Craneware's Sentry deal displays potential

These are Craneware’s (CRW) first half-year results since the acquisition of US pharmacy software business Sentry for $400mn (£305mn) last year. The problem assessing the performance is that the scale of this deal makes it difficult to compare year on year. Revenue more than doubled to $80mn (£61.2mn), although statutory profits were constricted by $8.9m linked to the amortisation of acquired intangible assets.

Perhaps the most promising feature is that annual recurring revenue (ARR) rose to $165mn, from $64.5mn. This was ahead of management expectations and was driven by many of the new Sentry customers using a cloud-based product. Cloud now makes up 67 per cent of ARR compared with 16 per cent in June 2021. Customer retention rate was also above 90 per cent – which could indicate that products are becoming embedded within the businesses of existing customers.

Management hopes that it will be able to boost ARR by cross-selling and upselling between its legacy customers and its new Sentry customers. Peel Hunt is expecting single-digit organic growth. The broker has resisted the temptation to cast at a higher rate despite seeing more than 200 per cent uplift in the ARR from upselling to shared Sentry-Craneware customers.

The prospects for the merger are tantalising. However, if the $44.9mn of revenue contributed by Sentry is stripped out, then organic revenue declined $2.7mn, or 7 per cent. A drop in professional service revenue due to Covid-19 disruption contributed £1.67mn to this fall. Management described this as a temporary effect, although you are left wondering about the remaining shortfall that can't be directly linked to the pandemic. It may prove a case of direct and indirect impacts – the pandemic has muddied the waters on this front.

Analysts at Peel Hunt “aren’t bothered by the drop in services” and believe earnings will grow when hospitals move on from Covid-19 and start thinking more strategically about their future. The broker also pointed out that while Craneware can increase contract prices in line with the higher rate of inflation in the US, it can recruit software engineers in Scotland, where it is headquartered and wages are increasing at a lower rate. This effective arbitrage opportunity could conceivably help margins.

Peel Hunt expects a 2023 adjusted EPS of 96.8p, giving a two-year forward PE ratio of 22.7.  For a company with growing recurring revenues and pricing power, this looks like good value. Better to get in now, rather than when Craneware has already cross-sold to all its new customers. Buy.

Last IC view: Buy, 2,320p, 21 Sep 2021