K3 Business Technology Group had already warned over FY13 (see K3 warns on full year profits due to retail slide) and although it met revised expectations it was a hard haul as costs rose while the retail market stagnated. There was some strain relief in Q4 as new orders were signed, although revenue from these deals was not due until the new financial year.
For the year to June 30 2013 revenue fell 7% to £63.5m, although recurring revenue was up 2% to £34.5m (54% of total revenue). But the profit picture is poor - operating profit was down an eye watering 55% to £5m.
K3 is still pouring revenue into product development, including the Microsoft AX-based Gemstone multi-channel retail suite (c£1.4m development costs during FY13 and similar slated for FY14, on top of previous investment). Initial modules are attracting customers and the full product is expected in mid-2014 so the proof point for the product is rapidly approaching. Early signs are positive with 4 confirmed contracts (see here) and 2 more expected soon. They are phase 1 deals though so the onus is on K3 to execute well to release up to £8m in follow on sales. We think K3 is in the right spot because retail is undergoing major change as technology alters the way customers buy, and industry solutions are the way to go, but this is still a nerve racking time for the business.
There was also further investment in the hosting platform for the managed services unit (£6.4 revenue, up 18% yoy). This is now complete so the pressure in is on to generate profits. The fortunes of the Microsoft and Managed Services divisions are linked as much of the current and expected hosting revenue will come from Microsoft products – which in turn are dependent on the problematic retail sector. K3 has some complex inter-relationships to manage across these and its other business units. FY14 interims will show how well it is managing them.