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Lombard Risk Management plc: THE INVESTMENT CASE

Lombard Risk Management unlocking revenue

The top line was driven primarily by the strong growth of the company's Risk Management and Trading Software Division
Lombard Risk Management unlocking revenue
INVESTMENT OVERVIEW: LRM The Big Picture
The company develops risk management solutions for the financial services industry

The turnaround at risk management and collateral solutions provider Lombard Risk Management plc (LON:LRM) is going even better than expected.

In April, it raised guidance on revenues, underlying profits and its cash position, and in May the numbers confirmed the improved performance.

Turnover in the 12 months to 31 March of £34.3mln was up 44.8% from £23.7mln the year before and at the upper end of its revised guidance range of 34mln-£34.4mln.

All companies are chasing recurring revenues these days, but especially software houses and technology platform providers, and encouragingly Lombard saw recurring revenue rise 21.0% to £12.4mln from £10.2mln the year before.

There is clearly life left yet in the old licence-based model, however, as revenue from new licences and renewals soared 113.7% to £11.6mln from £5.4mln the year before.

Underlying earnings, or EBITDA, came slap bang in the middle of the revised guidance range at £2.6mln, up from £2.1mln the year before.

The provider of risk management software to the financial services industry said the top line was driven primarily by the strong growth of the company's Risk Management and Trading Software Division.

The target is to achieve cash profitability within two years of the fund-raising

After raising £8.3mln via a placing and open offer of shares, Lombard was able to plough money into its core products as well as funding a development centre in Birmingham.

"The Lombard Risk two-year plan to achieve cash profitability was predicated on unlocking revenue growth by investing in both product and employees,” said chairman Philip Crawford.

The company's cash management has been “particularly encouraging”, following the focus on debt collection and working capital management, he added.

Broker bullish ...

In a note to clients on Lombard Risk, analysts at ‘house’ broker finnCap said: “The new management team has more than delivered in the first of the two year plan to transform LRM into a profitable and cash generative, leading-edge software supplier to the global financial services industry. That plan is predicated on the belief that development costs were not too high for the size of business, but rather the business was too small for the proper investment required to develop regulatory and compliance solutions for Tier-1 banks.”

Funds raised are being used to step up sales to a more sustainable level, finnCap, asserted, and this, in the broker’s view, will allow the operational gearing of a software business to deliver profit and cash.

Agile product

The company is a market leader in bank regulatory reporting software, while it also has a second string to its bow with its collateral management offering.

Its flagship AgileREPORTER product enables the company to keep the regulators and compliance officers happy, while also providing key information for company management.

“You don’t win gold medals for being brilliant at regulatory reporting, but you could be put out of business for not doing it correctly and in a timely fashion,” chief executive Alastair Brown told Proactive Investors in an interview last year.

Collateral management

Turning to collateral management, it is simply the process of monitoring, tracking and valuing the funds put up as collateral for a trade, such as highly geared derivatives position.

The Lehman collapse of 2008 revealed how financial institutions are bound together and affected by default on these often huge transactions, and also how woefully monitored the transactions were.

So, the push since then has been to tighten up the processes with technology such as Lombard Risk’s.

Lombard’s COLLINE product has one major competitor, but Brown said that in many cases the true competitor is each bank’s in-house system.

finnCap noted that the 44.8% improvement in the top-line was mainly driven by sales of COLLINE, which were up 83% year-on-year, but the Regulatory side of the business is showing signs of perking up after “five years of relative pedestrian” growth.

“There is further progress to be made this year, both organic and augmented by significant partnerships like that with Atos in Germany and Oracle worldwide,” finnCap said as it upped its price target to 18.8p.

Since that broker note, the company has announced a few more partnerships: a hook-up with Smart Communications to combine the pair’s market-leading software offerings to provide an integrated documentation and asset tracking package; an alliance with Elixium on an integrate repo solution; and a partnership with DTCC-Euroclear Global Collateral Ltd to drive further improvements in collateral management operations.

The year is not yet done, so expect more of these deals, as the company seeks to embed its platforms in the workflows of more customers.

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