K3 (LON:KBT) had a tough end to H117, with lengthening sales cycles for enterprise customers causing a shortfall in new business. More positively, recent restructuring is starting to drive more cross-divisional sales and is reducing the cost base. We have revised our revenue and EPS forecasts to reflect the slower pace of order wins as well as the restructuring, reducing FY17 EPS by 34% and FY18 by 11%. Evidence of improving order flow, growth in channel sales and growth in recurring revenues will be the triggers for share price recovery, in our view.
Order slippage at the end of H117
In the crucial last few weeks of December, K3 failed to close as much business as budgeted, with order slippage in both divisions. Enterprise customers are delaying decisions, particularly when choosing between cloud-based and on-premise solutions, although SME business (which typically is less cloud-focused) remains strong. In management’s view, these deals have not been lost, merely delayed, with the company remaining firm on pricing. The new management team is in the process of restructuring the business in order to streamline the operational structure and create a broader offering across the group. This strategy is already starting to pay off with a growing pipeline of cross-divisional opportunities.
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