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UK tech investors look on in envy at NASDAQ's strength

Technology stocks remain all the rage on the other side of the Atlantic but the market is more diffident about the UK's techies

First Derivatives -

UK tech stocks drifted over the week despite the tech-heavy NASDAQ pushing to fresh highs.

UK small caps tech stocks were mostly lower while UK large-cap techs were held back by Micro Focus International PLC (LON:MCRO), which tumbled 27% after announcing disappointing interim results that included a US$922mln goodwill write off due to the impacts of coronavirus (COVID-19). While the key numbers for Micro Focus were in line and cash generation was healthy, a 7.7% decline in recurring maintenance fees spooked some investors.

News roundup

Last week saw trading updates for Gresham Technologies PLC (LON: GHT), IMImobile PLC (LON: IMO), Tracsis PLC (LON: TRCS), First Derivatives PLC (LON:FDP), Craneware PLC (LON:CRW), SRT Marine Systems PLC (LON:SRT) and PCI-PAL PLC (LON:PCIP).

First Derivatives (FD), the managed services, consulting and software provider, said in its annual general meeting (AGM) update that total revenue in the four months to June 30 was 6% ahead of the prior-year period. Managed services and consulting revenue was up 2% while software revenue increased by 8%. Separately, the company announced it had hired David Collins as managing director of managed services and consulting, reporting directly to chief executive Seamus Keating. Collins previously worked with FD’s financial consulting competitor GFT, where he was managing director of the UK, US and Canada and a member of the group executive board.

IMImobile, the cloud communications software and solutions provider, said in its first-quarter trading update that gross profit had risen about 20% year-on-year (you). The gross profit for cloud communications products, which represent about 90% of gross profit, grew by more than 30%, with the growth driven by the acquisition of 3Cinteractive. The group finished the period with net cash of £2mln, bolstered by the share placing in April, which raised around £22mln.

Tracsis, which provides software, hardware and services for the rail, traffic data and wider transport industries, said that it expects revenues of some £46mln in the year to July 31. The group estimates that the impact on current year revenue from coronavirus (COVID-19) will be in the region of £10mln, with the Traffic Data and Events business units most affected by project cancellations and postponements. The Rail Technology & Services businesses continued to trade very well as the performance of these segments is underpinned by high levels of recurring software revenue. The group currently has cash balances of around £16mlnln, after making tax and acquisition-related payments. A more detailed trading update will be provided next month.

Gresham Technologies, which provides solutions for data integrity and control, banking integration, payments and cash management, announced that its Clareti business's annualised recurring revenues (ARR) rose by 13% over the six months, and 18% over the twelve months, to stand at £10.7mln as at 30 June 2020. During the period Gresham secured two important Clareti licence commitments, including a £1.7mln licence contract with one of the world's largest banks. Recognised group revenues for the first half are expected to be 2% lower at £12.2mln, as Clareti revenues dipped by 11% to £7.4mlnln while non-Clareti revenues bounced by 15% to £4.7mln.

The group finished the period with net cash of £7.4mln. Effectively 88% of budgeted revenues for fiscal 2020 (FY20) are in the bag, after including business already won and renewals that have been contractually committed or are confidently expected. Consequently, management “confidently expects to achieve FY20 guidance for adjusted EBITDA [underlying earnings] and cash EBITDA.”

Craneware, which provides value cycle solutions for the US healthcare market, said it expects to report total revenue for the year to June 30 of roughly US$71.4mln (FY19: US$71.4mln) and adjusted EBITDA of around US$24.5mln (FY19: US$24.0mln). Trading in the first nine months of the year, which was before the COVID-19 outbreak, had been strong, with total sales tracking over 30% above the prior year; however, due to the impact of COVID-19, total sales for the year were only marginally ahead of the prior year at around US$65mln (FY19: US$63.1mln). Churn remains below 10%.

The group finished the period with cash of US$47.6mln and no debt, which is a similar position to a year earlier. Also, Craneware has undrawn debt facilities of US$50mln.

SRT Marine Systems, a provider of maritime surveillance, monitoring and management systems, saw its shares surge 27% after it announced its Philippines fisheries management system project has recommenced, with a significant cash payment having been received this week. Also, final contract negotiations have recommenced in the Middle East, and hence projects are expected to commence in the coming months. Furthermore, the transceivers business has performed better than expected, achieving gross sales during the first quarter 2% ahead of the same quarter for the previous financial year despite the COVID-19 lockdown.

PCI-PAL, the provider of secure payment solutions, said that trading for the year ended June 30 was in line with current market expectations. The company expects to report revenues in the region of £4.4mln, an increase of over 55% on the prior year (2019: £2.8mln). The total annual contract value of contracts signed to date rose by 68% to £6.7mln (2019: £4.0mln). In the period, the group signed new contracts with a recurring annual contract value (ACV) of £2.6mln (2019: £1.9mln).

