Delcam’s pattern for success

Birmingham-based Delcam develops software that is used for the design and inspection through to the manufacture of complex shapes. The company’s history dates back to 1965, when development work at Cambridge University saw the possibility of using computers to assist pattern-makers in solving the problems of modelling tricky 3D shapes.

The progress since has been impressive, as Delcam is now the third-largest provider globally of CAM software for the manufacturing sector. It has a market share of 6.5 per cent and boasts clients that operate in markets as diverse as aerospace, footwear, medical, dental, toys and sports equipment.

Leveraging from a network of 80 countries, the AIM-listed firm has 35,000 customers, so is very well spread. Earlier this year, Delcam reported that results would beat expectations, and in  March it duly reported an impressive set of numbers as sales reached record levels.

Growth has been driven by a strong performance in Europe (44 per cent of sales), Asia and the US. However, Delcam is also seeing impressive demand in newer territories such as China, Korea and India. There has been a recovery in software licence sales across most countries, as clients begin to spend again. Delcam has also boosted its investment in sales resources for both China and India.

Chief executive Clive Martell enthuses, ‘We operate in a fragmented market and have a strong market position with good brand awareness.’

The highest ever investment of £9.4 million in R&D last year has ensured that Delcam remains competitive. Moreover, efforts have been stepped up in newer markets such as healthcare, which has involved the launch of new products for the dental and orthotic sectors. Indeed, new versions of all its main software products were released during the second half of 2010.

To improve efficiencies Delcam has combined its tooling services arm with professional services, a move that should also help growth in its prototype manufacturing efforts.

Due to the nature of its software maintenance contracts, 32 per cent of annual revenues are recurring. In addition, the strong cash generation it enjoys allowed Delcam to double its net cash pile last year to £8.8 million – this should push through £10 million in 2011, even after a £2.5 million payment to a new pension scheme.

Another point of interest is the fact that specialist FTSE 250 engineer Renishaw holds a 19.75 per cent stake. Two former listed rivals, Planit and VI Group, met with bids, so Delcam could yet provide a tasty morsel for a larger competitor. The current year has got off to a good start, with companies in most of its major territories planning to boost their investment in capital equipment and associated software.

Though the final quarter is crucial for Delcam, the strength of its balance sheet and market position provides a solid rationale for investment. Trading at a significant discount to the software sector, the shares, although illiquid, are worth locking away. Buy.