Research that is free to access for all investors. Companies commission these providers to write research about them.
Brokers who write research on their corporate clients and make it available through our main bundle offering.
Research that is paid for directly by asset managers. Only accessible to institutional investors permissioned for access.
Event in Progress:
View the latest research on other companies in the sector.
Gamma Communications^ (GAMA, Buy at 1,304p) - In line AGM update
Gamma Communications PLC
Whilst the well-flagged UK macro continues, a strong Germany vindicates its strategy and (alongside cost savings) Gamma is comfortable with FY25E market expectations. Nevertheless, to be cautious, we trim FY26E EPS by <5%. Yet this soon-to-be FTSE250 member remains on 7% FCF yield. Buy.
Gamma has released a trading update with its AGM statement. Whilst trading has been decent in Europe and the new acquisitions in Germany are performing well, the performance in the UK is described as soft. The challenging conditions noted at the full year in March have continued, and the company has acted on costs. Whilst they note that they are trading in line with the range for Adj EBITDA for 2025E and eps, we now expect lower growth in revenues, We are at the lower end of this range. This rolls into 2026E and we cut our forecasts for both revenues and EBITDA. What is unclear in the UK is how much of the slowdown is macro, how much is structural and how much is a short term execution? Over time we had expected to Germany to become the main growth driver given the lower penetration. At the current valuation, trading on 1.8x EV/sales and 11.7x EV/EBIT we would argue the shares are discounting no growth. We lower our target price to 1595p to reflect our reduced forecasts. We retain our Buy rating.
The update notes a slowing UK, which is down to a number of interrelated factors. For FY25E we had already factored in a growth rate fade (c3% org rev ex-2024 acquisitions, for the channel segment), and trimmed EBITDA in March; the former assumption may come under pressure (0%-3%), but the latter still looks OK. FY26E is more of an issue, and we shave EBITDA by c.£2m, while expecting the consensus range to move to c.£145m-£150m. Macro issues are at play, with a <20 seat average per customer for Horizon meaning that Gamma is more at the “S” end of the SMB definition, and seeing creeping churn pressure on renewals. UK Enterprise, i.e. direct, is soggy, albeit this is more macro / classic delays rather than anything structural. There are a few product trends going on in UK channel, most importantly being i) front-book pricing pressure on cloud PBX showing through a bit more, with core UCaaS net adds still climbing, but overall ARPU pressure, ii) SIP churn, partially due to macro, with a bit of uncertainty over mix re Teams / Phoneline+ / competitor solutions, iii) margin pressure in connectivity (transition to SoGEA ), which was known about previously. Gamma is in a “mind the gap” transition period where there are encouraging signs in Europe, particularly Germany where the asset has been largely assembled (possibly barring enterprise / connectivity bolt-ons), organic growth is sensible, and long range potential is excellent, but this segment is still a bit too small to offset UK sogginess, at least in the near term. The transition from AIM to Main has been navigated and now the sunlit uplands of passive funds progressively buying beckon, as a result of FTSE250 inclusion; c.£20m of the buyback still remains to be deployed. We retain Buy while cutting back our TP to 1500p (10x FY25E EBITDA).
We believe the results highlight the irrationality of the 20% derating since the September upgrade, with the current PE around 13x. We consider this as an excellent entry point, given the new buyback, positive developments in Germany, and the confirmed move to the Main Market on 2 May. We reiterate our Buy rating and target price of 1,820p. Watch the video interview by clicking on the image below.
Gamma Communications^ (GAMA, Buy at 1,260p) - Oktoberfest of opportunity
Gamma results confirm the comments at the January trading update. The AIM to Main move should complete on the 2nd May, in time for FTSE250 inclusion. They have also announced a £50m buy back. While UK macro has had an impact, they still expect satisfactory growth. Germany will increasingly be the focus and the under penetration of cloud communications there should be a multi-year revenue driver. Germany is now 17% of Group revenue on a proforma basis, and organic growth in Germany was 5% for revenue, 8% for gross profit. We make no significant underlying changes to our forecasts but include STARFACE numbers. The stock has fallen 20% YTD leaving it trading on EV/sales of 1.7x, EV/EBITDA of 8.0x and EV/EBIT of 11x. The growth potential is now in for free. We retain Buy and 1700p target.
The results for the year ended 31 December 2024 are in line with expectations, as reconfirmed in the January update. Revenue of £579.4m is 11%% above FY23 and gross profit of £300.3m is a 12% improvement. On an organic basis, the growth in revenue and gross profits is 5% and 6%, respectively. Gamma finished the year with net cash of £153.7m, up from £134.8m last year. UK operations showed good growth. Europe was mixed, with both Germany and Spain managing to deliver growth. Management expects satisfactory group organic growth and strong overall group growth in FY25. We are excited by Germany and how the recent acquisitions, most importantly STARFACE, translate into longer-term growth engines.
Gamma Communications^ (GAMA, Buy at 1,206p) - Positive FY24A results
The results highlight the irrationality of the 20% derating since the upgrade in September, now at c.13x PE. We consider this an excellent entry point given the new buyback, Germany ticking along nicely, and the confirmed 2 May move to the Main Market. We reiterate Buy, 1,820p TP.
FY results are “there-or-thereabouts” versus our numbers, and absolute year-on-year EBITDA add in FY24 (+11m) probably underplays performance on a net basis by a few million due to several minor headwinds - R&D tax credits, R&D treatment shifting slightly to expense rather than capitalisation, acquisition costs above the line. Underlying growth on key metrics is mid-single digit i.e. resilient / unsurprising. Guidance is necessarily vague, due to main market shift, but we shave FY25E EBITDA by c.3% (£4.5m) due to NIC impact (c.£2m) and a slightly lower growth rate in the UK channel (i.e. Business) segment. There is no one product trend to draw out, just generalised sogginess for UK SME (note Gamma’s definition of SME is smaller than infrastructure solution peers), particularly in the form of soft capacity renewals. Adjusting for the (welcome) £50m buyback, but also a slightly higher tax rate, FY25E EPS is -5%. The locus of growth is now going to shift within the group from UK to Germany. The acquisition of STARFACE was unpopular with some investors seeking a (much larger) buyback, but adds a strategically vital hardware solution, and leaves Europe broadly similar in size to the first year post-IPO for the UK (2014: £24.5m EBITDA); the thesis that Europe EBITDA can ultimately be tens of millions bigger, has credence. AIM-to-Main date is given as 2nd May, based on 20 days of trading required prior to the FTSE250 indexation date of 23rd May. IHT funds have to sell out by the date of admission to the main market (but not necessarily VCT funds within the same portfolio), whilst some index trackers / huggers can in theory buy ahead of the main passive fund wave post-FTSE250 inclusion. The whole process has likely been a technical factor depressing the price for a while; if exacerbated in the near term, this would be a buying opportunity.
Gamma Communications^ (GAMA, Buy at 1,328p) - FY24A Results preview
Gamma Communications^ (GAMA, Buy at 1,308p) - A stellar fusion in cloud PBX?
With Gamma Communications now holding the keys to this game-changing German asset, we look forward to seeing how it augments the business and leverages the power of its platform in term of central costs, go-to-market, and global strategic tech relationships. We reiterate our Buy recommendation and 1,820p TP.
