Netcall - linear growth disappoints

Netcall (NET) is a software company that digitises clients’ customer engagement. It is currently in the process of transitioning to a cloud business, which in the long run should improve its profitability, but at the moment it is leading to a slight cannibalisation of revenues.

For the full-year, its total cloud service revenue was up 26 per cent to £8.3m. Product support contract sales were down 6.3 per cent to £9m because Netcall is moving these customers to the cloud. The cloud had a net annual contract value (ACV) retention rate of 116 per cent (total current period ACV divided by the total prior period ACV). This shows it is a popular product segment that can be upsold.

A strength of the business is its constant profitability. Gross margins improved two percentage points to 90 per cent while its cash profit (Ebitda) margin was also up two percentage points to 20 per cent. Its overall profit before tax margin for the period was 10 per cent. Management wants to balance growth with profitability, with an aim of maintaining profit margin as it pursues expansion.

On the morning of the results, its share price was down six per cent. This could be because the market was expecting faster growth for a company that is trading at a 12-month PE ratio of 53. Healthy profit margins are nice but at some point we want to see evidence of growth, particularly given the forward rating. The pandemic should have been the optimal environment for a digital transformation business. Sell.

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