smartFOCUS: software that drives revenues

Just over a decade ago stockmarkets were awash with software companies whose share prices had reached their peak as the dot.com boom turned to bust. Since then the software sector has not been anywhere near the levels it reached in late 1999.

But after the recent financial crisis saw the FTSE Software sector (an index largely composed of firms that develop business and financial software) tumble to below 350 points in late 2008, that index recovered to more than 750 points earlier this year.

With fears of a double-dip recession stalking the markets it will certainly be a long time before we see a real bubble in the software sector, but one software business that appears to be doing well amid all the gloom is Alternative Investment Market-quoted smartFOCUS Group (AIM:STF).

Since Proactive Investors first profiled the firm in May 2009, its shares have more than doubled (rising from 5.25 pence to 12 pence at the time of writing).

This share price increase has been driven by improving results at the business, which in turn have been given a boost by changes to smartFOCUS’s business model that began last year.

smartFOCUS is a business software developer that supplies ‘intelligent marketing’ systems that aim to deliver relevant, personalised and timely communications to a brand’s customers through different channels, e.g. print, e-mail, mobile phones and the Web.

The firm’s clients include well-known brands such as Easyjet, Harrods, Hilton, Manchester United, Rabobank, Société Générale and Sony. In total it has more than 700 clients around the world.

Earlier this year, smartFOCUS published its final results for 2009. These showed that the firm made a pre-tax profit of £490,000 (after registering a loss of £1.7m in 2008) on revenues that had improved 14.7% to £11.9m.

Perhaps the most significant figures in 2009’s results were those that showed how smartFOCUS significantly boosted its cashflow last year as a result of debtors as a proportion of revenues (a measure of how quickly a company collects its revenues) falling sharply. Cashflow from operating activities came in at £1.5m, compared with £626,000 in 2008.

Speaking to Proactive Investors recently, smartFOCUS’s chief executive officer, Chris Underhill, said that the reduced debtors were partly a result of a general focus by the firm on cash conversion as well as a one-off large early payment from a customer.

“But fundamentally, our change in business model is positively affecting cash flow,” he said.

“We’ve been moving away from a perpetual licensing model to a rental licensing model. SaaS is driving the improvement in our trading.”

smartFOCUS’s ‘software as a service’ (SaaS) business model is a form of selling software where the software vendor runs applications on its own servers while clients pay a rental fee to access it remotely (usually via the Internet).

Customers benefit because they are required to install little, or no, software from the vendor on their own computers, since the vendor carries out tasks such as upgrades and maintenance to the software at its own site. Meanwhile, the vendor gets a more predictable revenue stream from rental fees than through the traditional perpetual licensing model, which is often characterised by delayed payments.

But it is not only smartFOCUS’s shift in business model that has been driving its success. Although there remain big question marks concerning the health of the wider economy, the firm is still seeing strong demand for its software.

“Irrespective of the concerns around the economy, business brands are having to invest in customer-facing marketing,” Underhill told us.

“They’re moving away from advertising-led marketing to direct marketing.”

For example, a company like online holidays and travel firm Lastminute.com, which signed up with smartFOCUS in March this year, wants to understand each customer’s preferences in order to push to that customer the deals that the company thinks he is most likely to be interested in.

A customer who is known to take half-a-dozen city breaks a year is more likely be interested in a discounted weekend stay in Berlin than, say, a family man whose main break is a two-week holiday in Benidorm once a year.

This, more bespoke, way of dealing with customers is preferable to the blanket advertising that has long formed a major component of marketing budgets. “It is less about sending a message and more about driving revenues,” according to Underhill. “We help firms to analyse and understand their customers.”

This year has seen smartFOCUS score a number of new deals with consumer-focused businesses from a variety of industries. The most recently-reported deal was with thetrainline.com – an independent retailer of rail tickets.

In July thetrainline.com said it will be using smartFOCUS’s Intelligent Marketing system to improve one-to-one communications with its customers across multiple channels in order to drive both revenues and customer retention. The company believes that the software will give it a deeper insight into user activity, which it can then use to nurture relationships with its customers.

A month earlier, smartFOCUS reported that PartyGaming – the world’s leading listed online gambling business – is using its software to deliver a complete and centralised view of its customers. PartyGaming is now able to profile players in a number of ways, such as their value to the business, their recent activity and their frequency of play.

The deal with PartyGaming reflects a decision by smartFOCUS to make online gambling a key vertical market for the firm. “We’ve focused on that vertical recently and it has gone from 0% of our business to 6% of it during the last 18 months,” said Underhill.

“I think gambling represents an international market for growth.”

smartFOCUS is due to report its interim results for the six months to 30 June by mid-September. Investors will be on the lookout for figures that confirm the business is on track to deliver forecast revenues of £13.5m this year, along with pre-tax profits of £760,000. That would translate to earnings per share just short of 0.6 pence, compared with the current share price of 12 pence.

Clearly, smartFOCUS’s directors are upbeat. A couple of months ago they not only reported that first-half trading had been “very positive”, but that they were examining the possibility of paying a dividend to shareholders.