As many investors will acknowledge, the software sector can be something of a minefield in terms of hitting on a company with the ability to truly deliver.
Many company’s take years to build on the business front, where too often, ongoing investment impacts on an ability for the recognition of real and meaningful profits.
One company that really stands out for me in this space though and which looks a decent proposition is Netcall, (NET) which although standing on a premium rating, appears worthy of a closer look.
It is one that I have covered previously, where I have spoken with management over the years, which has seen the business grow and generate significant cash.
Having previously been invested and electing to take profit, I have recently bought back in with a longer-term view, given the prospects for ongoing growth and delivery look firmly intact.
NET, based in Hemel Hempstead is firmly entrenched in the customer engagement software space, which sees it working for and with some of the biggest blue-chip names across the UK.
These span numerous sectors and include majors, such as the NHS, Legal & General, Bovis Homes, not to mention a significant number of both City and County Councils, all of whom use NET’s services.
The company’s flagship Liberty software platform boasts highly intelligent automation that ultimately assists customers in providing and delivering faster and improved services to their own clients or end customers.
The offering, supported by other aspects of the operation, enables the likes of insurance companies to provide a smooth customer journey, be it through claims or investment transactions, which sees an enhanced communication process being administered.
This could be via various channels such as a text message or email, which provides up to date information, thus negating the more historic and far more protracted processes.
Across various NHS Trusts, NET has been and is deeply involved in assisting App development and deployment, which is a fast-growing area.
This, for an example, sees the likes of out-patients receiving speedy confirmation of appointments and referrals, thus, ensuring a faster and far more desirable outcome than previous forms of notification.
Additionally, its services for housing societies or developers enable their customers to engage, providing an ability to report a maintenance issue, which in turn is replicated with an appointment being booked.
Much of NET’s software and services have been evolving for many years and along the way, in keeping with others in the sector, it has taken significant investment providing for both organic and acquisition driven growth.
Today, the company appears to be in a very good spot, where the markets it serves are only going to continue to grow and expand, which whilst providing for new business opportunities, importantly also provides for a building of notable recurring revenue.
NET has in place what is described as a clearly defined roadmap, which whilst it drives faster application development, should also see a reduction on the intensity of capital as margins drive northwards.
The interim results that were released back in March of this year made for positive reading and saw revenue increase by 8% to £18.9m which returned a 61% jump in pre-tax profits to £3.87m.
Perhaps most notable, was the group cash performance which came out at a registered £28.6m against the prior periods £20.4m and has led broker Singer to forecast a marked increase for next year to £34m.
The next update regarding the current trading and the full year prospects is due late next month, where, if firmly on track to at least meet market expectations I am hopeful of a bounce off of the current 87p mark.
Although that price is above the 52 week low point of 70p, it is some way below the high of £1.12p achieved and significantly off of the consensus figure of £1.35p from brokers Canaccord and Singer.
CEO James Ormondroyd was happy to chat with me yesterday, in order for me to hear how things are going.
In recent months there has been news on a further notable contract win, which followed on from an acquisition announced in January and that was my starting point for our conversation.
That purchase concerns Skore labs which had an initial consideration of £2m rising to £6.2m depending on earnouts being met.
Speaking of the buy, Ormondroyd said that what Skore brings is a cloud-based mapping offering, where the logic of that is its strengthening NET’s transformation tool kit. “One of the first things you do when you decide to do automation is that you try to understand what the processes are that you are trying to automate,” said the CEO. “It is very nice, slick and easy to use, that suited our ethos of having a good looking and simple functionality.”
Ormondroyd added that the acquisition provides them with cross selling opportunities which will work both ways and with Skore bringing with it some 100 customers it looks like a good fit to support ongoing growth. “Its customers are varied and across a variety of sectors and it has some serving healthcare and government, where we know there is potential for a lot of cross selling and a channel opportunity as well.”
Since bringing it on board, NET has already successfully integrated it into the Liberty platform which happened just last month and it has been re-labeled as Spark. Although early days, it is already making its mark with Lancashire County Council planning to apply it, enabling teams to run collaborative workshops and driving the speeding up of processes and conversations.
“The first cross sales have already happened” added ormondroyd “and it has gone really well without hiccups.”
Aside from the Skore purchase, more recently there has been news of a highly significant contract renewal of £7.6m over five years, which the CEO was happy to expand on.
“This was with a transportation company who started life with us four years ago with a single application and with around a hundred thousand pounds per annum.” From there, further business has been won, where the customer in question employing many thousands of employees has created its own kind of digital factory to support its business.
NET has been a key part of that enablement, being on hand to assist in driving that, where prior to the latest deal the customer was using in excess of thirty applications. “Some of those applications we helped to build” added Ormondroyd, “some they actually did themselves and they have added tremendous value.
It then came to a new contract period and because of the application issues around health and safety and field service they wanted to commit for a new five-year period, so we were happy to do that.”
That has resulted in a new fee of around £1.5m per annum, which arguably serves to underline both the stickiness and long-term value of NET’s offerings to major end users.
The company now offers an extensive range of services and applications with perhaps one of the most interesting being the core patient hub as touched upon earlier.
Ormondroyd was happy to expand further on this where he said, “it saves a lot of money, where patients can manage their bookings and we are now up to millions of unique patients across the customer base saving tens of millions of pounds for the NHS.
A combination of better utilisation, results in fewer missed appointments and also a significant saving in just not having to pay for letters.”
It isn’t just about the patient engagement portals though, as the CEO told me that in April, NET launched a diagnostic bookings portal enabling an easy to manage booking system which involved a whole different set of workflows. They also have a new product titled Patient Relationship Management (PRM) that was also launched during April, which provides for an operator in a booking centre to view everything on hand when a patient makes contact, rather than having to undertake a search as has been the norm.
As things stand, with loan notes now paid off and a significant net cash position, the company looks well placed to further deliver and execute on an already proven strategy.
Speaking on the cash front, Ormondroyd said that the capital policy at present is to pay a dividend to shareholders as a percentage of earnings, whilst retaining sufficient funds for further M&A opportunities alongside working capital.
Although NET has undertaken acquisitions over the years and the CEO points out that he isn’t a deal junkie, he is very keen to undertake a few more.
The company knows exactly what type of technologies they are looking for, he explained and which one’s make sense for the business, so it looks as though investors will see further strategic and earning enhancing deals ahead, which pleasingly can be funded from NET’s bulging cash pile.
And looking ahead, Ormondroyd says that across healthcare, financial services, insurance along with utilities and logistics there are plenty of opportunities for growth, where he pointed to around three thousand target accounts purely in the UK at present.
The net retention rate is good, where combined with the ability to cross sell and a now 75% level of recurring revenue, then the company is arguably one of the better players across the sector.
But the ambitions going forward do not appear to be confined to the UK, as Ormondroyd explained, “what we are working on, but haven’t cracked yet, is working with some partners and getting some more exposure internationally, which I think will provide a little more excitement. It seems like some of those commonwealth markets like Canada, Australia and N.Zealand, have relatively similar problems in those territories, because the constitution was set up similar to how the UK was set up all those years ago. We think we can solve those similar problems and so what we are exploring is partnering for that.”
Following those strong Interim results, Singer is currently forecasting full year revenues of £39m with adjusted pre-tax profit of £6.7m giving EPS of 3.1p. Although that equates to a PER of 27, it is worth taking into account the impressive cash generation at NET and the substantial and growing cash pile.
More will become clear no doubt when next month's update arrives and I remain upbeat on the prospects for future upside.
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