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Allocate Software in robust health

Last updated: 09:15 11 Jan 2013 GMT, First published: 10:15 11 Jan 2013 GMT

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After a slow first quarter things picked up in the second quarter of Allocate Software’s (LON:ALL) financial year.

“Pipeline levels in our healthcare businesses in Sweden and Australia remain high and I am delighted to see that so many NHS Trusts are still seeking to engage with us about our products and solutions, especially the new Cloud service we launched in July, which has already been taken up by 13 NHS Trusts,” said Allocate’s chief executive, Ian Bowles, in a trading statement released on 8 January.

The National Health Service (NHS) is the fourth largest employer in the world, with around 1.3mln workers to keep track of, so it is little wonder the NHS is keen to make use of Allocate’s workforce optimisation software.

The firm also sells its services and solutions to the defence sector and maritime businesses, such as cruise and shipping companies, and offshore, oil and gas firms.

It is the healthcare sector, however, which provides the bulk of the company’s revenue and which, because of the market’s sheer scale, offers fertile opportunities.

Bowles believes it is a mistake to think of the NHS as one homogenous organisation, however. He likens it more to a brand, with 300 independent NHS trusts delivering a wide range of medical services under that brand.

The trick for Allocate Software is to configure its solutions on a case-by-case basis, because a one size fits all solution will not work.

“You try getting hundreds of CEOs, hundreds of CFOs, hundreds of nursing directors, hundreds of medical directors to go, ‘yes, this is exactly the right thing to do, in terms of administration or staffing …’ - it’s absolutely not going to happen,” Bowles asserts.

“For us, it is what is most important and appropriate for the individual client’s infrastructure, and business processes,” Bowles explains.

The flexible approach has enabled Allocate Software to make impressive strides in the healthcare arena in a short space of time.

It started just seven years ago with a nurse rostering product and has about a 50% + market share in this particular area of the NHS.

Through a mixture of organic growth and acquisitions it has broadened the portfolio considerably, to encompass: governance, risk and compliance; rostering of a broad spectrum of healthcare staff (not just nurses); payroll and back office admin; performance management.

As we are all aware, the NHS is under pressure to make cost savings and persuading those who control the purse strings in the NHS to “invest to save” in the current volatile environment has led to longer decision-making cycles.

A trading update from Allocate in October warned of delays in closing contracts, raising doubts that the company’s proud record of six consecutive years of record revenue might not extend to a seventh.

With five months of trading to go, it is still too early to count chickens, but management assurances that the first quarter underperformance was down to delays, not lost contracts, proved to be prescient, with the company’s second quarter update revealing it enjoyed its second highest billing quarter for its HealthRoster application.

Though healthcare is now the major part of Allocate’s business, its heritage is actually in the defence sector, where it has an impressive list of blue-chip customers, including the British Ministry of Defence, which has been a customer for over 20 years, NATO and the Australian defence forces.

Allocate DefenceSuite product is designed specifically to deliver Enterprise Resource Planning and military resource management.

The product integrates information from disparate databases and systems, including Personnel, Platforms, Logistics and Finance, and consolidates the data in one aggregated view.

The software accelerates informed decision making, and is capable of capturing mission data in the field to feed back into training and planning.

“We also manage all of the Royal Australian Navy in terms of crew deployment, and training, and we have a project we started about a year ago with the Australian army, [which is] again around individual training, deployment of resources and scenario planning,” Bowles told Proactive Investors.

Throughout its history, the company has been prepared to augment organic growth with bolt-on acquisitions.

In terms of what sort of companies Allocate Software targets, Bowles says complementary applications is the biggest driver.

“Are there complementary applications out there that our existing customer base would find interesting?” is probably the first question Bowles asks himself when sizing up an acquisition target, as the company is always looking for cross-selling opportunities.

“I will consider acquisitions in overseas territories as a way of entering the market, so effectively in one go getting domain expertise and a customer base to sell to,” Bowles adds.

Judicious acquisitions have been a major driver in top line growth. As Bowles points out, the company was not in the healthcare sector seven years ago, and now it provides about 70% of revenue.

Revenue in the year to May 31, 2012, was £36.6mln, up from a mere £11.6mln four years earlier, with healthcare providing £26.2mln of the 2012 figure.

Recurring revenue, meanwhile, rose 36% year-on-year last year to £15.6mln and accounted for 42% of total revenue, up from 38% the year before.

“Our policy of driving more business on to a recurring basis will benefit future reporting periods,” Bowles said.

Underlying earnings (EBITDA) last year rose 10% to £6.4mln from £5.8mln the year before, while diluted adjusted earnings per share jumped by 16% to 7.4p from 6.4p.

The company has a history of raising the bar each year and after a first quarter wobble looks like it is back on track, despite a difficult trading environment.

Shareholders who kept the faith at the time of the downbeat October update, when the shares dipped to 79p, have been amply rewarded; the shares currently trade close to their all-time closing high of 88.5p.

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