Wednesday, June 17, 2009

ISS - Management guidance for FY2009

I'd like to think that this blog played some small part in prompting management of ISS to provide some clarity on how they were tracking...but alas in the words of the great Sicilian strategist, its "inconceivable".  Nonetheless, its good to get the news...

FY09 guidance

It's yet to make it to their website, but you can pick it up from the ASX site.  A summary of the guidance is as follows:

ISS Group        
  12 mth to 6 mth to 6 mth to 12 mth to
  30/6/09 30/6/09 31/12/08 30/6/08
Revenue 17.6 6.4 11.2 18.8
Expenses 19.3 9.5 9.8 14.2
EBITDA -1.7 -3.1 1.4 4.7
Depreciation 0.4 0.2 0.2 0.2
EBIT -2.1 -3.3 1.2 4.4

1) Let's assume they made no new sales during the second half (my estimate for H1 was for ~$5m in sales, so take this off and you get close enough to $6.4m revenue for H2).  They did announce a deal with ENLG, so not sure how these numbers will flow through.
2) The Schlumberger deal was a good one for ISS in terms of de-risking the business.  We have a little more clarity on the terms - it looks like ISS get $4m each year - paid semi-annually.  That makes it one-third of the H2 revenues.
3) The H2 revenue should be the low-tide watermark for ISS - given the assumptions it made no new sales and that Babelfish remains relevant and existing customers therefore keep paying their maintenance fees.
4) ISS is caught between maintaining the resources to secure new sales (staff costs ~$5m) and not actually getting them.  It's unfortunate but necessary.  The good thing is that their key target market (resource companies) are likely to enjoy strong commodity prices and therefore should have the cash to pay for the implementation of Babelfish.

In summary, the profitability of ISS remains heavily dependent upon new sales.  This makes for a high risk investment in ISS.  On the plus side, it only takes a couple of sales to make a difference - and they still have the surplus cash to go after these sales.

Do you back them?  Yes - but given the market uncertainty, I'm going to wait to see if they track down towards NTA before committing any more capital (note I own some from higher prices). 

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