Demand for Netcall's automation technology grows

Netcall (NET) automates processes for both companies' employees and customers. On a macro level, the argument goes that with labour markets tightening after the pandemic there will be more demand for automation software. Netcall’s annual results provide some evidence to support this theory.

For the full year, total annual contract revenue (ACV) increased 31 per cent to 24.2mn. Cloud service ACV grew faster at 60 per cent, meaning around two-thirds of ACV is cloud. This number has been driven by the signing of a $19mn (£17.75mn) three-year contract with an S&P 500 international finance firm.

This big contract win pushed up the cloud net retention rate to 152 per cent from 116 per cent last year. Even if this contract is stripped out, the retention rate would have creeped up one percentage point to 117 per cent. The ability to win a contract of this size suggests that the company can maintain its recent sales momentum.  

Housebroker Canaccord has upgraded its 2023 EPS forecast to 2.9p up from 2.5p. This would be a 30 per cent annual increase and give Netcall a forward PE ratio of 27.8. The 'land-and-expand' sales technique is central to this forecast. And with only 15 per cent of customers having both the Intelligent Automaton and Customer Engagement products there are cross-selling opportunities.

We had Netcall on a sell but its strong momentum means the forward PE ratio has almost halved since then. The ruptures in the labour market will provide some tailwinds which should offset the macro uncertainty. Upgrade to hold.

Last IC View: Sell, 80p, 6 Oct 2021