Netcall hoping to boost growth with investment

Netcall (NET) sells software to help companies automate their interactions with customers. Its cloud platform allows companies to build chatbots, sales management platforms and software to analyse their data.

The sales pitch is obvious. At the moment, when salaries are rising companies should be looking to save on labour. Instead, they can use Netcall to build software to boost productivity. And it seems to be popular. Cloud product revenue increased by 55 per cent in the full year to June and total annual contract value (ACV) was up 15 per cent.

The net retention rate was 113 per cent, which shows that customers are happy to increase their spending on the platform. Netcall also managed to retain its largest S&P 500 customer on a new year five-year contract despite that customer consolidating its software suppliers. All good evidence it is popular with those that use it.

Netcall is investing heavily in the product to boost growth. Research and development costs (including those that were capitalised) were up 22 per cent to almost £5mn – equivalent to 14 per cent of revenue and above the industry average. This kind of investment means return on equity has been below 10 per cent in the past but its returns are increasing as profitability rises.

The share price has fallen almost 20 per cent this year which has brought the forward price/earnings ratio down to 26. Netcall is still expensive but if it can prove its investment will accelerate growth then it could be in for a re-rating. Move to buy. 

Last IC View: Hold, 81p, 05 Oct 2022