Instem (INS:AIM) released strong first half revenue growth of 11% to £11.7m, for the period ended 30 June 2019, giving the shares a 2% boost to 382.6p.
The Staffordshire-based software solutions provider to the life sciences industry has been gradually shifting its business from fixed-term licences to a subscriptions model. This should make future revenues more predictable although the transition can mean squeezing profits and cash flow in the short-term.
Momentum remained good in the first half with earnings before interest, tax, depreciation and amortisation up 21% to £1.66m and strong cash generation of £3.2m reflecting tight working capital management and the research and development credit.
Chief executive Phil Reason said ‘performance in the first half of the current year reflects both the strategic restructuring undertaken in prior years and the increasing efficacy of the Company's leading technology and services.’
OPERATIONAL LEVERAGE BENEFITS
The company invested heavily in the business, notably with headcount additions in the Informatics and Regulatory solutions businesses. This resulted in operational costs increasing in-line with revenues, curbing margin growth.
Phil Reason reckons that the company now has a scalable platform in place and will see operational gearing kick-in in the next few years. The company is in a position to grow revenues by half, without incurring additional operational costs, which should boost margins.
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The top performers in this industry achieve 20% to 25% EBITDA margins, compared with Instem’s 14.2%.
The company believes that there is a significant growth opportunity ahead, which it will exploit through a combination of organic growth, improving margins and acquisitions.
Chris Glasper, at broker N+1 Singer, thinks that the migration towards subscriptions bodes well for revenue visibility, margin improvement and quality of earnings.
