Allocate Software bounced back strongly in Q2 after an unexpectedly poor Q1. As presaged in its January trading statement (see Allocate gains momentum in Q2), the provider of workforce and compliance optimisation solutions broadly met revised expectations for the first half.
Total revenue was essentially flat at £16.1m (H1 11: £16.0m), which means that it was down slightly on an organic basis, but underlying profitability worsened. Adjusted EBITDA declined to £562k (H1 11: £1.6m) as SG&A costs rose largely as a result of the RealTime acquisition (see here) which is now fully integrated and expected to generate revenue from the second half. The operating loss (as reported) improved to £2.5m – that compares to a loss of £6.6m in the first half of FY11, but the prior year figures included a £4m impairment.
In fact, the headline figures tell far from the whole story. Chatting to Ian Bowles, CEO, and Chris Gale, CFO, this morning we discovered that the UK healthcare business grew at a very respectable 5-10% in H1. The Swedish business also continues to perform well. But, as expected, the mature defence business didn’t sign any new deals in the first half causing a slight revenue decline from this part of the business. More notably, the Australian healthcare business saw revenue decline after a strong performance last year because of the ‘lumpy’ flow of services revenue from its major New South Wales contract.
Indeed, looking at the big picture, there are good reasons for the management team to be positive about the outlook for the business. Financially, the cash position is improving (gross cash balance was £6.1m compared to £4m in H1 11) and recurring revenue is now 51% of total revenue, up 11% on the prior period to £8.2m. The healthcare pipeline also appears strong, particularly for the Allocate Cloud offering launched in June last year. This managed service provides an incremental revenue stream for Allocate (in addition to its standard licence revenue) and, in the words of CFO Chris Gale, “stores up goodness for the future”. The average contract length for Allocate Cloud is 4-5 years and of the £1.4m of bookings taken so far, Allocate has recognised less than £100k. What we'd like to see now, as Allocate continues the evolution of its business, is a period of relative stability during which these positive trends have a chance to deliver growth and profitability for the business as a whole.