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Tapping into Software-as-a-Service

A company that makes its money by providing telecom operators with precision marketing software has delivered a step change in revenue and profitability
Tapping into Software-as-a-Service
  • Annual cash profit rises sixfold to $2.8mn (£2.2mn) to deliver small adjusted pre-tax profit on 80 per cent higher revenue of $7.2mn
  • Annual recurring revenue and repeat income account for 92 per cent of total, compared with 80 per cent in 2020
  • New business pipeline worth $17mn

Aim-traded Pelatro (PTRO:22.75p), a company that makes its money by providing 23 large telecoms operators with precision marketing software, delivered a step change in profitability last year. Cash profit rose more than sixfold to $2.8mn (before accounting for non-cash depreciation, share-based payments and amortisation charges) as the operational leverage of the business kicked in on an increasing recurring revenue stream.

Pelatro uses 'big data' analytics (artificial intelligence, machine learning and other analytical techniques) to reveal patterns, trends, associations and behavioural traits of telecom subscribers. These insights enable mobile telecom operators to monetise their data, boost average revenue per user and their share of subscriber spend, while also reducing churn rates. It’s proving popular. The group added three new clients to its customer base last year and now processes data of over 1bn telecom subscribers every day.

However, the real game changer has been transitioning large Asian telecom operators to long-term managed service contracts that produce an annual recurring revenue (ARR) stream and a high level of repeat business. To put this into perspective, Pelatro’s ARR of $4.8mn accounted for two-thirds of last year’s total revenue of $7.2mn, and that excludes $2mn of change requests, effectively repeat revenue earned from clients as products evolve. The group started 2022 with ARR of $6mn, or four times higher than at the start of 2019. Furthermore, the addition of three new customers has reduced concentration risk, with only two clients now accounting for more than 10 per cent of revenue.

The directors are also leveraging Pelatro's position in 'big data' analytics by entering the mobile advertising space, a market that is projected to double in size to $221bn by 2024. Expect the first customer to be signed this year, adding another potentially valuable revenue stream.

Importantly, gross cash of $3.3mn (excluding borrowings of $0.75mn) has been buoyed by $1.9mn received from debtors since the financial year-end, while the strength of the order book is such that ARR is expected to account for 80 per cent of the $9mn revenue forecast this year, says managing director Subash Menon. New house broker finnCap has yet to initiate coverage, but the business is clearly generating strong momentum.

This explains why Pelatro’s share price bounced 21 per cent post results, having been de-rated since the half-year results (‘Dial into a lowly rated tech play’, 28 September 2021). However, even if the share price doubles from this point, Pelatro would still be undervalued as its enterprise valuation is only 1.1 times forecast revenue for 2022 and a miserly 3.7 times historic cash profit, respective discounts of 66 per cent and 74 per cent to finnCap’s Tech 40 Spec Software index. Buy.

 

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