Eckoh has warned that pre-tax profits for the year to 31 March will be below market expectations.
Eckoh says that to increase the company's proportion of recurring revenues in the US and to bring it in-line with the recurring revenue model in the UK business, it is in the process of transitioning its new secure payments customers to a software-as-a-service pricing model rather than the historical model of upfront pricing followed by a fixed maintenance and support charge.
In the last two years, over 90% of contracts in the US secure payments market have been sold using upfront pricing, largely due to the fact that hardware-based solutions implemented on the customer's premises has formed the basis for all implementations.
Recognising the benefits to the company of improved recurring revenues and the attraction of a SaaS model to our customers, the Company has been working to transition more of its new US business into this model.
Eckoh says the newly introduced SaaS model offers the company greater revenue visibility, longer-term client relationships (typically of three to five year fixed terms) and higher overall gross margins.
Eckoh's US customers have proved extremely receptive to this approach and the transition is taking place much more quickly than expected, with over 80 percent of the company's US sales pipeline already using this pricing structure.
The speed of this transition is expected to reduce the forecast margin from US secure payments in the short and medium term but to increase it in the longer term.
In November 2015, Eckoh acquired the US business Product Support Solutions (PSS), predominantly in order to support Eckoh's continued expansion of its secure payments products in the US, where PSS has a significant presence.
As detailed in the announcement at the time of the acquisition, PSS has a non-core US division, which carries out one-off professional service projects typically with no ongoing revenue.
In the current financial year there have been cost over-runs on a large and complex fixed-price project undertaken by the division, which is expected to lead to overall losses for the division of £600,000 in the six months to 30 September 2016 and will have an expected total cost for the full year of £700,000.
As a consequence, the decision has been taken to accelerate the closure of the division and focus the company's US workforce on its continuing core operations.
Eckoh says that as a result of the transition to SaaS pricing and the cost over-runs at PSS's professional services division outlined above, it is expected that the company's pre-tax profits for the year to 31 March 2017 will be below market expectations and is expected to be in line with the performance last year, after absorbing the costs of the discontinued division.
The medium and longer term outlook for the company remains positive, with the transition to a recurring revenue model and decisive action at the PSS professional services division resulting in an improvement in the certainty and the quality of its earnings.
At 8:03am: (LON:ECK) Eckoh PLC share price was -11.5p at 37.5p