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ServicePower Technologies: upwardly mobile

Published: 13:39 17 Dec 2015 GMT

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ServicePower Technologies: the (work)force is strong in this one

The secret of successful investing, as in comedy, is timing, and now could be a good time to have a fresh look at ServicePower Technologies (LON:SVR).

The shares of the mobile workforce management software solutions provider took a knock in mid-December when the company said it had spent more than envisaged on information technology costs and its transition to a Cloud-based model, while some licence sales expected to complete in 2015 are now expected to be signed in 2016 instead.

Speaking to Proactive Investors, chief executive officer (CEO) Marne Martin explained that the increased expenses were partly as a result of a change in its accounting procedures and partly as a result of a switch to the Software as a Service (SaaS) model.

In general, the market likes the SaaS model, which makes life easier for customers and makes them more likely to renew; on the other hand, switching from an upfront licence fee system usually means that the service provider has to forgo those juicy (but lumpy) one-off licence renewals in return for the less volatile drip-fed SaaS revenues.

ServicePower's interim results in September revealed that 81.5% of first half turnover was recurring, with 71% of customers now using the SaaS model, so the clients have certainly voted with their wallets.

As an investor, if you catch the share price after the market has reacted to the drawbacks of the switch to SaaS and before it has twigged the benefits, you can end up quids in.

Likewise with the issue of deferred licence sales. This is a perennial problem with software companies, and is more noticeable with smaller operators such as ServicePower.

The crunch decision is whether you reckon those licence sales in the pipeline are lost forever, or merely postponed.

CEO Martin explained that the company, which historically has been very Anglo-American focused, had set itself ambitious targets to expand geographically this year and, as often happens, moving into new markets has taken longer to achieve than expected.

She is adamant, however, that the company will expand its geographic base, and along with the increased visibility provided by the transition to the SaaS model, this will serve to make ServicePower's revenue less volatile.

Globally, the workforce optimisation software market was worth a staggering US$1.3bn in 2013, according to market research outfit Gartner, and has grown at a compound annual rate at 13%.

The reasons why are not hard to discern. ServicePower's range of software is proven to increase productivity, reduce costs and – not to be underestimated this – make life easier for all concerned.

Such a market is sure to attract a lot of competition, and ServicePower has not been immune to the need to offer inducements to customers to head off rivals, but as research house GECR points out, “the relatively high costs of software and field service management industry experts, as well as a sufficiently high required level of marketing spend, make it challenging for new players to enter the market”.

“Increasing competition, changing customer dynamics and reduced margins are driving field service organisations to implement technology that will improve their competitive edge and increase productivity, efficiency, and customer satisfaction," GECR notes.

ServicePower's software supports clients spanning 27 different industries, and it covers the complete life cycle of a call-out.

It is not technology that is likely to be supplanted by the trend towards all things mobile; far from it, in fact, with the mobile devices revolution playing right into ServicePower's hands.

Its recently launched NEXUS FS mobile workforce product created a new sales channel for ServicePower, since it has been designed to be white labelled and sold in conjunction with or separately from a full workforce management deployment.

Research house Equity Development, which has an 11p target price for the shares (currently trading around 2.75p), reckons the product is potentially “game changing” technology.

“We believe this functionality could substantially improve the firm’s competitive position across the industry, and perhaps even lift its classification from ‘Visionary’ to ‘Leader’ within the Gartner's influential Magic Quadrant for Field Service Management,” Equity Development said.

Given the barriers to entry, any move by an existing software giant is perhaps more likely to be through acquisition, and GECR notes that sector peer ClickSoftware was recently acquired for US$438mln, which put an enterprise value – essentially market capitalisation adjusted for debt or cash – on the acquired company that was 3.1 times annual sales, and was a 40% premium to ClickSoftware's share price prior to the announcement of the bid.

ServicePower's revenue for the current year is forecast to be around £13.3mln, so using the ClickSoftware acquisition multiple of 3.1 that implies a take-out price for ServicePower of £41.23mln; ServicePower's market cap is currently £6.0mln and it expects to end the year with net cash of £1.4mln.

As ServicePower's American CEO might say, you do the math.

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