There's nothing quite like a profit downgrade to ruin your day, well apart from a profit downgrade preceded by company management dumping their own shares just a few weeks prior to announcing the downgrade.
Step forward GBST Holdings Limited (ASX: GBT), which is a technology business that recently updated the market its first half profit would be significantly down on the prior corresponding half due to delays in major client projects and increased costs. Its now ex chief executive also sold much of his substantial holding prior to the bad news apparently unaware it was in the pipeline.
The stock dropped more than 20% on the news, with earnings for the second half forecast between $12 million to $14 million. This is a wide range that suggests more uncertainty and a full year profit almost guaranteed to be substantially down on the prior year.
Despite the disappointments the company's Wealth Management division appears to be performing strongly, with its Composer platform winning clients as an administration interface for financial advisers and their clients.
However, the company's Wealth Management division appears to be performing strongly, with its Composer platform winning clients as an administration interface for financial advisers and their clients.
The UK in particular has produced many significant client wins and remains a large financial services market for GBST to grow into.
However, the Capital Markets business which services brokers and wealth managers in terms of back office functions like settlements and trade processing has not gained the traction overseas that was hoped for on the back of significant investment.
A recent client win in Asia is a positive and investors will hope it can deliver on its potential to provide middle office services to institutional banks in the region.
GBST is forecasting a return to growth in financial year 2017, although with no permanent CEO and an uncertain outlook for the rest of this financial year the business looks one for the watch list despite the big share price falls.
A better alternative?
Another technology business that has been successful in building and selling software used by some of the world's biggest banks and money managers globally is Iress Ltd (ASX: IRE).
Altogether more mature and entrenched than GBST, Iress is also coming into an attractive valuation range for a growth stock that also offers a generous dividend of nearly 5%.
Over the years Iress has also performed especially well in the UK financial services market with market-leading data feed and software products that are deeply integrated into the order routing systems of wealth management businesses.
Iress is also on the record as being keen to grow acquisitively and both it and junior rival GBST now have similar geographic footprints, with strong UK and Australian operations alongside ambitions to grow further into other overseas markets.
Iress recently acquired a UK market data business named Proquote for an amount in the region of $80 million, although it would have to cough up many multiples of that if it were to ever make an offer to swallow GBST, which is a business currently valued around $285 million.
Today Iress is selling for $9.40, which looks a reasonable entry point for long-term growth and a big yield in today's low cash rate environment.
