November 2017 Chairman’s statement – overview and outlook
K3 has undergone significant change over the last 18 months. We have reshaped the Group including the leadership team, creating a simpler, more integrated and streamlined structure, and have removed substantial costs. We have also redefined our growth strategy, IP development roadmap, and are improving our customer delivery capability. In addition, we completed a share placing and open offer to qualifying shareholders. While these initiatives have involved substantial one-off costs, as well as internal cultural change, we are encouraged by the progress made to date and the opportunities ahead.
We see scope for further operational improvements but believe that K3 is now substantially better positioned for long-term revenue growth, higher quality earnings and improved cash generation.
K3 is a leading provider of mission-critical Enterprise Resource Planning (“ERP”) and other business solutions to customers across the supply chain, including retailers, manufacturers and distributors. We support c.3,700 customers predominantly based in the UK, but also in Europe, the Far East and the USA. We deploy our business solutions, which are mainly built on Microsoft, Sage and SYSPRO solutions, both directly to customers and through channel partners. Once installed, our solutions generate high levels of recurring revenues through annual software maintenance renewals, support contracts and hosting.
Strategic Refocusing and Organisational Changes
Building upon these foundations, during the period under review, we began to implement significant organisational changes to the business, and strategically refocused K3’s growth plans.
A core element of our growth strategy is to increase revenues from own intellectual property (“IP”). Our IP is embedded within specific third party ERP solutions, including Microsoft and SYSPRO’s, to provide sector specific functionality. It differentiates our solutions, underpins stronger customer relationships, and generates higher margins and recurring revenues. While we will continue to build on this model, an important part of extending our software roadmap is the growth of our own stand-alone ‘point’ solutions, and in particular, our cloud-native delivery platform, ‘Imagine’, and our cloud-native applications, which have been specifically developed to perform in the cloud.
As we previously reported, ‘Imagine’ is an exciting ‘next generation’ delivery platform, which enables us to embrace fully the opportunities that the increasing shift to the cloud brings, and places us at the forefront of cloud-native development. What is especially relevant is that it is system agnostic, capable of swift integration with any IT infrastructure a customer may already have. Customers therefore do not need to replace core systems, unlike traditional models. We have developed a cloud-native suite of solutions that is built for our platform and provides highly advanced functionality. The whole offering therefore enables customers to adopt innovative solutions and applications rapidly and flexibly. It also offers them a faster return-on-investment and extends the life of their previous IT investments. We intend to develop additional applications for Imagine in order to broaden the scope and target market of our existing solutions set, and view its growth potential very positively.
In reviewing our market approach for our Enterprise-related software offering, ax l is fashion, (a K3 own IP add-on to a Microsoft core ERP product), we are renewing our focus on building strategic relationships with System Integrators (“SI”). These relationships enable us to capture more efficiently the sales potential of this market-leading product. SI’s will provide implementation and support services while we retain IP-related income streams and provide industry specific expertise. Helped by this increased focus on SIs, we are pleased to report that we saw significantly improved sales momentum for ax I is fashion towards the end of the reporting period and an encouraging number of contracts have closed since then.
As previously reported, we undertook a review of the Group’s resources as part of our process of simplifying and integrating the Group’s operations. This review was completed in December 2017, and we have subsequently combined our Microsoft Dynamics businesses (AX, NAV and CRM) into a single practice. This should also enhance our customer service capability.
Other changes that resulted from our review included the integration of all software development and own IP management functions into a single Group-level IP unit. We also created a single team to support sales of our Software-as-a-Service (“SaaS”) offering, as well as a single support team for SaaS.
We are confident that these initiatives will improve both the sales process and operational efficiencies.
We have materially reduced our cost base over the period, delivering savings in excess of £5.0m on an annualised basis. Over 2018, we plan to add resource selectively to support sales demand.
K3 has undergone significant change and is focused on continuing to improve its performance. While there is still work to be done in implementing our growth initiatives, we believe that the Group is now better positioned to drive own IP sales and recurring income, which currently stands at nearly half the Group’s total revenues.
The Group’s revenue profile is changing as the move away from ‘on-premise’ solutions accelerates and customers increasingly adopt consumption-based models. In the short term, this will decrease the Group’s rate of revenue growth but the long term effect is highly beneficial, with revenue flows becoming more predictable and the customer relationship expected to deepen and broaden.
Trading since the period end has been encouraging, especially with our own IP product sales. In particular, three ax I is deals were signed in the first quarter of the new financial year compared to seven in the 17 months to November 2017, and our cloud-native Imagine offering is seeing encouraging traction. More widely, we view prospects for our solutions offerings positively, underpinned by the steps we have taken to improve the Group’s operational performance.
We remain confident about prospects for continuing progress over the year ahead. We also highlight the bias in the Group’s earnings, which is now weighted to the second half of the financial year. This corresponds to the timing of annual software licence and support renewals in our SYSPRO operations.