Interactive Investor

NetDimensions tipped to double

13th April 2015 14:46

Lee Wild from interactive investor

NetDimensions sells learning management software to highly regulated industries where companies have to guarantee that staff are fit and proper - think transport, energy, financial services, and healthcare. A multi-year business plan put in place less than two years ago is beginning to pay off and sales are growing fast.

Revenue jumped by 40% in 2014 to a record $22.7 million and the number of active users rose by slightly more to 4.4 million. That was more than analysts had expected, and way better than the more modest 17% top line growth reported in 2013.

"This acceleration in the rate of revenue growth provides the board with confidence that the company's strategy of focusing on high consequence industries is beginning to deliver results," said chairman Roger Durn.

However, this kind of growth has come at a price. NetDimensions has spent heavily chasing market shares by growing its sales team. Last year, cost of sales jumped by 152%, or $2.5 million, to $4 million, selling expenses rose by 22% to $14.5 million and operating expenses by 19% to $9 million. It also takes time for sales staff to begin generating income, and sales cycles can be anywhere between nine months and two years. So, that meant another pre-tax loss of $5 million.

Still, strip out net foreign exchange losses of $0.3 million, intangible asset amortisation of $0.5 million, and $0.7 million of non-cash share-based payments, and the loss actually narrowed to $3.5 million.

And finance director Matthew Chaloner tells Interactive Investor that the heavy investment is now over, which means more of that rapid sales growth will drop through to the bottom line.

Winning a big contract with a German manufacturer in a head-to-head battle with big industry rivals was a "game changer," says Chaloner. "It gave us additional confidence that our strategy was right."

Recurring revenues under contract was $19 million at year-end, of which $12 million will be recognised as revenue in 2015. This, combined with deferred revenue of $8.6 million, "provides the group with an excellent start to 2015".

Predictably, house broker Panmure Gordon remains bullish. It thinks the company will make an adjusted pre-tax profit of $0.8 million in 2016 and $1.7 million the year after. If NetDimensions does the numbers, the shares could be worth 182p, says the broker. "On our revised forecasts shares trade on a very attractive 1.5x EV [enterprise value]/Sales."

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.