Dillistone performing below expectations as it develops new product

Recruitment industry software supplier Dillistone Group updated the market on its trading and its new product under development on Monday, ahead of its annual general meeting to be held on 7 June.

The AIM-traded company had said at the final results announcement for 2016 released in April, that there was “some softness” in the UK recruitment market following the Brexit vote last June.

As the firm moved further into the year, it said it had seen “some improvement” in terms of the volume of new business wins, and was “pleased” to have taken a number of clients from its direct competitors.

However, a significant majority of its new clients had been new or young businesses with relatively few users purchasing on a subscription, as opposed to a licence model.

While those subscriptions may be valuable in the long term, Dillistone said they had a “much reduced” impact on short term revenues. and that had not allowed the company to catch up on the slow start to the year.

“The group has also been informally told that a contract with a major client is likely to expire later this year or early next,” the board said in its statement.

“This contract, which is with a client using a legacy product, is worth in the region of £0.6m per annum in contribution terms to the group.”

Despite that, the board was “pleased” that recurring revenues in both divisions were at record levels, providing forward visibility and largely underpinning the group's administrative cost base.

That enabled it to anticipate that revenue in the first six months of the year would be broadly in line with the first six months of the previous year, Dillistone said.

On its proposed new product, the board said development to date had been funded by internal resources while the company explored the feasibility of the product.

The new product addressed a market need which, in the view of the board, was global in nature and had the potential to be “very significant” for the group.

“We believe that our new product will be unique in scope, its commercial model, and its method of delivery.”

Although the confidential nature of the product meant that it had not been possible to discuss it widely with the potential market, those conversations that had taken place had been positive, the board reported.

“These have led to the board receiving a non binding letter of intent from an organisation which is globally recognised in the market it serves and which plans in principle to adopt the product on release,” the statement read.

“While other conversations are not as far developed, the board is confident that similar agreements will be reached and, as such, the board has now approved the project and fundraising for completion and launch of the product is now being explored.”

Dillistone said it anticipated that development, marketing and other cash costs associated with the new product in the period to 31 December 2018 would be in the order of £2.4m, but excluding any revenue generated in the period.

Approximately £0.7m of those costs would be capitalised.

“While significant investment in the new product has already been made, and will increase through the year, it is not anticipated that meaningful revenues will be generated prior to 2018 and the product is not expected to be profitable before 2019.

“Thereafter we anticipate that it will be highly cash generative.”

The group's cost base increased in 2016, in particular to develop cloud based hosting services, and remained at the level required to continue with its product development programme and to pursue the new product project, the board said.

Dillistone had a cash balance at 2 June of £1.3m.

Medium-term prospects - given the introduction of the General Data Protection Regulation in 2018 and the new product launch - remained “positive”.

Despite the increased investment in the new product - some of which will impact the profit and loss in the current half - the group said it expected to make a “small” operating profit before acquisition-related items in the first half of the year.

The board said it currently expected that the second half of the year would deliver “better results” than the first half in terms of general trading.

However, the slow start to the year and the higher cost base meant that the results for the full year were expected to be “significantly below” market expectations, the board cautioned.

In view of the proposed fundraising, the board said it expected to reduce its dividend until the benefits of its investment in the new product flowed through to the group's balance sheet.

“We've seen improvement in the order book since the beginning of the year and are confident that this will improve further in H2,” said CEO Jason Starr.

“We are delighted by the early response to our new product and excited by its potential.

“The new product is essentially a startup being developed within the auspices of an established business, [and] we believe that it has the potential to transform the nature of our business and to deliver significant shareholder value.”