Paul Scott interviews Louis Hall, CEO/Founder of Cerillion (CER)

This is the latest in my series of CEO interviews with interesting companies that have passed my 4 key criteria (this is a spin off from the SCVRs) -

• Issued a recent, positive or in line trading update, and reasonably sound outlook comments,
• Strong balance sheet (so little to no dilution or insolvency risk – very important in a downturn)
• Good management (partly subjective!) with a clear strategy, executing well, and a good business model
• Reasonable or cheap valuation, so a possible buying opportunity (long-term).

Although I should add that point 4 above is more difficult to justify with CER – the shares appear quite expensive, but I’ve been saying that for the last 3 years, during which time they’ve risen about 8-fold! So sometimes it makes sense to pay a premium, if a company is growing into a high valuation.

I don’t charge any fees for my interviews, so I’m free to ask anything, and I carefully select only companies that I think are good. They’re obviously for general interest, and are never tips, recommendations, nor advice. As you know, our whole ethos here at Stockopedia is about everyone doing your own research amp; taking responsibility for managing your own portfolios.

Summary – these are the key points -

“… the trend towards larger deals with larger customers. The market swinging round to our view of SaaS, cloud, unified products used by all our customers. Those are the main points.”

Cerillion (LON:CER)

CEO interview with Paul Scott

Audio is here, and on podcast platforms (“Paul Scott small caps” should find my podcasts).  It’s done over the phone, so audio quality isn’t perfect, but I’m planning on moving to a web-based recording system in future, for much better audio quality, once I’ve familiarised myself amp; practised using it. I’ve bolded key points below.