Gamma shares have been weak post the STARFACE deal as concerns on the price paid, buying from a PE seller, German macro, and IHT sellers ahead of main market move have weighed on the shares. In this note we include some initial pro forma numbers. We believe that the STARFACE deal should be looked at in combination with Placetel. We also look at other value levers the management can pull, such as some cost synergies, selling the Spanish business, and potential buy backs. We believe the share pop on the AIM to main move was overdone, the weakness here is equally overdone in our view. We continue to like the growth, the cash generation and the valuation of the business. We reiterate our Buy rating and 1700p target price.
Gamma did pay a premium versus its own market multiple. However, not only is Gamma’s multiple suppressed in our view, but this was a strategic purchase of a high-quality asset that provides scale, upside, and uses the disparity between cost of equity and debt. We reiterate our Buy recommendation, lifting our target price from 1,800p to 1,820p.
Gamma Communications^ (GAMA, Buy at 1,336p) - Expanding cloud horizons
The year-end trading statement reconfirms that Gamma’s management expects to report FY24 results in line with market expectations. Gamma has also announced that it has agreed to acquire SF Technologies Holding GmbH (trading as STARFACE) for €196m (c.£165m). We believe the deal puts Gamma among the leading challengers in the German SME cloud communications market. Furthermore, the acquisition extends Gamma’s market reach and provides a product fitted to the market. We regard this as a good deal. But if Gamma can leverage its market position and if Germany’s transition to cloud PBX gains momentum and German market growth accelerates into double figures % pa, it has the potential to be a great deal.
Gamma’s ambition to buy a more meaningful German business was well known. Following the Placetel deal in H224 Gamma has today announced the acquisition of STARFACE for £165m. The deal is funded mainly (75%) by cash reserves. Gamma will post completion be the number 4 or 5 player in Germany, the largest and most underpenetrated cloud communications market in Europe. The Company has also provided a trading update which is in line with our FY24 expectations. We revise our forecasts for Placetel but do not include STARFACE as it requires approvals. We expect the deal to be accretive. We retain our Buy rating and leave our target unchanged.
The FY24 update is solid enough with an upper half EPS outcome, and H2 is broadly consistent on H1, albeit with a possible bit of a sogginess in Q4. The comment about consistent gross margins looks designed to put to rest any concerns about pushing hardware to make numbers. The real news is the STARFACE acquisition, which at c.£165m essentially takes out the group’s current net cash surplus. We like this deal as a “big bolt-on” reflecting continued targeting of Germany (plus broadening out of geographic exposure within the country), as opposed to the much larger risk of a bigger pan-Euro cloud PBX deal, or the strategic question mark around a defensive UK reseller channel deal. Following Placetel the deal establishes Gamma as number one market share in German cloud PBX, in simple seat terms, at >500k, with more to come through the SIP hardware base (c.360k) migrating progressively over time. STARFACE is not especially cheap at an early-teens EBITDA, especially as most of these European PBX assets do not necessarily have very advanced products / roadmaps relative to UK, and there is a longer-term product integration programme to come. Still, the business looks attractive at a base level, with c.70% recurring revs (likely to rise to c.90% over time through SIP hardware migration), strong GMs (c.80%), good EBITDA profitability, and a sensible high-single-digit EBITDA growth pa profile historically. The comment over near-term investment probably means the FY24 financials (EUR44m revenue / EUR15m EBITDA) gets applied to FY25 (for a nine month contribution) as opposed to any racy growth estimates, but this still appears to translate down to low-single-digit current year accretion. We retain Buy and our TP and see a bounce due in the stock.
Gamma Communications^ (GAMA, Buy at 1,428p) - Positive FY24A update and £165m acquisition
Gamma is firmly back on the upgrade track, and we believe this acquisition positions it as a clear market leader in the German SME sector. With shares significantly lower than before the upgrade in September, earnings momentum and this acquisition make now an ideal time to invest, in our view. We reiterate our TP of 1,800p and Buy rating.
Gamma’s many-to-many network between global tech giants, thousands of SMEs, and enterprise clients could yield increasing earnings momentum, even as it trades at a 25% discount to its long-run PE. We spoke to Gamma’s CEO to hear the firm’s medium-term strategy. We reiterate our Buy rating and 1,800p TP.
Gamma announced the completion of the Placetel acquisition yesterday, and so we expect this to now be included within consensus estimates. We had already included it for FY25E-FY26E assuming c.10% EBITDA margin and leave these years unchanged on P&L, but tweak up FY24E marginally for a Q4 contribution, which is fairly de minimis at the profit level. Placetel has been a coveted asset for some time as a standalone within Cisco, not having a legacy voice business to slough off unlike Gamma’s other European deals. The logic of becoming co-market leader in Germany with c.300k cloud PBX seats alongside NFON, in a market 1.5x the size of the UK on most metrics but with very low cloud PBX penetration (and relatively basic products at this stage of evolution) is sound; interims commentary suggested Gamma still remains active in M&A terms. Consideration has not been detailed, and no upfront cash certainly helps accretion calculations, but as per before, we think the prize is really in the group’s existing Cisco licensing commitment being broadened and expanded (perhaps 50m / 5 yrs as a guesstimate), with Gamma having principally been using Broadsoft soft-switching technology within Horizon already. A shorthand is therefore that the trade-off is scaling up in Germany and improving the European growth rate, in exchange for substituting the Collaborate unified comms upsell module for Webex, where we assume Gamma is assuming the role of key channel champion and cheerleader (with a lot of licences to sell through). Collaborate was only ever SME-focused with a decent attach rate, so this looks a sensible trade to us, albeit the group product strategy being heavily married to Cisco’s product roadmap effectively for the rest of the 2020s is a subtlety to be watched. We retain our Buy and up our TP slightly to reflect 12x FY25E EBITDA.
Gamma Communications^ (GAMA, Buy at 1,694p) - Acquisition of Placetel completed
Gamma Communications^ (GAMA, Buy at 1,704p) - Reiterating BUY recommendation
Gamma reported a strong H1 with revenue up 10%, 5% of which was organic. Gamma has raised guidance to upper half of range for Adj EBITDA and eps to the top of range. Gamma also announced they are considering a move from AIM to the Main market, PLe estimate c14% of register is IHT. European revenue growth was muted, and they announced an interesting deal in Germany with Cisco to buy Placetel, materially enhancing their position in German cloud PBX, confirming the significant increase in focus on Germany, the most underpenetrated and largest market. Cash generation is strong again and cash grew again even after acquisitions and buy back. We make minor adjustments to our forecasts and retain a Buy rating and 1700p target price.
H1 results show impressive performance, with the UK strong and Europe stable. Revenue was £282.5m, up 10%, and gross profit £145.8m, up 11%. Underlying organic growth was a healthy 5% for revenue and 7% for gross profits. Cash generation was strong, as usual – net cash £142.9m and cash generated by operations £59.6m. There was strategic progress in the form of both acquisitions and development of the product offering and key relationships. The outlook is positive, leading us to raise our forecasts.
