09/09/2007
Five years after hitting rock bottom when its banks and creditors were calling for the company to be sold off, business-to-consumer software group Portrait’s recent resurrection has proved nothing short of remarkable. Now, boasting more than two hundred clients across more than 20 countries and a market valuation of less than £20 million, Portrait is a growth stock that deserves more attention from investors.
Founded 21 years ago as AIT Software, the Henley-based company enjoyed a successful run after going public on the Full List in 1996, with its market cap soaring to £200 million. Sadly, the management team at the time dropped the ball after an extravagant series of investments and a severe cash crunch crippled the business.
But instead of the touted trade sale, in rode white knight Nick Randall. As chief executive he set about a major restructuring, trimming fat and paying off debt with a
£20.5 million refinancing supported by his long-time collaborator, US-based venture capitalist Bessemer.
Strategy
On arrival, Randall was impressed with the potential of a new software suite AIT had created – the fruit of almost £30 million worth of development. Based around this software, Portrait now operates in a field it describes as business-to-consumer (B2C) customer interaction management (CIM), a niche territory in the increasingly ubiquitous realm of customer relationship management (CRM).
Portrait targets the retail financial services sector where there are high volumes of customers communicating via a range of methods (branch, phone, internet and so on) and where companies want to ensure customer interactions proceed smoothly, increase retention rates and respond better to change.
For some time, the group’s biggest client has been building society Nationwide, where 12,000 people use the software. But around 200 clients worldwide provide Portrait with sterling recurring revenues as well as the potential to sell new software and services. These include British Telecom, China Automobile Association, ‘the largest police force in Europe’, Merrill Lynch, T-Mobile and the Bank of Tokyo.
In 2005, Randall added an analytics capability to Portrait’s suite of CIM software through the acquisition of Quadstone, which enables financial services companies to analyse the needs of all their existing customers in order to sell them new products more effectively. In addition, Portrait’s offering allows organisations to analyse details from a potential customer and, in ‘real time’, come up with a range of ideal products. This has been described by industry research experts Gartner as a ‘visionary’ product and, says Randall, ‘is the holy grail of marketing and makes us unique’.
Management
Portrait’s management team have all been involved in growing or recuperating small software businesses. Randall, an acknowledged turnaround expert, is an engineer by training who set up his first business in the 1980s to make superconductor magnets for MRI scanners.
With the money from the sale of this company he bought and turned around ailing defence company AirTech. After floating it on AIM he eventually orchestrated a merger with US-based Remec, where he worked as the head of mergers and acquisitions until leaving for Portrait.
From AirTech, Randall recruited finance director Matthew White, an able numbers man with whom he has worked since 1998. Prior to AirTech, White ran a corporate financial services team at Arthur Andersen in London, gaining seven years’ experience in international corporate recovery and six years in audit practice.
Manning the board as chairman is John O’Connell, the man who founded and grew business process software specialist Staffware from a small AIM stock to a Full List player operating profitably in 22 countries. O’Connell knows all about shareholder value creation, having sold Staffware to California-based Tibco in 2004 for over £120 million, and is an experienced figure in the software space. He sits on the board of technology companies Columba and InforSense.
Based on Bessemer’s 14.5 per cent stake in the business, Randall has brought two of its experienced venture capitalists, Felda Hardymon and Rob Stavis, onto the board as non-executive directors. They are joined by Neil Pearce from recent £1.3 million investor Advent Venture Partners, which, Randall says, has a few smaller portfolio companies on its books that could prove suitable ‘infill’ acquisition candidates for Portrait.
Prospects
Guided by management with considerable gravitas and back on a stable footing, prospects rest on three pillars of growth.
The first is Portrait’s recurring revenues from its 200-plus clients, which are users of older ‘legacy’ software in the main. Randall is determined to ‘upsell’ as many as possible to the new, improved versions of the technology, which means ‘we can not only sell them new software but we can also keep them longer’.
Long-time customer Lloyds TSB provides a salient example. It is the recent signatory of a £1 million contract to use Portrait’s new technology, providing a channel for all of the bank’s internet, call centre and branch interactions through a single system. Other important contract wins during the last year include deals with Nationwide Insurance, Hutchinson 3G, Accenture and TJX.
The second pillar is to create alternative means of getting to market by developing partnerships with other software producers. These are based on an application platform suite called Portrait Foundation, which allows other software companies to build better ‘customer-critical’ applications more quickly. The prime example in this case is US-based Fiserv, a $4 billion (£1.9 billion) software company that has incorporated Portrait’s software into its offering to banks. Fiserv has already signed up ten customers to this product and Randall expects Portrait will receive highly lucrative licence and service revenues from this successful tie-up.
Other partnerships include one with insurance giant Swiss Re for a rather unusual application known as a ‘decisioning engine’, with smaller developer Impendium for ABN Amro’s capital markets team, as well as with Unisys, a global integrator that has already sold Portrait-based products to six customers in the financial services and public sectors.
Since Portrait possesses the only CIM software built on Microsoft’s ‘.net’ framework, the group is in a unique position to work with the computer giant and to this end is helping it sell to top-tier B2C manufacturers. Portrait is also part of a Microsoft retail banking consortium set up to challenge Oracle and IBM.
The third strategic pillar is to build new software applications to be sold directly or through re-sellers. As Randall explains, this means Portrait now looks to deliver specific solutions to customer problems rather than simply the tools that allow them to build their own solutions, making its sales process smoother because selling applications is easier than selling a whole platform. Moreover, the more applications it sells the more Portrait increases its high-margin software licence and support revenue as a percentage of total sales.
New applications developed include the Interaction Optimizer, described as ‘a turbo charger for making traditional CRM systems more intelligent and responsive’. Furthermore, the Metropolitan Police is using one newly developed application to take
999 calls that Portrait hopes to sell into other markets.
Valuation
Results for the year to March came in ahead of forecasts and contained pleasing news
of an 89 per cent increase in licence sales to £3.4 million, showing strategic moves
to increase the share of high-margin applications are bearing fruit. Support revenues grew nine per cent to £6.1 million and services 17 per cent to £4.9 million. Profits before goodwill amortisation, exceptional items and charges for share-based payments trebled to £600,000. Cash in the bank at the year-end amounted to £4.3 million with gross debt relatively modest at £3.8 million.
For March 2008, investors might expect a 24 per cent sales rise to £16 million, from which pre-tax profits should double to £1 million, more than doubling earnings to 1.1p a share. Based on market forecasts, the shares are trading on a prospective p/e ratio of 17.1 times which drops to below ten times for 2009, representing a large discount to the sector average. That looks unwarranted considering earnings are forecast to swell 111 per cent this year and 73 per cent next. PEG ratios closer to zero than one imply Portrait is very good value indeed, with the anomaly possibly reflecting a volatile share price performance over the past few years.
We believe Portrait is a gem that has yet to be unearthed by the wider market. Added spice might come if one of its partners, or a larger competitor, decides to snap the company up itself. Portrait, offering terrific earnings growth as an independent as well as potential strategic value as an eventual target, is a good long-term buy.
| AIM | £14.21m |
12.00p
|
0.00p
|
|
| Other company articles: |
| 31/03/2008 |
| 09/09/2007 |
| 03/08/2007 |
| 30/04/2003 |
| 25/04/2003 |
