IS Solutions primarily acts as a strategic technology partner, helping its clients to develop and improve business with their own clients and give them a competitive advantage through access to the best analytics information and in a timely manner. In the past year trading has boomed, helped by the transformational acquisition of Celebrus Technologies in December 2014. UK-based Celebrus specialises in data feeds that supply detailed records of customer interactions with websites, mobile apps and social media. Its IP, protected by US and European patents, relates to the control of web page visitor behaviour – monitoring information and allowing the session context to be maintained. Focused on the finance and retail sectors, it is sold as a standalone system through systems integrators and in partnership with large analytics companies such as SAS, Teradata and Pega Systems.
Not only has Celebrus enhanced IS Solutions’ analytics offering, giving it a more predictable income stream from project work, as well as boosting recurring revenue, it has also helped the company become a more balanced product-led business, rather than primarily service-led. The acquisition has also provided new routes to market through the UK and international analytics companies utilising the Celebrus platform, and given IS Solutions the opportunity to cross-sell its products and services across the 25,000 websites on which the software is deployed. Clients are generally leaders in their markets and have made the progression from basing their online activities on aggregated trends-based data to a more personal view of their individual customers’ behaviour, communications and interactions. This is key to profitable long-term online customer relationships and is being realised by IS Solutions’ clients through improved marketing conversion rates, lower customer acquisition and retention costs, higher revenue and improved business savings.
Celebrus’s client list includes catalogue retailers Little-woods.com, Very.co.uk and JD Williams; leisure brands P&O Ferries and Hilton Hotels; insurance aggregator comparethemarket.com and household names across the automotive, banking, insurance, telecoms and travel industries.
Exploiting big data
A good example of how this smart ‘big data’ analytics software works in practice is the company’s relationship with JD Williams, the principal subsidiary of FTSE 250 retailer N Brown (BWNG). The way customers interact with retailers has changed fundamentally. For example, customers are increasingly visiting JD Williams’ websites using multiple devices and mobile traffic now accounts for half of all sessions, a threefold increase in only three years. This offers a profit opportunity as customers using multiple devices are more valuable to the business through greater overall sales.
Using 62 tables of granular data, the retailer can visualise a raft of customer activities at an individual level, from the way the customer is sorting products to the time spent viewing a single web page, the entry method to the site, the products added and removed, the use of filters (such as size or price) and the searches used externally to access the site. It also enables retailers to compare conversion rates between individual shoppers that do and don’t use the image zooming on products, for example, track exit pages and customer journeys or track abandoned products. Celebrus allows JD Williams to build up a picture of what each individual shopper is doing in one session and then to pull data together over multiple sessions to produce a detailed single customer view.
Celebrus also enables JD Williams to combine offline and online information to provide deep customer insight, including contact, payment and order history. In addition to using this web data within all marketing campaigns – from e-mail to outbound telemarketing – JD Williams is also using this depth of insight to deliver a far more personalised experience. For example, it is using the data to target behavioural e-mails such as ‘browse not bought’ and ‘abandoned basket’. Mailing selections are informed by product preference or the way a customer sorts on site, indicating price sensitivity, for example. Customer data is also being used for predictive modelling in order to understand the likelihood of a customer making a purchase. JD Williams has over 50 predictive models based on transactional and payment insights. Enriching this with Celebrus web data has markedly improved the predictive accuracy of the models from 75 per cent to 93 per cent.
The software also allows the retailer to create a number of behavioural personas – such as value hunters, frequent abandoners and on-trend customers. Frequent abandoners, for example, are identified and offered incentives to encourage them to complete the purchase or increase the number of products in their bag, while on-trend customers – those always looking for new products – can be targeted with the latest items and aspirational e-mails.
Revenues ramping up strongly
Business intelligence and analytics is one of the fastest growing software markets. According to global research consultancy Gartner, this market was worth in excess of $37.7bn (£26bn) globally in 2013 and is expected to grow at a compound annual rate of 9.4 per cent through to 2018.