Gamma Communications^ (GAMA, Buy at 1,502p) - Positive H1 FY24A results
H1 UK organic growth is solid but Enterprise has at least shown sequential pick-up in H1 after a soft H2/23, and underlying gross margins are marginally up in both UK segments. Europe revenues are a bit disappointing (-3%) due to legacy voice sloughing off, but underlying cloud PBX / margin performance are both good. At group level, lower amortisation and higher interest than planned suggests EPS tracking to slightly above the top end of FY consensus. We incorporate the anticipated Placetel deal into forecasts, assuming FY25E c.£25m revenue / c.10% EBITDA margin. This is interesting strategically in catapulting Gamma in cloud PBX seat terms to being a leading German player, alongside NFON / Deutsche Tel as well as more pan-European cloud PBX vendors like Dstny / Enreach, plus broadening out geographically beyond Bavaria. Commentary on consideration is not explicit, which makes us think Gamma’s recent wider licensing re-commitment to Cisco on cloud PBX, could have been a significant factor in this deal. Forecasts: FY24E revenue £575.7m (£551.8m), EBITDA £125.8m (£120.9m), EPS 85.2p (78.4p); FY25E revenue £634.4m (£573.9m), EBITDA £136.0m (£125.5m), EPS 92.8p (81.6p). A main market move has near-term implications, given AIM M&A proceeds reinvestment has been a component of recent share price appreciation. As a result, while the share buyback has now culminated (c.£27m spent vs £35m authorisation), we would not be surprised to see another in due course. Our view is unchanged – Gamma is the best business telco to be publicly quoted, with a reliable mid to high single digit compound outlook for the core for the next few years (albeit with some potential economic sensitivity), and future (bigger) M&A the real delta to the long-run investment case. A fair rating is c.12-15x NTM EBITDA, with our TP at the bottom of this range.
Another strong performance, with a cautious but confident tone as GAMA navigates the macro. We upgrade FY24E EPS 3%, with more in the offing from executing its cross-sell strategy across its broader product set. We reiterate Buy, upgrading our target price 3% from 1,750p to 1,800p.
Gamma Communications^ (GAMA, Buy at 1,470p) - Interim results preview
Gamma Communications^ (GAMA, Buy at 1,456p) - Reiterating BUY recommendation
Today’s AGM trading update states that Gamma has made a strong start to the year in its UK businesses, while the challenging economic environment and some impact from foreign exchange have contributed to the European businesses making a slower start. Recent acquisitions are performing in line with expectations. Cash generation remains strong, with net cash of £140.4m as at 30 April (vs £101.3m last year). Management expects adjusted EBITDA and adjusted EPS to be in line with current market expectations for FY24. We maintain our forecasts and note that, despite recent share price strength, the shares continue trade at lower multiples than we were accustomed to prior to the pandemic.
Gamma has released a trading update with its AGM today. Gamma Business and Gamma Enterprise have experienced a strong start to the year; growth has been enhanced with some recent acquisitions which are performing in line with expectations. Notably Gamma Enterprise won a 5-year contract with Wm Morrison. The European Business is growing more slowly than the UK. Cash continues to be strong at £140.4m after outflows for the acquisition of Coolwave (£6.3m) and the share buyback (£5m so far). Gamma expect FY24 to be in the range of market forecasts which is for Adj EBITDA to be £120.9m to £127.4m. We like the recent strategic moves to partner with the likes of Cisco and to renew the focus on Germany. Our valuation model is driven off a terminal EBITA margin of 20% and high single digit growth, this drives a 2.6x EV/Sales multiple. Applying this to FY24 gives us an updated 1700p target price. Today’s trading update confirmed a strong start to the year for the UK. We like the recent strategic move to expand its product offer and partnerships with Cisco and Ericsson/LG are the most recent examples of their product enhancement. These partnerships will push Gamma’s UCaaS offer into larger SMEs and Enterprise. This is important as while the move from SIP/ Hardware PBX to Cloud PBX tends to have an opportunity to increase ARPU, their market share is lower currently in Cloud PBX. We believe this pushes their growth opportunity in the UK as it increases their penetration into Enterprise. The European business is slower due to macro headwinds. This is consistent with the expectations in our model. Strategically we also like the increased emphasis on Germany. This makes sense to us given the size of the market (largest) and the relative under penetration (lowest) of cloud communications. They have recently hired a sales director from nFon, a hire they are excited about. We believe there are two or three businesses they are interested in acquiring in Germany. Gamma expect FY24 to be in the range of market forecasts which is for Adj EBITDA to be £120.9m to £127.4m. We are in the middle of the range at £124.1m. In terms of revenues, we are at £580m including the inclusion of EnableX acquisition. We make no changes to our forecasts. Our valuation, using our model, is driven off a terminal EBITA margin of 20% and high single digit revenue growth, this drives a 2.6x EV/Sales multiple. Applying this to FY24 gives us an updated 1700p target price.
We infer AGM statement commentary to mean c.9%-10% group growth at headline level when including acquisitions, with underlying UK growth likely in the 5%-7% range. Our bottom-of-the-range forecasts sit below this; we leave forecasts unchanged for now, but performance is implicitly tracking ahead of our numbers across the different segments. Strong cash generation has evidently carried on through to the end of April. There is no product commentary, but, following on from FY results in March, we infer good core cloud PBX adds in Q1, plus the now-established strategic buttressing of growth and ARPU from upsells and the wider product range. The Enterprise segment was flat on an underlying basis in H2/23 on H1/23, but there now seems to have been an improvement, with a relatively vibrant backdrop and both pipeline and order book progressing well. This is headlined by the Morrisons win, which we broadly expect to be meaningful in a similar way to Aldi several years ago, with this set to contribute materially from FY25E onwards. The statement references lower European growth than the UK, but underlying performance is not dissimilar to 2023. However, FX has become a slight headwind instead of tailwind last year, and there was a small inorganic boost from Neotel. The message is therefore (for some) not to get too carried away short term, albeit the long-term European opportunity remains sizeable. Recent momentum in the shares has started to correct what was a gross undervaluation, but trailing FCF remains >6% and EV/EBITDA well below the 12x-15x NTM range we consider reasonable. Hence, we reiterate Buy and our 1800p TP, broadly reflecting the middle of this EBITDA range.
The strong performance in the UK is pleasing, with M&A and its shift to a best-in-breed communications partner seeing it take advantage of the positive mood of these end-markets. Europe remains subdued but growing and should benefit, in kind, in due course. Remaining at <10x EV/EBITDA for FY25E, we reiterate our Buy rating but increase our TP to 1,750p.
