NetDimensions doubling down on compliance-heavy sectors

Staff training and talent development software provider NetDimensions made its traditional first half loss but the red ink was of a paler hue than last year as revenue increased by a third.

Loss before tax in the first half of 2012 narrowed to $0.5m from $0.7m last year, while the adjusted operating loss was hacked to just $0.1m from $0.4m.

Chief Financial Officer Clarence Wu noted that, as per usual, the company's performance would be second-half weighted, possibly even more than usual.

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"It was about 35/65 weighted last year, maybe 40/60 the year before that," he told Sharecast.

Revenue rose to $5.9m from $4.4m the year before, while deferred revenue - money the company is contracted to receive but for which it has not yet invoiced the client - rose 57% to $4.4m from $2.8m a year earlier.

"Of that $4.4m, around $3.3m is expected to feed through in the second half of 2012," Wu said. NetDimensions operates a software as a service (SaaS) model, which means contract wins see revenue spread out over the life of the licensing period, rather than as a lump sum when the contract is signed.

Jay Shaw, Managing Director and Chif Executuve Officer of NetDimensions, admitted that the company had not grown the top line as fast as some of its US rivals but suggested that many of those competitors are only interested in buying market share so they can sell their companies on to bigger players.

"We are committed to the idea of sustainable growth; we're not just flipping burgers here," Shaw said. "The bottom line is we have a little cash and we are growing," Shaw added. The net cash position at the end of June had improved to $7.8m, prior to the pay-out of the dividend, from $5.9m a year earlier, equivalent to 19.7p per share.

The company increased headcount by 21% and added 42 new clients via direct sales and reseller channels during the reporting period. "We continue to hire and we are feeling pretty good about R&D [research & development] right now," Shaw said.

"Quota-caring sales people will grow at a faster rate over the next couple of years," Shaw revealed, with the main sales pushes coming in the US, Europe and China.

"The next office is set to be in Rio, and that's not so we can attend the carnival," Shaw quipped, "it's because of the growth of the Brazilian economy.

The company will continue with its emphasis on addressing compliance-heavy markets, such as financial services, mineral extraction, transport and pharmaceuticals.

The company has not declared an interim dividend, but looks likely to pay a final divi again for the current financial year, having made its maiden payment at the full-year stage last time out. That 2p pay-out included a special dividend element of 1.5p "for our loyal shareholders", Shaw noted.

Research house Edison, which counts NetDimensions as a research client, notes that the group "is expanding into emerging markets, increasing the emphasis on direct selling and broadening its product range to enable cross-selling of new modules to its global customer base. Nevertheless, the shares are still trading at half the 2007 IPO [flotation] price."

It is conservatively forecasting the group will grow revenue by 13% this year (FY12) to $13.8m, which implies a similar second half to last year.

"We expect operating margins to pull back in FY12 due to the increased headcount and marketing spend, but to rise back above 10% in the medium term," Edison added.

Edison's view is that the stock looks undervalued compared to its AIM-quoted UK peers and its larger US competitors.

"Our discounted cash flow analysis, which incorporates potentially conservative assumptions, suggests a valuation of 65p," the research house said.

House broker Panmure Gordon left its "buy" recommendation unchanged and upped its price target to 84p from 76p after the results.

"We are reminded of recent industry research stating that NetDimensions is

'clearly a company to watch' - not just watch, we venture, but Buy," Panmure Grdon analyst George O'Connor said.

The broker has upped its full-year earnings per share forecast to 2.586 cents from 2.43 cents.

"In a consolidating LMS [learning management system] sector continued banner results like these coupled with an increased profile and its emerging economy tag (China +159%) should make the share subject to bid speculation," Panmure Gordon suggested, adding that IBM's acquisition of Kenexa for $46 a share - a 42% premium to the pre-bid price - was the most recent takeover in the sector.