Several interesting points jump out from today's profits warning from retail and manufacturing software and systems supplier K3 Business Technology (KBT:AIM). The firm flags several issues - operational reorganisation, longer sales cycles on larger deals, the customer shift to cloud tools and lower demand in December, one of K3’s key periods.

The net effect is a £3.5m EBITDA miss on previous £16m forecasts for the year to 30 June 2017. That means this year's outcome will be lower than last year's equivalent £12.8m, with new estimates cut to £12.4m.

The last issue first. There's been little anecdotal evidence of a profound slowdown in either of its target markets to date and K3 has actually been enjoying a firm run of demand lasting several trading periods.

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This may imply that this is a company specific rather than sector or macroeconomic problem. We'll learn more as other retail/manufacturing companies, and their respective IT suppliers, post their own updates. It's well worth investors watching out for a first quarter update from K3's smaller peer Sanderson (SND:AIM) sometime in March.

Second, this is far from the ideal way for a new management team to get off and running. Retail savvy and Microsoft tools expert Adalsteinn Valdimarsson only took the CEO job in October (the apparent last leg in a game of management musical chairs, read here) but his first task was to implement a strategic review. That's now done and dusted at a cost of £3m but K3 reckons it'll earn at least that back every year as efficiencies and streamlined sales deliver.

It's also worth pointing out that Microsoft, which K3 is a key tools reseller/partner, is driving cloud and software-as-a-service (SaaS) adoption. As you may know, transition from a licensing model typically drags on revenue growth but improves long-run visibility and earnings quality. This is evidenced in broker FinnCap's 2017 revenue estimate of £89.7m (lowered from £93.7m) barely budging in 2018, to an estimated £90m (also lowered from £98m).

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'Customer interest has not diminished, however decision making processes, with Microsoft encouraging a consumption/subscription (SaaS) model has led to protracted enterprise decision making,' spells out FinnCap analyst Andrew Darley today.

All this considered, the market's reaction looks fairly sanguine. Sure, the share price is down a hefty 22% at 238p but that's muted compared to typical 30% to 35% slumps on most profit warnings, implying that investors see the issues as short-term. Time will tell.


Issue Date: 10 Jan 2017