This month Simon Banks talks to Philip Carse, Principal Analyst at Megabuyte – a leading market research company for the IT Service, software and telecoms industries.
How important is recurring revenue and recurring margin when valuing a business.
Cash flow is the fundamental driver of a business’s valuation, with the most attractive companies converting a high proportion of profits to operating cash flow and having modest capital investment requirements. However, other things being equal, a business will attract a higher valuation multiple if it enjoys one or more of the following; high growth, high recurring revenues and high margins. In particular, high recurring revenues and margins give investors confidence as to the future performance of the business and its ability to withstand economic challenges. To mix metaphors, revenue is vanity, profit is sanity, but cash is king.
How easy is it to diversify into tech verticals?
There are examples of very successful business diversifications into tech; for example online book seller Amazon has become the world’s biggest provider of Cloud computing infrastructure. At a more mundane level, every business these days – whether traditional, people based or tech-heavy – needs to constantly evaluate the use of technology for business advantage. This is especially true given the pervasiveness of the internet, the proliferation of mobile devices, the growth in broadband, the rapid growth in Cloud computing and advances in areas such as data analytics. Established traditional businesses with customers have a good starting base, though should not underestimate the challenges of embracing tech.
In the case of the security sector, the broader Internet of Things (IoT) is an obvious opportunity, leveraging devices/monitors, connectivity and data analysis for business intelligence and consumer benefit. However, it is also an opportunity for closely related sectors such as home automation, which could change the competitive dynamics of the security sector.
Megabuyte reports on 400 companies across a number of sectors. What do the best companies have in common?
Whilst we Megabuyte analysts like to opine on the companies that we cover, we also back up our analysis with a rigorous, quantitative financial assessment – the Megabuyte Scorecard. The Scorecard ranks UK companies – public and private – based on seven revenue, profit and cash flow measures; therefore taking into account a far fuller range of factors than other ‘fast track’ type league tables.
The Scorecard tells us that the top 25% of companies are growing revenues and profits at about 20-25% a year, enjoy profit margins of about 25%, and convert about 90% of their profits to cash after investment spending. CSL consistently ranks in the top 50 UK private companies according to the Scorecard.
What is the projected growth in the tech sector?
Whilst the better performing (top quartile) companies are growing at above 19% in organic terms, the average is of course much lower, at 12%, whilst a quarter of companies that we track fail to grow organically due either to market or competitive pressures or because of business transformations; for example moving to software as a service (SaaS) models. The fastest growth areas tend to be in Cloud computing/web hosting (for example Amazon Web Services) and SaaS (for example Salesforce), whilst other hotspots include cyber security and mobile Machine to Machine (M2M). The Internet of Things (IoT) is expected to be a future major market and one which, as previously noted, could be a target for security companies given the overlap with areas such as home cinema, automation, biometrics, cameras and big data analytics.
A 50 year old getting excited about a DigiAir Connected with Pyronix! Full remote access and push notifications on all events. Facebook post from Select Security System - Nov 17