Gamma Communications^ (GAMA, Buy at 1,360p) - Reiterating BUY recommendation
Following its trading update in January Gamma has released its FY23 results. The results were broadly in line and they have also announced a £35m buy back. Gamma Communications is strongly placed in UK cloud communications and has a good footprint in key European markets where cloud communications are less penetrated (most notably Germany). This should fuel growth into the medium term. Gamma continues to make acquisitions, invest in the business, and expand its offer through partnerships, such as Cisco. While the £35m buy back is welcome, we also expect them to invest further in Europe, most likely in Germany. Gamma is one of Panmure Gordon's 20 for 24; and we retain a Buy and target price of 1530p. After revenue growth of 9% in H1 Gamma reported FY23 revenues of £521.7m up 8% YoY. The slight miss for revenues was due to a softer macro backdrop in the UK. Management suggest that this has recovered already in Q124. EBITDA grew to £114.3m in line with our forecasts. Cash conversion was very strong in FY23 at 108% and net cash ended the year at £134.8m. The £42.3m net cash increase was after the cash outflows for two acquisitions and dividend payments. Management expects more normal cash conversion of 90%+. Gamma expects results for FY24 to be within the current market range i.e. EBITDA between £118.3m to £127.4m. We leave our EBITDA forecasts unchanged at £124.1m for FY24. This is before the impact of £3m investment into HCM systems. In terms of the segmental performance: Gamma Business revenues grew 7% YoY and gross profit grew 8% with gross margins broadly stable at 53%. Gamma Enterprise revenue grew 8%, helped by the Satisnet acquisition in August, gross profit grew 7% with gross margins slightly down at 47.8%. Europe’s revenue grew 8% (6% cc) and gross profit grew 11% (8% cc), with gross margins up 1.1% to 48.5%. Germany seems to be a renewed area of management focus. This makes sense to us given the size of the market and the relative under penetration of cloud communications. They have recently hired a sales director from nFon, a hire they are excited about. We believe there are two of three businesses they are interested in acquiring in Germany. Gamma continues to expand its product offer and partnerships with Cisco and Ericsson/LG are the most recent examples of their product enhancement. These partnerships will push Gamma’s UCaaS offer into larger SMEs and Enterprise. This is important as while the move from SIP/ Hardware PBX to Cloud PBX tends to have an opportunity to increase ARPU their market share is lower currently in Cloud PBX. Gamma had promised more on their capital allocation and today they announced a £35m buy back. This leaves them sufficient capital to make further acquisitions, we believe Germany is the most likely area, we expect them to do more product tuck ins as well. They bought Coolwave in February this year for £6.7m. This is after gross considerations of £27.2m for Satisnet and EnableX in 2023. We would expect them to maintain a cash position of £30-40m in the medium term and return capital if they cannot make acquisitions that hit their targets. Gamma trades on 2x Sales 9.1x EBITDA and a PE of 16x. The growth, margin and cash profile is very solid and should drive upside to the shares. Gamma has significant recurring revenues c90%. Gamma is also looking to further enhance this with more acquisitions. We use the Panmure Gordon Technology Valuation model to derive a target price of 1530p. Expressing this another way, the shares are currently discounting little or no growth, which is clearly not the case, and the shares should continue to be rerated. We retain our Buy rating and 1530 target price.
Gamma’s results for the year ended 31 December are in line with the expectations confirmed in the January trading update. Revenue of £521.7m is 8% ahead of FY22, with gross profit at £267.2m showing the same progress. Adjusted EBITDA grew by 9% and PBT by 10%, although the impact of higher tax rates was seen in the 5% increase in adjusted EPS. Cash generation was strong once again, with 108% adjusted cash conversion. Year-end cash of £134.8m is £42.3m above the year before, even after the £30.5m in acquisition spend. Perhaps the most anticipated element of today’s news is the statement regarding the £35m share buyback programme, alluded to in the January trading update. On an operational basis, Gamma is making good progress in Business, Enterprise and Europe. For those looking at ‘undervalued’ UK equities, Gamma’s growth stands out.
Gamma Communications^ (GAMA, Buy at 1,350p) - Positive FY23A results
Another encouraging year of growth and significant cash generation leave Gamma with £134m of net cash in the bank. In our view the £35m buyback presents a shrewd allocation of capital given the current valuation, but the priority remains investing in organic growth and acquisitive activity to bolster exposure in underpenetrated markets (Germany 10-20%, vs the UK at c.60%). We reiterate Buy, lifting our TP from 1,380p to 1,650p.
The balanced 'CEO Review' explains well why periodic profit upgrades are likely from now. Bolt-ons of more products & know-how, coupled with its high-quality service/own telecom networks/wide distribution across Europe, give GAMA enhanced growth prospects. In addition, the macro backdrop may be
Results are in line with the ranges outlined in the January update, and marginally ahead of our own estimates. CFFO / EBITDA conversion was particularly excellent, well above the normal range at c.108%. Incorporating the announced c.£35m buyback, EPS edges up for FY24E after several other tweaks. Forecast changes: FY24E revenue £551.8m (prev. £541.9m), EBITDA £120.9m (£119.5m), EPS 78.4p (77.1p). Reflecting the tougher macro, the UK growth profile did slow a bit in H2, down to mid-single digit in the Business segment, while ex-Satisnet, Enterprise segment revenues were slightly down. The outlook statement comment for some improvement in Q1 is therefore encouraging, particularly suggestive of a bounce-back in growth for Enterprise through 2024. Product strategy is evolving, with focus on Ericsson and Cisco in the statement. Cisco has always been a soft-switch technology partner for Horizon, so this is a re-affirmation in one sense, but essentially we see an expansion of the product range at the enterprise end of unified comms. There may be less focus on the Collaborate UCaaS upsell module, but otherwise this is additive, i.e. no “mothball” implications for the rest of product range. Phoneline+ adds are small but encouraging at +12k, while there is a comment over competitor metallic path framework solutions leading to a more graduated migration of single user lines post-PSTN switch-off in 2025. We never went in for the “mini-boom” argument in the first place, and do not think this is a factor in investor sentiment, long-range, the population of single user lines (several million) will still shift to a cloud telephony solution. The shares have staged the beginnings of a recovery in the last few months, but sub-10x EBITDA and FCF yield in excess of 6% still looks good value to us.
25 - 29 March 2024
GAMA BOOT EVOK BAG BWY FEVR LUCE OCDO PHLL SCT YOU PTEC SFOR VANQ
GAMA will show it has repointed its strategy & 'stepped up a gear' now its CEO & CFO have been in post for >1yr, and have been complemented by its new Non-Exec Chair from Jul-23. Thus, we expect upgrades to consensus f'casts and yet more evidence that GAMA is very undervalued currently.
Gamma Communications^ (GAMA, Buy at 1,250p) - Well placed for growth
Gamma Communications^ (Buy at 1,230p) - Making the right calls
Gamma’s deepening relationships with Cisco/Ericsson in 2H23, moving it away from internal R&D, reduces its ongoing capital requirements. We expect it to announce a capital allocation policy prioritising organic growth followed by M&A before prudently returning excess cash, above a threshold via buybacks. On 9x FY24E EV/EBITDA, it remains a Buy in our view. We reiterate our 1,380p TP.
Gamma continues to produce solid recurring revenues, at reliable margins, whilst still converting almost all to cash. No change to FY23E income statement adjusted estimates. When Gamma prints its results in March, the refocus (ie restructuring) might lead to cost savings within FY24E guidance and the capital allocation update will give us more idea about how to allocate its excess cash. These results, specifically around cash, are set against its current <8x CY24E EV/EBITDA. Reiterate Buy and 1380p TP.
Gamma’s trading update for the year ended 31 December confirms adjusted EBITDA and adjusted EPS in line with market consensus (£113.8m-£116.0m for adj. EBITDA and 74.2-77.4p for adj. EPS). Business is performing well and making progress with the development of its product offering, while Enterprise is winning notable contracts. In Europe, Gamma has made strong financial progress. Year-end cash was £134.8m (FY22: £92.5m) with operating cash conversion over 100%. The statement refers to an update on the approach to capital allocation with the full-year results in March.
