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Aconex Cuts Swathe Through Expectations

Australia | Jan 31 2017

Brokers slashed forecasts as software service provider, Aconex ((ACX)) substantially downgraded revenue expectations for FY17, raising questions regarding the reliability of its growth outlook.

-Near-term outlook curbed but brokers retain ratings given the potential
-Concerns over management's depth of engagement with clients
-Existing business growth seen slowing to around 10%

By Eva Brocklehurst

Construction management software service provider, Aconex ((ACX)), has delivered a blow to investor hopes, substantially downgrading revenue expectations for FY17. The downgrade raises questions regarding the company's growth profile, predictability and momentum in the US and UK markets. Brokers slash price targets.

The company has cut its FY17 revenue forecast to $160-165m and its operational earnings (EBITDA) forecast to $15-18m. These estimates are down -8% and -30% respectively at the mid points compared with prior guidance. A slower conversion of new clients in the US and UK, amid the political uncertainty, has been cited as the main cause of the downgrade.

Impact To Linger

Morgan Stanley expects the impact to linger but retains its Overweight rating given the earnings power inherent in the business. Still, the issues are whether this is a one-off, whether the 20% long-term revenue growth rate is achievable and whether the company is still truly a global story.

Morgan Stanley opts for lower growth in FY17, but does not believe the company has downshifted from a 20% growth profile for the longer term. The question for Morgan Stanley is: how can a business with 72% of revenue booked in from July 1 miss expectations twice (first time at AGM)? The broker understands the cumulative nature of any miss in earnings forecasts but suspects volatility in user-based agreements has increased.

The pressure on US and UK growth is not a competitive issue, in the broker's opinion, and the company's service remains a clear product of choice for the world's largest projects. The broker takes heed of two clues to a possible rebound in sales: weighted contract length and bookings growth. The company has indicated a higher proportion of long-term contracts, which should boost contract length and, if new work is longer dated, it should imply the slowdown in bookings would be less pronounced.

Deutsche Bank is concerned by the apparent lack of visibility by management in downgrading guidance that was less than three months old. This adds to existing concerns surrounding poor operating leverage and inconsistent cash flow. Although the reasons given for the weakness are plausible, the sudden nature of the shortfall raises questions for the broker around the depth of engagement the company has with its clients.

While the company's software is world-class, as is evidenced by the strong customer list and consistent channel feedback, Deutsche Bank believes the path to achieving a globally dominant product with strong recurring earnings remains uncertain. Moreover, confidence in management has been severely dented. Deutsche Bank retains a Hold rating, cutting its target to $4.50 from $6.80.

Conject Below Expectations

Macquarie also sticks with a Neutral rating. The broker notes the first half includes a full contribution from the Conject acquisition and commentary suggests the performance of this business has been below initial expectations, with revenue affected by changes to recognition policy and integration disruptions. Assuming flat revenues from Conject implies, the broker expects a slowdown in the existing business growth to around 10%.

The stock has fallen a long way but the broker continues to believe in the medium-term growth prospects, although concedes there is little valuation support even at current levels. Delivery of medium-term revenue growth targets and the significant margin expansion that is typical of software-as-a-service will be need to be demonstrated.

Near-term Catalyst Difficult To Find

A near-term re-rating is unlikely and a catalyst difficult to identify, Credit Suisse asserts, given the market is likely to be sceptical about the value of new enterprise agreements and management credibility has been reduced. The broker retains its Outperform rating despite the decline of 45% in the share price, continuing to envisage potential upside in the long-term at current levels. This is because the company has a first-mover advantage and a large addressable market.

The main change since the AGM in October, UBS observes, is the lower-than-expected performance in the Americas. The broker notes, at the time of the FY16 result, the 72% of FY17 revenue is contracted implied a further $49.3m of new revenue required to meet the mid point of prior guidance. Hence, the new guidance implies $35.8m is now required on a full year basis, which equates to a -27% decline in new revenue expectations.

Given the apparent slowdown in revenue expectations, UBS has reduced confidence in the FY18-19 guidance of 20-25% per annum growth and the EBITDA margin of 17-22%. The stock is not expected to outperform with such uncertainty. UBS retains a Hold rating and downgrades its target to $3.40 from $8.00.

Citi also downgrades its target sharply, to $4.95 from $8.69, but retains its Buy rating. The broker considers the market reaction excessive and there is a low probability of a further material downgrade. First half guidance implies robust second half expectations, which may prove challenging, and medium-term growth could be affected by shifting political landscapes and slower customer uptake.

Citi does point out that the company's visibility on the full year ordinarily increases at the first half result. For example in FY15 the company had 78% of FY16 contracted revenues, which increased to 97% at the first half result. Citi expects a similar outcome for FY17, although acknowledges the company's Connected Cost offer is not contracted, so visibility this year may consequently be slightly lower.

There are three Buy ratings and three Hold on FNArena's database. The consensus target is $4.05, suggesting 32.4% upside to the last share price. This compares with $7.72 ahead of the downgrade. Targets range from $3.40 to $4.95.

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