Intercede AGM and Tech Stock Valuations

Yesterday (18th September) I attended the Annual General Meeting of Intercede Group Plc (IGP) at their offices in Lutterworth. I have held a very few shares in this company since 2010 in the hope that it would be able to turn its identity software solution into a profitable and growing business. Although they have some great major account customers, revenue has been static at around £10 million for the last 5 years and in 2017/18 they reported substantial losses. It always looked to me a typical example of a common failure in technology driven companies – great technology but inability to sell it. There was a revolution in the management in 2018 though with founder Richard Parris who was Executive Chairman departing in March 2018. Last year (year end March 2019), revenue was £10.1 million, a slight increase, and a small profit was reported after substantial reductions in costs.

New Chairman Chuck Pol introduced the board including the new CEO Klaas van der Leest and they have also appointed a new non-executive director, Rob Chandok. The other two non-executive directors have been there since 2002 and 2006 which is too long but they were not up for re-election.

There was no trading statement or other announcement on the day, so we went straight into questions. I asked about the “distractions” referred to on page 9 of the Annual Report and Klaas covered the management changes. It seems quite a number of staff left and new hires were made including sales staff, pre-sales and new developers, but the situation was now stable.

I asked about the status on development of channel partnerships which is what they are now clearly focusing on rather than direct sales. In response it was stated that 2 new channel managers had been appointed – one for the USA and one for the rest of the world. But it takes time to develop channel sales. The previous 4 offices have been cut to 2 in Lutterworth. Is it difficult to recruit staff bearing in mind the Lutterworth location? Not an issue it seems as remote working is now practical – Klaas lives in Surrey for example and visits the office a few days per week.

I also asked about the comment about development of a more standard variant of MyID (see page 6 of the Annual Report). Klaas said when he arrived the product had not been standardised – they were more selling a toolkit with “lots of arms and legs” so significant implementation expertise and effort was required. Comment: this explains why sales were not easy in the past because from my experience in the software industry this adds to costs substantially and slows sales.

I later asked whether the development effort put into before the management changes were made was of any use, but it seems that has been “mothballed” and they are concentrating on sales of MyID.

Another shareholder asked about the £1.45 million of receivables that are “past due” (see page 40) – have they been received? The answer from the CFO was in the main yes. The reason for the long payment times were because they are involved in large projects, often acting as sub-contractor. But he was somewhat evasive about whether they were now all collected and refused to disclose the current outstanding position. But he did say that with the type of clients they have, collection is not usually a problem.

I asked about the convertible loan note they have which is quite expensive – £4.7 million outstanding at 8% p.a. interest and repayable by December 2021. Could they be redeemed early? Answer was no but the board is considering that issue. As one shareholder commented, all they need to do is get the share price above the conversion price to remove the problem, although there would be some dilution as a result of course.

I chatted to Klaas after the formal meeting closed, and it’s good to have the company led by an experienced sales person. The changes he has been making look altogether positive but it seems to be taking some time to produce better results – but that might simply be the long lead times on major account sales and the time it takes to develop the partnerships. But it would have been preferable to have a trading statement of some kind at this meeting. I think we will have to wait and see on this company.

Technology Stock Valuations

Intercede is an example of a company which has minimal profits at present so valuing it is not easy. Based on broker’s forecasts of some increase in revenue this year it’s valued by the market at 1.4 times revenue approximately. That simply reflects the slow growth and the convertible debt issue. The large number of shares still held by Richard Parris may not help either. If the sales and profits can be ramped up, that may appear cheap in due course.

It’s interesting to compare this company with other technology stocks which have announced figures recently, which I also hold (none in a big way as they are all somewhat immature businesses to my mind with no proven profit or positive cash flow record).

Bango (BGO) issued interim results on the 17th September. It operates in the mobile phone payment and identity verification markets. It has forecast revenue for this year about the same as Intercede’s at £12 million and may break even after substantial historic losses. Its valuation is over £100 million, i.e. about 10 times revenue. The big difference from Intercede is that it is seen as a high growth business in terms of revenue! Another similar business is Boku (BOKU) which is also rapidly growing but historically loss making. They issued an interim statement on the 10th September. Revenue was up 39% and they appear to be on target to meet full year forecasts of revenue of $52 million. Their market cap valuation is £280 million at about 7 times revenue. Both companies have volatile share prices and tend to talk about EDITDA as profits are ephemeral.

You can see how important revenue growth is to technology stocks and why Intercede’s valuation is so low at present. If growth disappears as it did at Intercede then valuations quickly fall. You can see why it is necessary to look at the business dynamics, the management and the future prospects for the company to be able to understand the valuations.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )