry-leading
Accolade solution. We have grown by focusing on key verticals such as Food
& Beverage, Chemical, Aerospace & Defense, and Industrial
Manufacturing. Servicing these markets will continue to be a strength moving
forward. But we also see an opportunity to grow beyond these verticals, as the
market for innovation is growing at even a faster rate than we have
historically performed and faster than even market growth rates in innovation.
We have stepped up our investment in marketing communications, where we have
historically been more conservative, to ensure we are creating improved
results in reach, engagement and leads required to continue to grow our
customer base. Also, these marketing activities will lay the foundation for
connections with the new individual and work group buyer of our software with
our cloud-native PLG offering, in turn creating upsell opportunities for our
Accolade enterprise solution. Finally, we are also establishing new business
and technology partnerships. With more and better partnerships, we can expand
our capabilities, benefitting customers, differentiating from competitors,
both without taking on the full costs.
Throughout its history, Sopheon has tackled the large innovation challenges of
some of the world's largest companies. This experience has allowed us to
prosper and gain many remarkable 'blue chip' customers. While we focused on
meeting many of their highly unique needs, we sacrificed building a product
that could meet a larger market need. Historically, this was not unusual in
the enterprise software market; many Enterprise Resource Planning (ERP) and
Customer Relationship Management (CRM) products faced the same challenges.
Given the stated Corporate Enterprise industry trends and shifts discussed
above, we find ourselves in a unique opportunity to introduce a product that
not only continues to meet the Enterprise requirements but also addresses the
new market requirements.
How We Execute our Plans
As we look to transform Sopheon and execute this strategy, we have created
five themes to support the activity that needs to take place for us to
succeed. For Sopheonites, these themes are not just words on paper; they have
been turned into specific Objectives and Key Results (OKRs) - a collaborative
goal-setting methodology used by teams and individuals to set challenging,
ambitious goals with measurable results - by each department leader with
specific Key Performance Indicators (KPIs) that will allow us to focus on
achieving our goals.
They are:
GROWTH: Repeatable, scalable, profitable growth through increased net new
customers and strong customer retention.
MORE: Broadening of product offerings and market solutions, company/technology
acquisition, and delivering differentiated value.
SPEED: Faster time-to-value for our customers.
VISIBILITY: Greater awareness of Sopheon and expressed interest in our
products and services
PEOPLE: Attract, retain, and grow our employees to best accomplish our
company's goals.
A deeper look at each one of these is set out in the annual report.
Financial Review
Overall revenue grew strongly to $34.4m up from $30.0m the year before. This
comprises $24.0m of software revenue (2020: $20.3m) showing growth of 18
percent, and $10.4m of consulting services (2020: $9.7m) representing growth
of 7 percent. Behind this headline performance, ARR grew to $20.7m, an
increase of 15 percent compared to the prior year at $18.0m. This key aspect
of our migration continues to show good movement and is discussed in more
detail below.
Trading Performance
Total license order volume (including SaaS deals) grew substantially to 72 (10
new) license transactions compared to 43 (10 new) the year before; and
moreover 39 were SaaS compared to 22 the year before. A higher volume was
offset by lower average deal value - we saw fewer million dollar deals signed
in 2021, but we are reassured that overall a higher volume of smaller orders
is good evidence of market traction. SaaS naturally lends itself to smaller
initial orders followed by the promise of future expansion as reflected in the
substantially higher volume of extension orders. The combination of higher
volume but lower deal value led to total TCV coming in modestly above 2020
levels. Within that, the TCV of SaaS business rose to $7.3m (2020: $6.6m).
Supported by our ARR transition, revenue visibility for the year now stands at
$25.1m compared to $24.5m at this time a year ago.
SaaS & ARR
As Andy and Greg have noted above, we continued to make progress on our two
core steps to move the business to SaaS first introduced in 2020. For new
customers, the sales team now only offers SaaS unless, by exception, the
customer makes an explicit requirement for a perpetual license. As noted
elsewhere, the make-up of the pipeline has shifted. At the end of 2020,
approximately 75 percent of our new license opportunity by value was SaaS
related. Today, this is almost 90 percent. For existing perpetual customers,
in particular those that do not host with Sopheon, we have developed a "Cloud
Lift" program to encourage them to upgrade their perpetual license to a SaaS
license, delivering good return on investment by taking on hosting and certain
managed services and we have implemented this change for 10 customers so
far. This is being further enhanced with new pricing models designed to
offer additional inducements for customers to switch to SaaS. In addition to
the four perpetual customers that took advantage of Cloud Lift during 2020, we
added a further six in 2021. We believe this program will continue to gain
momentum as we progress through our transition and continue to improve the
value of our cloud offering. Furthermore, approximately 50% of the license
transactions signed during 2021 were for SaaS contracts, and the value of SaaS
bookings was more than double that of perpetual contracts.
