Talking Tech

Talking Tech is produced by the Progressive Tech Team of George O’Connor, Ian Robertson and Gareth Evans. Our aim is to bring you up to date with the tech news cycle each week. We comment via blog and podcast on the slings and arrows of the sector at a time of huge change.

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March 27, 2024

Super Tuesday Financials: BYOF (Bring-your-own firehose)

On Tuesday (26/3) a firehouse of results washed over us. On the podium; Big Technologies, Get Busy, K3 Business, Kooth, Pebble Beach, Softcat, Trufin and Xaar with FY Trading Updates from CML Microsystems and ZOO Digital. Our breathless review of the 10 shows positive financials, a ho-hum share reaction (average +3.6%) a nuanced (bobbing up & down) KPI review (see below) but few signs of continued deterioration. In addition, we take a deeper dive into the latest financials from Accenture (21/3), Computacenter (20/3) and Hostelworld (21/3). These interplay with our bigger tech themes: (i) slow recovery in T&M Services, (ii) The Great (Inventory) Unwind theme has played out as Computacenter sliced 15 days off Inventory – a remarkable ‘whack amole’ result. (iii) Our ‘Experience Economy’ theme shows little interest in tiring at Hostelworld and its sleepover with a strong FY print underpins that secular shift. We are excited to see Hostelworld tap into shifting demographics: target customers from Africa & Latin America who reverse traditional travel corridors as they go west, and north. We note the newly public Reddit and New Digital World/Truth Social shows us what Marketing spend ratios look like for a viral platform (yes, we raided the S-1 cookie jar and here) as we ponder Hostelworld margin outlook. Swim with the tide and read on.

The Super Tuesday KPI messages:

  • Revenue growth: Pleasingly at 13.9%, revenue growth was well in excess of current tech industry growth rate projections.
  • Gross margin: A better pricing environment comes through with an impressive 28 basis point improvement Y/Y.
  • Adj EBITDA margins: At 19.3% the group Adj EBITDA margins remain low but it is more firmly on a recovery path.
  • Operating margins: Given the mix of business models this is a disappointing out-turn at negative 0.4%.
  • Cash conversion: The tech sector is noted for strong cash conversion (Note: Folks typically pay for tech before they consume it, recently this happy formula has been dented by post-pay subscription and consumption cash models) so the c91% level may look positive on a stand-alone basis but should edge higher in strong trading environments.

See the Data Section of this report.

Our mooch around the keywords in the outlook commentaries

Big Technologies Final results: On the day share price reaction +2.7%

Started the new financial year in line with the Board’s expectations. Despite some short-term headwinds to sales and profits expected in 2024 as a result of the ending of a contract in Colombia, the Group expects to remain highly profitable and cash-generative and there is a solid pipeline of future opportunities. The Board is confident of a return to growth in 2025 and beyond.

CML Microsystems FY Trading Update: On the day share price reaction -16.1%

The Company performed well through the first half year of trading, reporting solid growth against a backdrop of a general decline in the semiconductor market. At that time, the Company sounded a note of caution on the trading outlook for the second half, due to elevated inventory levels across a selection of customers, a generally weaker than anticipated China market and the need to absorb the acquisition of Microwave Technology, Inc. (MwT). The knock-on effect of this has led to shipments from the core CML business (excluding MwT) being lower than previously expected. The revenue contribution from MwT has been very positive under CML’s first period of ownership and has been above management expectations. This change in revenue mix between higher margin core products and lower margin MwT products impacts the overall Group margin and will result in profitability being below prior expectations. Over the last few reporting periods, the business has successfully negotiated a number of headwinds whilst simultaneously taking actions and making investments to strategically re-position the business.

Learn more: CML is covered by our colleague Ian Robertson

Get Busy Final results: On the day share price reaction +0.1%

Core markets remain robust, balance sheet is strong, we have a loyal customer base and our revenue is highly predictable. 2024 has started well, with continued growth across the Group through a combination of new business, expansion and price improvement. “Against an ongoing challenging economic backdrop, never has the relevance of our products been more apparent as we help customers to be efficient and secure in the face of rising costs, elevated cyber threats and ever-increasing compliance burdens.”

K3 Business Final results: On the day share price reaction -1.9%.

Group trading in Q1 of the new financial year is in line with budget, and K3 has a stronger balance sheet than in FY22, which should continue to strengthen. While the markets that K3 serves remain challenging, the Board believes that both divisions have good growth opportunities. The Board remains focused on the transition to higher quality recurring earnings, as well as cash generation, cost discipline and additional operational simplification, which will help to drive further shareholder value. Overall, the Board expects cash generation to continue to improve in FY24 and the Group to deliver a higher adjusted operating profit result.

