Losses at Datalex likely to be 50% worse again than profit warning

Embattled software provider to the travel industry Datalex has warned that it plans to take a "significant" charge on its research and development (R&D) costs in 2018 accounts, which have been delayed for months as the group continues to deal with the fallout of accounting problems.

The company has also said it expected to post a wider loss than expected for 2018 and suspended its earnings guidance for this year and next as its acting chief executive, Seán Corkery, and recently appointed chief financial officer Niall O’Sullivan, carry out a “comprehensive review” of the business.

Shares in the company have been suspended since the start of May after Datalex missed a deadline to file figures before a regulatory deadline of the end of April.

The company had converted some $26.3 million of development costs into intangible assets as of the end of 2017, according to its most recent set of annual accounts. Software companies are allowed to do so under accounting rules as long as it is probable that the projects behind the costs will be a success.

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Some of the converted – or capitalised – costs in Datalex’s case are understood to relate to the group’s overhaul of German airline Lufthansa’s digital retail platform, which has been beset by project delays and cost overruns and prompted the Irish company to issue a profit warning in January.

The higher the level of R&D spend that can be capitalised in a given year, the less that needs to be written off and deducted against profits. This is a highly subjective area in the software industry.

Auditors

Auditors of Datalex's accounts in recent years – at PwC and EY – had drawn the attention of the company's credit committee to the high degree of judgment and estimation in determining how much of the company's R&D spend could be capitalised, or added to its capital base.

Datalex’s shares tumbled by almost 60 per cent in mid-January when the group said it would report an adjusted earnings before interest, tax, depreciation and amortisation (ebitda) of a loss of up to $4 million for 2018 – some $20 million off what stock market analysts had been expecting.

The company was forced to resort to a €10 million equity-and-debt funding line from its main shareholder Dermot Desmond in March to shore up its finances.

Datalex said on Friday that the loss would now be as high as $6 million.

The warnings related to an overly optimistic view of the services revenues it could recover from Lufthansa on its biggest-ever project.

The company also disclosed suspected accounting irregularities at the time. These were subsequently confirmed by a review carried out by PwC. These relate to the booking of service revenue on the Lufthansa project in the first half of last year.

Datalex came out with ebitda guidance for 2019 and 2020 in February, but this has now been suspended.

Datalex expects to report 2018 figures before an annual general meeting on September 17th.