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Credit Suisse downgrades Diligent to neutral ahead of new product spending

03 Mar 2015

Diligent Board Member Services's plans to spend up ahead of its new product has seen the governance software developer's stock downgraded by Credit Suisse's local analyst.

The stock has been cut to a 'neutral' rating from a previous 'outperform' by First NZ Capital research analyst, James Schofield. Yesterday, the New York-based company announced profit rose 43 percent to US$8.59 million in the year ended Dec. 31, as sales climbed 28 percent to US$83.1 million, while revealing plans to launch a new product - DiligentTeams - in the third quarter of this year.

Further details on the new product were "opaque" due to commercial sensitivity in a competitive environment, Schofield said in his report, making it difficult to "ascribe value to the opportunity at this juncture".

"Regardless of how well the DiligentTeams does eventually, there will be a clear ramp-up of expenses, with no revenue flows from DiligentTeams," Schofield said. "We believe this product will need material dedicated resource to convince potential clients of what is a dramatically different way of professional teams working and collaborating."

Chief executive Alex Sodi told investors that the new product will let companies use the firm's workflow and security software to improve collaboration. It will be separate, but complementary, to the BoardBooks tool, Sodi said.

As a result of the new product rollout, Diligent will increase spending on research and development, lifting staff numbers by about 30 percent. The company flagged capital expenditure in 2015 will double to about US$14 million.

The company is in a transition period as it invests ahead of revenue from the new product "which in our view leads to heightened earnings risk", and First NZ's Schofield, who expects growth to slow and margins to contract.

Diligent said yesterday it expects sales growth of up to 19 percent in 2015 to between US$97 million and US$99 million in 2015, as it attracts customers to its BoardBooks service, though further appreciation in the US dollar could crimp earnings.

First NZ's Schofield forecast 2015 revenue of U$101 million, down slightly from an earlier forecast of US$101.7 million. Schofield also revised down his expectations for coming full-year earnings before interest, tax, depreciation and amortisation to US$24.6 million, from US$25.9 million.

The software as a service firm is still recovering from the setbacks of a series of administrative blunders that saw its share price plunge and led to two censures by the NZX. It has since hired a new finance chief and over-hauled its processes as it works to restore investor confidence.

Shares of Diligent fell 2.5 percent to $5.80, below the analyst's target price of $6.35, and has gained 13 percent since the start of the year.

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