Adj. EBITDA & EPS in FY23 will be as a tight range of sell-side f'casts expect (which imply +9% & +5% YoY growth). LFL, period-end net cash (£134.8m) will be +17% vs. the consensus f'cast. We adjust for this beat; make no changes to our LFL and above-consensus-average profit f'casts, and ad
FY outturn is healthy in being in-line within a relatively tight consensus range on EBITDA (c.£114m-£116m), and possibly upper half on EPS (74p-77p) based on better interest income. We will refine our forecasts with FY results, but the FY24 prognosis is a small boost (+£2m EBITDA) for consensus, from the recent EnableX deal, on unchanged organic outlook. In the UK, we infer that both Business and Enterprise segments delivered similar growth rates in H2 as seen in H1. We see this as resilient, given the background environment probably got slowly tougher through H2. The only real sign of this is somewhat suppressed core cloud PBX adds (we estimate c.45k-50k FY23 vs normalised 70k-80k) but wider product strategy / upsell has worked to offset this (particularly Phoneline+). Europe improvement in H1 carried on in H2, accentuated by the currency tailwind; headline high teens gross profit growth is more like high single digit on a constant currency basis, but still marks a slight inflection on prior years. Housekeeping includes a one-off writedown of capitalised intangibles (we estimate c.£10m-£15m) following Cisco “re-partnering”, and EnableX adding an Ericsson-based cloud PBX platform (and also a strong back book buttressing UK SMB cloud PBX market leadership). Restructuring c.5% of group workforce (c.80 people) likely is another c.£2m-£3m exceptional, but saving several million in combined intangible capex & opex. Cash performance is monstrous with a slight beat (c.£135m vs £132m) even after the unanticipated c.£19m spent on EnableX, and underlying FCF generation is strong. Boiling down the investment case, c.12.5x cash-adjusted PE looks very low, while FY24 EPS ultimately likely ends higher than current consensus, even if this is due to deployment of surplus cash and FCF generation in some shape or form. Hence, we retain Buy and our TP.
Gamma has released its full-year trading update this morning for the year to December 2023. Having narrowed guidance to the top half of the range at the interims in September (we upgraded our EBITDA forecast by 2.7%), Gamma is expecting FY results in line with market expectations. We expect revenue growth of 9.3% and EBITDA growth of 8.6%. The UK has continued to deliver robust performance with growth and margins similar to H1. Europe has continued to grow, having shown 8% growth in H1. The German and Dutch businesses have been combined under a single leadership team. Cash performance was very strong – closing net balance was £134.8m, well ahead of forecasts. This was after two acquisitions with a net cash consideration of £27.2m. Gamma trades on 1.5x sales, 7.2x EBITDA, 9.0x EBIT and a PE of 13.6x for 2024. Gamma is one of Panmure Gordon's 20 for 24; we retain a Buy and target price of 1530p. The UK business, comprising Gamma Business and Gamma Enterprise units, has shown strong financial performance throughout the year despite inflationary pressures, with a successful price increase. Both units maintained similar margin and volume trends, as reported in the 2023 interim results. Gamma Business expanded its Unified Communications as a Service (UCaaS) offering through new partnerships, including collaborations with Cisco and Ericsson-LG. Adjustments to intangible development costs for in-house products are expected and will be detailed in the full-year results; we estimate this will be £10-15m. Gamma Enterprise secured significant contract wins, including UK-wide SD-WAN solutions and Microsoft Teams implementations. Overall, the business remains robust, with notable partnerships and contract wins. In Europe, Gamma saw an improved year-on-year financial performance, with 8% revenue growth and 17% gross profit growth reported in H1, this performance is described as strong, so we infer this has decent performance has continued into H2. In response to organisational changes tied to the expanded Unified Communications as a Service (UCaaS) offering and the merging of the German and Dutch senior leadership team. Financial growth in the Spanish business was driven by Contact Centre as a Service (CCaaS), with the successful integration of the Neotel business acquired in 2022. Gamma carried out a restructuring exercise in late 2023, affecting around 5% of the entire group's workforce. Given the one-off nature of this cost, it will be treated as an exceptional item; we estimate circa £2-3m. Gamma had a closing net cash balance of £134.8m (£92.5m in 2022), highlighting its consistent high cash generation; above 100% of EBITDA. The £42.3m net cash increase was after the cash outflows for two acquisitions and dividend payments. The acquisitions included Satisnet, with an initial cash payment (net of cash acquired) of £8.3m, and EnableX Group, with an initial cash payment (including the repayment of EnableX debts, and net of cash acquired) of £18.9m. The dividend increased by 14.3% to £15.2m (£13.3m in 2022). Capital expenditure remained in line with guidance. The strong cash performance was driven by better working capital and higher interest on cash balances. We have not made any material adjustments to our 2023 P&L. For 2024 we have consolidated the EnableX acquisition, which adds about £17m to revenues and £2m to EBITDA. We have also increased PBT to reflect the higher levels of interest received. Gamma will update us on capital allocation at the full year results on the 25th March. The growth, margin and cash profile is very solid and should drive upside to the shares. The business is also looking to further enhance this with more acquisitions. We use the Panmure Gordon Technology Valuation model to derive a target price of 1530p. Expressing this another way the shares are discounting no growth at this level, which is clearly not the case, and the shares should be rerated. Gamma Communications is strongly placed in UK cloud communications and has a good footprint in key European markets where cloud communications are less penetrated; this should fuel growth into the medium term. Communications and technology are closely interlinked, and UCaaS and CCaaS further blur the distinction. Improving connectivity and the services and products this enables are key productivity drivers and an enabler of digital transformation. Gamma has significant recurring revenues c90%. Gamma has made several acquisitions, adding technology capability and customers/geographies. Gamma trades on 1.5x sales, a 7.2x EBITDA, 9.0x EBIT and a PE of 13.6x 2024. It is one of Panmure Gordons 20 for 24, we retain a Buy and target price of 1530p.
EnableX boosts scope for GAMA's 'Gamma Business' unit to keep growing value at pace for several years yet (in FY22, adj. EBITDA from Gamma Business was +9% YoY and accounted for 68% of the Group total). In addition, EnableX may well provide GAMA with a second major Cloud PBX product to help catalys
Gamma sits c.55% below 2021 highs, but this is also 20% below pre-Covid, despite an FY23E EBITDA that is 80% higher than FY19A and a net cash of £116m, more than double FY19A. Whilst multiples have rightly contracted, we believe what lies ahead for Gamma, along with recent financial performance means today’s share price feels like a solid entry point. We reiterate our Buy recommendation. PLEASE CLICK BELOW TO WATCH OUR VIDEO
We think investors new to GAMA are considering the stock. To help them, in this note we list reasons why: its shares devalued materially since peaking in Sep-21; we rate it a Buy at this level; we revised our forecasts post 1H FY23 results; the risk to our new estimates is likely on the upside and
Gamma Communications reported decent H1 results this morning. Revenue and gross profit grew by 9% to £256.2m and £131.2m, respectively. Cash conversion was higher than prior periods at 101% and net cash was £121.7m vs £72.6m. The interim dividend was increased by 14%. Notably the European business grew revenues 8%, vs flat performance in FY22. Gamma now expect EBITDA and adjusted EPS to be in the top half of the range of market expectations. We upgrade our EBITDA estimates by 2.7% to £114.2m. Gamma Communications is strongly placed in UK cloud communications and has a good footprint in key European markets where cloud communications are less penetrated, this should fuel growth into the medium term. Improving connectivity and the services and products this enables are key productivity drivers and an enabler of digital transformation. Gamma has made several acquisitions, adding technology capability and customers/geographies. We expect Gamma to continue to enhance its position with M&A. We have a Buy rating and a new target price of 1530p.
