Cerillion: Larger deals, contracts and customers driving growth momentum (LON:CER)

Cerillion plc (LON:CER) Chief Executive Officer Louis Hall caught up with Liberum to discuss the sharp acceleration in revenue in FY21, the dynamics between serving increasingly larger customers and increasing software and SaaS revenues, the key drivers of the margin increase and what should investors anticipate going forward and the key drivers of demand for Cerillion products and how they will evolve over FY21.

Q1: Should investors anticipate new higher sales growth to persist over the medium term?

A1: We’ve seen an uptick in the momentum that we first saw at the half year where we saw an increase in revenue of 25% compared to the prior period compared with the trend over the life of the company, growth of around 9-10% a year, certainly going back as far back as the IPO. We saw that uptick confirmed in the final year numbers just released this morning.

That’s been driven by a move towards larger contracts with larger customers and obviously signing larger customers, larger licence deals, bigger upfront commitments from new customers means that growth can be increased. Also, those larger customers then becoming long-term customer accounts tend to be higher spending than perhaps smaller customers would be. That is a double hit of additional growth driver to keep that momentum going.

Q2: Can you explain the dynamic between serving increasingly larger customers and increasing software and SaaS revenue?

A2: Larger customers obviously tend to have larger budgets but also there’s quite an important dynamic in terms of licence fees because larger customers, by definition, have more end customers. So, for example, if a customer of ours has 1 million mobile subscribers, then our licence model works on the basis that the licence fees are 1 million times X, if a customer has 2 million subscribers, then the licence fee is 2 million times X.

So, bigger customers will drive higher licence revenues and they’re also more likely to want the Software as a Service so providers fully hosted in the cloud or at least managed by Cerillion so those additional services obviously bring us extra SaaS revenue.

Q3: Can you outline the key drivers of the margin increase and what should investors anticipate a steady state adj. EBITDA margin going forward?

A3: Margins are benefitting from a higher proportion of software revenue in our numbers this year so that software as a proportion of total revenue has increased from 37% last year to  51% this year. This, again, is being driven by bigger licence deals with larger customers with bigger customer bases so that’s the main driver behind that.

We are seeing some heat in labour costs both in India and in the UK and I think whilst margins are likely to remain strong, I think it would be unwise to envisage margins increasing much beyond where we are today.

Q4: Cerillion has seen record levels of orders, backlog, and pipeline – what are the key drivers of demand for your products and how have they evolved over FY21?

A4: The main drivers have really been quite similar through the year so we have a situation where the world of work as we know it has probably changed for the long-term in that most people in white-collar jobs are going to want to have some kind of flexible work arrangement where they’re working at home remotely, off-site etc. for a part of time. That means greater dependency, ongoing dependency on connectivity, on broadband, be it mobile or fixed.

We were already seeing, before the pandemic, a big surge in investments in 5G faster mobile data starting to be rolled out but also in fibre, fibre for the home, fibre for premises, fibre for  business, and those are just two of the latest technology trends that are driving investment through the industry.

I started in this industry in the early ‘90’s in the days of GSM being the next big thing and in telco, in telecoms, in technology, there’s always a next big thing but I think those waves of technological change will continue to drive investment in the industry and investment in network improvements and then in ancillary software and ancillary software that we provide to telcos as well.

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