Key points:
- Glantus shares are down 65% today on interims
- That makes a 90% loss since the IPO 17 months back
- What's going wrong here?
Glantus Holdings (LON: GLAN) shares have fallen 90% since their IPO 17 or so months back and some 65% today from just yesterday's price on their interims. These interims are not, as should be obvious, good. The issue is twofold, costs are higher than expected and revenues are now predicted to be below expectations. This is not a total and a killer blow but it does show the issue of what happens to a go go, growth stock when the growth doesn't turn up. All of those future expectations built into the GLAN share price suddenly fly away. A little lesson then in growth stock investing – it's important that the growth does turn up.
As to what Glantus does it's a provider of software as a service (SaaS) in the accounts payable world. An adjunct to accounting systems that is. The normal measures of success in this fiscal environment are sales – because obviously we want to see rising sales – and also percentage of recurring revenue. For the entire point of SaaS from the provider point of view is that it is not “lumpy” in cash flow. Gain a new client and that then produces a flow of monthly or quarterly income off into the future rather than a single once off licence fee.
That does mean that how much of that revenue does repeat is an important measure of how good the software offer is, thus the use of the metric.
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The problem Glantus has is not that revenue isn't up – it is, 54% in the first half as against a year before. Recurring revenue is up by 70%, which is pretty good by the standards of this sector. Gross Profit is up by 40% but adjusted EBITDA down by 39%. There are some integration costs from an acquisition etc. Those are all good – except for the EBITDA – numbers. So why this collapse in the GLAN share price?
One problem is that the costs of moving the audit function to Costa Rica seem to be ballooning out. That's really just not a good look when an accounting software firm can't control costs – there's even a certain giggle factor to that problem.
But here's the real problem: “the Board now expects revenue and EBITDA to be significantly below market expectations for the full year” and the share price drop is all about that. The company was expected to grow – those 54 and 70% growth rates. And now the board is saying that growth will be less than everyone is assuming. So, the premium applied to a growth stock disappears if the growth does. This is always the problem with those high ratings of a growth stock – if the growth disappears then so does the premium. The gearing of price to growth is very high is another way of putting it. This is also a tad worrying: “in advanced negotiations regarding a €1.5m short-term working capital facility” They've got their costs and revenues mismatched so are having to increase working capital.
A useful expectation is that the Glantus share price will remain fragile until how this all works out is known with greater certainty.