Gamma Communications’ H1 results, released today, show strong performance in the two UK business units and very encouraging revenue and profit growth in Europe. Revenue of £256.2m was up 9% (H1 22: £234.7m), while adjusted EBITDA also improved by 9% to £56.5m (H1 22: £51.9m) and adjusted EPS grew by 5% to 37.5p (H1 22: 35.6p), or by 11% on a constant-tax basis. Gamma’s strong cash generation was once again a highlight. Net cash (pre-leases) at the period-end was £121.7m, up from £92.5m at the start of the year.
Back to the familiar sight of an interims upgrade, Gamma performed well, despite the current environment. Targeted price rises and faster growth in its higher margin bolt-on products helped offset slightly higher churn, as customers right-size post-Covid-19. We upgrade FY23E EPS by 2%.
Adj. EBITDA likely c.+2% vs consensus f'casts; 101% EBITDA-to-operating-cash conversion well in excess of “>90%” standing guidance; raised outlook for FY23 adj. EBITDA means consensus f'casts must rise c.3%; big extra profit opportunity due to switch-off of BT's legacy network starts in earnest
Headlines: H1 performance is healthy with c.9% growth delivered by a mixture of continued volume uptick, but also pricing improvements in select areas in the group’s largest segment (Gamma Business). As a result, the Business segment is compounding steadily away as usual, while Europe is a modest pleasant surprise at high single digit underlying revenue / gross profit growth and double digit EBITDA growth. Cashflow is better than usual at a >100% headline CFFO / EBITDA, with total capex also trending to the bottom of the full year guidance range (c.£22m-£25m). Strategy: Interims are proof that the strategy to build out product families in recent years is working to sustain growth and (at least) stabilise overall ARPU. Core UK SIP trunk volumes are flattish (unsurprisingly) while healthy gross adds in core UK cloud PBX were offset by a handful of churn items, bringing down net adds (+4%). However, the various upsells and bolt-ons are offsetting this, particularly Teams-related products. Substitution of Horizon for Phoneline+ at the very bottom of the cloud PBX base is referenced, but is minor and should be placed in context against Phoneline+ market capture opportunity from >3m single user telephony lines set to transition as part of the forthcoming PSTN switch-off. Continued (select) pricing power is likely to buttress growth. Forecasts: H1 out-turn along with statement commentary confirms that the business is tracking to the upper half of consensus (£110m-£117m EBITDA). We were bottom of the range and so our upgrades today narrow the range upwards. FY23E revenue £515.1m (£507.7m), EBITDA £113.8m (£110.4m), EPS 74.2p (70.0p), FY24E revenue £541.9m (£528.0m), EBITDA £119.5m (£115.6m), EPS 77.1p (72.0p). Our new forecasts imply limited sequential improvement in H2, and so have potential for further upside, in our view. View: We retain Buy and our 1800p TP, broadly reflecting the midpoint of the c.12x-15x NTM EBITDA range we think is reasonable.
Gamma has released its H1 trading update, following on from comments at the AGM in May. Gamma highlights growth in all segments, continued high cash generation and full year guidance is reiterated. The UK is performing well and the improving performance in Europe continues. We are currently at the low end of the range and will revisit at the results in September. We think the shares are not pricing in margin expansion or growth, and therefore clearly do not reflect the potential. We retain a Buy rating and target price of 1500p.
Good EBITDA performance across the board + cash conversion likely stronger than usual c.94%. We remain confident of our top-of-the-range forecast for FY23 EBITDA.
The trading update for the six months ended 30 June confirms that Gamma performed well in H1 and is set to report in line with market expectations for the full year. In the UK, Business (formerly Indirect) is performing strongly and Enterprise (formerly Direct) has won a number of significant contracts. In Europe, EBITDA grew healthily, supported by forex. Cash generation is in line with the 90% conversion guided to, with net cash at c.£121.5m (FY22: £92.5m). We maintain our forecasts, noting that our figures are towards the lower end of the ranges.
We infer the interim update wording to imply high single digit (c.9%-10%) growth in group revenue and EBITDA, with flattish margins as select price increases offset wage inflation. We leave forecasts unchanged and will update at interims, but assuming solid sequential H2 EBITDA growth tends to suggest FY23 EBITDA comfortably in the upper half of the consensus range. Rising interest rates likely additionally help consensus interest income, so top of the range EPS appears feasible. Net cash appears to be tracking (+£10m) ahead of plan. There is a reporting change with new segments reflecting customer groups rather than route to market. The “Business” segment is effectively UK Indirect plus a reclassified c.£13m rev / £2m EBITDA moved from the Direct business, which we believe is a rump of a few thousand small cloud PBX / UCaaS customers. The “Enterprise” segment is the remaining UK Direct business. The “Business” segment performed well in H1 (“strong” implies double digit growth to us) with the strategy of expanded product families driving growth across the range, while keeping ARPU stable. We expect gross adds in core cloud PBX to have been solid as usual (>30k), but slightly higher churn, lowering net adds by a few thousand to below the usual level. There is also a comment around Phoneline+ switching from Horizon, but this is something we expect only partially applies to the bottom end of the Horizon base. We assume the “Enterprise” business (i.e., most of UK Direct) broadly delivered mid-single digit growth in H1, with continued order flow through the period and strong contractual cover, but increased focus on H2 execution. On balance, Europe is slightly better than expected, revenue is a push / pull between legacy decline against good underlying cloud PBX seat growth, but gross profit and EBITDA are both performing well (i.e., we assume double-digit growth). An early-teens cash adjusted PE and >5% FCF yield look excellent value to us, and we retain Buy and our TP, still seeing this as a core holding.
Resolutely driving on despite a macro that has impacted tech elsewhere, Gamma continues to land (with wins from the NHS) and expand (with upgrades at the Home Office). Its new Chairman is now in place, bringing a fresh pair of eyes (and a useful rolodex) to help Gamma on the next leg of its journey which will be supported by the role that cutting-edge software will have on tech spend overall
Gamma Communications is strongly placed in UK cloud communications and has a good footprint in key European markets where cloud communications are less penetrated, this should fuel growth into the medium term. Communications and technology are closely interlinked, and UCaaS and CCaaS further blur the distinction. Gamma is increasing its investment in its IP. Improving connectivity and the services and products this enables are key productivity drivers and an enabler of digital transformation. Gamma has made several acquisitions, adding technology capability and customers/geographies. We expect Gamma to continue to enhance its position with M&A. We initiate with a Buy rating and a target price of 1500p.
Last Thursday we hosted our 21st annual TMT Conference. Twenty-one companies had >80 meetings with >110 investors. This note provides detailed feedback from investor meetings with GAMA's CFO, Bill Castell. The overarching message is that GAMA continues to perform well across the board, and lo
Today’s AGM trading update confirms that Gamma has continued to show growth across all three business areas. Management expects the strong start to the year to continue and for FY23 adjusted EBITDA and adjusted EPS (fully diluted) to be in line with market expectations. UK Direct and Indirect both continue to perform well, and in Europe the H2 22 improvements have continued into FY23. New products have helped growth in Europe, while in the UK Gamma has launched its Simple Swap product for SME customers to convert their legacy data and voice services as PSTN switch-off approaches. Despite the strong balance sheet, excellent cash generation and an impressive growth outlook, Gamma’s shares appear to trade on undemanding multiples.
