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Instem flags potential after converting large customer to SaaS model
Instem, a provider of IT solutions to the life sciences market, has signed up "one of the world's largest" chemical companies to its software-as-a-service product suite, Instem Cloud.
Annual recurring revenue from this client, which has been a customer for 12 years, will apparently immediately jump more than 40%, the AIM-listed company said.
As Instem shifts more clients to this SaaS model, it should see a continued increase in earnings visibility and expand operating margins.
Noting that in the 12 months to the end of last June, the company had £3.4m of existing SaaS revenue and £9.6m of non-SaaS recurring revenue, chief executive Phil Reason said there remained a "significant opportunity" to achieve material increases in SaaS based revenue recognition over the next few years.
"The strategic process of migrating clients from on-site installations to our market leading SaaS model continues apace. This latest agreement with a leading chemical client sees Instem deploy its Provantis product from its own secure cloud services environment, as opposed to the client's own data centre, thereby reducing their cost of ownership while improving Instem's software deployment and management efficiencies."
Reason observed that the regulatory life sciences industry has been increasingly transferring over to SaaS platforms in recent months as initial concerns over data security were overcome in what is generally a conservative industry.
He felt that with the European Union's GDPR data regulation coming into effect in May, the company should see strong further growth in SaaS revenue.
Shares in Instem surged 25% to 235p on Wednesday morning, their highest level since late 2016.
"The conversion of an existing long-standing client to SaaS is the start of what will hopefully become an accelerating trend as clients become increasingly comfortable with cloud-based deployment," said analysts at N+1Singer.
Singer said the uplift to recurring revenues would be "materially earnings accretive" if Instem can convert the £10m+ of traditional annual fees to this model.
The broker make no changes to forecasts at this stage, but "remain very encouraged by Instem's direction of travel", following on from the strong end to FY17 and the signing of a large services contract in January.