Cerillion PLC (CER) — Investment Research Note

Executive summary

Cerillion is a specialised UK-listed BSS/OSS software vendor selling billing, charging and CRM platforms to telecoms operators (c.70 customers in c.45 countries), with a product-centric SaaS model that stands apart from the services-heavy, bespoke incumbents. Over FY20–FY25 revenue roughly doubled from £20.8m to £45.4m while adjusted EBITDA margin expanded from 27.9% to a remarkable 50.9%, driven by increasing software-licence mix and operating leverage; however, FY26 has disappointed, with a 14 Sep 2026 profit warning cutting revenue guidance to £46–48m (vs. consensus £52.8m) and EBITDA margin to 43–45% (vs. 45.2%) as licence orders and expansions slipped. The single most important point for valuation today is whether those orders are genuinely deferred — in which case the record £82.1m back-order book, £271m pipeline and 50%-margin software licence model make the de-rated shares cheap — or whether this is the start of a structural slowdown.

Fair value estimate

• Methodology: mid-cycle normalised earnings multiple cross-checked with EV/EBITDA, anchored to the £82.1m back-order book and £32.5m net-cash balance.
• Key assumptions: FY27 revenue recovers to £50–55m (back-order book conversion plus modest new licence recognition); EBITDA margin reverts toward 46–48% (vs. H1 2026 trough of 34.5% and FY25 peak of 50.9%); valued at 10–12x EV/EBITDA (reasonable for scaled vertical SaaS with net cash) and 18–20x normalised earnings.
• Mid-cycle EBITDA: £23–26m → EV range £230m–£312m + £32m net cash → £262m–£344m equity.
• Fair value range: 900p – 1,170p per share (implied market cap £265m – £345m).
• Mid-point fair value: ~1,035p / ~£305m market cap.
• Vs. current £206.8m market cap at 670p → absolute upside ~55% to the mid-point (34% to the low end, 75% to the high).

Sector context

• Sector: Technology — Software, specifically vertical B2B SaaS for telecoms (BSS/OSS category).
• Quality profile: well above typical peers — gross margins ~80%, adjusted EBITDA margin 50.9% at FY25 peak, net cash, mid-single-digit to mid-teens growth. The business is capital-light, with ~70% recurring/subscription-adjacent revenue and multi-year customer tenure. 2025-11 final results
• Listed peers: Amdocs (NASDAQ:DOX) and CSG Systems (NASDAQ:CSGS) are the obvious scaled telecoms BSS peers; closer-size UK comparables include Beeks Financial Cloud and GB Group (not perfect fits — few UK-listed vertical-SaaS peers of similar scale).

Investment thesis

1. Record back-order book and pipeline underpin a plausible FY27 recovery. Back-order book of £82.1m (+64% YoY) and new-customer pipeline at a record £271m provide multi-year revenue visibility; the £42.5m Omantel contract alone is the largest in the company's history 2026-06 interim results.
2. Fortress balance sheet and shareholder-friendly capital returns. Net cash of £32.5m against a £207m market cap, zero meaningful debt, consistent ~17% annual dividend growth across the period, and discretionary buybacks demonstrate durable financial health through the downturn 2025-11 final results; 2026-06 interim results.
3. Spectacular operating leverage will work in reverse during an upswing. Software licence revenue carries 80%+ gross margin; when revenue was growing 20–25% during FY21–FY23, adjusted EBITDA grew 31–81% YoY, with adjusted PBT rising 131% in FY21 alone 2023-11 final results. If the deferred FY26 orders simply slip into FY27, the margin snap-back could be dramatic.