In summary, all 3 GAMA business units have made a strong start to FY23, and the group remains very cash generative (net cash grew 10% in the first 4 months of FY23, from £92.5m to £101.3m). We remain very confident of our top-of-the-range forecasts, and so we remain conviction buyers of the stock t
No change to outlook – Whilst Simple Swap launched in the UK to take advantage of the PSTN switch off, the introduction of additional products in Europe should help that division catch up. We make no changes to numbers, though with its continued cash generation the question remains, what will the cash be used for/
The key AGM update message is that trading is healthy and reassuringly consistent with commentary given with results in March. Implicitly, we think the year has started somewhat better than H1 last year, with price rises contributing to healthy run-rates, but with a continued need to focus on cost control to keep margins stable year-on-year. We are bottom-of-the-range (as usual) and keep forecasts unchanged for now, albeit we see performance as comfortably within the consensus range as things stand. This means the range has potential to narrow upwards in H2 when more visibility is gained. The mood music around all segments is encouraging. The UK channel (c.63% of gross profit in FY22) is performing particularly well, and previous messaging around stabilising ARPU through upselling wider product families still applies. Direct bounced back to double-digit growth in H2/22, and building the order book further is now a key focus for the rest of 2023, with large deals in pipeline. Europe is a long-term game, but there is also improvement here off a low point in 2022. The statement refers to improved performance in H2 carrying on in H1, which we infer to mean Europe EBITDA being higher in H1/23 than H2/22’s c.£4.7m (itself an improvement on H1/22), i.e. a pattern of half-on-half improvement is being established. FX has switched to a marginal tailwind, the effective Neotel swap for ComyMedia has helped Spain, and there is underlying improvement as a general rule; Europe gross profit growth (+5% in FY23E on our estimates) could have slight upside potential as a result. Gamma’s status as steady compounder is again reaffirmed, a moniker which perhaps underplays ongoing re-acceleration in organic growth since H2/21. Focus has shifted to use of surplus cash (c.£130m-£150m year-end); a good problem to have. We see bolt-on accretive M&A as probable, within a wider range of possible options. The shares have seemed curiously suppressed for some time now, and valuation is undemanding; we retain our Buy and 1800p TP.
Meeting Notes - Apr 03 2023
GAMA FCH BUR ACSO GHH SAGA
Had a longer heading been possible, the third part of our one-sentence message on GAMA would be 'and the risk to our forecasts is on the upside and material'. Our EBITDA forecasts were top-of-the-range, and we have struggled not to raise them after GAMA detailed FY22 results and FY23 prospects last
In the note, we explore five reasons to look at Gamma right now, not least because its share price has been unfairly punished (-16% LTM), but also because its long-term value proposition (including ARPU upgrades and margin accretion) is becoming clearer with every passing set of results.
Meeting Notes - Mar 22 2023
GAMA HSW BYIT KGF CRST INCH PTEC
Andrew Belshaw, CEO, and Bill Castell, CFO, presented and answered questions with confidence (about GAMA's growth prospects) throughout. We hear 1-2 on the sell-side trimmed their EBITDA forecasts for FY23 post news today, but we doubt these cuts are driven by GAMA fundamentals (see below). Therefo
Gamma continues to produce solid recurring revenues, at reliable margins, whilst still converting almost all to cash. We do not expect to change estimates materially, but plan to increase development capex as the company pushes for ARPU/margin enhancement via its own IP solutions.
Gamma’s results for the year ended 31 December 2022, released today, are in line with expectations and guidance, and show a strong performance with 8% growth in revenue (£484.6m vs FY21 £447.7m), 10% improvement in adjusted EBITDA (£105.1m vs FY21 £95.4m) and 12% increase in adjusted diluted EPS (71.8p vs FY21 64.0p). Cash generated by operations was up by 10%, resulting in year-end net cash (pre-leases) of £92.5m (FY21 £49.5m). Trading in the UK, in both the Indirect and Direct businesses, was strong, with Germany leading the way in Europe. The impressive and consistent progress, and notable drive on investment in technology, suggest to us that Gamma’s recent derating is unjustified.
EBITDA/EPS/period-end net cash in line with pre-announced figures; DPS +14% YoY; consensus FY23 EBITDA should inch up 2%; CFO likely to change cash conversion guidance from 85-90% to >90%, but GAMA likely to spend c.£13m extra capex over 2 years (FY23 & FY24) to build a uniform group-wide pr
Results are slightly ahead of our expectations on revenue / EBITDA / EPS and materially ahead on net cash due to strong cashflow conversion. We tweak up FY23E-FY24E P&L forecasts, including FY23E EPS up c.3%, with our overall blended assumption for this year being mid-single digit growth with stable margins. Possible upside is for a similar year to FY22 (c.£10m EBITDA added i.e. c.9%-10% growth); macro uncertainty is heightened, hence our assumption of a fade in growth rates, but the year has started well. 2022 data shows that the unified comms upsell strategy is starting to work well in the UK, with stable ARPU in the cloud PBX segment as a result, and price rises across back-book products which will help to buttress FY23 performance. Core volumes in cloud PBX (+11%) remain good and core SIP trunk is still growing (+4%), with SIP integration to Teams showing explosive growth, albeit from a small base. UK Direct performance improved back to double-digit revenue and EBITDA growth in H2 year-on-year. Areas to watch in 2023 include large deal flow in UK Direct (albeit more relevant for driving FY24 financials), and any competitor price action in SIP. Europe had a flattish year overall, albeit decent underlying German cloud PBX performance in a toughening market was obscured by the difficult Spain macro and a relatively mature Netherlands business. European product and go-to-market strategy is evolving, with significant interest in Operator Connect across countries in particular in 2023. Medium-term consolidation in cloud PBX platforms is also being worked towards; together with launch of additional cloud PBX upsell products in 2024, this suggests Europe could eventually start to approach UK margins (currently c.12% versus c.26%), but potentially at much higher scale given the size of TAM and market maturity. We retain our Buy and 1800p TP and see the stock as oversold; we see Gamma as the sort of “quality growth” stock that performs relatively well in tougher markets.
Key Stocks Gamma Communications (GAMA.L) (Buy, 1,890p) - Focus on commentary on ARPU and Mission Labs Trustpilot (TRST.L) (Buy, 165p) - On track to break even on EBITDA Vistry# (VTYV.L) (Buy, 1,075p) - A few weeks on Inchcape (INCH.L) (Buy, 1,200p) - Derco opportunity Wickes (WIX.L) (Buy, 170p) - Few surprises expected for FY22 SigmaRoc# (SRC.L) (Buy, 95p) - Upgrade potential Stocks Previewed Gamma Communications, Henry Boot#, Luceco, MP Evans#, Trustpilot, YouGov, Gresham House, Hostelworld, LSL Property Services, Ten Entertainment#, Inchcape, Playtech, Wickes, J D Wetherspoon, Ocean Wilsons#, Dialight#, James Fisher#, Petershill Partners, Regional REIT#, Wood Group, Strix, Supermarket Income REIT, Saga #Corporate client of Peel Hunt
GAMA BOOT LUCE MPE TRST YOU GHE HSW LSL TEG VTY PTEC WIX JDW OCN DIA SRC FSJ PHLL RGL WG/ KETL INCH SUPR SAGA RST ALU
Gamma’s trading statement for the year ended 31 December 2022, issued today, confirms that the group will be able to report another year of strong financial performance, with results in line with expectations. The UK business has been trading strongly through both the Direct and Indirect channels, while UCaaS adoption in Europe continues to build, with Germany showing notably strong UCaaS growth. We maintain our estimates for FY22 and FY23 following today’s statement, and look forward to the full-year results on 21 March for more detail on the progress of the business.
