Why Outsourcery just surged by 89%

We caught up with cloud service provider Outsourcery (OUT) recently, and after an interesting conversation with chief executive and Dragon's Den star Piers Linney, concluded that "the shares could fly." Eight weeks later, and having just secured inclusion on the Microsoft Cloud programme, they have.

As part of the Microsoft Cloud Solution Provider Programme, Outsourcery can now provide direct billing, sell combined services and support Microsoft Cloud offerings such as Office 365.

"We are able to further integrate Office 365 with our own offering down to billing whereas previously the billing and contractual relationship was managed by Microsoft," said Linney Thursday. "As we have already proven, we can add material value for end-customers by integrating Office 365 with our own cloud capabilities to create hybrid solutions for commercial and public sector organisations."

This is a clear boost to Outsourcery whose share price has slumped since listing on AIM at 110p in May last year. It closed at just 10.25p Wednesday night, but traded as high as 19.35p Thursday.

As we acknowledged in September, there have been problems. Partners have come on stream much slower than expected, always an issue when dealing with big organisations. That explains modest revenue of just £3.4 million in the six months to June 2014, which includes no contribution from key strategic partners.

With hefty admin costs of £4.8 million, Outsourcery made an underlying pre-tax loss of £3.6 million during the period. But it's the top line that's important here. Its main cost is people, and spend doesn't increase much whether the business is generating sales of £1 million or £50 million.

"The model isn't broken, it's just delayed," Linney told Interactive Investor. "If Vodafone and Microsoft thought we weren't special they wouldn't be working with us."

Outsourcery focuses on the delivery of services based on Microsoft technologies; things like servers and emails. It designs and deploys cloud services for partners, which it then bills monthly based on usage and storage. Others are charged a monthly fee. Contracts are typically for three to seven years.

Interestingly, the company is also working with Microsoft and Dell on highly secure cloud services for central government. Linney tells us that Outsourcery is one of only two UK companies capable of doing this on scale, and hopes to generate revenue from it during the first quarter of 2015.

According to house broker Investec Securities:

The company will need to prove that it can deliver this level of new business from its growing pipeline. More frequent news of material contract traction with its large partners will give forecast confidence and ease balance sheet concerns. Until we see evidence of this we expect the stock to continue to be volatile, but retain our Buy based on the long term potential of the business. Our new 71p TP is based on 2x FY15E EV/Sales.

As we said before, Outsourcery shares are not for widows and orphans, but they should do well when there's evidence of greater up-take.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.