Companies: IEN   

Many companies involved in the technology boom at the turn of the millenium have fallen by the wayside or been snapped up by larger rivals at lowly prices.

A few have managed to plough their own furrows in an ‘against the odds’ belief that profitability will eventually arrive.

One such stock is Intelligent Environments, which looks as if it is moving into the black after many barren years.

The revolution in its prospects is due to a simple change in its charging strategy that has ensured that more of its revenues will be based on usage of its software rather than a one-off licence fee.

A decade on AIM
Surrey-based IE was formed two decades ago and floated on Aim in 1996, when it raised £15.6 million. That is nearly twice the company’s current market capitalisation.
It has been involved in many aspects of the finance software sector but its most exciting product now is NetFinance, an online financial software platform.

NetFinance enables quick and efficient online applications for financial products such as credit cards and loans. Software modules handling prepaid cards and savings were added this year. This will widen the range of potential customers.

The driver for IE’s long-term growth is the increasing use of online financial products. Around 14 million people are estimated to use online banking.

The move to charging on a per-usage basis gives IE the chance to generate revenues throughout the time the software is used rather than just when it is installed. There shouldn’t be any need to significantly increase group costs, so additional revenues from growing usage will mainly fall through to profit. There is still some initial consultancy revenue prior to the launch of the service. Overall, though, revenues won’t be as lumpy as the in past, as transaction revenues are paid quarterly in arrears.

Slow burner
NetFinance was originally launched in 1999 so it has taken some time to build up the customer base. Adding a ‘.NET’ version in 2002 helped to persuade banks and financial organisations to use its software.

It is designed so that these organisations can change their product offers easily and, as well as handling applications over the internet, it can equally be used in call centres or bank branches.

Because the software is easier to use, more customers’ complete the application rather than stopping part of the way through.

Good relations
Despite its poor financial performance in the past IE has built up good relationships with its customers. They include First Data International, and Certegy, the largest and the third biggest credit card issuers in the world, as well as HSBC, HBOS and Bank of New York.

Between 2001 and 2005 turnover hovered around the £3 million mark. This year it should be near to £4 million. In the first half of 2006, IE made a profit of £165,000 on turnover of £1.79 million. Transactional revenues won’t begin to be significant until next year.

House broker Dawnay Day forecasts a full year profit of £433,000, rising to £753,000 in 2007. IE will start to pay tax in 2007 and a tax charge of around 5 per cent is forecast for that and subsequent years. The broker suggests that profits could hit £2 million in 2009. That is a long way out but it shows the potential for the business.

More importantly, those profits will turn into cash. IE is expected to have net cash of £576,000 at the end of this year, rising to £1.2 million at the end of 2007. If IE meets forecasts then the net cash figure could be in excess of £4 million by the end of 2009. That is a significant figure as IE is currently capitalised at £8.8 million.

The main worry is that IE is at the mercy of its – much larger – customers when it comes to how long it takes to choose and then roll-out its software. That could have an effect on its rate of growth.

The shares are trading on 20 times forecast earnings for this year, falling to 12 in 2007. That’s attractive for a business whose revenues should grow along with online banking.

Intelligent Environments	AIM	£8.23m	5.00p	-0.38p
Click here for interactive charting
Other company articles:
In the Hot Seat			28/04/2008
Intelligent suffers one-off costs			18/01/2008
Intelligent wins big European bank client			16/11/2007
Pick of AIM by James Crux			09/08/2007
Fund Manager Focus by Pauline McCallion			02/07/2007