Datalex’s lat­est scary up­date of­fers glim­mer of hope

The Irish Times - - Business Today - Joe Bren­nan

Datalex, the travel re­tail soft­ware provider to air­lines that’s be­ing kept alive with the sup­port of Der­mot Des­mond, warned at the end of April it was de­lay­ing the pub­li­ca­tion of its 2019 re­sults by up to two months as it availed of re­port­ing le­niency from reg­u­la­tors amid the Covid-19 cri­sis.

It picked the lat­est pos­si­ble land­ing slot, re­leas­ing the re­port at 5.26pm on Tues­day, the cut-off date.

The re­port was noth­ing like the hor­ror story that was Datalex’s 2018 tome, which recorded a net $47.2 mil­lion (¤42 mil­lion) loss as a new man­age­ment team, hired to clean up the mess after the dis­cov­ery of ac­count­ing ir­reg­u­lar­i­ties, went through the books with a dose of salts. But it still no easy read for in­vestors strapped into a com­pany where shares have been sus­pended from trad­ing for more than a year.

The busi­ness, whose soft­ware is used for book­ing flights, seats and bags and al­low­ing car­ri­ers to sell on car, ho­tel and in­sur­ance deals, posted a $12.1 mil­lion loss last year, as it was hit by $8.3 mil­lion of noisy ex­cep­tional items such as re­dun­dancy costs and ex­penses for reg­u­la­tory in­ves­ti­ga­tions stem­ming from the ac­count­ing scan­dal.

They also in­cluded a $2.9 mil­lion charge against ser­vices to Lufthansa, with which it is locked in a le­gal dis­pute after the Ger­man air­line can­celled a con­tract to over­haul its e-com­merce of­fer­ing. The whole project had gone way over bud­get and missed a se­ries of dead­lines by the time Lufthansa lost pa­tience late last year.

Evap­o­rated in re­cent months

Datalex also re­vealed it faces a $4 mil­lion cash short­fall for the next 12 months un­der fore­casts that Covid-19’s ef­fect on air­line cus­tomers would see its trans­ac­tion vol­umes, which evap­o­rated in re­cent months, re­cov­er­ing to only 60 per cent of 2019 lev­els in the fourth quar­ter – and re­main at that level for the first half of 2021.

The pre­dic­tion also sees ser­vices rev­enues from new projects slump­ing, as launch dates are pushed out and air­lines hold off of­fer­ing new busi­ness un­til early 2021.

An ad­verse case, how­ever, would see the cash gap widen to $8.4 mil­lion, ac­cord­ing to the re­port.

Datalex’s new au­di­tors, Deloitte, were un­able to of­fer an opin­ion on the 2019 ac­counts as they had no way of stand­ing over the com­pany’s open­ing balance sheet for the year. That’s be­cause the pre­vi­ous au­di­tors, EY, had re­fused to sign off on the 2018 fig­ures.

Mean­while, Datalex said it would not be in a po­si­tion to meet a sched­uled Novem­ber re­pay­ment of $13.9 mil­lion of prin­ci­pal and in­ter­est to Des­mond, the com­pany’s main share­holder, who pro­vided it with emer­gency loans last year.

The board would not have been able to pre­pare the ac­counts on a go­ing-con­cern ba­sis – es­sen­tially vouch­ing for the com­pany’s abil­ity to re­main in busi­ness for at least 12 months – had Des­mond not stepped for­ward again, agree­ing the de­lay get­ting his money back for a fur­ther year, and of­fer­ing a fur­ther ¤10 mil­lion to keep the show on the road, if needed.

But there are glim­mers of hope for in­vestors who be­lieve that the air­line in­dus­try has any fu­ture.

For starters, the re­port showed that two new top ex­ec­u­tives, Sean Cork­ery and Niall O’Sul­li­van, had man­aged to sta­bilise the un­der­ly­ing busi­ness of the course of last year, be­fore Covid-19 hit. While the com­pany re­ported an earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion short­fall of $2.8 mil­lion for the first half of 2019, it swung into a profit of $500,000 for the year as a whole.

Datalex was also able to slash costs last year – cut­ting 104 jobs, or al­most 40 per cent of its work­force, as well as cut­ting con­trac­tors and con­sul­tants by a sim­i­lar amount – while keep­ing its rev­enues steady at

$45 mil­lion.

The com­pany also man­aged to get some key cus­tomers – in­clud­ing Aer Lin­gus, low-cost US car­rier Jet­Blue, Latin Amer­ica’s Copa Air­lines, and Philip­pine Air­lines – to pro­vide tes­ti­mo­nial blurbs to pep­per the an­nual re­port.

“We know that 2019 was a year of change at Datalex, it was also a year of great part­ner­ship. At Jet­Blue, this mat­ters,” said Eash Sun­daram, chief dig­i­tal and tech­nol­ogy of­fi­cer Jet­Blue. “We stand be­hind Datalex.”

‘‘ Air­lines re­cov­er­ing from the im­pact of Covid-19 will be look­ing more than ever to com­pa­nies like Datalex to help them find ways to cut costs and boost their an­cil­lary rev­enues

Some­thing like this should or­di­nar­ily be dis­missed as bland mar­ket­ing speak. But that’s a big pub­lic en­dorse­ment from a ma­jor client of a com­pany re­cov­er­ing from the biggest ac­count­ing scan­dal on the Ir­ish stock mar­ket for more than a decade.

Air­lines re­cov­er­ing from the im­pact of Covid-19 will be look­ing more than ever to com­pa­nies like Datalex to help them find ways to cut costs and boost their an­cil­lary rev­enues.

Cash gen­er­a­tion

Datalex, which saw its cash lev­els slump by al­most two-thirds to $3.1 mil­lion last year, es­ti­mates it will be gen­er­at­ing cash from by Novem­ber 2021, when Des­mond’s loans fall due.

The com­pany is look­ing in the mean­time to raise eq­uity to re­pay the Des­mond loans, pos­si­bly avoid hav­ing to rely on the bil­lion­aire for the ad­di­tional ¤10 mil­lion he’s pledged, and se­cure some ad­di­tional work­ing cap­i­tal. We’re talk­ing in the re­gion of ¤25 mil­lion – more than a third of Datalex’s mar­ket value be­fore its shares were sus­pended in May 2018.

But first, it must se­cure the go-ahead from Cen­tral Bank and Euronext Dublin to se­cure a re­sump­tion of share trad­ing.

“We be­lieve that Datalex has a sig­nif­i­cant mar­ket op­por­tu­nity and it is time for us to show not only that we can sur­vive, but that we can thrive,” Cork­ery con­cluded in the an­nual re­port. Will Des­mond’s pa­tience be re­warded?

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