PCI-PAL had a particularly strong second half, despite more than half of that period being during the height of the pandemic - the group signed £0.8mln ACV in the final quarter alone. Sales are predominantly in the US and the UK and more than 80% of new business is generated through channel partners. While the business is still burning cash, the group finished the year with net cash of £3.16mln and has a further £1.25mln of undrawn bank facilities.

PCI-PAL is one of three British companies, alongside Eckoh PLC (LON: ECK) and Semafone, a private company, that has carved out the niche market of secure payment solutions for contact centres. The market is growing quickly driven by regulations and the need to be PCI DSS compliant. PCI-PAL’s unique selling point is that it is the first to market with a “true-cloud” platform.

Seeing Machines, the advanced computer vision technology company that designs artificial intelligence-powered operator monitoring systems to improve transport safety, notes that the 'Moving Forward Act' has been passed in the US House of Representatives and is now set to move to the Senate. The bill, which is focused on advancing safety technologies proven to reduce crash and harm and to make sure strong safety standards are in place to save lives, seeks to mandate automatic braking, lane-keeping, blind-spot detection, event data recorders as well as driver monitoring systems in all cars and trucks sold in the US from 2024.

Separately, Euro NCAP has announced a delay to the 2022 and 2024 rating given the COVID-19 pandemic. These dates have been changed to give vehicle makers and Tier 1 suppliers more time to incorporate the necessary changes in light of the events of recent months. Despite these delays, Seeing Machines does not expect any material impact to its near-term forecast for automotive revenue. The company also said that in its view the ongoing work and projected timeframe for ongoing and potential new programmes will remain largely on target resulting in little or no impact to projected revenue for the next two to three years.

VR Education, the virtual reality technology company focused on the education and enterprise training space, has announced that it has signed a multi-year enterprise licence agreement with Tokyo Global Gateway (TGG) for use of the group's proprietary Engage platform. The agreement will see TGG use VR Education's Engage platform to teach Japanese students and corporate clients how to speak English in everyday travel situations - such as arriving at an airport, checking into a hotel or ordering food at a restaurant.

Small-cap software & services market roundup

Tech stocks drifted back with broader equity markets last week. Our small caps software index eased 1.2% over the week, while the large caps index slipped by 2.4%. Among the small caps, Aptitude gained a further 8% following its trading update the week before,  while losses were recorded by Kape, Ideagen and Bango. Among large caps, Micro Focus tumbled 27% after it posted disappointing interim results on Tuesday.

Small caps performance - chart

Indices are unweighted with the number of constituents indicated in brackets

Recent UK software sector fundraisings

No significant new fundraisings in small-cap tech were announced last week.

  Estimated gross amount Announced Method Price Discount/(premium) to prior day (%) Estimated % of new capital Comment
Redcentric £5.755m 26-Jun Placing/subsc 110p (7.8) 3.3 Part funds settlement with the FCA
Instem £15.75m 26-Jun Placing 435p 4.4 17.7 Accelerate the acquisition strategy 
Boku £20.1m 17-Jun Placing 85p 7.1 8.4 Part finances $41m acquisition of Fortumo
Wandisco $25m 11-Jun Placing 650p 12.2 6.0 Strengthen b/s and working capital
Learning Tech £81.8m 29-May Placing 127p 7.6 8.8 Accelerate growth and gain market share
accesso technology £32.9m 22-May Placing 290p 13.4 29.1 Strengthen the balance sheet as CV19 continues
accesso technology £6.2m 22-May Open offer 290p     1 for 13 ratio
VR Education €3m 20-May Subscription 5.47p 43.9 20.0 Subscription by strategic partner HTC
Keywords Studios £100m 15-May Placing 1450p 5.8 9.5 Acquisition strategy and strong balance sheet
KRM22 £0.135m 14-May Subscription 30p   1.8 Management subscription
KRM22 £1.145m 14-May Placing 30p (9.1) 15.4 Strengthen working capital, accelerate growth
Rosslyn Data £7.3m 07-May Placing 5p (5.3) 43.1 Increase S&M, maintain product development
Mobile Streams £1m 06-May Placing 0.3p 25.0 33.2 To give potential clients confidence
Shearwater £3.75m 24-Apr Placing 240p 17.2 6.6 Capitalise on considerable growth opportunities
Blue Prism £100m 21-Apr Placing 1100p 4.4 9.8 Improved balance sheet resilience
Crossword Cyber £1m 20-Apr Placing 230p 34.3 21.8 Enable to continue to drive business growth
essensys £7m 09-Apr Placing 151p 4.1 8.8 Increase balance sheet liquidity and flexibility
IMImobile £22.2m 09-Apr Placing 300p 8.4 9.0 To provide maximum financial flexibility


Calendar

March year-end results are anticipated over the next few weeks from ZOO Digital, IMImobile, Redcentric and Aptitude and April year-end from Ideagen. The June interims results season begins in late July with FDM and Gresham.

