Fintech: Citadel’s pivot to SaaS runs into headwinds; stock slumps over 30pc
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It’s been a rough morning for shareholders of IT services company Citadel Group (ASX: CGL), as the stock tumbled following an earnings update.
Citadel revised its projected underlying earnings for the 2019 financial year down to a range between $22-$24 million.
In explaining the downgrade, the company pointed to delays in existing project extensions and changes to its revenue mix as it pivots to a software-as-a-service (SaaS) strategy.
Here’s what the market thought:
Regarding the delays, Citadel said approvals for project extensions that were expected to take place in FY19 have now been pushed back to the first half of 2020.
In addition, customer receipts in the June quarter are expected to be lower than prior periods.
The company established its business model by providing managed IT services for the health sector, where it won large-scale contracts including for the new Royal Adelaide Hospital.
At its half-year results, the company announced it would be shifting towards a global SaaS strategy.
And that has meant “a changing mix of revenue from higher margin consulting, to SaaS and related software services — which operate at a reduced margin in the short term before scaling out in the medium term”, Citadel said.
Difficulties in execution mean the the company’s gross profit margin has declined to 46 per cent.
Despite the growing pains, Citadel remains optimistic that its strategy will result in a more diversified earnings stream and a broader client mix.
“The board expects to see strong growth momentum in FY20, across all areas of the business,” Citadel said.
Mark Bouris’ Yellow Brick Road (ASX:YBR) released a strategy update after markets closed last night, announcing plans to “streamline” its business structure.
The company now plans to outsource or sell its wealth management platform in order to cut costs associated with maintaining an Australian Financial Services Licence (AFSL).
YBR said it will now refocus on its mortgage distribution and servicing operations. Bouris will oversee the changes while group CEO Frank Ganis will step down into a part-time role. Shares in YBR were down 1.5 per cent to 6.5 cents in morning trade.
And the UK subsidiary of Ensurance Ltd (ASX:ENA) has launched a new line of terrorism and sabotage insurance.
The policy is “designed to protect a business from damage caused to its buildings, profits, employees and customers resulting from an act of terrorism or sabotage”, Ensurance said. Shares in ENA were unchanged at 2.6 cents.