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UK tech stocks broadly sideways amid results activity

UK tech stocks were boosted last week by positive trading news from sector heavyweights, The Sage Group PLC (LON:SGE), Computercentre (LON:CCC) and Learning Technologies Group PLC (LON:LTG)

The Sage Group plc -

At a glance

Computercentre hit record highs after it said that first-half profits were substantially ahead of the same period last year, helped by a surge in demand for IT equipment to enable home working. Sage jumped 10% over the week, after it reported a 6.5% growth in Q3 recurring revenue, with the number supported by lower-than-expected churn among its SME client base. Learning Technologies rose by 4.5% over the week after it produced an inline trading update, with revenues rising c 2% as a small organic decline was more than offset by the contribution from the acquired Open LMS business.

A key focus this week will be Apple’s Q3 results after the close in the US on Thursday.

Small-cap tech news roundup

Last week saw full year results from Redcentric (LON:RCN) and interim results from Gresham Technologies plc (LON:GHT), Access Intelligence PLC (LON:ACC) and GetBusy PLC (LON:GETB). There was also trading updates from Kape Technologies PLC (LON: KAPE), Instem PLC (LON: INS), KRM22 PLC (LON:KRM), Blancco Technology Group PLC (LON: BLTG), CloudCall Group PLC (LON:CALL), Boku Inc (LON:BOKU), Dotdigital Group PLC (LON:DOTD),  Attraqt Group PLC (LON:ATQT) and XLMedia PLC (LON:XLM).

