Tuesday 05 November 2019

Castleton H1: highs and lows

Castleton Technology logoThe highlights and lowlights of Castleton Technology’s H1 were previewed in the company’s trading update last month – see Castleton H1 behind expectations. Having spoke to management this morning, we have a clearer understanding of what’s gone on behind the numbers.

As expected, revenues decreased by 10% to £11.6m, with organic revenues declining by 13%. But within that, recurring revenues increased from £7.0m to £7.6m, comprising 66% of total revenues (vs. 55% in the comparable quarter a year ago). Reported revenues represented a significant reduction on previous expectations: £2.6m lower on hardware, and £1.6m lower on professional services. Profitability and cash conversion were also negatively impacted.

During the period, hardware revenues were impacted by a handful of clients abandoning their hardware refresh and to, instead, opt for cloud technology. In one example, Castleton had previously earnt £500-600K in hardware sales in a year and, though it won the replacement cloud delivery contract, that new-look contract is worth £1m over four years… in other words, a c50% decline in in-year revenues. Of course, this is also the reason for the welcome increase in recurring revenues.

Meanwhile, in professional services, Castleton started the year with a strong backlog of project work and good visibility. However, as it entered Q2, several clients decided to spend some time embedding their already-purchased solutions before embarking on new project work; it seems that the older generation of tenants utilising Castleton’s digital repairs system have needed a little more hand-holding to get to grips with the technology than had been expected. The result for Castleton was too many consultants on the bench; the company as now restructured to reduce the number of billable consultants.

Castleton has invested in several areas of the business over the past few years. And much of that investment is having the desired results: Deeplake (see Castleton Technology acquires Deeplake Digital) has now been integrated into Castleton’s solution and is “working well”; its Indian development capabilities are contributing as expected; and its Castleton Community Solution, designed to be used by smaller housing associations, has been successful in winning a place on a National Housing Federation framework agreement as preferred supplier (available to more than 800 housing associations).

Castleton has now accounted for a reduction in hardware revenues in its outlook. And is confident that it can achieve its target for professional services for the year. The total contracted backlog is up 5% year-on-year compared to September 2018 (to £30.1m) and is expected to build. The consolidation of its software and managed services business under a ‘one Castleton’ structure (from 1st June), streamlining sales and delivery, is expected to start having more of a positive impact on cross-selling and upselling. There are still some risks to future performance - and we will be keeping a keen eye on the client retention rate which seems to have suffered - but Castleton has been working to mitigate against them. And the fundamentals of the business remain strong.  

Posted by: Georgina O'Toole

Tags: results   saas   cloud   software   managedservices   housing  

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