Eckoh has been around for a decade providing speech recognition and secure payments software to large public and private organisations that use call centre services or take card payments. Its niche used to be in speech recognition, but now the company is selling more and more software that doesn't allow call centre agents to see credit card numbers while they're taking credit card payments over the phone or online, thereby reducing the risk of data theft.
That's nifty, but hardly revolutionary; there are already a raft of competing products out there. But unlike most peers, Eckoh is heavily accredited with major credit card companies and has been steadily growing its user base of late. Moreover, Eckoh seems to have reached a point recently where operational gearing is kicking in. Because its costs are now largely fixed following a period of heavy investment, relatively modest increases in sales are having a disproportionately large impact on profitability. That's especially the case since around 93 per cent of Eckoh's turnover is recurring.
In the six months to 30 September, for example, Eckoh's revenues increased 24 per cent to £6.3m. That drove a 57 per cent increase in operating profit to £730,000, while cash profit (earnings before interest, taxes, depreciation and amortisation) climbed 29 per cent to £1.2m. New clients contracted late in the first half are also expected to generate significant turnover in the traditionally busier second half, with Eckoh's board saying in the outlook statement that there is a "very real prospect of this growth accelerating faster than currently anticipated" by the market.
Underpinning recent growth is a burgeoning partnership with Capita Customer Management signed in April 2013. Capita is a leading provider of outsourcing services to blue-chip companies and has agreed to try to sell on Eckoh's services to its clients. This has already delivered a few significant contract wins for Eckoh, but Capita has over 40 other clients that could eventually take up Eckoh's software suite.
Broker N+1 Singer expects adjusted cash profits for the full year to rise by a third to £3.2m from £2.4m last year, driving adjusted EPS up by two-fifths to 1p from 0.7p (before share-based payments). Adjusted EPS is expected to rise another 20 per cent in 2015 to 1.2p.
Unfortunately, this puts shares in Eckoh on a staggeringly high 38 times forward earnings estimates, falling to a lofty 32 times in 2015. Even with double-digit revenue and earnings growth that's a lot to pay for a software company in a very competitive marketplace. Indeed, shares in Eckoh peer Netcall (NET) trade on a much more reasonable 20 times forward earnings for the current year. Or looked at another way, after adjusting for Eckoh's £4.3m net cash pile, the shares trade on an EV/Ebitda multiple of 25, nearly double Netcall's multiple of 14. (Click here to read Simon Thompson's most recent analysis of Netcall).
So, although Eckoh's growth profile and scope for earnings upgrades is impressive, the shares merely remain on our watchlist for now, awaiting the possibility of a cheaper entry point sometime in the future - as many Eckoh investors from the early noughties would surely suggest.
