Why the RXP Services Ltd (ASX: RXP) share price has fallen 12%

The share price of digital services consultancy firm RXP Services Ltd (ASX: RXP) has fallen 12% to 50 cents following yesterday’s release of a trading update that was below the market’s expectations.

Lower revenue and margin contraction 

RXP announced that revenue for FY18 is now projected to be in the range of $145 million to $146 million with underlying earnings before interest, tax, depreciation and amortisation (EBITDA) in the range of $15.8 million to $16.1 million. The revised guidance for FY18 was below the previous forecast the company provided during its half yearly result. In February, RXP provided the market with a FY18 revenue forecast of $150 million with an underlying EBITDA margin of 13.3%. This would result in underlying EBITDA of approximately $20 million.

The lower revenue and underlying EBITDA guidance was attributed to the delayed start and ramp-up of several client projects in the second half. Furthermore, associated digital product sales were deferred into FY19. The company also noted that declining margins and a fall in revenue from its traditional business was worse than initially anticipated in the second half. The trading update also revealed that Q4 was on track to deliver revenue of around $40 million with an EBITDA margin of 14%. RXP considers its Q4 performance a more representative measure of the underlying business’ performance moving forward into the next financial year.

Another downgrade

This was the 3rd earnings downgrade for RXP over the last several months. In December, RXP provided a trading update to the market where it forecast FY18 revenue in the range of $162 million to $167 million with an EBITDA margin in the range of 14.6% to 15.1%. Using these figures would result in EBITDA in the range of $23.6 million to $25.2 million for FY18. As we can see from yesterday’s announcement, the company has missed its earnings targets by a material margin.

Investors seeking exposure to the tech sector may want to consider other companies in that space with more compelling growth prospects such as Hansen Technologies Limited (ASX:HSN) and Integrated Research Limited (ASX:IRI).

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia owns shares of Hansen Technologies. The Motley Fool Australia has recommended Integrated Research Limited. 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 Scott Phillips.

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