  • Gresham Technologies, which provides solutions for data integrity and control, banking integration, payments and cash management, saw its shares slip despite the company producing strong growth in its core businesses annualised recurring revenue (ARR), as some investors were disappointed by the small decline in the statutory group revenue and adjusted underlying earnings (EBITDA). Clarity ARR grew by 13% in H1 alone to stand at £10.7mln as at 30 June, and was up by 18% over the 12-month period. The strong H1 growth puts it in a strong position to exceed 20% growth in Clarity ARR for the full year. While the Clarity business is still loss-making, it is expected to break even in the next two years and management is targeting 30% cash EBITDA margins in the longer-run as the business matures. While group statutory revenue declined by 2% to £12.2mln and adjusted EBITDA dipped by 4% to £2.4mln, these numbers were impacted by two cancellations that provided a full six months contribution in the previous period, and none in this period, along with a lucrative £0.6m term licence deal in the prior period. While there was churn last year, there was virtually no churn in the latest period. The Clarity business has successfully completed its shift to a subscription model, a process which has obscured the performance in recent years as subscription business models mean less upfront revenue but are more lucrative in the long run. Gresham is also delivering an increasing amount of its Clarity business as cloud solutions, currently c20% of the total. Meanwhile, 88% of this year’s consensus revenues are effectively in the bag and management is confident it will meet consensus earnings estimates. The group remains in strong financial health with £7.4mln cash and no financial debt.  Management is focused on keeping costs under control as it scales the business. It is confident it will become the clear market leader in the data integrity and control space, from its current number three position.  In our view, the dip in the shares provides an interesting opportunity for investors to gain exposure to a promising UK growth stock.
  • Redcentric, the UK IT managed services provider, reported a 6% decline in the fiscal year 2020 (FY20) revenues to £87.5mln. Recurring revenues represented 89% of group total and the recurring revenue run rate eased by 4% to £77.6mln. On a pre-IFRS16 basis, adjusted EBITDA rose by 5% to £17.6mln, generating a margin of 20.1%, up 220bp’s. The company says that Q1 trading has been strong and slightly ahead of the board's expectations. Redcentric has been hampered by an accounting debacle dating from late 2016 that has now been resolved with the FCA. The group is cash generative, with adjusted cash generated from operations of £19.6mln and net debt reduced by £4.1mln over the period to £13.5mln.  In addition, there was £21mln of lease liabilities. No dividend is proposed in light of the restitution scheme and the continued Covid-19 uncertainty. After the year-end, a £5.8mln share placing was undertaken to raise funds to settle claims under the restitution scheme. The remaining £5.6mln of potential claims will be settled through a combination of cash and share payments.
  • Access Intelligence, which provides SaaS solutions for the PR, communications and marketing industries, reported a 52% jump in H1 revenues to £9.4mln. Excluding Pulsar, which was acquired in October 2019, the growth was 10%. The annual contract value (ACV) base jumped by 12% to £19.1mln. There was an adjusted EBITDA loss of £147k, but when excluding Pulsar, the adjusted EBITDA was a positive £573k. The group finished the period with net cash (excluding leases) of £2.6mln. Management remains cautious on the H2 outlook, due to the pandemic, but is buoyant on the longer-term opportunities, supported by the expanded product mix including Pulsar.
  • Kape Technologies, the digital security and privacy software business, said that H1 revenue is expected to rise by 97% (or 12% on a proforma basis) to c $59.0mln. Recurring revenues represented c 90% of the group total. Adjusted EBITDA is expected to jump by c 180% to c $16.1mln providing an EBITDA margin increased of 27.3% (H119: 19.4%).  The company is maintaining its FY20 guidance of revenues of between $120-$123mln and adjusted EBITDA of between $35-$38mln.
  • Instem, which provides IT solutions to the global life sciences market, said that H1 revenues increased by c 20% with like-for-like revenue growth of c 12%. Cash generation was strong, with cash rising to £9.1m as at 30 June from £6.0m at the beginning of the year. The company says it continues to trade in line with the board's expectations. The group wants to act as a consolidator in the fragmented space and after the period end, it raised £15m net of expenses, to provide additional capital to accelerate the group's acquisition strategy. Management is seeking to boost revenues from £25.7mln last year to £50-75mln within three to five years and is now optimistic it can achieve this goal in closer to three years. 
  • KRM22, that is focused on risk management for capital markets, said that while the first half has been impacted by the effects of COVID-19 the group is on track to deliver the full year expectations. The annualised recurring revenue (ARR) as at 30 June was £4.0mln (which excludes a disputed contract with ARR of £0.3mln).
  • Blancco Technology, which provides data erasure and mobile device diagnostics, said it expected FY20 results to be in line with current market expectations with revenue of c £33.4mln and adjusted operating profit of c £4.0mln. Cash generation has continued to improve in H2, as anticipated in February, and the group ended the year with £6.7mln of net cash
  • CloudCall, the cloud-based provider of integrated communications technology, said that H1 revenues increased by 11% to £5.8mln, with recurring and repeating revenues representing 95% of the total. Recurring subscription revenues jumped by 20% to £5.1mln. The business is split roughly 60% UK and 50% US, and the group has recently begun operations in Australia, where it has 7-8 customers. CloudCall experienced a 35% drop in outbound activity between March and May due to the pandemic, with a 50% decline in the UK reflecting the furlough but there was a more modest 15% fall in the US. However, there was a strong rebound in June that has continued into July. Further, CloudCall won a record 112 new customers in Q2, though these were smaller than normal, reflecting small recruitment sector customers. The recruitment/staffing sector is the company’s largest market, and CloudCall is seeking to broaden its exposures. The gross cash position slipped by £2.7mln over the period to stand at £8.4mln as at 30 June, with cash burn slipping from £0.5mln per month in Q1 to £0.3mln per month in Q2. Cloudcall has achieved strong growth since 2012 and management has ambitious plans to continue to sustain the growth, with a goal to achieve revenues of $50-60mln within the next few years. It has recently appointed a chief revenue officer and chief technology officer to help spearhead this growth.
  • Boku, the mobile payment and mobile identity company, said that underlying payments revenues increased by 13.5% to at least $22.0mln and total revenues are expected to be at least $24.7mln. The company said that full-year adjusted EBITDA is expected to be at least in line with expectations and at least 65% higher than FY19. The group has cash of $80.7m as at 30 June, of which $44.5mln was held to pay for Fortumo. The acquisition of Fortumo was completed on 1 July.
  • Dotdigital, the 'SaaS' provider of an omnichannel marketing automation and customer engagement platform, said that pandemic had minimal impact in Q4 due to the high level of contracted recurring revenues in the core business. Momentum has continued into FY21, despite the ongoing uncertainty around the impact of COVID-19. Organic revenue grew by c.12% to £47.4mln. Adjusted EBITDA from continuing operations is expected to be comfortably ahead of market expectations while adjusted operating profit from continuing operations is expected to be in line. The group finished the period with cash of £24.5mln.  Average revenue per customer continued to rise, growing by 12% from c 966 per month to c 1,083 per month. Recurring revenues remained at c 85% of the total.
  • Attraqt, which provides of online experience orchestration, said that H1 trading was broadly in line with the board's expectations, despite the challenging external circumstances. During the lockdown the group saw a significant increase in usage volume (e-commerce website activity) across its customer base reflecting the sharp increase in e-commerce activity, and early indications suggest that this is continuing into Q3. Attraqt signed 27 contracts with an aggregate value of £10.7mln in the year to date, up from 11 worth £3.9mln in the same period in the prior year, and already more than the 24 worth £4.9mln signed in FY19. The group had net cash of £3.8mln as at 30 June, broadly in line with the position as at end-December.
  • GetBusy, which provides document management and productivity software, reported a 13% growth in H1 revenues to £7.0mln while group recurring revenue jumped by 18% to £6.4mln, representing 91% of the total. The adjusted loss eased slightly to £0.3mln. Net cash rose by £0.4mln over the period to stand at £2.1mln, helped by £0.7mln receipt of R&D tax credit cash refunds and a £0.4mln loan from the Paycheck Protection Program in the US.  The group has traditionally targeted accounting businesses but is broadening its addressable markets, and believe the shifts to remote working is a strong driver of the business, accelerating trends towards fully digitised, paperless work practices that its document management products enable.
  • XLMedia, a digital performance publisher, said that the H1 performance, as previously reported, was impacted heavily by a manual penalty being applied by Google to over 100 of the company's websites ('Google deranking") in January, and the subsequent global pandemic-induced slowdown. It expects to report H1 revenues of c $27.5mln and EBITDA of c $3.5mln while cash balances at 30 June were c $27.9m.  Monthly revenue is currently running c $2mln below the level being achieved before the impact of the Google deranking.

