Customer growth is coming at a cost for back office optimisation software provider eg Solutions whose H1 2012 results reveal a 35% yoy dive in profits before tax, and a fall in gross margin from 64.7% to 55.2%. Nevertheless, the results are in line with expectations and management claims they set the scene for a better H2.
Ironically, the culprit is new customer wins and resultant pilot projects that incur upfront costs for eg but don’t deliver revenue until roll outs start. As we noted in eg Solutions locks into optimisation sweet spot, the company did secure substantial new business during H1 but revenues are not expected to start flowing until H2, hence the fall in margins and profits. Management talks confidently of new client wins with the “potential to transform eg’s financial performance” and of a short term reduction in margins and profitability. Some of its deals are sizable and it does have good visibility on these but the business model cannot be confortable for a company the size of eg Solutions who delivered revenue of £2.85m in H2 2012 (to July 31). Revenue was up 7.1% due to careful cost control but profit before tax dropped from £0.28m to £0.18m.
Back office optimisation does seem to be experiencing a surge in interest. eg is clearly gaining business and Active Operations Management International (AOMI), who operates in a similar space, also reports more activity in the market. eg’s challenge is reducing the gap between customer wins, pilots and revenue generation.