Last week marked the deadline for companies with a December financial year-end to publish their 2021 annual financial statements. Among the numerous company announcements issued last week, RS2 Software plc published its 2021 annual report showing a pre-tax profit of €6.4 million.
The RS2 announcement was eagerly awaited following the issuance of preference shares in the first half of 2021, during which the company published its three-year financial forecasts. RS2 shareholders and also financial analysts could therefore compare the actual results published last week with the financial forecasts published in early 2021 in order to understand the progress the company achieved despite the COVID-19 pandemic, which surely disrupted business operations, especially during the first half of the year.
Revenues during 2021 amounted to €38.7 million, translating into a 44.3 per cent increase over the prior year. However, revenue fell short of the projections of €42.5 million published in early 2021. CEO Radi El Haj made reference to this in his address to shareholders, explaining that the company experienced “delays in some expected revenue resulting from unforeseen circumstances and dependencies on third party deliverables”. Meanwhile, the CEO highlighted that “all other projected revenues were met”. In fact, he projected revenue figure of €42.5 million included an element amounting to circa €3.8 million that represented new business that had yet to be sourced. On the other hand, the estimated remaining amount of €38.7 million were to be generated from contracted and/or committed business (€5.95 million) as well as existing clients (€32.7 million).
It is interesting to note that the actual revenue figure of €38.7 million generated in 2021 is exactly in line with the amount of forecasted business that, at the time of the capital raise, was either already contracted/committed or else was to be derived from existing clients. The data available in the segmental information provided in the 2021 annual report indicates that revenue from the ‘Processing Solutions’ segment amounted to €18.7 million. The financial projections included in the prospectus last year had included revenue from the ‘Processing Solutions’ of €22.4 million. The shortfall of €3.7 million may be due to the delay in the launch of the ISO business by US subsidiary RS2 Software Inc. The directors explained that although the US subsidiary significantly contributed to overall growth in the group’s revenue, it was slower than originally anticipated “primarily due to a delay in the launch of the ISO business”. It is worth highlighting, however, that this has since been successfully launched during the first quarter of 2022.
The progress achieved in the US by RS2 Software Inc is evident in the data available in the annual report, with this subsidiary showing a jump in revenues of 81 per cent to €16.1 million (2020: €8.9 million) and a profit before tax of €0.8 million compared to a loss before tax of €5.1 million in 2020. Moreover, when also including the revenues generated from the sale of licence, the revenue derived from North America increased by almost 82 per cent to €16.1 million (2020: €8.87 million) which, in turn, represents nearly 42 per cent of overall group revenues.
The ‘Merchants Solutions’ segment also recorded a lower-than-expected level of revenues in 2021, as this amounted to €2.07 million compared to the projected figure of €3 million. However, the group successfully obtained an e-Money Institution licence from the German Federal Financial Supervisory Authority ‘BaFIN’ in 2021, thereby allowing RS2 to provide a wider range of financial services (including direct acquiring and issuing services to merchants) and also enabling it to tap new business opportunities in practically all EU and EEA countries. In fact, the CEO indicated in the recent annual report that the group launched its acquiring business in Europe during the second quarter of this year. The revenue contribution from the ‘Merchants Solutions’ segment is expected to increase markedly to just over €22.1 million by 2023. Moreover, this segment should be one of the main drivers of the expected exponential increase in the profitability of the group since it represents a higher margin business.
In contrast, the ‘Software (Licensing) Solutions’ business is a stable business with a large part of revenues being contracted revenues. Although over the years, RS2 has consistently indicated its target of gradually becoming less reliant on the licensing of its BankWorks platform, revenues generated from the ‘Software Solutions’ segment represented 46.2 per cent of total turnover in 2021.
Nonetheless, the importance of the ‘Software Solutions’ segment is expected to become diluted by the upcoming growth in ‘Processing Solutions’ and ‘Merchant Solutions’. Indeed, although revenues from the ‘Software (Licensing) Solutions’ segment was anticipated to increase to €19.6 million by 2023, given the very strong projected growth of the two other business units, ‘Software Solutions’ would only represent 19.2 per cent of total revenues by 2023, assuming that the financial targets as provided at the time of the preference share issue are achieved.
Although the significant ramp-up in business is encouraging, the most positive element of RS2’s 2021 financial results is the considerable turnaround in profitability. The group reported an EBITDA of €8.76 million compared to the projected figure of €3.58 million and the negative figure of €1.43 million recorded in 2020. It would be interesting for the company to provide further details for this better-than-expected performance, although it is apparent that the boost in profitability emanated from the more efficient use of resources, which ultimately resulted in a significant uplift in profit margins.
Following the losses reported in 2019 (-€1.63 million) and 2020 (-€3.78 million), RS2 posted a net profit of just over €3 million for 2021, which is well above the marginal net income of €0.16 million anticipated at the time of the capital raise in 2021. This is surely a welcome development for the group’s shareholders, who throughout the years have been patient in seeing the gradual transformation of RS2’s business model into a truly global player across the entire payments value chain.
In this context, and given the extent of the superior level of profits achieved in 2021 despite slightly weaker revenue levels, RS2 ought to consider publishing updated financial forecasts for this year as well as for 2023.
Given the extent of the superior level of profits achieved in 2021 despite slightly weaker revenue levels, RS2 ought to consider publishing updated financial forecasts for this year as well as for 2023
In last year’s prospectus, the directors had anticipated revenues will climb to €68.4 million in 2022 and €102 million in 2023, with EBITDA and profit before tax reaching €29.5 million and €24.9 million respectively in 2023. An updated set of financial forecasts will help the investing community gauge the progress being made by the group in its international expansion strategy.
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