Small-cap software & services market roundup

Tech stocks continue to drift with trading updates providing bouts of activity.  Our small caps software index was flat over the week, while the large caps index rose by 2.6%, bolstered by gains in Sage, Comptercentre and Learning Technologies. Among the small caps, Redcentric jumped 13% after it posted an optimistic outlook with it full year results while its larger peer Iomart Group PLC (LON:IOM) rose 8% in sympathy. Gresham Technologies dipped 13% despite reporting strong growth in its core Clarity units ARR. Elsewhere, Cerillion, a telecom software company, slipped 11% over the week.

Recent UK tech sector fundraisings

Tern PLC (LON:TERN), an investment company specialising in the Internet of Things, raised £1.5m before expenses through a subscription of 17.6m new ordinary shares at a price of 8.5p. It also reported a 62% year-on-year increase in turnover of principal portfolio companies in H1.

Calendar 

March year results are anticipated this week from OTAQ, IMImobile and Aptitude. In addition, June interims results season is picking up with results this week from Quartix and FDM.  Across the pond, results season picks up pace this week with a host of results, including from NXP Semi, AMD, SS&C, Corning, Seagate, Gartner, Lam Research, Cognizant, Qualcomm, ServiceNow, Shopify, Atlassian, Apple, Xilinx and Motorola.

Small-cap software & services valuations

The sector ratings look fair in comparison with the UK 350 large caps, given the significantly stronger growth potential, combined with the relatively strong balance sheets.

 

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