As highlighted by the metrics above, the conversion of Sopheon's revenue model
to SaaS continued during the year while delivering overall growth in revenues,
highly unusual while going through this revenue transition. This was also
supported by a solid improvement in gross retention which returned to historic
levels of 95 percent (2020: 91.5 percent). Our customer base continues to
report high satisfaction levels, with our net promoter ("NPS") surveys
recording an all-time high NPS score of 45 in 2021. A score of 45 is
considered excellent for B2B enterprise software. We continue to ensure that
our customers are on new releases, with almost 80 percent of them on Accolade
versions 13 and 14, the current supported releases.
Seasonality and Geography
The sensitivity of revenue to calendarization has started to come down, which
is something we expected to happen as our recurring revenue began to rise more
steeply. The second half of the year accounted for 52 percent of revenues
(2020: 54 percent and 2019: 55 percent). Unlike previous years, we also saw
less seasonality in the booking experience; while overall bookings were higher
in 2021, whereas 2020 saw 44 percent of TCV signed in the final quarter, in
2021 the final quarter represented 20 percent of the total.
Revenues to customers in our core markets of North America and Europe were 60
percent and 31 percent of total respectively (2020: 61% and 32%). Following
several signings in the Asia-Pacific region in 2020 and also in 2021, revenues
outside our core regions rose by $1m to make up the remaining 9 percent (2020:
7%). Our activities in the Pacific region continue to be managed through
partners while the broader Americas, Europe and Middle East markets are
addressed by our direct sales teams.
Gross Margin
Gross margin was 72.6 percent, compared to 69.8 percent in 2020. This
remains well within the historical range. 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. The change in margin last year was driven largely by
the dynamics of our services organization. Although total consulting revenue
rose in absolute terms, it both fell as a percentage of total revenues and
also improved its own gross margin largely through higher staff utilization
and better hourly recovery rates. Headcount in this area actually fell
compared to 2020.
Research and Development Expenditure
Overall expenditure in product development in 2021 increased by approximately
$1.7m to $8.6m. These amounts can be compared to the headline research and
development reported in the income statement showing an increase from $5.9m to
$7.3m; the differences are due to the effects of capitalization and
amortization of development costs. Headcount in this area went up by four on a
yearly average basis, with significant strengthening in product management in
particular. In addition, we added eight offshore FTEs in the second half.
This continued expansion of resources supports the multi-product strategy
mentioned in the Chairman's statement. We are maintaining investment in our
core enterprise Accolade solution, while also developing cloud-native
applications that will bring multiple benefits in the short and medium term.
Looking ahead, we will add investment in the ROIB solution. Greg explains the
strategic ambition that underpins these multiple product tracks in his report.
As we note later, we offset delays in hiring staff through the addition of
greater subcontracting resources.
Overall, the amount of 2021 research and development expenditure that met the
criteria of IAS 38 for capitalization was $4.3m (2020: $3.7m) offset by
amortization charges of $3.0m (2020: $2.7m). The higher capitalization rate
reflects the greater resources referred to above; the consequent impact on
amortization will come through over time as the products are released.
Capitalized costs in 2021 are largely attributable to the group's investment
in the Accolade 13.3, 14.0, 14.1 and 14.2 versions, as well as our foundation
cloud-native platform. The first three releases were issued during 2021;
Accolade 14.2 in early 2022, and our first cloud native application is
expected in 2022. This will initially be marketed on a "freemium" model
whereby users can download the application at no charge with the future option
to purchase higher subscription tiers to access greater functionality.
Other Operating Costs
Payroll 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.
