NetDimensions Going For Growth

NetDimensions (NETD.L) has been stepping up its growth plans and heavy investment led to a fall in profits in FY12, as indicated in January’s trading update. The group has been actively investing in its sales and marketing and has opened new offices in Germany and Australia to increase direct sales. The Talent Management Software sector is seeing strong growth as global organisations move to centralise their employee management and training processes to improve efficiencies and reduce costs. NETD’s focus is on highly regulated, high-consequence businesses where there is a requirement for stringent compliance. As the group’s larger US peers trade at high sales multiples, we believe there is significant share price upside if management can successfully execute on its growth strategy.


FY12 results: Broadly in line with January update
FY12 results were broadly in line with January’s downwardly revised trading update, with revenues up 12% at $13.8m and a small profit reported. Invoiced sales rose by 15% to $15.3m while deferred revenue jumped 36% to $6.1m, reflecting the cash-generative, payment-in-advance business model. The growth was generated in the Hosting and Professional Services segments. Average revenue per customer jumped c 22% to $73m as the group shifted its focus to larger customers, and the average number of users of software per customer now stands at 6,000. The group finished the year with $6.8m of cash and no debt, and bought eHealthcareIT after the period end with $2.5m in cash and $1m in new ordinary shares.

Employee numbers rose from 105 to 130 over the year and currently stand at 153. The latest number includes the acquisition of eHealthcareIT in early March 2013 for $3.5m, which will enable NETD to accelerate its growth in the healthcare vertical. Fresenius Medical Care was a standout contract win, which is significant both in scale and in the fact NETD beat strong competition on technology grounds to win it. The deal involves the rollout of NetDimensions Talent Suite to 30,000 employees in 24 countries; this is likely to be expanded to c 134,000 employees.

Forecasts and valuation: High growth sector
We have made initial changes to our forecasts following the final results and also taking into account the acquisition of eHealthcareIT in early March for $3.5m. We will review the numbers in more detail in due course. With the company now moving into heavy growth mode, we expect a small loss in FY13e moving into a small profit in FY14e. However, the group’s US peers, though mostly loss-making, trade at significantly higher EV/sales multiples to NETD, on 0.7x FY14e sales.

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