Sopheon Plc (LON:SPE) Trading Update

Sopheon Plc (LON:SPE) issued a trading update on Wednesday. Revenue for the first half of 2019 is behind the same period last year (US$13.7 million v US$15.9 million). The company operates a primarily perpetual licensing model where the customer pays a one-off fee for lifetime usage of its software, Accolade, and so revenue can be volatile when comparing short periods. Perpetual licenses are accompanied by recurring maintenance charges which were US$12 million in 2018. Sopheon generates other recurring revenue from hosting services (US$1.5 million in 2018) and Software as a Service (SaaS) subscriptions (US$1.5 million in 2018). An increasing number of customers are opting for SaaS deals which are smaller in size than perpetual arrangements but entirely recurring in nature. This reduces revenue in the short term, but makes it more predictable and resilient to economic conditions.

I suspected results for the first half of 2019 would be weak after reading the company's AGM trading update in June which stated that revenue visibility for the year was in line with that at the 2018 AGM. This was a shift from the trend in prior updates which consistently showed an increase in revenue visibility.

I think the drop in performance is temporary. The company notes that its sales pipeline is exceptionally strong and Sopheon has an almost uninterrupted history of growing revenue year on year since it was founded in the early 2000s. Costs are mainly fixed so profit will fall by more than revenue in percentage terms in the first half of 2019. The stock trades on an enterprise value to earnings multiple in the low 20s based on a revised earnings base of US$4 million for 2019. That is reasonable given the quality of the company in my view and so I am happy to hold in the absence of a better opportunity.