Across the pond, reporting is quiet for the next few weeks, until Microsoft reports annual results later in the month.

The main economic focus this week will be May industrial production data for the US on Wednesday and for Japan and the UK on Tuesday.

Date - Company - Event

  • 14-Jul ZOO Digital Final results
  • July Ideagen Final results
  • 21-Jul Redcentric Final results
  • 21-Jul Gresham Technologies Interim results
  • 22-Jul CloudCall Trading update
  • 23-Jul GetBusy Interim results
  • 28-Jul IMImobile Final results
  • Late July Quartix Interim results
  • Late July Shearwater Final results
  • 29-Jul Aptitude Software Final results
  • 29-Jul FDM Interim results
  • 05-Aug Seeing Machines Trading update
  • 11-Aug SDP Interim results
  • 13-Aug Tribal Interim results
  • 03-Sep NCC Final results
  • 07-Sep SRT Martine Systems Final results
  • Early Sept Craneware Final results
  • Mid-Sept Accesso Interim results
  • 30-Oct Seeing Machines Final results

Source: Data from regulatory news and company websites

Valuation table

The sector ratings look fair in comparison with the UK 350 large caps, given the significantly stronger growth potential, combined with the relatively strong balance sheets. Among individual shares, CentralNic has seen upgrades.

 

  Share Price (p) Market Capitalisation (£mln) Net debt/(cash) (£mln) Enterprise Value (EV) EV/sales Price/earnings
    Year 1 Year 2 Year 1 Year 2
First Derivatives 2540 697 49.4 746.4 3.2 2.9 42.5 32.5
EMIS Group 1090 685 (31.1) 653.9 4.1 4.0 22.9 21.1
NCC Group 171.8 479 5.0 484.0 1.9 2.0 25.3 27.4
SDL 500 456 (26.3) 429.7 1.2 1.1 24.0 17.1
Ideagen 165.5 375 16.8 391.8 7.0 6.5 31.4 26.4
Iomart Group 338.5 369 37.3 406.3 3.5 3.3 20.5 19.4
DotDigital Group 106 316 (22.0) 294.0 6.3 5.8 26.6 27.7
Kape Technologies 199 315 24.2 339.2 3.5 3.1 18.4 16.1
WANdisco 602 309 (17.6) 244.4 14.3 10.1 (21.7) (31.3)
IMImobile 302.5 249 (2.0) 247.0 1.5 1.4 20.5 25.8
Aptitude Software Group 412 232 (30.9) 201.1 3.5 3.7 32.1 34.7
IDOX 48.45 215 14.0 229.0 3.4 3.2 23.1 19.0
Redcentric 129 192 13.5 205.5 2.4 2.3 24.8 19.0
Alfa Financial Software Holdings 63.1 189 (58.5) 130.5 2.2 2.1 70.1 40.2
Tracsis 595 173 (16.0) 157.0 N/A N/A N/A N/A
Centralnic Group 84.5 160 56.6 216.6 1.3 1.3 17.8 15.4
Eckoh 62.5 159 (11.6) 147.4 4.1 3.7 37.0 29.6
Blancco Technology Group 195 147 (5.4) 141.6 4.3 3.8 66.1 35.5
Quartix Holdings 305 146 (6.8) 139.2 5.4 N/A N/A N/A
Bango 168 125 (2.7) 122.3 10.3 N/A 98.8 N/A
Tribal Group 57.5 118 (16.5) 101.5 1.4 1.4 15.5 14.3
Accesso Technology Group 262.5 108 (24.5) 83.5 2.2 1.0 (4.1) (37.8)
Seeing Machines Ltd. 3.05 103 (25.0) 78.0 3.7 2.7 (6.2) (13.9)
D4T4 Solutions 235 95 (12.8) 82.2 3.8 3.4 34.5 29.2
Oxford Metrics 75 94 (14.2) 79.8 2.1 1.9 17.4 12.8
Cerillion 302 89 (4.8) 84.2 4.1 3.8 29.0 25.7
Gresham Technologies 128 87 (7.4) 79.6 2.9 2.7 54.9 39.4
Essensys 150 79 (8.7) 70.3 N/A N/A N/A N/A
Sopheon 775 79 (17.3) 61.7 N/A N/A N/A N/A
Instem 454 76 (5.9) 70.1 2.4 2.3 21.1 20.3
                 
Median         3.5 2.9 24.4 21.1
Average         3.9 3.2 28.6 18.6

Source: Data from regulatory news and market sources

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