Brady Results Commentary

Brady PLC released its results today for the 6 months to June 30th 2017. The company did four license deals in H1 2017 on a recurring revenue basis  and recurring revenues are now 68% of total sales in H1 – up 8% on the 2016 period. It has full visibility over 93% of 2017 full year revenues which are expected to be in line with analyst expectations. Ian Jenks, Executive Chairman, commented: “We have continued to take actions this year to move the business towards a solutions model focussed on growing recurring revenue to improve the quality of our earnings. Brady successfully secured a number of recurring revenue contracts during the period, and I am pleased to report that recurring revenue now represents 68% of total sales. Whilst our H1 results reflect the natural consequence of our transition process away from the legacy licence model, the actions we have taken in the first half of the year coupled with the actions we will undertake in the second half will allow the business to scale efficiently and deliver significant improvements in profitability in 2018 and beyond. With a high visibility of over 93% of our full year revenue and control of our cost base we continue to expect full year results to be in line with market expectations.”

2017 is a year if transition for Brady with some associated short term costs. At last year’s Interim Results, Brady announced plans to review its organisational structure in order to:

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  • Improve earnings visibility by changing its focus from one-off licence deals to a recurring revenue model;
  • Focus on expanding Brady’s Energy products to the rest of Europe though initiatives such as Irish Single Integrated Market connectivity; and
  • Deliver products based on microservices supported by the Brady Framework

The year has also proven fairly difficult to date for everyone in the space with ‘challenging’ market conditions prevailing due to low commodity prices, regulatory pressures, and so on – all issues that have been well discussed on this blog. In essence, this is a difficult time to transition and yet it may well also be the best time to attempt it. In the first half of 2017, Brady lost 2.9 million GBP on revenues of 13.1million GBP according to its statement – some of which is due to yet another challenge facing companies based in the UK – Sterling weakness. Brady still has a strong balance sheet with 5 million GBP cash on hand.

An interesting paragraph in the announcement concerns the impact of shifting from perpetual license revenues to recurring revenues – an issue that we fully discuss in our 2017 Market Update. Brady will receive 3.2 million GBP in recurring revenues over the life of its four new contracts whereas, under the perpetual license model, its H1 revenues would have been 1m GBP more than reported. Essentially, the recurring model pushes recognised revenues into the future and provides improved visibility and surety.

Two of the four new deals were in the Energy sector and include building connectivity to the Irish I-SEM. The other two deals were in commodities and recycling.

ComTech expects market conditions to improve over the remainder of the year and Brady’s new approach around microservices appears to be in line with what we are observing in the market. In essence, we see a shift in some tiers and segments from procuring off the shelf packaged software towards a model in which users partner with vendors and suppliers to develop customized solutions around standard product. In essence, a sort of return to buy and build model except on a different and more flexible architecture, often cloud-enabled and on a recurring revenue basis.

 

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