AlphaValue Corporate Services
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Bloomberg   KEYW BB
Smart Cards-Security  /  Belgium  Web Site   |   Investors Relation
The soft bet is paying off
Upside 114%
Price (€) 0.99
Market Cap (€M) 23.3
Perf. 1W: -1.00%
Perf. 1M: 0.00%
Perf. 3M: 3.66%
Perf Ytd: -4.81%
10 day relative perf. to stoxx600: -2.56%
20 day relative perf. to stoxx600: -11.9%
Earnings/sales releases05/12/2017

Terminals positioning for recovery, Software already a strong contributor


Keyware released its Q3 17 results, with revenues reaching €4,763k, corresponding to 19.4% growth yoy. Terminals came in at €2,019k (-7% yoy), Authorisations at €2,136k (+17.5% yoy), while the recently created Software business unit came in at €608k, benefiting from a change in the consolidation perimeter.

The gross profit margin reached 53.1%, down 310bp yoy, and the operating margin came in at 5.3%, down 1030bp yoy. Profit before tax came in at €496k, leading to a net result of €328k. No results from associated companies were recorded during the quarter, as EasyOrder and Magellan are now fully consolidated.


Terminals’ revenues stabilising, at the expense of profitability

H1 17 had been marked by a strong negative trend in the Terminals business, down by over 15%. It is therefore a clear satisfaction to see that the revenues have been showing signs of stabilisation during the quarter, especially as they are a precursor for additional revenues.

However, the product mix hasn’t been favourable to margins, with a higher share of lower-end devices which has had a negative impact on the gross margin, down by 1060bp compared to the same quarter last year and clearly below the company’s normative levels. Moreover, it looks like the installed base is showing little progress, partly due to the lacklustre performance in Germany, where growth is much below expectations, to say the least, and might trigger a change in strategy with more of a focus on the Software business.

As a consequence, although the top-line is showing a positive inflection, the situation remains fragile and the recovery is far from being over. The inflection in the German business will reduce the pressure on the bottom-line, but the real driver will be the company’s ability to re-establish a more favourable product mix, while the comparative figures could prove demanding in Q4.

Authorisations back on track, Software taking flight

We were pleased to see that the Authorisations’ business performance in Q2 was only an air pocket, and that the business is now back to growth despite a demanding basis of comparison (+75% in Q3 16!). Margins have also improved sequentially (and stable yoy), constituting a notable satisfaction given the competitive landscape, and reflecting the strategic choices made during the past few years.

The other notable point was the consolidation of EasyOrder and Magellan, which have given birth to a healthy Software business. We are pleased to see that despite some products remaining in their early stages, and despite initial high D&A and start-up costs which weigh on profitability, the business is already accretive to earnings. In addition, the activity of Magellan is highly geared towards the year’s end, which will allow the persisting difficulties in Terminals to be offset as it did during Q3: without the Software business, the gross margin would have come in at about 46%! The diversification is subsequently already paying off, and will deliver its full potential when the Terminals’ recovery is further ahead in its cycle.


Moderate adjustments to our forecast. The consolidation of Magellan and EasyOrder will inflate our top-line expectations, but the already higher depreciations and amortisations run rate combined with the start-up costs will have a negative impact on profitability, although this will be partially offset by the effects of the share buy-back programme.