The Citadel Group Ltd (ASX: CGL) share price has crashed 35% in early trade after giving a trading update.
Citadel is a software company that manages information so that users can access what’s needed anywhere at anytime. Most of its revenue are derived from long term managed services and software as a service.
Why Citadel Shares Are Down Heavily
Citadel has warned about FY19 expectations. Full year revenue guidance is in the range of $97 million to $104 million and the gross profit margin is going to reduce to 46%.
The company also gave EBITDA guidance for a range of $22 million to $24 million (click here to learn what EBITDA means).
Citadel said that there are two reasons for this negative update.
The first was that customer-controlled project extensions, which were expected to commence during the second half of FY19, but now aren’t expected to start until the first half of FY20.
The other reason was that Citadel is not experiencing the same fourth quarter growth in FY19 in client spend that has occurred in previous years.
The shift from higher margin consulting and managed services business to software as a service (SaaS) was the cause of the profit margin decrease, but SaaS is expected to scale in the medium term to a higher margin.
Citadel said that the company is shifting to become a global software business under its “Citadel 2.0” strategy which will mean a period of transition. However, this strategy, with new clients in Australia and overseas, will set the company up for future success.
The Citadel Board said it expects to see strong growth momentum in FY20 across all areas of the business.
Is Citadel A Buy?
We won’t truly know until the FY19 report (and FY20 report) is released to know whether this sell-off is overdone.
However, whilst the sell-off may worsen in the short term, there’s a fair chance the company’s confidence could be well-placed if it does become a growing global SaaS provider. But, I’d at least wait to see if the share price is going to fall further today and in the coming days.
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