175p - Software & computer services - The internet is awash with 'information'. type the word into Google and you will be presented with over 2bn web pages to visit - four times the number you get if you type 'sex' into Google's search box. Search engines have developed to guide users through that morass, but a similar problem exists for mass-market consumer companies. The rapid fall in both the price of data storage, and the ease with which it can be collected, has seen businesses build massive databases of customer information. So the challenge now is to analyse and use that information effectively, which is where Alterian comes in.
The group helps to modernise the way in which the marketing industry handles and acts on consumer data. And in so doing, it puts its software at the heart of the marketing process, thereby building itself a niche.
Its business model is to work through so-called marketing service providers, such as Saatchi & Saatchi, Thompson Directories and Experian. These providers compile, maintain and analyse huge volumes of data for consumer-product companies, such as Kodak, Sony or HJ Heinz. Alterian has signed up over 70 providers so far and each pays an annual partnership fee for its package, then a further annual fee for each of its clients that uses the product.
Developing the business in this way looks smart because it brings growth without heavy spending on marketing. Once a service provider is signed up, it typically takes 12 to 18 months for its customer base to be moved onto Alterian's software. So, given that five of the top 10 service providers in the US have been signed up in the past year - bringing Alterian's total to eight of the top 10 - the group's near-term prospects in the US look good.
The nature of marketing also means that a high proportion of revenues tend to recur. Consumer companies are usually signed up on three-year contracts and, once their data is built into the system, it becomes difficult and expensive to take it to a competitor. Indeed, Alterian claims a 90 per cent renewal rate. What's more, the group charges according to the size of the database it is analysing. So, as online marketing becomes more advanced and feeds back ever more information about customer preferences, those recurring revenues should continue to expand.
Admittedly, there is a danger that a marketing company could take the data analysis role in-house. The decision by one large service provider to do just that resulted in Alterian's European revenues falling 15 per cent in the first half of 2006-07. However, the increasing complexity of data mining means that few providers have the IT resources to do this themselves. In addition, Alterian has pursued an acquisition strategy designed to expand its offering. For example, the acquisition of Dynamics Direct last May for $5.5m added software capability to plan and execute an online marketing campaign using the information thrown out by Alterian's search engine. Similarly, the Nvigorate business, which was bought last September, added further tools for marketing departments. So, while small, these bolt-on deals help to distinguish Alterian from big competitors, such as SAP or Oracle, which offer generic database and customer-management systems.
The group also continues to spend heavily on research and development to keep its competitors at bay. That spending meant that Alterian only broke into profit in 2005-06 and, as usual, the group made a loss in the first half of this year. Overall, though, 2006-07 promises to be a good year, with profits growing strongly in the second half. Beyond that, future revenues should continue growing, benefiting profits disproportionately. Yet, even though Alterian's shares have doubled in price since last August, they still trade on just 13 times forecast earnings for 2007-08. That fails to reflect the group's true potential. Buy.
| Ord price: 175p | Market value: £74m |
|---|---|
| Touch: 174-176p | 12-month High: 175p Low: 87p |
| Dividend yield: nil | PE ratio: 13 |
| Net asset value: 40p | Net cash: £8m |
| Year to | Turnover | Pre-tax | Earnings | Dividend per |
|---|---|---|---|---|
| 31 Mar | (£m) | profit (£m) | per share (p) | share (p) |
| 2004 | 5.67 | -3.23 | -7.1 | nil |
| 2005 | 7.81 | -0.65 | -0.4 | nil |
| 2006 | 10.63 | 0.89 | 3.4 | nil |
| 2007* | 13.80 | 2.10 | 5.4 | nil |
| 2008* | 18.50 | 5.50 | 13.5 | nil |
| % change | +34 | +162 | +150 | - |
*Investec Securities forecasts
Market makers: 6
Normal market size: 500
Beta: 2.0
Last IC view: Good value, 113p, 3 Nov 2006
BULL POINTS
- Strong niche in marketing software
- High level of recurring income
- Profits set to grow fast
BEAR POINTS
- Danger that customers take work in-house
- Big company competitors