In 2020, we froze our previously ambitious hiring plans due to the onset of
the pandemic. In 2021, we reintroduced recruitment targets but were once again
somewhat thwarted, this time by the incidence of higher staff churn as the
impact of the recovery and the "great resignation" took hold. Salary
pressures have also been marked during 2021, consistent with the rest of the
technology sector. Accordingly, we ended last year with 167 staff, compared to
169 at the end of 2020. Average headcount for the year was also 167 (2020:
164). Several recruits during 2020 were senior including several new members
of the management team. Excluding variable pay, staff costs as reported in
Note 7 of the financial statements increased by approximately $1.25m due to
all these factors. A further $0.25m was due to currency effects. Variable pay
also increased, reflecting higher commissions and bonuses tied to the stronger
financial performance during the year. We have 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 EBITDA. The bonus is paid in
the following year. In parallel, subcontracting costs rose by approximately
$0.4m. This is primarily linked to increases in our offshore team working in
India, which rose by 8 for a total of 18 FTEs during the second half of 2021.
The offshoring is achieved through an outsourcing firm and supports both
consulting and development efforts. Non-payroll costs, which fell in 2020,
increased by approximately $0.9m before exchange, interest, tax and
depreciation. The main components of the increase were expanded marketing
program costs; staff training and infrastructure costs associated with our
transition plans; and deal related expenses in connection with the acquisition
of ROIB. These were offset to some degree by very low travel costs.
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 increased by approximately $1.9m including variable
compensation. This mainly reflects the higher variable component, addition
of new leadership, and the significantly higher investment in marketing
programs referenced earlier in this report. Administration costs - which
include infrastructure costs - have risen by approximately $1.1m. This area
includes all other overheads, office costs, regulatory and compliance costs,
and depreciation, as well as the full impact of the notional charge for share
option grants, which is allocated entirely to this caption. Roughly half the
increase came from higher share option costs as well as exchange losses
arising on stronger sterling; the balance reflecting additional resources in
training and IT in line with our transition investments, as well acquisition
related expenses.
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 dollar driven, while revenues remain roughly two thirds
dollar and one third euro or sterling. This has led to a build-up of Euro
balances. Following the recent reversal of Euro strength, we are now gradually
shifting this into dollars.
Results and Corporate Tax
Adjusted EBITDA (Earnings before Interest, Tax, Depreciation, Amortization and
Share based payments) 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 2020 rising to $6.2m, from $5.9m in 2020.
Due mainly to the incidence of higher share based payment charges, as well as
higher amortization, profit before tax reduced to $1.2m (2020: $1.7m).
The tax charge of $0.4m (2020: $0.2m) reported in the income statement
comprises two main elements. Although Sopheon benefits from accumulated tax
losses in several jurisdictions including at the US federal level, this is not
universal, and accordingly a current tax charges of approximately $0.2m each
was incurred in Germany and for state taxes in the US. In addition, a $2.6m
deferred tax asset is recognized at both 31 December 2020 and 2021, of a total
potential asset of $11.7m (2020: $11.1m).
Altogether this leads to a profit after tax of $0.8m (2020: $1.5m). This has
also resulted in profit per ordinary share on a fully diluted basis of 7.47
cents (2020: 14.06 cents).
Dividend
The Board is pleased to maintain Sopheon's dividend at 3.25 pence per share
for the year ended 31 December 2021 (2020: 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 9 June 2022, the dividend will be
paid on 8 July 2022 with a record date of 10 June 2022.
Facilities and Assets
We continued to be cash generative during 2021 in spite of the tough
environment, with cash rising to $24.2m (2020: $21.7m) as detailed below. This
provides a strong platform for growth as well as M&A. Furthermore, our
relationship with Silicon Valley Bank remains strong, with potential
established for funding arrangements in connection with corporate activity if
required.
Intangible assets stood at $11.9m (2020: $7.9m) at the end of the year. This
includes (i) $8.1m being the net book value of capitalized research and
development (2020: $6.9m) (ii) acquired technology and intellectual property
rights of $2.3m arising on the acquisition of ROIB; and (iii) an additional
$1.6m (2020: $1.0m) being goodwill arising on acquisitions, including $0.6m
for ROIB arising in 2021.
As stated above in our discussion of research and development costs,
capitalization and amortization were broadly in balance for a number of years;
however, recently capitalization has accelerated, and amortization has yet to
catch up, as development resources have expanded over the last few years.
Our spend on tangible fixed assets was held to $0.4m last year (2020: $0.4m)
whereas depreciation was approximately $0.3m (2020: $0.4m), resulting in net
book value rising to $0.6m at the end of the year (2020: $0.5m).
With respect to the acquisition of ROIB, as detailed in Note 14 we have
estimated approximately 88 percent of the contingent consideration will become
payable during the earnout period, resulting in a total net acquisition cost
of $2.8m. Of this, $2.3m has been allocated to technology and intellectual
property rights, with the balance being treated as goodwill.
