earning guidance - looking good, page-5

Really poor understanding by the market of this announcement (albeit the company could have made things much clearer as well so there was no confusion).

What do we know?

We know that last year profit was $252k.

This year is is going to be about 50% lower, so we expect that the profit will be about $125k.

We also know that:
- the R&D refund was lower than the previous year (and this reduction in revenue also has a corresponding reduction in profit)
- there is a timing difference when compared to the previous year for recognition of revenue for the WA contract (and this reduction in the first half will be made up in the second half). They say there was significantly less revenue this year vs the previous year for the amount recognised for this contract.
- there was a business decision to not pass on wholesale SMS cost increases that will be passed on in the second half (so revenues and profits will be up in the second half when compared to the first half)
- there were pre-release legal and consulting costs associated with Pinpoint that were incurred in the half for the launch, but there is no associated revenues (so this understates the real position)
- the costs of the director options have been fully expensed in this half (and this is not a cash cost to the business).

What is the size of the "cost" of the options? Well, by my calculation and using the assumptions stated for the previous grant of options, if they use a 40% volatility for the options then this would have a cost around $115-$120k. If the use a 30% volatility, then the cost will be about $95-$100k. I think they will use the 40% volatility, as this is probably reasonable for expectations (and by my calcs is similar to previous year calcs).

So if we just add back the expense of options of $115k, to the profit of $125k, then we get a profit of $240k before the other contracts. If this is after tax, then the comparable before tax profit is even higher (and even a greater increase vs the previous year).

Whilst it is hard to estimate, I think the "real" result if you take all the timing differences into account will come in somewhere around $300-350k.

Also they did note that cashflow from operations was $300k for the period compared to $84k for the previous year. This suggests MUCH stronger performance this year (even before adjusting for the Pinpoint expensing of items, the WA contract and the SMS wholesale costs). Thinking about the likely quantum of these items, the "normal" profit is probably realistically even higher.

Cheers
Marv

DISCLOSURE: I hold plenty (and I think the market is stupid in their analysis of the announcement).