Timber! Why the Adacel Ltd share price collapsed today

Shares in air traffic control software business Adacel Technologies Ltd (ASX: ADA) crashed this morning after it shocked investors by warning that it now expects profit before tax for the six months ending June 30 2019 to be down a giant 65%-70% on the prior year.

Previously Adacel had only given investors vague guidance as to what expect operationally in FY 2019, but nothing as to specific financial guidance.

The news has sent the Adacel share price 40% lower to a multi-year low of just 90 cents and the software business has now lost more than two thirds of its value over just the past year. The only dim light at the end of the tunnel for Adacel shareholders is that it revealed it expects full year profit to be just 25%-30% lower on the result in posted in 2018.

The big downgrade was mainly blamed on the previously flagged losing of a significant FAA (Federal Aviation Administration) Tower Simulation Support contract that will take a chunk out of revenues and profits.

The group also flagged that it’s pursuing a ‘legal action” for breach of contract and infringement of intellectual property rights against the company named Adsync Technologies Inc that took the contract off it.

In an unusual twist Adacel’s management even reported that they had “protested the decision” to switch contract provider, but that “the protest was denied”.

Due to the problems around the lost contact, Adacel also reported it had excluded any other revenue from the “FAA Tower Simulation System” for its guidance for FY 2019.

Adacel also blamed the downgrade on other issues including increased investment in sales, research, marketing, and adverse FX movements.

As such there are two near-term issues for Adacel investors to closely monitor; the outcome of any legal proceedings against Adsync Technologies and the potential status of its other relationships with the FAA.

The latter is a key issue as investors may be dumping the stock today out of fear there is more bad news down the line over this important relationship. Furthermore, Adacel’s decision to update its guidance to “remove all FAA Tower Simulation System revenue from its FY 2019 forecasts” is a little ominous.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Adacel Technologies 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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