As described in Note 1, 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 $0.8m (2020: $1.0m) and corresponding lease liabilities of $0.8m (2020:
$1.1m) at 31 December 2021. Notional amortization and interest charges in
connection with the above recognized in the income statement were
approximately $0.7m (2020: $0.7m).
Consolidated net assets at the end of the year stood at $31.3m (2020: $30.2m),
an increase of $2.1m and including net current assets of $15.7m (2020:
$18.7m). Within the net current asset position, net cash at 31 December 2021
amounted to $24.2m (2020: $21.7m). Approximately $5.6m was held in US
Dollars, $15.2m in Euros and $3.4m in Sterling. The group has no debt
(excluding notional debt from the adoption of IFRS 16).
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2021
2021 2020
$'000 $'000
Revenue 34,356 29,996
Cost of sales (9,416) (9,057)
Gross profit 24,940 20,939
Sales and marketing expense (10,991) (9,092)
Research and development expense (7,329) (5,894)
Administrative expense (5,293) (4,178)
Operating profit 1,327 1,775
Finance income (34) 25
Finance expense (66) (93)
Profit before tax 1,227 1,707
Income tax expense (410) (211)
Profit for the year 817 1,496
Earnings per share - basic 7.83c 14.68c
Earnings per share - diluted 7.48c 14.06c
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2021
2021 2020
$'000 $'000
Profit for the year 817 1,496
Other comprehensive income/(expense)
Exchange differences on translation of foreign operations (734) 693
Total comprehensive income for the year 83 2,189
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 2021
2021 2020
$'000 $'000
Assets
Non-current assets
Property, plant and equipment 605 528
Right-of-use assets 752 1,027
Intangible assets 11,950 7,863
Deferred tax asset 2,557 2,557
Other receivables 19 19
15,883 11,994
Current assets
Trade and other receivables 13,182 14,566
Cash and cash equivalents 24,193 21,718
37,375 36,284
Total assets 53,258 48,278
Liabilities
Current liabilities
Trade and other payables 7,668 5,077
Lease liabilities 474 515
Contract liabilities 13,505 11,985
21,647 17,577
Non-current liabilities
Lease liabilities 305 546
Total liabilities 21,952 18,123
Net assets 31,306 30,155
Equity
Share capital 3,219 3,133
Capital reserves 10,500 9,398
Profit and loss account and translation reserve 17,587 17,624
Total equity 31,306 30,155
CONSOLIDATED CONDENSED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2021
2021 2020
$'000 $'000
Operating activities
Profit for the year 817 1,496
Adjustments for non-cash and financing items 4,877 4,087
Movements in working capital 4,391 991
Net cash from operating activities 10,085 6,574
Investing activities
Finance income 1 25
Purchases of property, plant and equipment (435) (367)
Development costs capitalized (4,271) (3,658)
Acquisition of business (1,450) -
Net cash used in investing activities (6,155) (4,000)
Financing activities
Issue of shares 648 52
Lease payments (686) (664)
Finance expense (56) (93)
Dividends paid (460) (429)
Net cash used in financing activities (554) (1,134)
Effect of foreign exchange rate changes (901) 845
Net increase in cash and cash equivalents 2,475 2,285
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2021
Share Capital Translation Retained
Capital Reserves Reserve Profits Total
$'000 $'000 $'000 $'000 $'000
At 1 January 2020 3,126 8,942 9 15,819 27,896
Total comprehensive income - - 693 1,496 2,189
income for the year
Issue of shares 7 45 - - 52
Share-based payments - 411 - 36 447
Dividends paid - - - (429) (429)
At 1 January 2021 3,133 9,398 702 16,922 30,155
Total comprehensive income - - (734) 817 83
income for the year
Issue of shares 86 562 - - 648
Share-based payments - 540 - 340 880
Dividends paid - - - (460) (460)
At 31 December 2021 3,219 10,500 (32) 17,619 30,306
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 2020 or 2021.
Statutory accounts for the year ended 31 December 2021, which were approved by
the directors on 23 March 2022, have been reported on by the Independent
Auditors. The Independent Auditors' Reports on the Annual Report and
Financial Statements for each of 2020 and 2021 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 2020 have been filed with the Registrar of Companies. The
Annual Report (including the statutory financial statements for the year ended
31 December 2021 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 2020,
except for those that relate to new standards and interpretations effective
for the first time for periods beginning on (or after) 1 January 2021. 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
and the war in Ukraine have so far had limited impact on our 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 and
business partnerships, statement of financial position and the net cash
position of the Group.
