- Top-line figures look robust
- Covid disruption in an expensive sales team and weak R&D feed underlying concerns
At first sight, it may seem surprising that the market hacked off a quarter of a software company’s value on the same day that it posted a 46 per cent sales increase in FY2020. But underlying concerns at Blue Prism (PRSM) meant that investors were quickly spooked by new challenges brought on by the pandemic, as well as a conspicuous restatement of the headline figures for the prior year. The revised numbers revealed weaker revenues and deeper losses than initially stated, although today’s update showed that the robotic process automation (RPA) company managed to narrow its operating loss from £91.8m to £81.6m year on year.
With a negative operating cash flow of £33m (compared with an outflow of £57.5m in the prior year), management committed to its plan to reach break-even by the end of the 2021 financial period. Given the abrupt plunge in the share price (also its largest daily drop since the stock first started trading four years ago), it seems that some investors do not share the same confidence. That is not without justification: coronavirus has shaken up Blue Prism’s enormous sales team, with customers delaying purchasing decisions or reducing deal sizes. While there was some recovery in activity towards the second half of the year, overall deal sizes have still shrunk, with the total value of new software sold flat on the prior year.
The software company did push more investment into its research and development (R&D), an area where historically low spending has prompted concerns about the long-term competitiveness of its product. Management more than doubled R&D expenditure to £17.7m, although it still sat at a relatively modest 12 per cent of total turnover. Compare that with competitor Pegasystems (US:PEGA), which spent 27 per cent of its revenues on R&D in the quarter ending September 2020.
Blue Prism expects revenues to grow by more than a quarter in 2021. But sales have rarely been an issue for the company. Our concerns lie elsewhere: while R&D spend has improved, it still needs to catch up with its deep-pocketed peers across the pond. Sales and marketing costs continue to make up almost half of the company’s total operating expenses, with a massive hiring round in 2019 bulking up the department to almost three times the size of the product team. Management still has some way to go to address concerns about its ability to protect its market share against bigger US competitors in the long run. Sell.
|BLUE PRISM (PRSM)|
|ORD PRICE:||1,396p||MARKET VALUE:||£1.32bn|
|TOUCH:||1,395-1,397p||12-MONTH HIGH:||1,886p||LOW: 850p|
|DIVIDEND YIELD:||nil||PE RATIO:||na|
|NET ASSET VALUE:||123p*||NET CASH:||£138m|
|Year to 31 Oct||Turnover (£m)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £37.4m, or 40p a share **Restated|