Profit from big data analytics

Aim-traded Pelatro (PTRO:40p), a company that makes its money by providing 19 large telecoms operators with precision marketing software, has been making huge strides in transitioning from a lumpy licence fee model to one based on annual recurring revenue (ARR).

Pelatro uses 'big data' analytics (artificial intelligence, machine learning and other analytical techniques) to reveal patterns, trends, associations and behavioural traits of telecom subscribers. In turn, this insight enables telecom operators to monetise their data, boost average revenue per user and increase their share of subscriber spend. Adopting a more customer-centric approach to marketing also reduces churn rates.

The company entered 2021 with ARR of $5.4m (£3.9m), up from $4m a year earlier and $1.5m at the start of 2019 when the transition process commenced. It’s a more stable revenue stream – most contracts are for three to five years’ duration with scope for extensions – and it’s more valuable as Pelatro can leverage its relationship with telecom customers by cross selling other services and winning contracts across the clients’ other geographies.

The improving revenue visibility prompted house broker Cenkos Securities to nudge up its 2021 revenue estimate to $7.2m post results, and that was before Pelatro secured a further $0.5m of work to take its 2021 contracted order book to $6.5m. On this basis, Cenkos expect the operating loss to dramatically reduce from $1.9m in 2020 to US$0.2m in 2021. It's also worth flagging up that Pelatro's earnings from licence fee income tend to be more back-end weighted, whereas the ARR model generates a much more even income stream throughout the year. The collection cycle for trade debtors tends to be shorter, leading to improving cash collection rates. Pelatro’s trade debtors declined from $5.4m to $3.5m last year and the company has since collected $1.7m of that sum post the 2020 financial year-end to give a pro-forma net cash position of $2.1m.

Although Pelatro reported a loss in 2020 on revenue down from $6.7m to $4m, this reflects the ongoing move from one-off licence fees to ARR and the fact that although telecom customers have been largely unimpacted by the Covid-19 pandemic, there was slower implementation on certain projects, mainly change requests. Revenue is recognised on completion of the relevant project, so some revenue was deferred into 2021. In addition, marketing for new business is currently being targeted more on selling services to existing customers given the restrictions caused by the Covid-19 pandemic. Pelatro has clearly been successful, hence the increase in ARR and repeat orders.

Exploiting a new revenue stream

Having rolled out its leading mViva software platform across 23 markets, handling data of 800m clients across Asia, Middle East, Africa and Latin America, Pelatro is now leveraging its valuable position by entering the mobile advertising space, a market that is worth $100bn and projected to grow to $221bn by 2024. It makes strategic sense to do so given that Pelatro's mViva platform is uniquely positioned to partner with its telecom partners and sell (with the appropriate mobile subscriber consent) access to the data held on 350m mobile subscribers who use smart phones.

Corporate customers in financial services, retail, travel & hospitality, and Fast Moving Consumer Goods (FMCG) are the target market and will be charged a usage fee to engage in marketing of their own products across advertising, campaigns, surveys, and loyalty programmes. The revenue earned will be shared by the advertising agency representing these clients, Pelatro and the telecom operator to create a supplementary revenue stream for the company.

Pelatro is looking at key Asian countries (India, Bangladesh, Thailand, Myanmar, and Malaysia) where it already has relationships with telecom operators. The company has a head start given its five-year managed services contract with Vodafone in India (offering its MViva flagship product) completed final implementation in February this year. That network alone has over 400m subscribers. It's worth noting that Cenkos has not embedded any revenue from this new income stream into its forecasts, but analyst Simon Strong believes that “it could be as material as the core business”, a sentiment shared by managing director Subash Menon during our results call. This possibility is certainly not in the price.

Low valuation

Although the share price is largely unchanged since I covered the half-year results (‘Priced for profitable outcomes’ 13 October 2021), there is clear value on offer here.

Based on Cenkos’ current year cash profit estimate of $2.9m – the $0.2m forecast operating loss is stated after a non-cash $3.1m depreciation and amortisation charge – Pelatro’s enterprise valuation to cash profit multiple of 6.5 times is hardly excessive for a company that should be cash-flow neutral this year, reversing a $2.3m outflow in 2020. Pelatro is also lowly rated on a multiple of 3.5 times ARR to enterprise valuation – software companies operating Software-as-a-Service models are generally rated on between eight to 10 times their ARR.

As the directors convert more contracts in their $16m pipeline into ARR, and revenue starts to be earned from the mobile advertising space, I expect Pelatro’s profits to scale up rapidly and the shares to make a concerted move towards my 100p fair value target to value the equity at £37m, or 10 times 2022 forecast cash profit of $3.5m.

From a technical perspective, a chart break-out above the October 2020 high (48p) would confirm that the base formation is complete to clear the path for a rally to the June 2020 high of 73p. Buy.

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