In terms of the addressable market, financial organisations are the largest investors in big data solutions, with energy, utilities, communications and media companies all seen as key growth areas, driven by the need to optimise the monetisation of existing customers and potential ones, too. And this is feeding through to sharply rising demand for Celebrus’s suite of software products. In the first three months following its acquisition in December 2014, the business contributed revenue of £540,000, but this exploded to £1.43m in the six months to the end of September 2015, around 49 per cent higher year on year.
This helped IS Solutions to book £8.5m of revenue in the six-month trading period, of which £4.8m came from project work, £2.25m from licensing and £1.45m from product sales. It’s high margin, too, as gross profit of £4m, of which Celebrus accounted for just under a fifth of the mix, produced a margin of 47 per cent. A pre-tax profit margin of 18 per cent is pretty impressive, too. That performance was ahead of expectations and prompted a 40 per cent earnings upgrade from house broker FinnCap in September 2015. The news got even better in an unscheduled trading update earlier this month when IS Solutions revealed it had secured a further two contracts with new and existing customers in the retail and financial services sectors. These will add £2m of revenue in the current financial year and a further £250,000 of recurring revenue, and follows on from two major contract wins in the first half worth £4m.
Profits surging
Reflecting these contract wins, analyst Lorne Daniel at broker FinnCap now expects IS Solutions’ revenue to increase from £12.8m in the 15 months to the end of March 2015 to £18.3m for the financial year ending March 2016. On that basis, expect underlying pre-tax profit to almost treble to £3.5m, EPS to double to 7.8p, and the payout per share to be hiked from 0.6p to 2p. The company can certainly afford the £728,000 cash cost of the higher dividend as its balance sheet is debt-free, reflecting a cash inflow of £2.5m from operations in the six months to the end of September 2015.
The board also revealed that profit for the financial year to the end of March 2017 will be significantly ahead of previous upgraded estimates, prompting Mr Daniel to raise his pre-tax profit estimate last week by a further 25 per cent to £4m, based on revenue rising by 15 per cent to £21m. On that basis, expect EPS of 8.9p and a 10 per cent hike in the payout to 2.2p a share, implying the shares are rated on 13 times earnings estimates and offer a 1.8 per cent prospective dividend yield.
That’s hardly a punchy rating for a company that’s firmly in an earnings upgrade cycle, winning a raft of new contracts, well funded to meet the working capital requirements to service these new contracts and growing its recurring revenue streams. IS Solutions is establishing a US office that will offer real-time customer service and pre-sales support to its growing US business. The company is also expanding its European direct salesforce in order to offer its portfolio of products and services to a broader range of customers. In the circumstances, I certainly wouldn’t bet against IS Solutions beating those raised expectations given the potential for earnings to be enhanced through more new contracts, and margin gains from selling more of its own solutions rather than those of third parties.
Risks
Of course, no investment is without risk and it’s only fair to say that IS Solutions’ share price has more than doubled in the past year, but so too have earnings expectations for the March 2017 financial year. This means that the forward rating is only a point or so higher than it was 12 months ago even though the company’s management team has delivered, and there is now strong momentum in the business.
Other risks include the loss of a major client. However, IS Solutions has a diversified customer base, including several blue-chip companies, which mitigates risk. In any case, as its products provide a tangible benefit for clients, and one that can be quantified in terms of return on investment, there is an incentive to do business with IS Solutions.
Currency risk is another issue, given that a large amount of business is transacted overseas, and in the US in particular. IS Solutions has reviewed its pricing policies and closely monitors credit terms for external business to offset any negative impact of adverse currency movements. In fact, in the last financial year, the company actually booked a modest exchange rate gain.
Finally, the top seven shareholders, including founder and chief executive designate Peter Kear, hold around 50 per cent of the share capital of the £43m market cap company. Although this reduces the free float, liquidity is not an issue and the bid-offer spread is tight enough at 118p to 120p. I am not concerned either that non-executive director Michael Tinling sold 100,000 shares (or a fifth of his holding) last week, as he still owns 1 per cent of the shares in issue.
So, having assessed the key drivers of IS Solutions’ business, prospects for further contract wins and potential for earnings upgrades, I feel comfortable initiating coverage and have an initial target price of 150p a share, or 25 per cent above the current share price. Buy.
MORE FROM SIMON THOMPSON...
I have written articles on the following 61 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small-cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