Key risks

1. Delayed orders may not fully return — contract timing is now the central question. Management attributed the FY26 shortfall to "delayed or deferred" orders including "software licence expansions and upgrades" 2026-09 full-year trading update, but there is no visibility into whether these are competitive losses, budget cuts at telco customers, or genuinely timing-related.
2. Customer concentration and large-contract lumpiness. Customer No. 1 contributed £13.1m (29% of FY25 revenue) and Omantel will become similarly large; project-driven licence revenue creates significant period-on-period volatility, as the −38% H1 2026 EBITDA swing demonstrates 2025-11 final results; 2026-06 interim results.
3. AI substitution risk is real at the margin, even if management disputes it. Management devoted an unusual amount of H1 2026 narrative to defending why telcos won't in-source BSS/OSS using AI tools 2026-06 interim results, which itself signals that the question is being asked by investors and customers; competitive pressure from AI-assisted builds by larger vendors (e.g. Amdocs) is a tangible risk.

Operating leverage

Cerillion exhibits textbook high operating leverage, and the FY20–FY25 record is one of the clearer examples on AIM. Gross margins run 78–81% 2024-11 final results; 2025-11 final results with the bulk of the cost base — R&D, central ops, management — essentially fixed. Services revenue carries lower margins but incremental software-licence revenue drops almost entirely to EBITDA; this is why FY21 revenue growth of 25% translated into a 131% adjusted PBT increase and 1,240bps of EBITDA margin expansion. Working the other way, H1 2026 revenue fell 14% but adjusted EBITDA fell 38% and EBITDA margin compressed 1,320bps to 34.5% 2026-06 interim results — the same leverage, inverted. The implication for a 10–20% revenue beat above management's current £46–48m FY26 guide is substantial: at the FY25 incremental margin pattern, each additional £1m of licence revenue could add £0.7–0.9m to EBITDA, meaning a £5–10m revenue surprise would plausibly expand EBITDA by £3.5–8m (an uplift of 15–40% on the guided FY26 base). The strategic footprint (India + Bulgaria operations) means fixed-cost expansion is being spread across lower-cost geographies, suggesting incremental margin could even exceed historical norms as the business re-scales.

Value-trap signals

• Modest signal: FY26 is the first reported year of revenue growth decelerating meaningfully (from +12% in FY24 to flat/slightly down), accompanied by a visible profit warning.
• Modest signal: Louis Hall (CEO, founder) sold £20m of stock via secondary placing at 1,500p in June 2025 — just months before the de-rating 2025-06 proposed secondary placing. He is subject to a 365-day lock-up but the timing in hindsight was prescient.
• No evidence of: declining revenue trend (still growing), rising debt, dividend cuts (dividend +15% in H1 2026 despite earnings decline), aggressive accounting (clean audit reports, strong cash conversion historically), related-party issues, or regulatory threats. No structural value-trap signals identified.

Earnings vs. expectations

Across the five-year window, Cerillion built a track record of consistent beats: FY20 and FY21 trading updates flagged results "ahead of market expectations"; FY22's October trading update stated adjusted PBT would be "materially ahead" of £10.1m consensus (actual £11.9m); FY23's October trading update stated results would be "meaningfully ahead" of £14.3m consensus (actual £16.8m); FY24's October 2024 update flagged results "comfortably ahead" of £17.9m consensus (actual £19.8m); FY25 trading update was "slightly ahead" of consensus £20.5m (actual £21.8m). This long sequence of beats broke abruptly in September 2026 with a material miss (FY26 revenue £46–48m vs. consensus £52.8m, EBITDA margin 43–45% vs. 45.2%) 2026-09 full-year trading update. Pattern: five consecutive years of modest-to-meaningful beats, broken by one material miss driven by order deferrals.

Conviction: 3 (moderate)

Anchors: (a) exceptionally clean, well-disclosed financials across five years with consistent definitions; (b) proven and durable margin structure makes mid-cycle normalisation estimates well-grounded; (c) record back-order book provides a tangible floor on near-term revenue.

Limiters: (a) the FY26 profit warning materially changes the trajectory and we cannot yet verify whether deferred orders are truly timing-related or indicative of a structural slowdown; (b) telco customer buying behaviour and macro backdrop in FY27 is the single swing factor on fair value, and we have little visibility beyond management's commentary.