Kooth Final results: On the day share price reaction -1.0%

UK headwinds remain given NHS short-term financial pressures to address the 2023/24 budget deficit. Robust balance sheet enabling Kooth to invest to meet long-term, increasing demand for its services. Kooth’s proven track record, strong recurring revenue and net cash position give it an excellent platform for profitable growth as it enters 2024 with the expectation of gross margins of >70%, an EBITDA margin in the mid-teens and rising thereafter. Revenue and EBITDA expected to be in line with 2024 market expectations.

Pebble Beach Final results: On the day share price reaction +10.5%

We were pleased to announce in our trading update in January 2024 that we expected FY24 trading to be ahead of the prevailing market forecasts. We are confident in the market opportunity for the Company and that the anticipated growth in FY24 will be a platform for further growth in FY25 and beyond. The Group enters 2024 with a strong pipeline, a platform for profit growth and with our dedicated, happy workforce, the Board are confident of the opportunities that lay ahead.

Softcat Interim results: On the day share price reaction +4.4%

Positive performance over the first six months of the FY reinforces our expectations to deliver on our FY guidance of double-digit gross profit and high-single digit operating profit growth. The future opportunity in our industry remains incredibly exciting. AI, data management and cybersecurity, amongst other technologies, continue to drive rapid transformation in technology, and this will generate growth across all areas from the cloud and datacentre to the edge. These incremental tailwinds to an already growing market play into our comprehensive offering at a time when customers need broader and more integrated support from their partners than ever before. This is a great opportunity for us to further increase our market share and we have therefore continued to invest for future growth, increasing headcount by 14.6%.

Trufin Final results: On the day share price reaction -3.5%

TruFin has had a strong start to the year with Group revenues for January and February expected to be not less than £5.8m; a 271% increase over the same period in 2023. Playstack’s latest game launch, Balatro, has contributed to much of this growth. It is important to note that this pace of growth is not expected to continue throughout the year. As always, growth, profitability and value crystallisation remain integral to TruFin’s purpose and vision. Whilst mindful of the unsettled global political and economic picture, TruFin’s steady yet ambitious stewardship of its subsidiaries in pursuit of shareholder value will continue.

Xaar Final results: On the day share price reaction -6.0%

Having put in place strong foundations through the development of our strategy over the last three years, the Board is optimistic about the opportunities that lie ahead for the Group and for all our stakeholders including employees, customers, and shareholders. Xaar remains in a good position with unique and compelling products and a significant addressable market.  External factors mean we are cautious about the short term, but we believe the business is well positioned for growth over the medium and long term. We look forward with confidence.

Learn more: Please visit our Research Hub

ZOO Digital FY Trading Update: On the day share price reaction +46.6%

The Company has since received further clarity on timing of projects and is now receiving orders relating to work on feature films and TV shows that have been completed following the industry strikes of 2023 that brought productions to a halt. With January invoicing the highest month since April 2023, the Company is beginning to see an acceleration of its pipeline with work expanding in March and April 2024. As a result, the Company expects to beat revised market guidance for FY24 with revenues of at least $40. Consequently, the anticipated EBITDA loss will be reduced. Net cash on 31 March 2024 is expected to be at least US$3m, also higher than revised market expectations. The Company’s order book for FY25 Q1 is currently up by 30% on FY24 Q4.

Learn more: ZOO Digital is covered by our colleagues Gareth Evans and Tessa Starmer.

Addendum: On the screen 27 March . . . more of a drip feed

Quartix Technologies – AGM statement and CFO exit

Today (27/3) Quartix Technologies, one of our IoT/Smart cohort, issues a positive AGM. Trading for the first two months of 2024 has been consistent with meeting market expectations for the year. However attention today likely focused on why CFO Emily Rees resigned in order “to pursue opportunities outside the Company”.

Nanoco Group – Interim Results

Two standout positives with; (i) commercial progress with shipment in November 2023 of two first-generation materials for use in infra-red sensing applications in electronic devices (cameras and imagers. Pleasing telling that Nanoco can focus on commercials rather than just legals and, (ii) the return of £33m to shareholders via Tender Offer and Share Buyback. “The FY24 performance is expected to be in line with market expectations”.

Corero Network Security – Final results

Corero is a distributed denial of service, DDoS, vendor. The company comments on a “strong start to 2024” with robust new business pipeline. Newbie CEO Carl Herberger comments that during 2024, the company will continue to build upon the foundations laid in 2023. For us, Corero never lived up to its potential, but in addition to a new CEO the results sport some decent KPIs: 11% revenue growth, 30BPs growth in gross profit margin, a small operating loss and very strong operating cash conversion, 143%.

