IS Solutions: Underlying Positive Picture

The underlying picture at IS Solutions (ISL) is positive, with good growth achieved from managed services and especially projects in FY12. However, this was blurred by the continued decline in software sales, which is related to shrinking public sector budgets, along with a fall off in software renewals within the recurring revenues division. We foresee a continuation of the healthy growth in the group’s specialist Web Analytics business and SAS, the blue-chip business analytics software vendor, is now the group’s largest customer, utilising ISL’s strong Web Analytics domain knowledge to service its global CXA (Customer Experience Analytics) customer base. Hence, ISL shares look attractive on a single-digit FY14 P/E given the potential to ride the Web Analytics wave.


Highly sought after Web Analytics expertise
Web Analytics is about using internet data for optimising e-commerce performance, and growing demand is coming from B2C companies seeking to improve their revenue conversion and reduce costs. According to ISL, a typical online business is now spending a third of its marketing budget on analytics, up from less than 10% in 2009. The market is expected to continue to grow at healthy mid-teen rates and is increasing in complexity, as new sophisticated solutions must be integrated with a multitude of technologies and back office systems. ISL has developed this know-how, having been involved in the internet sector since the mid-1990s.

Results and forecasts: Very good underlying picture
Revenues edged up 2% to £9.2m while adjusted operating profit was flat at £0.9m. These numbers reflect the sharp decline in software sales and renewals along with rising costs, while managed services recorded good growth and projects was boosted by a large contract with Toshiba. We have eased our revenue forecasts by £0.7m in each of the next two years to £9.8m and £10.9m respectively to reflect the lower software sales and renewals. Normalised pre-tax profit is unchanged in FY13 at £1.0m and edges up to £1.2m in FY14 reflecting the improving operating margins. Net debt was £1.0m at the end of December (or £0.5m adjusted for a cashable investment) and we forecast net cash of £0.6m (£0.8m) at end FY13.

Valuation: Modest, given the specialist expertise
ISL’s market cap and adjusted net debt of £0.5m imply a £10.8m EV. Hence the shares are trading on c 1.0x our FY14 revenues and c 8.7x operating profits. In our view, these ratings look very attractive given the group’s strong position in Web Analytics including key partnerships with SAS, EMC and Celebrus/Speed-Trap.

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