GBST Holdings Limited (ASX: GBT) saw its share price crash 23% today to below $4.00, after the software company announced temporary delays in major client projects and increased costs.
GBST provides software for Capital Markets and Wealth Management in a number of countries, including Australia, Asia, North America and the United Kingdom. 55% of revenues come from offshore.
The delays and additional expenses will see first half of 2016 financial year (FY16) earnings before interest, tax, depreciation and amortisation (EBITDA) of between $7 and $9 million, and a range of between $12 and $14 million for the second half of FY16.
Full-year EBITDA is therefore expected to come in between $19 million and $23 million, compared to $24.5 million in the 2015 financial year and $20.5 million in FY14. Analysts had been expecting around $25.9 million in EBITDA in FY16.
The guidance also doesn’t include any recruitment costs for a new CEO and final payments due to the outgoing CEO, which are still being negotiated.
CEO and managing director Stephen Lake announced plans to retire from the company on September 17, 2015, and is expected to leave sometime during 2016. Mr Lake was appointed CEO and managing director in 2001.
Fortuitously for Mr Lake, he also sold $2.4 million or roughly half of his shares in GBT shortly after announcing his retirement, receiving around $4.75 per share. Given today’s share price crash, his timing was certainly lucky.
The downgraded earnings guidance is a result of a number of UK wealth management projects moving from the first half to the second half of FY16, and a significant Australasian wealth management project has also been deferred to the second half.
GBST says it expects to resume earnings growth in the 2017 financial year, but clearly investors are looking at the short-term issues the company is facing and aren’t willing to assign much value to growth that may or may not come in FY17.
Delayed and postponed projects are a consistent operational risk for most software companies. Integrated Research Limited (ASX: IRI), Hansen Technologies Limited (ASX: HSN) and Infomedia Limited (ASX: IFM) are three Australian software companies that have all experienced contract or project delays at some time in the past few years. Each has also proven that they can come back from those delays and post high earnings growth, and GBST may well go on to post higher earnings in FY17.
The best guide for investors is that unless it becomes a recurring problem, then the original thesis for investing in these companies usually remains intact.
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Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Hansen Technologies and Infomedia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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