Netcall – dialling up growth opportunities

Call centre software specialist Netcall is a veteran of AIM, having joined the junior market back in 1996. In fact it was one of the very first companies to bring emerging internet and telephony interfaces together.

Driven by the surge in call centres, demand for its range of services has increased substantially. Whether calling for insurance quotes or to change your mobile provider, queues are a way of life. This can create unhappy customers, damage to brands and, worst of all, lost business.

So Hemel Hempstead-based Netcall has set about developing a broad suite of four key products, one of which is Queuebuster. This is a patented solution that allows customers the option to leave their details and hang up – whereupon their call will be returned when an operator becomes free, leaving the customer free to carry out other activities instead of waiting in a queue.

This helps boost contact centre productivity by smoothing out call peaks, enabling clients to handle up to 15 per cent more calls while improving the customer experience. Netcall went on to acquire QMax, an industry supplier of workforce management solutions. This can deliver a reduction in staff-related costs of up to 25 per cent by providing faster, more flexible and accurate scheduling and forecasting of contact centre resource requirements.

But the quantum leap took place last year when it bought AIM-listed rival Telephonetics for £10.6 million in a mixture of shares and cash. The deal has completely transformed its prospects and left Netcall with more than 600 clients, including big names such as Halifax, British Telecom, Honeywell, Autoglass and the NHS.

Telephonetics was a well-established provider of speech automation, intelligent call routing and data integration solutions, with a strong footprint in the NHS, where it delivers to over 60 per cent of the UK’s NHS acute health trusts.

Strategy
The strapline for Netcall is ‘always engaging’ – a strategy that it is working on heavily as it continues to integrate the Telephonetics business.

The business model generates revenues from a number of streams: software licences, support contracts, installations and set-up fees, as well as subscriptions and call usage charges.

With 120 staff, and a relatively flat annual overhead of £9.1 million, a large chunk of any new business drops straight through to the bottom line.

Netcall has also worked hard to deliver cost savings. The elimination of duplicated costs and streamlining of senior management has yielded better-than-expected annual savings of £1.8 million.

Netcall has rationalised its finance and back-office functions, in addition to relocating some offices. The effect has been to boost its blended margin by five points to 18 per cent, and broker Evolution reckons that 25 per cent is a realistic target.

Recent results for the year to June revealed the clear impact of the acquisition, as sales soared 229 per cent to £13.6 million and adjusted cash profits leapt 156 per cent to £2.75 million.

However, the real prize will be its ability to cross-sell its best-of-breed range of call centre services. Having reshaped its sales team, Netcall now has more than 100 cross-sale opportunities in the pipeline.

Chief executive Henrik Bang says, ‘We have freshened things up, and are very focused on not missing opportunities.’

He points out that every year more than 95 million outpatient appointments are booked in hospitals. Sadly, up to seven million people don’t show up, costing the NHS up to £600 million in lost productivity each year.

Using a new solution, it can contact patients by call or text to remind them of appointments. Netcall has integrated this system from Telephonetics with its Queuebuster to create an added-value product that could further its reach to beyond its 100-strong client base of hospitals – this alone could be worth £5 million over three years.

The healthcare sector is a big area for Netcall, but it also has strong market positions with local authorities, police forces and the private sector – particularly in financial services, utilities and retail.

Capital expenditure on software is just £250,000 a year, but Netcall is investing £1 million in new developments. This will smooth its entry into the multi-media space as well as a push into the cloud-computing arena.

It’s also worth noting that no single customer accounts for more than ten per cent of revenues.

Management
For those with a passion for smaller companies, chairman Michael Jackson is a man who needs little introduction. He joined the board of Netcall in March 2009, providing a wealth of experience.

In 1990, he founded Elderstreet Investments, which is a leading UK venture capital fund manager, specialising in the provision of early-stage and development capital for growing companies.

For more than 25 years, Jackson has helped raise finance, but is probably best known for his time at accounting software giant Sage, at which he held the position of chairman from 1987 to 2006.

He studied law at Cambridge University and qualified as a chartered accountant at Coopers & Lybrand before spending five years in marketing for various US multinational technology companies.

Jackson is also a director of fellow AIM counters Snacktime and Access Intelligence.

Charismatic Dane Henrik Bang joined Netcall as chief executive in 2004 at a time when the company had lost its way and was in dire need of a turnaround. Prior to this, from 1999 to 2004, he was vice-president at GN Netcom, which was part of the Denmark-listed GN Great Nordic Group. Bang has also held a number of international management positions in IBM and shipping giant AP Moller-Maersk Line.

Number cruncher James Ormondroyd joined the Netcall board as finance director last year, on completion of the Telephonetics deal – where he held the same title. Quick-witted Ormondroyd was previously the finance director and company secretary at World Television Group. He is also a member of the Institute of Chartered Accountants in England and Wales.

Supporting the executive board are three seasoned non-executive directors. Following the Telephonetics acquisition, Mark Brooks swapped boards to join Netcall in 2010, as did its former non-executive chairman, Michael Neville,
who brings a wealth of experience in capital markets.

Prospects
As an extremely scalable business, cross-selling is likely to keep the management team at Netcall pretty busy in the months ahead. There is clearly scope to win new contracts, as it works hard on becoming more embedded with its clients. Indeed, broker Evolution predicts that Netcall should be able to deliver at least high single-digit revenue growth from this area.

However, it’s not all about organic growth; indeed, Bang is keen to explore acquisition opportunities in what remains a massively fragmented market.

There are an estimated 150 companies in the UK with sales of £2 million to £10 million in the relevant areas of contact centres and enterprise communications. By plugging in additional bolt-on acquisitions, Netcall should be able to strip out overheads (as it has proved to be capable of doing). Bang admits that they have a significant pipeline on their radar, but will remain ‘highly selective’. By integrating the products of others, it has a readily addressable customer base to target.

Its Movieline product is a cash-cow, but as a supplier of software to cinemas for when clients book tickets on the phone it is understandably under pressure as the order process switches more online.

Current trading is good, with order inflow in the first quarter of 2011/12 being well ahead of the comparative period last year. Expect a further update on progress at the annual general meeting, which is scheduled for 24 November.

Valuation
Netcall is a high-margin business, with significant recurring revenues. Following its last financial results to June, it has already swelled its net cash balance to £6.5 million by the end of August, which equates to more than a quarter of its current market value. Evolution predicts that this will swell to £7.6 million by 2013, assuming no corporate activity.

When stripping the cash from its market cap, the enterprise value is little more than £16 million. For this, you get a company that has a raft of blue-chip clients, as well as services that are clearly in demand.  

Moreover, it has not paid tax for many years and still has substantial accrued tax losses. It has capital losses of more than £6 million, and values these at just shy of £2 million.

Netcall recently declared a 0.4p dividend, which equates to a yield of 2.1 per cent. This was a payment that few had expected, but is evidence of the board’s plans to reward shareholders.

It also has shareholder approval to acquire up to three million shares, and has already exercised this with the recent purchase of 300,000 shares at 17.4p for cancellation.

WH Ireland predicts a 28 per cent jump in 2012 pre-tax profits to £3.2 million, delivering EPS of 1.9p. For 2013, the small-cap specialist expects Netcall to achieve pre-tax profits of £3.4 million and EPS of 2.1p.

Trading on just ten times earnings, shares in Netcall are on an unwarranted discount to the sector. Indeed, Evolution has placed a target price of 25p, which would still be low compared with recent acquisitions in the software space.
On track for another record performance, we rate Netcall as a long-term buy.