The current economic and geopolitical conditions continue to create
uncertainty, particularly over (a) the level of customer and potential
customer engagement; and (b) the level of new sales to new customers. The
pandemic has 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 these 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 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. 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 2021 and
2020 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
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) (429)
(3,974)
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)
-------
------- -------
Year ended 31 December
2020
North
America Europe Total
$'000 $'000 $'000
Income Statement
External revenues - by location of
operations 18,938
11,058 29,996
Operating profit before interest and
tax
2,259 (484) 1,775
Profit before
tax
2,238 (531) 1,707
Finance
income
45 (20) 25
Finance
expense
(66) (27) (93)
Depreciation and amortization
(3,306) (399)
(3,705)
Adjusted
EBITDA
5,933 (6) 5,927
-------
------- -------
Balance Sheet
Fixed asset
additions
277 90 367
Capitalization of internally generated development costs
3,658 - 3,658
Total
assets
29,408 18,870 48,278
Total
liabilities
(11,672) (6,451)
(18,123)
-------
------- -------
NOTES
3. Segmental Analysis (continued)
Revenues attributable to customers in North America in 2021 amounted to
$20,434,000 (2020: $18,332,000). Revenue attributable to customers in the
rest of the world amounted to $13,922,000 (2020: $11,664,000) of which
$10,765,000 (2020: $9,500,000) 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 2021 and
2020 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.
2021 2020
$'000 $'000
Perpetual software
licenses
3,931 3,021
Consulting and implementation
services
10,390 9,680
Maintenance, software subscriptions &
hosting
20,035 17,295
------- -------
34,356 29,996
------- -------
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 adding back net interest payable
of $100,000 (2020: $68,000) and adding back depreciation and amortization
charges amounting to $3,974,000 (2020: $3,705,000) and employee share-based
payment charges of $880,000 (2020: $447,000) to the profit before tax of
$1,227,000 (2020: $1,707,000).
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 $880,000 (2020: $447,000). 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.
NOTES
7. Income Tax
The current tax expense represents German corporation tax payable by Sopheon
GmbH and US state taxes payable by the Group's US subsidiaries. US corporate
Alternative Minimum Tax (AMT) was repealed in respect of tax years beginning
on or after 1 January 2018. AMT paid by the Group's US subsidiaries in
respect of periods prior to that date has been fully refunded.
At 31 December 2021, tax losses estimated at $54m (2020: $54m) 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 $2.6m
(2020: $2.6m) and a further potential deferred tax asset of $9.1 m (2020:
$8.5m), based on the tax rates currently applicable in the relevant tax
jurisdictions. An aggregate $8.7m (2020: $8.8m) of these losses are subject
to restriction under section 382 of the US Internal Revenue Code due to
historical changes of ownership.
8. Earnings per Share
The calculation of basic earnings per ordinary share is based on a profit of
$817,000 (2020: $1,496,000), and on 10,442,000 (2020: 10,193,000) ordinary
shares, being the weighted average number of ordinary shares in issue during
the year. For the purpose of calculating diluted earnings per ordinary
share, adjustments are made to the number of ordinary shares to reflect the
impact of employee share options to the extent that exercise prices are below
the average market price for Sopheon shares during the year. These
adjustments had the effect of increasing the number of ordinary shares to
10,939,000 (2020: 10,637,000).
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 $4,271,000 (2019: $3,658,000),
and amortization of $2,997,000 (2019: $2,669,000) during the year.
On 20 December 2021 the group announced the acquisition of the business and
certain assets and liabilities of ROI Blueprints LLC, a cloud-based project
and portfolio SaaS solution designed to help organizations drive operational
execution management of corporate initiatives. The initial consideration of
$1,500,000 comprised cash of $1,460,000 (of which $10,000 was deferred) with
the balance satisfied by the assumption of current assets with a fair value of
$36,000 and contract liabilities with a fair value of $76,000. Further
contingent consideration of up to $1,500,000 is payable pursuant to an
earn-out which has been estimated at $1,312,500 based on expectations of
performance at the date of this report. The technology and intellectual
property rights acquired with the acquisition have been recorded at a fair
value of $2,250,000 and the balance of the excess of the consideration over
the fair value of the net liabilities acquired of $563,000 has been allocated
to goodwill comprising expected synergies and other intangible assets that do
not qualify for separate recognition. The technology and IPR will be amortized
over 4 years.
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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