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== Financials: Increasing revenues and margins == In FY20, SPA delivered £23.4m in revenue, growing by 33% y-o-y. However, growth was flat on an organic basis after considering the GI acquisition. Overall, gross and EBITDA margins improved and SPA achieved profitability at the EBIT and EBITDA levels. Despite the COVID-19 outbreak, SPA generated 5% revenue growth to £24.6m in FY21. After an H121 fall in organic revenue (8% y-o-y), H221 marked a return to growth with total sales up 3%, led by the US, up 45% (12% of FY21 revenue) and Europe rising by 5% (45% of FY21 revenue). ARR also grew 10% to £11.2m. Lastly, in H221 gross and EBITDA margins reached record levels of 55% and 15%, respectively with free cash flow turning positive. H122’s results were encouraging, with headline revenue up 8% y-o-y and growth in all regions, driven by the US up 34% to £1.6m. Adjusted EBITDA rose 10% to £1.8m with relatively steady margins, although free cash flow (FCF) (including leases) turned negative to a £1.4m outflow, primarily due to investments in sales and delivery capacity. Overall, SPA’s prospects going into FY22e and FY23e appear promising. As can be seen in Exhibit 10, the trend of significant contract wins has accelerated this year, with c £15.3m in contract wins in H222, the largest since 2019. The pipelines should continue to grow in both the US and UK, and we assume a 6% revenue CAGR during our forecast period (through FY23e). Our forecast assumes that SPA grows revenues by 5.1% to £25.8m in FY22e and then 6.3% in FY23e to £27.5m, with growth led by the United States and UK/Ireland where revenue rises by 28% and 6% in FY23e, respectively. We forecast that SPA’s revenue growth will come primarily from two geographic segments (see Exhibit 11): * UK/Ireland (34% of FY21 sales). Revenues grow 3% in FY22e, accelerating to 6% in FY23e, driven by growth in governmental and transportation revenues as part of the Net Zero Strategy and the UK’s ‘Build Back Better’ and ‘Build Back Greener’ initiatives. * US (12% of FY21 sales). Revenues rise 23% in FY22e and 28% in FY23e as the Land and Expand strategy continues to bear fruit, with growth in government business, including NextGen 911, transportation initiatives with various DOT and federal highway contracts and the recent $1tn infrastructure bill. * Europe (45% of FY21 sales). Revenues increase 1% in both FY22e and FY23e, supported by renewed growth in French operations, as demonstrated by contracts with Strasbourg, the Nantes Water Department and a large French water utility company, as well as increased business from Esri-based business applications. * Australia (9% of FY21 sales). Revenues stay relatively flat across FY22e and FY23e, coming in at about £2 per year. Customer concentration also appears not to be an issue for SPA, as no one customer makes up more than 5% of total revenues. Furthermore, no single geography has all of the largest clients, and they are spread across the US, UK and EU. The transition to a SaaS model should continue to drive the increase in recurring revenue, which we anticipate growing at a 7% CAGR in FY22e–23e. Related services revenues will also benefit from contract growth, albeit at a slightly lower CAGR of 5% (FY22e–23e). We also forecast the shift away from perpetual licences towards a SaaS model will result in a slower growth in perpetual licences of 2% CAGR across FY22e–23e. As recurring, high-margin revenue continues to make up more of contract wins, both gross and EBITDA margins should benefit, as well as free cash flow. The US tends to see the highest gross margins, as most solutions have a high element of licensing revenues and are relatively standard ‘cookie cutter’ solutions that can be applied in many situations (eg 911 contracts). The UK/Ireland should also see margins improve, as contracts have higher elements of recurring revenues. The EU region has below average margins, as it mostly sells third-party software at lower margins, and the EU market is more competitive than the US or UK/Ireland. Altogether, our forecast implies gross margins improving 50bp in FY22e to 54% and 100bp in FY23e to 55%. As Exhibit 12 indicates, we see adjusted EBITDA margins growing to 14.9% in FY22e, delivering adjusted EBITDA of £3.8m, and further improvement in FY23e, with margins rising to 15.7% with £4.3m of adjusted EBITDA. Adjusted earnings remain positive, while IFRS earnings continue marching towards profitability, moving from a loss of £0.98/share in FY21 to losses of £0.73/share and £0.38/share over FY22e and FY23e, respectively. The difference between adjusted and IFRS results is primarily due to amortising acquired intangibles and share-based payments. '''Cash flows and balance sheet''' We have adjusted our working capital and the resulting cash balance estimates as much of SPA’s deal flow was weighted to the back end of FY22, especially some of the larger projects. As a result, not all of the cash has yet been received for those deals by the end of FY22 so we have adjusted our working capital, which affected operating cash flows, etc. SPA’s operating cash flows (before cash interest and taxes) of £4.0m in FY21 fall to £1.0m in FY22e as a result of the cash timing discussed above, but recover to £4.3m in FY23e as cash from the larger deals is received at the end of FY22. We forecast investing cash outflows will decrease slightly in FY22 to £2.4m, due to the £0.6m of deferred consideration (on the acquisition of GI) from FY21 not repeating, before increasing slightly to £2.5m in FY23e. We estimate that the net cash position falls from £2.8m H122 to £1.8m in FY22 and then back to £2.3m in FY23. Having turned positive to £0.9m in FY21, free cash flows (FCF, including lease payments) are forecast to fall, leading to a £2.6m outflow in H222 due to the aforementioned cash timing from new contracts. FCF is then projected to return to positive levels at £0.6m in FY23. In addition to working capital, much of the asset growth comes from intangibles increasing due to capitalised development costs of £2.2–2.3m per year over FY22e and FY23e. We also forecast that SPA’s gearing remains minor, with a small amount of debt (£3.0m) in FY22 and FY23, primarily in bank borrowings and most of which is due in two to five years.
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