Market: AIM It?s been a long time coming, but Intelligent Environments finally appears to have its house in order, and has moved into the black for the first time since listing on AIM in 1996. Intelligent Environments originally listed in order to capitalise on the emerging market for Internet based banking application forms. Perhaps a little bit before its time, the company was swept up in the dot.com bubble, and like many of its peers, reached astronomical levels before the bubble went pop. Since then, Intelligent Environments has cuts its staff from 150 to 50, exited the US market almost as quickly as it arrived, and has focused on building up the two clients that it did secure during the Internet frenzy at the turn of century. In fact, those two clients, HSBC and RBS, are still clients of the group today, and are the reason Intelligent Environments has managed to return to the market five times in the last ten years, despite never posting a profit until this year.
Intelligent Environments is essentially an Internet based software company. The group has Net based software that is both malleable and scaleable, and very easy to maintain and adjust to clients needs. The best way to explain what the company actually does for a bank is example. No doubt you have seen a Mint Credit Card commercial; Mint?s parent company, the Royal Bank of Scotland, has promoted it heavily on television in the past two years. If you visit the online mint credit card website and apply for a credit card, that online application is run on IE?s software. There are two reasons that a bank like RBS will use software from IE. First of all, outsourcing is the way to do business these days, so by allowing IE to design, develop and implement the application, RBS doesn?t have to do it internally. Secondly, RBS wants to maximise online applications, as they are cheaper, quicker and simpler to process than call centre or postal applications. As IE specialises in this sector, it has a lot of experience in developing application forms that help make sure that maximum number of applications that are started get completely filled out. Mint Credit Card for example, has around 65% of online applications completed and approximately 60% of all credit card applications are Internet applications, way ahead of Mint?s internal projections of 20% when they began. This doesn?t really come as too much of a surprise; the trend towards using the Internet for everything from shopping to insurance to socialising is a well-documented phenomenon. RBS pays for the service by acquiring a software licence for one year - with some basic support.
But the revenue model is undergoing change, and it is this change that offers a bit of spice to Intelligent Environments. Another client of IE is Barclaycard, for whom the business model is completely different. Rather than licence the software, IE has negotiated a transactional model and Barclaycard, in turn, has recently launched the Argos credit card. This credit card operation has many operational advantages over most models. Firstly, in traditional banking operations, when you apply for a credit card online, a dedicated division of that bank deals with your application. Whereas, someone who applies via a call centre is dealt by another division of the bank. What this means in practical terms, is that the bank is wasting a substantial sum of cash by not integrating all credit card applications, whether by post, online or call centre. This is where IE steps into the equation. The Argos operation is vertically integrated, with IE software. So no matter where your application is conducted, it will be processed through IE?s platform, offering one seamless system for all applications, and ensuring that the call centre can access applications made online if necessary. This is where the transactional model gets interesting. Rather than a flat software fee per annum, IE will receive between 50p and £1 per application completed across any of the media ? irrespective of whether the application passes or fails. This appears to be a clever move, as there are at least 60 million credit cards in use in the UK and the ?churn? rate is approximately 20%, and the rejection rate 50%. This implies a total application rate of 24 million per annum in the UK alone ? IE wants a sizeable chunk of this market.
IE has also negotiated an additional revenue model for online statements. While online applications for simple products like credit cards, personal loans and insurance have exploded in recent years, only around 15% of customers check their statements online. Again, the financial companies waste large sums of money by printing and posting statements to customers. The obvious trend for the future is to get customers to opt out of paper statements and move towards electronic statements; for instance, with the Argos credit card, IE has agreed an additional transactional fee for each successful applicant who registers online to view their account. It?s a logical step for IE, simply adapting its software for online account applications rather than an online product. Again, IE receives between 50p and £1 for each customer who registers online. The client recoups the fee back in multiples by cutting back on postage costs.
Intelligent Environment has predominately focused on the UK banking sector, and has notched up contracts with many of the heavyweights including HSBC, Barclaycard, HBOS and RBS. But the company still sees significant potential to sign up building societies, of which there are more than 60 and, of course, there is the potential to work with companies like RBS on their international operations. The company is also looking into applying its software to mortgages, and is keen to expand its presence in home loans, insurance and other online products, and while it does pitch for business directly, it has also generated substantial contracts through affiliations with back end financial product specialists like First Data, Fidelity and Unisys. First Data?s clients include several large overseas financial institutions including ING, Citybank, and Societe General, and clearly IE would love to sign contracts with them. In fact, Barclaycard came to IE through First Data. As the company tends to be ?pitching? to large institutions, the contracts tend to be bulky and very material which, unfortunately, equates to long periods without substantial news flow ? something to keep in mind.
Intelligent Environments released a trading update this week for interim results which will be published in September. The release was upbeat, with the company?s anticipation that it would exceed expectations; it specifically highlighted that revenues would be up approximately 72% to £3.07 million, and that cash balances had increased to £1.174 million as of June 30th. Shares in IE have reacted favourably to the improving outlook for the company, climbing from 5 pence 12 months ago to nearly 15 pence recently, before pulling back. House Broker, Dawnay Day, has pencilled in projected earnings per share of 0.48 pence for 2007, increasing to 0.75 pence in 2008, implying profit before tax of £1.219 million on turnover of £6.154 million. This puts IE on a forward profit to earnings ratio of approximately 12, assuming a share price of 9 pence, which one could argue is a bit on the light side considering the growth potential, clean balance sheet and high margins.
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