Rising costs cause Eckoh's earnings to slump

By 'breaking America' British payment security provider Eckoh (ECK) has succeeded where many British musicians have failed. In its results for the six months to 30 September, North American annual recurring revenue jumped 22 per cent. "North America is our most significant target market," said chief executive Nik Philpot, and it's easy to see why when looking at the growth rates across the pond. 

However, the American dream has not been a boon for the whole business. Total revenue dropped 4 per cent, which it said was due to the loss of a large UK client and the ongoing transition to cloud delivery. The move to the cloud also increased costs, slashing its already thin margins, meaning pre-tax profit halved.

Should the move to the cloud create the efficiencies Eckoh hopes it will, the temporary pain will be worth it. When this "exceptional cost" is removed, the results look better, though still down on last year. Its net cash buffer should help fund a fair amount of future investment should the business need it, which is another plus.

With North America now accounting for 47 per cent of revenue, the investment case rests in part on continued growth on this front. A consensus forward price/earnings ratio of 17.6 times for FY2024 falls to 16 the following year, which seems reasonable from an historical perspective. True, forecasts were similarly bullish in 2019 and proved incorrect, but no-one could have foreseen Covid-19 disrupting the business the way it did. Eckoh provides a B2B service, and many of its customers struggled during the pandemic. 

Barring another black swan event, we remain bullish on the growth story for this company. Buy.

Last IC view: Buy, 40p, 14 Jun 2023