1. Description of the business please.
   Founded in 1999, as an MBO from Logica plc. We bought the telecoms product part, got private equity funding, developed the product set amp; marketing team, and built a customer base. IPO in 2016 – for PE exit, and to gain currency to do Mamp;A. Also it raised our profile, with large customers. We provide enterprise software to telecoms businesses. All kinds of telcos, all about shifting messages, voice, through networks. We provide a suite of software, covering everything telcos do – e.g. apps, CRM, billing software, call centres, campaign management. Connecting those services through networks, and monitoring them. Creating bills, managing receivables, and a whole host of ancillary modules. Sold on a SaaS basis – something telcos have been slow to do, but are now adopting SaaS – a huge benefit due to predictable growth.
2. There was a very good ShareSoc webinar you did recently. You mentioned your customers are sticky. Why is that, and why don’t telcos write their own software?
   These are complex systems. All of our customers have the same software, we don’t write new code for new customers. Whereas traditional vendors in our sector would make heavily bespoked software for each customer. So we can deliver in 12 months, whereas traditional vendors would take 2-3 years to implement, on top of the sales process, which might be 2 years. So telcos don’t change software lightly. Changing your billing software for a telco is like changing the wings on a 747 in the mid-Atlantic! It’s high risk, and the potential for things to go wrong is enormous. So that’s why customers are very sticky in our market.
3. The main crux I’m trying to ascertain with this interview, is what happened in 2020, when performance (revs amp; profits) started exploding upwards. £3.7m profit in FY 9/2020. This year it’s heading for £11.1m profit. How have you achieved this?
   It’s a number of factors. It takes a long time to get established in these markets, not something you can build overnight. We spent a long time building a solid customer base. Making sure they are happy, and good reference sites, and trust our support. Then the market swung round to our view – pre-integrated modules, as opposed to a systems integrator trying to stitch together different products. Cloud ethos now is using off the shelf products – e.g. everyone now uses Salesforce. Big swing towards SaaS has helped us. So we’re now selling it to larger telcos, with larger deals. SaaS bundles in charges amp; services – creates bigger deals, and more recurring revenues. Licence fees repeat, which helps margins amp; growth is more predictable. As we’ve won bigger deals, other larger telcos are more comfortable going with Cerillion. Bespoke solutions could cost hundreds of millions. We’re helped with the transparency of being a listed company, helped more than we expected.
4. Risk of something going wrong with the software?
   There will always be bugs in software, and outages, the important thing is how vendors respond. We have highly respected, 24/7 support service. But we’ve never had any glitches that have caused anything like an existential problem, or any significant disruption.
5. Looking at contracts – you recently announced a 10-year £15m new contract. How much would be booked into profit this year?
   Not a huge amount would be booked into FY 9/2022. We don’t disclose all the detail, but a relatively small amount was booked immediately. Implementation revenues are booked when the project goes live. IFRS 15 determines when revenues are booked. SaaS revenues are recognised on a 10-year straight line basis. Most deals are 5-years.
6. Sustainability of profits – superb performance in recent years, is this a one-off, or sustainable?
   The SaaS model is much more sustainable than what we were doing 5 years ago, on perpetual licences. SaaS eases the pressure, and makes it easier to manage our costs – mainly people. Wages rising, especially in India. We’ve opened 2 new centres in India, outside the overheated area – access to more people at better rates. Also building a facility in Bulgaria, at lower cost than the UK.
7. Staffing numbers – well over 300 staff, growing fast, towards 350. About 175 are in India, and 100 in London, 30 or more in Sofia, Bulgaria. Is it a challenge to manage remote teams? The world has changed since covid – we learned a lot from remote working. Each person was a home office. So we learned how to manage amp; be more flexible, seeing home working as more of a positive now, compared with 3 years ago.
8. IT staff – shortages amp; pay rises. Is it abating?
   We’ve seen the peak in India recently, a lot less heat in that market. Hiring freezes amp; redundancies are now happening in IT. In the UK some cooling off, but wasn’t as overheated as India.
9. Smaller part of your business is serving energy markets. Is the energy crisis creating any risk or disruption for you?
   Pure energy part of our business is very small. Our energy customers are where we’re serving the telco part of their business. Highly profitable, so unlikely they would go under.
10. Are you going to stay focused on your telco niche, or diversify?
    We’re always looking at other opportunities, and potential acquisitions. But telco demand is so strong right now, and it’s such a varied amp; global market, which works the same way everywhere – hence an enormous market. We’re wary of diversifying into areas where we don’t have the same knowledge, as we could mess it up, and miss the opportunities we already have in our home market.
11. I like your clean accounts, only £1m capitalised development spend each year, very few adjustments, good cashflow generation, and £20m growing cash pile, no debt. It’s all clean. What are your plans for the cash pile? Divis, buybacks, acquisitions?
    Our focus would be on acquisitions. Originally on IPO, we thought about big acquisitions, but our focus now is on bolt-on smaller acquisitions, to add extra product capability, and new customers. We could tap capital markets, and debt, for acquisitions. Also as we do bigger customer deals, the customers expect us to have a strong financial position. One of the first things a new customer’s CFO does, is to look at our accounts, and scrutinise our balance sheet.
12. At Stockopedia we love owner-managed business. You own 30% still. Longer term, what is your vision for the company? What is the end game?
    Our mission is to keep growing this into a bigger amp; bigger business. There’s an opportunity in the market right now – Chinese vendors have withdrawn from Europe amp; US markets. There are only a handful of players who can do what we do. So the opportunity is enormous to build this into a bigger business. The challenge now is to get Cerillion to £0.5bn market cap, then the next target after that is £1.0bn. We don’t want to dress it up to be acquired by someone else. The valuation multiples possibly make that difficult for private equity now. As Cerillion grows, it’s less dependent on me as an individual. If I sold out, where would I put that money to earn a higher return? That’s the question I ask myself. In a business where you have control of the levers, it’s good being an owner-manager, the point you made before.
13. The total global market must be enormous. What market share have you now, and where can you get to?
    There’s no dominant player, none have more than 10%. Who are competitors? Oracle. Amdocs – the biggest player doing what we do. Netcracker – part of NEC (Japanese). Also network vendors, e.g. Ericsson. Nokia partner with us. Chinese players Huawei, we don’t really see. Our market share, difficult to estimate, as we don’t compete in Russia of China, so I’d be surprised if we’re currently more than 1-2% market share.
14. Any closing thoughts?
    We’ve talked about the main points – the trend towards larger deals with larger customers. The market swinging round to our view of SaaS, cloud, unified products used by all our customers. Those are the main points.
15. Thank you for getting broker research out from Singers amp; Liberum on Research Tree – incredibly helpful.
    We’ve also got Finncap, Canaccord, Berenberg, and Investec covering us, explosion of interest recently.
    Are institutions trying to buy stock?
    I’m not a seller. There are sellers, one or two shareholders (funds) reducing positions of late. If we raised funds for acquisitions, that would increase the number of shares in circulation. We need to improve liquidity.
16. We first spoke in Nov 2019, and I remember how good the call I was. The share price was 187p. It’s now £12. What a pity I didn’t buy any shares personally!
    Yes, the share price has been reasonably good [understatement!]. We do benefit from being in a strong sector, it’s not all down to us.
17. Thanks amp; goodbyes.

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Note the StockRank has been high since 2018.

It currently flags up excellent quality amp; momentum, but it’s expensive (low value score) -

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