GB Group hit by ‘internet economy’ slowdown

Cyber security firm GB Group (GBG) is facing two major headwinds. The first is general macroeconomic malaise –  specifically higher inflation and monetary tightening, which has suppressed consumer demand leading to lower transactional volumes. The second relates to changes in consumer behaviour. Since the pandemic, there has been less online shopping and a cryptocurrency slowdown, which has dampened demand in the ‘internet economy’, particularly from fintech businesses.

Growth has been disappointing as a result. GBG’s revenue was broadly flat in the six months to September and adjusted operating profit fell by 15 per cent to £23.9mn.

Many of GBG’s issues stem from its identity division, which offers biometric identity-proofing technology to verify customers and generates almost 60 per cent of group sales. Identity revenue fell by 2.8 per cent on a constant currency basis to £76.6mn. This was largely – but not entirely – driven by a decline in crypto customers. 

However, management said monthly transaction volumes had now “stabilised” and expects to deliver “some year-on-year revenue growth in the latter part of the year”.

Other parts of GBG have proved more robust. The fraud business grew revenues by 10.5 per cent on a constant currency basis, while the location division increased sales by 8.1 per cent. Cash generation across the group is also strong and management is making good progress on efficiency savings, achieving an annualised run-rate reduction in operating expenditure of £10mn. 

There are a couple of red flags though. First, while GBG turned an adjusted profit in the period, it reported a statutory operating loss of £56.2mn, driven by a goodwill impairment charge of £54.7mn, which was blamed on the increase in discount rates. This follows a £122mn impairment last year. With almost £600mn of goodwill still on the balance sheet, there is plenty of scope for further write-downs and we are increasingly sceptical about how much the company’s intangible assets are actually worth. 

It is also important to note that just 55 per cent of GBG’s revenues come from software subscriptions. The rest comes from transactions and consumption, meaning there is not huge amounts of visibility around future sales. 

Over the long term, there should be plenty of demand for digital location, identity verification and fraud software, as regulation increases and digital transactions stay high. However, we are waiting to see more evidence of this in GBG’s results. Hold.

Last IC View: Hold, 330p, 29 Nov 2022