Delving into the detail to find out the underlying growth story at IDOX is easier said than done. Speaking to IDOX’s CEO, Richard Kellett-Clarke, can sometimes feel like getting blood from a stone! The management team is keen to talk about the increase in new orders (up 11% in the core public sector business), about the increase in recurring revenues (up from 62% to 65% compared to H110), and about the diversification of the business (23% outside public sector, compared to 17% in H110), but it’s impossible to pin them down on the organic performance of the business.
At the top line, revenues increased by 21% to £18.1 million. UK revenue growth was 12.5%. However, total revenue growth was impacted by numerous acquisitions – most notably that of McLaren in December 2010 (see McLaren takes on a challenge with McLaren purchase) – and we understand that organically total revenues declined “slightly” (most of McLaren's business was international). The reason Kellett-Clarke is reluctant to dwell on the organic performance appears to be that he believes the positive trends in the business are more important to communicate. He’s also keen to emphasise the impact that the changing mix of revenues has on the top line i.e. revenues from maintenance and managed services/subscription contracts are spread over 3-4 years rather being booked as a one-off license payment under the traditional model. This is a transition that many software companies are dealing with. In H111, 66% of revenues came from this type of contract as opposed to 59% in H110.
The majority (78%) of IDOX revenues continue to be derived from its software business, which focuses on large scale document and information management. We understand that the decline in the core public sector software business has now “arrested” and, based on the new sales pipeline, we can expect modest organic growth from the business for the full year. IDOX talks about local government being in “execution mode”, and we’d agree. However, despite the rhetoric, the numbers indicate that growing the business in the local government sector is not exactly a walk in the park. Nonetheless, IDOX really does “get” the market (it should do!) and it’s taken some really positive steps to benefit from market trends such as the increasing interest in shared services, the desire for small packaged projects defined by quick wins, and the need to speed up core public sector processes. As market conditions improve, IDOX is well positioned to benefit with its growing portfolio of offerings.
IDOX’s diversification strategy also continues. Lateral moves into markets such as health and education are mentioned. Nothing has happened yet, and Kellett-Clarke states that the company would need a “stepping off point” to make it possible to leverage its technology and knowledge in a new sector. We got the distinct impression that an acquisition in the health sector (using its cash pile of £4.1 million) may not be too far off. In the meantime, strong cost control continues alongside the numerous acquisitions, with EBITDA margins up to 29% (up from 23% in H110).