UNIT4 continues transformation as Financial Force grows 80 percent

UNIT4 has released sketchy details of its Q3 results. From the blurbs:

• Total Q3 revenue up 5% on Q3 2012 to €116.0 million;
• SaaS & subscription revenues increased by more than 40% to €17.6 million and remains larger than traditional license revenue;
• FinancialForce.com, the cloud applications company in which UNIT4 is the majority investor, continued to perform strongly with SaaS revenue growing close to 80% compared to Q3 2012;
• Product (license) revenues decreased by 3% to €16.6 million;
• EBITDA grew 16% to €23.7 million (Q3 2012: €20.5 million), in spite of increased investment in FinancialForce.com;
• Excluding FinancialForce.com, EBITDA increased 17% from €22.6 million in Q3 2012 to €26.5 million in Q3 2013, representing an EBITDA margin of 23.7%;

I can't say I'm enamored of these results in large part because UNIT4 doesn't publish a profit and loss account or balance sheet on these quarterly releases. That means we have very little insight into the IFRS and non-IFRS numbers. Regular readers will know that contrary to many analysts, I consider non-IFRS results to be a fiction. In UNIT4's case, it refers to EBITDA, which in laymans terms means profit is stated before major chunks of cost that impact the P&L are taken into account by an acquisitive company.

Putting that personal beef aside, it is interesting to note two things:

First, UNIT4 seems to be maintaining margin despite moving to a subscription based model. This should not be confused with 'cloud' as generally understood although UNIT4 often jumps on the market bandwagon.  Instead, UNIT4's subscription model should be seen in the context of shared services, mostly in public sector, where it has played strongest. This is a credible performance although management notes that this may not continue going into the seasonally heavy final quarter.

Second, FinancialForce continue to gain momentum albeit from a modest base, despite sucking negative margin of around €1.8 million in the latest quarter. Again from the blurbs:

Chris Ouwinga, founder and co-CEO, said: “Growth has been good across the group, but we are particularly excited to see great traction in FinancialForce.com. Given the opportunities in the market, we will continue to push for very strong growth in the business, even if that pushes the point where we reach profitability further into the future.”

The significance of this statement should not be under estimated. For the first time, the company has effectively said: "To hell with it, we're going to throw money at FinancialForce in order to get market share." I like that statement but...I wish UNIT4 would put more meat on that particular bone. For example, how much are we talking about? Which industry segments are working out best? What does the development roadmap look like?

I suspect we'll get more answers as we head into Dreamforce. FinancialForce has a customer day in that timeframe during which I hope to learn more about progress.

Disclosure: FinancialForce is a premier partner and is a personal consulting client on product topics.