Infomedia Confident Turnaround Is Happening

This story features INFOMEDIA LIMITED. For more info SHARE ANALYSIS: IFM

The loss of a major customer, technology delays and macro and forex headwinds have led Infomedia to downgrade guidance, but does this ruin the turnaround story?

-Infomedia has downgraded FY25 guidance
-Loss of major SimplePart contract
-Dealer management system rollout delays, forex and macro headwinds
-Analysts for the most part remain confident

By Greg Peel

Infomedia ((IFM)) is a technology company developing and supplying electronic parts catalogues, service quoting software, and e-commerce solutions for the automotive industry worldwide.

The company has a long history of profitability from its core businesses and has delivered moderate growth, noted Moelis when initiating coverage of the stock a week ago.

Heightened auto market competition (driven by new brands, particularly from China) and a growing fleet of “connected vehicles” should be growth opportunities for Infomedia. Unification of databases and integration of systems will unlock the strategic value of its portfolio, allowing innovation of new products and services.

Infomedia has a strong incumbency supplying electronic parts catalogues (Microcat) and service workflow software (Superservice) globally, noted Moelis. It has long established and broad relationships with car manufacturers (OEMs) and dealerships which earn recurring revenues. From this base, the company is launching into new business opportunities in data analytics and insights (Infodrive) and e-commerce (SimplePart).

Moelis initiated coverage with a Buy rating and $1.88 price target.

Beware the Churn

Infomedia’s share price recently peaked over $1.80 in late August post the company’s FY24 result. Five years earlier, the stock was trading over $2.00. Analysts agreed, in responding to the FY24 result and FY25 guidance, Infomedia’s turnaround story was on track.

Management did nevertheless warn at the FY24 result release it was at risk of losing a major contract for its SimplePart business, but did not include a loss in its FY25 guidance.

This week Infomedia announced it had lost the contract, affecting a -$4m cut in annual recurring revenue (ARR). SimplePart generated $19m in revenue in FY24. Management also revealed the rollout of the integration of the company’s dealer management system (DMS) has been delayed due to a cybersecurity incident that prompted Infomedia’s partner to embark on a technology upgrade. This effectively pushes out ARR growth as the delay impacts Infomedia’s ability to roll out products to dealerships which use that particular DMS, RBC Capital notes.

And management flagged headwinds from foreign exchange and macroeconomic risk.

As a result, FY25 revenue guidance has been downgraded to $142-149m from $144-154m provided in August.

The -$5m reduction of the upper end of the guidance range ($149m from $154m) indicated “fresh news” for Moelis; the company faces a weaker revenue environment than previously guided. Management commentary highlighted “changing macro-economic conditions have contributed to a more conservative view around the ability to mitigate the impact of a customer churn event“.

Moelis estimates the outlook for Infodrive accounts for this more conservative guidance, while Infomedia’s parts and service subscription revenues are less sensitive to macro-economic conditions.

Still on Track?

The FY25 guidance cut is unfortunate, suggests Shaw and Partners, but not thesis-changing. FY25 revenue is still expected to grow 1-6% year on year despite macro headwinds, the loss of the SimplePart customer, DMS integration delays and forex headwinds. Ex of the irregular customer churn event, Shaw forecasts underlying ARR growth of 8% in FY25, which is only marginally lower than FY24 and FY23 (9%). Infomedia’s cash margins are expected to remain flat on FY24 (23.4%), which is up materially from the 20% delivered in FY22.

While the FY25 guidance cut is unfortunate, Shaw still believes that the turnaround remains on track and that Infomedia’s key metrics are heading in the right direction.

Management reiterated the margin commentary provided at the FY24 results, Moelis notes, stating  “The Company expects margins to be stable as it invests in its Strengthen Phase“. The company typically refers to margins as Annual Recurring Costs versus Annual Recurring Revenue.

Infomedia sees FY25 as a “Strengthen Phase” for the company, ahead of reaching “Scale Phase” in FY26.

The trading update included a statement “Focus for FY25: Continued to strengthen the business and prepare for the Scale Phase” through FY26 and ongoing. The Scale Phase has previously been described as targeting double-digit revenue growth and revenue growth exceeding cost growth by three percentage points per annum. This would be material for Infomedia, Shaw notes, and is not something baked into expectations.

Shaw still believes a successful turnaround would drive upgrades to both its own forecasts and consensus. Turnaround success is not factored into the current price either, with the share price taking another dive after management’s market update.

Operational deleveraging is difficult, but Moelis estimates the margin outlook is being supported by the resilient Microcat and Superservice divisions.

In short, says Bell Potter, the churn event and downgrade in guidance is not ideal but it does not significantly change the outlook.

Targets Down, Ratings Unchanged

Infomedia is currently trading on an FY25 enterprise value to cash earnings multiple of 13.1x, which makes it one of the cheapest software stocks in Shaw and Partners’ coverage universe.

The company is growing organically (mid-high single digits), is profitable (margins above 23%) and has a strong balance sheet (net cash $70m). Historically, the stock has traded on an average multiple of 19x and at times as high as 30x.

This suggests turnaround success is not factored in at current levels, and that even if the stock delivered in line with its historical performance, that there would be upside, Shaw suggests.

Shaw has lowered its revenue and cash earnings forecasts and price target to $2.10 from $2.20. The broker retains a Buy (High Risk) rating.

Bell Potter has reduced the multiples it applies in its PE ratio and enterprise value/earnings valuations from 30x and 11.25x to 27.5x and 10x on the back of the modest downgrade and flagged headwinds. The net result is an -11% decrease in Bell Potter’s target to $1.78, which is greater than a 15% premium to the share price, so the broker maintains a Buy recommendation.

Downgrades are never welcome, says Moelis, and often occur in sequence. Achieving a stronger second half FY25 result will be necessary for Infomedia to rebuild confidence. Moelis’ target reduces to $1.83 from $1.88, mostly due to lower earnings in FY25. Moelis retains a Buy recommendation, supported by the valuable legacy parts and service businesses.

Less sanguine is RBC Capital, who cites limited potential near-term catalysts. Macro headwinds are contributing to longer sales cycles, no margin growth near term and limited organic growth, warns RBC.

RBC has cut its target to $1.65 from $2.00 and retains a Sector Perform rating.

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