Financial management software developer Aptitude Software (LON: APTD) is going through a period of transition as it moves to a service-based revenue model with its new software. The fully listed company has strong prospects over the medium-term.
The current core product is AccountancyHub, but the newest product is Fynapse. So far it has four clients – two new, two existing customers. The plan is to transfer one-third of the AccountancyHub customers to Fynapse by 2027, while also adding new clients.
Construction, architectural and visualisation software supplier Eleco (LON: ELCO) is already going through a similar process with its software, although it is further along the road. This has held back profit in recent years, but it is starting to accelerate.
This is because one-off revenues from software sales are replace with monthly recognition of revenues over a longer period. Annualised revenues take time to build up. Eleco generated organic growth of 12% in the first half and overall revenues were 21% ahead at £16.3m. Cavendish is maintaining its full year pre-tax profit forecast at £4.8m, up from £4.3m, with a jump to £6.3m in 2025.
Aptitude Software is much earlier in the process, but if it can meet its target, it will have a highly valuable, growing recurring revenues base. It already has a high retention rate with 99% of customers retained in the first half of 2024.
There is a £3bn market opportunity for Fynapse, which is AI-based autonomous financial management software. It can cope with much more data than AccountancyHub and that will help to encourage the existing clients to move to the new product.
There is less need for complicated implementation processes with Fynapse and much of that work is done by partners. That is why those revenues have declined in the latest period and total interim revenues fell from £37.5m to £35.3m.
There was a cash outflow in the first half, but net cash should recover to £25m by the end of 2024. Pre-tax profit improved from £1.75m to £2.5m.
Annualised recurring revenues are £46.7m. As software becomes an increasing part of the revenue mix operating margins should improve. They are currently 12% and could reach 20%.
Canaccord Genuity forecasts an improvement in full year pre-tax profit from £9.6m to £10.6m. That is on lower revenues. At 365p, the shares are trading on 22 times prospective earnings, falling to 20 next year.
Increasing revenues combined with improving margins over the next few years will provide growth in profit and significantly reduce the multiple.