After a testing few years, IT outsourcing specialist Netstore is at last getting the thumbs-up from investors, thanks to a switch from techMARK to AIM in late 2004 and February's announcement of record interim numbers.

The results, for the six months to December, suggest that the company's long trudge towards profitability is now all but over. During the period, a £672,000 loss was converted into a £321,000 profit before tax.

Sales slipped slightly from £10.6 million to £10.1 million, but that reflected the disposal of several non-core, loss-making businesses. Importantly, £3.5 million of cash was generated in only six months, boosting total cash reserves to £13.4 million.

The company's improvement reflects decisions taken in the wake of Paul Barry-Walsh's arrival as chairman and chief executive in July 2001. Alongside finance director Neil Lloyd (who has since succeeded him as chief executive), Barry-Walsh set about transforming the business.

The basic idea, as Lloyd reminisces, was 'simply to sell bigger things to bigger companies'. Netstore had previously focused, rather narrowly, on supplying on-line back-up services to small and medium-sized companies.

Progress has been steady, yet marked. For the year to June 2001 Netstore ran up losses of close on £12 million from sales of just £3.6 million. This year, house broker Evolution is anticipating a total profit of £1.3 million on revenues of £21.5 million.

Today, the company makes its money providing outsourced IT services to mid-market organisations and local authorities. The emphasis is on supplying solutions in the areas of financial management, security and, of course, data back-up. A portfolio of additional software applications is provided via an ASP model, and Lloyd hints that further offerings in the human resources and payroll management areas are on the agenda.

Where Netstore differs from its larger competitors such as Capita, EDS and Syntegra is that rather than force a total managed solution on their customers from the start, Lloyd and his team encourage a more gradual adoption of outsourcing. Mid-tier firms instead embrace the model at their own pace. As they become more comfortable with outsourcing Netstore picks up additional business.

The local authority market is also becoming increasingly important to the company. Local government bodies are notoriously bad decision-makers when it comes to installing IT, yet Lloyd believes that the sector is compelling as it is characterised by 'high average spend, a homogenous set of problems and a long average contract length'.

A recently won £6.2 million eight-year deal to provide financial management and business intelligence solutions to Essex County Council is indicative of the progress being made in this area and Netstore now boasts a total of 17 significant local government clients, including six out of 26 London boroughs.

The benefit of such deals is that they grant Netstore a high degree of stability. Roughly £36 million of contracted revenues are waiting to be realised over three years and Lloyd anticipates that around 60 per cent of forecast revenues are practically guaranteed at the start of each year. This degree of earnings visibility is rare within the sector.

Contracting revenues provide the foundation but new business wins are also on the up. 'We used to pick up one or two new contracts a year, now we are up to 10 or 12,' Lloyd says. Further improvements should stem from the recent appointment of new sales, marketing and professional service directors.

So what of the cash? More than £13 million sits in the bank and despite calls to return a large portion of this Lloyd argues that 'we want to use [the money] constructively. We will look to make acquisitions and are keen to start paying dividends'. Pending court approval a maiden payment is likely to accompany the release of full-year figures.

At a 12 month high of 45.25p, the company's shares trade at around 25 times anticipated earnings (or just under 19 times those anticipated for 2006). But strip the cash out of the market capitalisation and the p/e falls to a little over 16 for the current year and 12.4 times for 2006. There is upside for the patient investor.