Utilitywise lowers revenue expectations as it changes accounting standard

Independent utility cost management consultancy Utilitywise brought disappointing news to the market on Monday, saying that it now expected revenue for the year to 31 July to be between £4m and £4.5m below previous market expectations.

The AIM-traded firm said the revenue shortfall primarily comprised revenue from the same supplier renewals contracts which formed a “substantial portion” of the revenue secured by the group in the final months of the financial year.

“Investors should note that the group has also announced today that it will adopt the new accounting standard, IFRS 15 on 1 August, as a result of which it will change its accounting policy in respect of timing of recognition of revenue related to renewals contracts,” the Utilitywise board said in a statement.

“For the reasons set out below, had the group adopted IFRS 15 as at 1 August 2016, the fall in signed renewal contracts against expectations would not have materially impacted Group revenue or profits for the year ended 31 July.”

Under IAS 18, the group said it currently recognises revenue upon the signature by a customer of a renewal contract with their existing supplier.

Additionally, the Group currently recognised revenue upon the commencement of a new customer contract under IAS 18.

“During the later months of the Group's financial year, a substantial proportion of the revenue secured by the Group relates to renewal contracts, as revenue from renewal contracts will be immediately recognised under current accounting policies, whereas revenue from any new customer contract signed is less likely to be recognised in the same financial period as the new contract is signed, as a new contract would typically commence one to four months later,” the board explained.

“Additionally, the group's monthly revenue has historically been weighted towards the end of each calendar month.

“Given the group's relatively fixed cost base, substantially all of the shortfall in revenue will impact the profit before tax of the group.”

Notwithstanding the reduction in profitability, the group said it would remain in compliance with the financial covenant requirements of its banking facility.

The financial year ended 31 July would be the final year for which the group will present its financial results with revenue accounted for under the existing accounting standard, IAS 18.

As a result of the adoption of IFRS 15, the results for the year ended 31 July, expected to be announced on 17 October, would also be restated to reflect the position as if IFRS 15 had always been in place.

“Under IFRS 15, revenue in respect of Renewal Contracts will be recognised upon the commencement of the contract, rather than upon signature,” the board said.

“Accordingly, revenue associated with such contracts signed at a late stage of the year would be much less likely to be recognised in the same financial period under IFRS 15, as the contract would commence in a later financial year.”

That would then increase the closing order book at the end of the financial period in which the renewal contract was signed, which represented future revenue secured, to be recognised in later periods.

As a result, had the group adopted IFRS 15 as at 1 August 2016, the fall in signed renewal contracts against expectations would not have materially impacted group revenue or profits for the year ended 31 July.

“The group expects to report gross order book additions in the year ended 31 July which are c. 18% higher than in the year to 31 July.

The group will issue a further trading update in respect of the year ended 31 July, including in respect of closing revenue pipeline, still to ‘go-live’, on 24 August.”