NetDimensions - Growth Platform

http://www.netdimensions.com/


NetDimensions Logo


NetDimensions (LSE:NETD) is an £11m market cap AIM listed company with headquarters in Hong Kong. The company is a global provider of enterprise-class performance, knowledge and learning management related software and services. With just 25m shares in issue, "NetDimensions provides companies, government agencies and other organisations with talent management solutions to personalise learning, share knowledge, enhance performance, foster collaboration, and manage compliance programs for employees, customers, partners and suppliers." NetDimensions' share price stood at just 7.25p following the 2008 crash but have since experienced strong steady growth with a current share price of 44.75p - this already equates to a 517% rise, but is there more to come?


Over the past year the share price has risen ~80% reflecting strong progress. Assuming the upward momentum is sustained, I would expect a shallow channel to form with an initial price target of around 60p. Beyond this, a target of 70p can be justifiable. This would be attained through continued growth or a takeover bid. Just over half the shares in issue owned by either directors or one of a few institutional directors.

The company's operations are located within creating educational, training and employee tracking/development software programs. These are primarily split into the company's Learning Management Software (LMS) and Talent Management Software (TMS). Within the operations of the company are four divisions. Historically software licensing has made up a significant proportion of the overall business. Hosting represents the next largest section. The final two sections; Support & Maintenance and Software Customisation/Implementation represent a smaller part of the overall business. Around 50% of the company's revenues stems from North America. The company has 472 clients including large firms such as ING, Skype, Virgin Atlantic and Unilever. The company's primary focus is on mid-cap firms with between 5000 and 15000 employees as these areas are more accessible and less saturated by larger industry players.

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A sensible starting point for analysing NetDimensions is to examine its 2012 annual report (i.e. including data for 2011). Revenues increased from $8.26m in 2010 to $12.26m with gross profit rising from $7.6m to $11.1m. Pre-tax profit came in at ~$1m which is fairly significant considering the company is only capitalised at £11m. As at year-end 2011, cash and equivalents stood at $6.9m (once again representing a very significant portion of the company's value). Even more significantly was that a maiden dividend of 2p/share was proposed. The company has no debt.

The chairman commented:
In fact, the Group achieved growth in every region, particularly in the USA, China and Asia Pacific markets with growth rates of 133%, 64% and 28% respectively. In addition, the Group ended the year with a strong deferred revenue balance of US$4.5M (2010:US$3.5M), some 29% higher than the prior year balance. Furthermore, the Group successfully integrated the two businesses it bought the year before and executed on a strategic decision to develop its professional services business. During the year, the Group saw customisation and implementation services revenue grow 159% to US$1.9M. In 2011, the Group added a further 135 clients through both reseller and direct sales efforts. New named client business made up more than 40% of invoiced sales. During the year NetDimensions did business with 472 active clients in total.

Clearly 2011 represented a strong year in the company's development - this was followed into 2012. The interim results (released September 2012) has the following salient points:

- 34% increase in revenue growth to US$5.9m (H1 2011: US$4.4m)
- 57% increase in deferred revenue to US$4.4m (H1 2011: US$2.8m)
- 32% increase in net cash position to US$7.8m (H1 2011: US$5.9m)

During the interim period, 42 new clients were added to the company's distribution channels predominantly in Asia - this type of progress is important geographically as it will reduce the reliance upon US revenues on the future making growth more sustainable. Sales in China alone were up 159%, with the rest of Asia up 40%. With $8m in cash I would expect to see a stable and potentially progressive dividend policy take place over the coming years - NetDimensions also noted that they expected this figure to improve during H2 2012. (The company also listed on the OTCQX exchange during the period in order to gain exposure to North American investors). NETD has recently launched its own iPad app to access a wider variety of businesses in the future.

The latest trading update was released on 10th January and revealed figures for the 2012 trading year as a whole. Despite being broadly positive, the share price slipped by well over 10% - it can be argued that such a pullback represents a good entry price as fundamentals have not changed, but the short-term catalyst has been removed. Revenue was up 10% to $13.5m (£8.51m) which was 'broadly inline' with the consensus estimate of £8.45m-£8.82m. The fall was likely focused upon a fall in the cash levels over the period to $6.8m despite the company expecting the cash levels to rise towards the end of the year. Short-term receivables of $5.1m were also announced.

Courtesy of freedigitalphotos.net
CEO Jay Shaw noted: “2012 was a year of success and investment for the future. We start this year with some US$6 million in deferred revenue to be recognised in 2013, our best ever opening position. Management expect 2013 to provide new opportunities in terms of deeper sector targeting and geographic expansion. We will continue to drive revenue growth and capitalise on new sales opportunities to increase the Company’s market share, especially in highly regulated industries. We are also delighted to announce that we have recently been approved as an independent software vendor partner by IBM and will be exhibiting at the IBM Connect conference later this month.”

Full year results for the company will be released in April. The financial situation of the company is undoubtedly strong. At the current level the company could be a takeover target (although I believe this is a less likely scenario). Whilst there are some firms that are direct competitors in the industry including Kenexa and SumTotal Systems. Another company SuccessFactors was acquired by German industry giant SAP for $3.4 billion in 2011.

The biggest risks the company faces surrounds pricing in the markets in which NetDimensions operates. This is due to the high levels of competition. Because of this market shares within the industry are continuously changing - NetDimensions is currently positioned well as it is increasing its market share through both organic growth and minor acquisitions. The Board of Directors should also seek to retain key board members in order to prevent the loss of any established business links. This has successfully been accomplished in the past through the issue of options (which have mostly been exercised).

Both Merchant Securities and Panmure Gordon have set broker targets for NetDimensions which are far in excess of the current share price - these were last adjusted on 10th January so are very much current expectations. The two brokers have targets of 80p/share and 88p/share respectively - they are forecasting appreciable upside.

NetDimensions offers investors a long term relatively low risk choice that has been performing well, increasing its number of staff and has begun paying dividends. Whilst future share price movement is unlikely to be as quick as the recent movements, it should offer steady increases going forward with an initial target of 60p assuming the uptrend is maintained. The company has a market cap of just £11m, ~ £4.3m of which is in cash, and is only trading at P/E ratio of 6x 2013 earnings which does not do the historically strong financial performance justice. With revenues expected to tend towards (circa) $16m in the next couple of years, the market cap could easily reach £20m thus the company offers investors a good growth platform.

Update (April 2013): NetDimensions has passed the 42p target entry. I now consider this a long opportunity with a 42p price stated.

Update (September 2013): In light of the recent price strength and placing, I have moved NetDimensions from buy to No Rating at 59p, locking.The rationale is that, even though revenues are expected to grow strongly, the company will still make a loss, and that combined with the higher market cap as a result of the placing, may look the valuation stretched in the short-term. On the Review Results page a close price of 59.50p is shown to factor in a 0.50p dividend issuance. Total profit is 41.7%

5 comments:

  1. excellent information. Thanks. Will be buying Steve

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  2. Well written. £11m doe seem to undervalue it. Looks like a better version of Netcall that was tipped yday by ofstad

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  3. Cheers thanks for the info....

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  4. And if you're in London next week (Feb 27th) they are presenting to prospective shareholders here http://www.iii.co.uk/interface/events

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