Looking into the sector themes and updated dashboards

Accenture Q2 results (21/3): The slow recovery in T&M services

With the one-month out reporting schedule we think that Accenture tells us what to expect about the coming quarter, rather than giving the exhaust fumes from the prior one. With this in mind; (i) revenue growth continues to drift south as Accenture reported US$15.8bn revenue flat Y/Y (ii) Book-to-bill strengthens and pleasingly the Book has not aged (iii) operating margins are falling sequentially but are now rising on a Y/Y basis, (iv) from the staff related KPIs we note falling FTE numbers, utilisation strengthens and attrition has risen. This trio suggests a generally positive set of circumstances for future profitability. (v) Bookings US$21.6bn, was billed as the company’s second-highest ever (Book-to-Bill 1:1.37x), and helped along by GenAI new bookings of US$600m+. This makes the GenAI tally US$1.1bn for the six-month period (a lot of PoCs). We revised our IT T&M Services dashboard (see below).

Computacenter Final results: The Great (inventory) Unwind and the investor payola

The print was ahead of expectations, the core interests are twofold;

  • Can Computacenter do the 20-year EPS growth run? The final year of a 20-year journey occurs in a soft year – this year. Computacenter has put a dampener on expectations (consensus believes that 20 happens) but we suspect that Windows 11 upgrades will drag rather than surge later this year – as we add in steep H1 comps – this could be a bit of a white knuckle down to budget flush season. In addition, Computacenter has a higher ETR this year (guided: 28.5%-30.5%, from 27.6% FY2023A) so PBT has to work harder to drive EPS growth. The geographic coverage model means that un-even performance is pretty much baked-in. Simply put, fortunes is aligned to weaker geographies and particularly so the UK where 2023 revenue was -4.4% Y/Y. The UK has been the ideal operational template with its ‘joined up’ model of services contracts pulling product sales and the whole of life offer from pre-procurement through to disposal (Circular Services) making for a sticker customer base. However, that interconnected model means that the slowness in one, drags performance in other.While Services gross margin was -32bps (blame inflation and on-boarding costs) positively, and in common with the wider Professional Services industry, Computacenter is better positioned to manage utilisation and pricing (see Accenture above) for 2024 so the profitability levers are working in its favour.
  • The Great (inventory) Unwind theme has played out. Inventory washed out to working capital in 2023 making that very strong cash out-turn – note Adj Net Funds grew to £459m from £244.3m Y/Y as c£200m was unlocked taking inventory down to £216m. As is usual investors get a to argue the capital allocation case over the coming months and recap the company has returned £697m since 2013. Computacenter could buy something (there is a coverage gap in the N. Eastern band in the US, and we have been looking at Computacenter Japan) but we recognise that India was largely organic, so on balance we think that a large RoV is on the cards.

For 2024, cash conversion comes back to a normal and inventory days hover around these levels. The wild card being users thinking of upgrading server estates to GPU rather than CPU (i.e. A GenAI inspired move). This would accelerate the depreciation cycle on server farms, and there would likely be a wait list from Nvidia and so building the customer configurations would lead to inventory build. We have revised our IT Infrastructure Services dashboard (see below).

Hostelworld Final results: Traffic growth, share gains cash – no sleepy bed nights

The print headlines were widely commented on elsewhere. We are interested in the underlying KPIs themes (Record full year net GMV, Adj FCF €13.9m, 75% cash conversion vs -521% Y/Y) and where this market is headed. Today, Hostelworld’s Social side is a feature to enhance the customer experience and create better informed customers for the hostels to upsell during their stay. In time, and with more transactional data, Hostelworld should get a better inventory of bednights and also better pricing as it delivers better informed customers to the hostels (the parallel is bit like the advertising world with first party data). In addition, the social has a value on its own. For if we transpose Hostelworld for Reddit in the S-1 we note that Reddit shaved off 51bps from its Sales & Market/revenue ratio leaving FY2023 at 28.6%. For its part Truth Social reports US$.1m revenue with US$0.38m outlay on Sales & Marketing. While Hostelworld ended 2023 with advertising/revenue below 50%, the company maintained longer term guidance suggesting there was no further step-down. In fairness, the social side at Hostelworld is only a year and a half old so we are likely premature in our thinking.

We are also interested in global demographics with the mode of target traveler groups now among the Asia/Pac, Latin American and African countries. At the analyst conference call CEO Gary Morrison commented on the different price points between Europe and Asia (c€30 vs €10). For us as the world gains from the general ‘middle classification’, European price points look prohibitive which should steer that next generation to hostels as the most sustainable and cost effect price point. For us, AirBnB, already commenting on this trend, seems to be pricing itself out of the market. We have revised our Travel-tech dashboard (see below).

The Data

The reporting companies of 26 March

Source: Company data, Yahoo Finance, Analyst

IT T&M Professional Services Dashboard

Source: Company reports, Analyst

IT Infrastructure Services Dashboard

Travel-tech Dashboard

Global youth population

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Opinions contained in this communication represent those of PERL and/or our affiliates at the time of publication and PERL does not undertake to provide updates to any opinions or views expressed. PERL does not hold any positions in the securities mentioned in this communication, however, PERL’s directors, officers, employees, contractors and affiliates may hold a position,  and/or may perform services or solicit business from, any of the companies or related securities mentioned.

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