Return to Profit For Major Company
As I have said before in this blog, my motivation in writing it is partly to communicate with small investors who miss out on the regular contact with the company which institutional investors expect, but I am also aware that it is widely read by clients and prospective clients as well as others.
We announced today that Lombard Risk had returned to profitability in the first half of this financial year and had grown its revenues by 34% against last year. We never make formal forecasts, but I can only say that we are going to try incredibly hard to ensure that this is the start of a trend, and that we have very ambitious plans for growth. Three of our directors bought shares last month. Unfortunately because I own 49.1% of the company (which is significant under UK takeover rules because it is more than 30% and less than 50%) I cannot buy a single additional share without making a takeover bid for the whole company. But if I owned 50.01% I could buy without restriction. One has to wonder who such a rule benefits – certainly not small shareholders who might see a higher share price as a result.
We are sometimes taken to task by large and small shareholders alike for not announcing enough news to the City. Fair comment perhaps as we have won 33 UK regulatory contracts alone in the last 10 months. With a new UK based Marketing Director this is something that we will address, but not always through regulatory RNS updates. If we close a deal that is very large and material, then under London Stock Exchange rules we have to announce this very quickly. However many of our deals are quite small (for example a regulatory deal might be under ?100k) and it would be unusual to announce such a deal on its own to the Stock Exchange. We will however be issuing more press releases, and if any of our shareholders or other stakeholders want to get these pushed to them they can either e-mail me personally to be put onto a distribution list for press releases or I would recommend setting a news alert in Google for “lombard risk” – don’t forget the inverted commas if you go this route since otherwise you will get lots of noise.
One topical issue for us is our R&D spend. Industry benchmarks show that large companies spend around 15% of their revenues on R&D. We have historically spent slightly over 30% of revenues on technology, and the question has arisen what is really R&D out of that (I believe slightly under half) – and more to the point how consistent are companies in how they describe their R&D spend. We have never capitalized a penny of R&D ourselves so that in effect tens of millions of pounds of investment appear in our balance sheet as zero. But under IFRS we may have to one day (not this year though), and many of our peers do. So when analysts are comparing the profitability of comparable companies, how rigorous are they in ensuring they are comparing like with like. I am quite gratified that this question has foxed even some of the top analysts in the IT industry, and I am hoping that the question will stimulate some useful research.
Last but not least, we really do seem set for a large amount of further regulation over the next few years, but it should mostly be better regulation. It was very refreshing recently to hear Lord Turner, Chairman of the FSA, saying on BBC Radio 4 that the financial crisis had been partly due to a failure of regulation. So it wasn’t just the bankers on high bonuses, or the politicians who thought they had abolished the business cycle! Sanity prevails at last if everyone admits they were part of the problem. The next thing we need to have admitted publicly is that Government anger with bankers is not because they lost money on TARP or on buying bank shares (because in fact they will probably make money on both) but because the real problem has been that governments were happy to collect ever increasing taxes from banks and bankers without asking why their profits had gone up so much or what the risk to their country’s budget would be if bank profits fell and the tax take from banks and bankers were to fall. Now that this fall in profits has happened and banks and bankers have ceased to be the goose that lays the golden tax egg, there is a resultant huge hole in public finances with all the unpopularity that brings to politicians. We continue to live in interesting times.
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