Idox provides steady and profitable growth

Idox (Idox) is finding UK government council clients to be a reliable set of customers, with its margin expanding and order book rising. The company sells management and regulation software, and managed to expand its adjusted cash profit (Ebitda) margin by 1 percentage point to 34 per cent in the six months to April.

Good quality software companies aim for the ‘rule of 40’. This means they aim for a combined profit margin and growth rate of 40. Idox is on track with revenue growth of 8 per cent and a cash profit margin of 34.

The revenue growth was mainly driven by the land and property division, which signed a number of large contract extensions. Revenue rose 22 per cent and the division now makes up 60 per cent of overall revenue. The order intake also rose 50 per cent, meaning growth is expected to continue next year.

Communities’ revenue shrank 19 per cent because there were no major elections in the first half of the year. However, it increased sexual health revenue and order intake by 6 per cent and 25 per cent, respectively. Election revenue is predictably lumpy, and it will return when the elections do.

Idox is a high-margin business, with a reliable government customer base and recurring revenue standing at around 60 per cent. Prompt payments helped increase operating cash conversion to 148 per cent. The downside is that the market size is limited but outsourcing back-office operations to India is a good way to improve margins. A solid performance. Hold.

Last IC View: Hold, 65p, 26 Jan 2023