Sales surge at Next 15

Getting through Next 15’s (NFG) financial results tends to be a slog, given the number of heavily adjusted figures they contain. Its latest report is no different, with statutory and underlying profits bearing little resemblance to one another.  

Let’s start with what we do know. Net revenue – ie revenue minus direct costs – is up by 56 per cent. While acquisitions played an important part in this, organic growth was also impressive at 20.7 per cent. Management noted “strong” growth across all its divisions, but business transformation stole the show, delivering organic revenue of 83.3 per cent after securing a $400mn contract win – the biggest in the group’s history.  

While investors have been jittery about marketing budgets and the future of tech companies, demand seems to be holding up well. The outlook for next year is also “resilient”, according to management, and the group’s performance so far has been in line with expectations. 

Next 15’s bottom line needs some serious unpicking, however. The group reported an adjusted pre-tax profit of £112.5mn in the year to January 2023, but its statutory pre-tax profit came in at just £10.1mn. While the discrepancy is less extreme than the previous year – when it reported adjusted pre-tax profit of £79.3mn versus a statutory loss of £80.1mn – it is still large. 

The group’s ‘buy-and-build’ strategy is largely to blame. Acquisition accounting-related costs came to £89.3mn in the period, including employment-linked payments and changes to future contingent consideration, and these were stripped out of the underlying results. 

On the one hand, given that Next 15’s expansion strategy relies on buying growth, it makes sense to be sceptical and stick to the statutory figures (the group made six acquisitions in its 2023 financial year).

That said, the group is good at generating actual cash. Net cash generated from operations has been growing steadily over the past five years, and jumped again in the period from £88.8mn to £95.2mn. Moreover, as we discussed in the Ideas section last month, Next 15 seems to manage acquisitions skillfully, using contingent consideration to retain its talent. 

Despite the messiness of the numbers, therefore, we remain convinced by Next 15’s growth strategy, and its move away from traditional marketing and into digital consulting. Its valuation is also extremely tempting: it is trading on a forward price/earnings ratio of 7.7, compared with a five-year average of 14.3, despite growing “at its fastest pace in over a decade”. Buy. 

Last IC View: Buy, 892p, 23 Mar 2023