Gamma remains positive in its outlook for 2023. The decline in traditional products is expected to continue and growth of its broad UCaaS offering and MS Teams products will drive margin expansion going forward. Our only change in numbers is net cash, we reiterate our Buy recommendation.
The statement implies EBITDA and EPS marginally ahead of our middle-of-the-range EBITDA and low-end EPS, indicating double-digit EBITDA growth for the year, and mid-single digit growth H2 on H1. With lots of tweaks to come, but no big overall changes in key P&L metrics, we put forecasts under review, to be updated with FY results. Meanwhile the cash out-turn is ahead of all expectations (>20% ahead of our own expectation) reflecting excellent CFFO / EBITDA conversion once again, so the quality of the earnings result is good. H2 performance is resilient with no major deviation seen from expected segment performance, i.e., high single digit UK channel growth, UK direct bouncing back to approach c.10% for the year, and flattish for Europe, with reasonable underlying German performance offset by poor macro in Spain. A seemingly unending ARPU debate around this stock got some answers in 2022 with the UK channel business displaying effective pricing power, with increases for some key products, and cloud PBX ARPUs maintained overall. This should offset any margin impact from wage inflation in both 2022 and 2023. Core seat volume growth in cloud PBX is still fine, in being solid / consistent with prior years, but pricing and upsell products are also now contributing, so growth is relatively multi-faceted, something we find attractive in a situation where the economic environment toughens. Gamma is unlikely to be immune to a recession, but with a strong array of upsell opportunities into a large existing customer base, a recurring revenue profile and a long history of product bundling, it should be resilient. Forecasts as they stand already factor in some slowing in growth rate in FY23E, and further accretive bolt-on M&A in Europe is possible; hence, incorporating this, we see £110m-£118m adjusted EBITDA as a realistic scenario range. The valuation has compressed radically and a single digit EV/EBITDA looks completely overdone to us; we retain Buy and our TP.
Meeting Notes - Sep 28 2022
GAMA PHLL TBLD CBG AGY NXT
GAMA remains a structural growth stock. Post strong 1H FY22 results, we have trimmed our estimates (Ne) just for prudence, due to continuing inflation pressures and component shortages. On new Ne, our DCF-based TP retreats 11% to 1,980p/share. In the last 10 years, GAMA's organic revenue growth ave
Gamma Communication’s robust H1 results, released today, contained no significant surprises, following the confirmatory trading update issued at the end of July. Revenue for H1 increased by 8% to £234.7m (H1 2021: £217.4m), Adjusted EBITDA increased by 13% to £51.9m (H1 2021: £46.0m) and Adjusted EPS was up 16% to 35.6p (H1 2021: 30.6p). Net Cash at the period end was £72.6m, up from £49.5m at the end of December 2021. The business continues to grow, the growth drivers remain intact, we have raised estimates and, in our view, the recent derating seems unjustified.
1H22A: solid performance, strong cash conversion Interims in line with commentary from the August update. We make no changes. 1H22A revenue up 8% with EBITDA growth of 13% (faster than our FY22E). Cash conversion up 1ppt to 95%; £73m net cash, up 47% since December. The interim DPS is up 14%, which we believe is a signal of confidence. It also provided more colour on its five growth areas, including new disclosure on cohorts and how ARPUs could rise substantially in some areas. In our view, Gamma has started to see some effects of inflation, with some costs passed on, but might impact next year. For now, our FY23E EBITDA sits c.3% below consensus. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com
H1s: These tracked slightly ahead of our revenue / gross profit / EBITDA expectations, with healthy year-on-year EBITDA / EPS growth in the teens. Our middle-of-the-range FY22E forecasts are unchanged, having been upgraded at the AGM stage (note here), but now imply flattish sequential H2-on-H1 EBITDA performance, hence look conservative. Cash generation is implicitly tracking ahead and good dividend growth (+14%) backs the confident tone. Segments: UK channel performance is reassuringly consistent (+8%) while UK Direct has bounced back nicely to growth in H1 in reported terms (+7%), as previously guided by management. Europe is up c.4% at constant currency with Germany the best performer, albeit this is part-driven by mobile distributor Epsilon. There was an H2 bolt-on in Spain and a disposal of a tiny IT service unit, but these moves are de minimis. Our overall view of Europe remains that slower progress is a market issue around cloud PBX adoption, as opposed to any company-specific issue. Secular trends: The statement calls out SIP trunk to full cloud PBX migration as a trend for the first time. There has always been latent potential here, but a tougher environment could accelerate this, with businesses shifting to opex spend, i.e., away from hardware PBX capex. On a per user basis this is a major gross profit multiplier (4x-5x) and given c.£70m UK channel SIP trunk revenues could end up being a growth driver, more than offsetting any wider economic slowdown. Additionally, the statement references SIP trunking to Teams (which is going well) as doubling ARPU compared to standard SIP trunking. This is part of a strong portfolio of upsell products, and with select price rises (some regulatory, some not), suggests good medium-term ARPU uplift potential that could more than offset any wage inflation dampening risk. Conclusion: Quality growth stocks have been sold off hard, but even within this Gamma’s valuation is a real anomaly to us; we retain Buy and our TP.
Meeting Notes - Aug 24 2022
GAMA GHH LOOK HAS BMK CRH GFTU
GAMA has good forward visibility: in May-22, it said FY22 EBITDA will "be in the upper half of the range of market forecasts". Thus, its investor meetings next month should better inform FY23 profit forecasts; the range of these is very wide currently. GAMA has a record of overdelivering, and will
We think the July trading update suggested that H1 results will be reassuring, with slight potential to exceed estimates at the end of year compared to our middle-of-the-range estimates. Specifically, we think double digit underlying EBITDA and EPS growth would be taken well, as the valuation has implicitly reset to Gamma being a 5%-10% growth stock with a flat margin profile. While not immune to a recession, we see Gamma as an outperformer in such an environment, as i) over 90% of revenue is recurring in nature with >60% of revenue in key product categories contractually recurring on multi-year contracts; ii) usage or volumetric revenue on top is communications-related and not especially correlated to macro; iii) Gamma has long experience of staving off price pressure through a bundling approach. In tandem with this, we see product evolution and strategy as being in a strong position, with Gamma currently having an array of relatively new products to upsell into the existing customer base, across business segments (i.e. enterprise to microbusiness) and product categories. European growth rates have been a disappointment to part of the market, but we feel sentiment here has now bottomed, while the long-term opportunity remains unchanged. The big picture data still suggests Europe can be bigger than the UK on a suitably long-term timescale, and the timescales and competitive position in Germany in particular suggest we are still early stage. The shares have been hard hit in the last year, despite beating the top end of estimates in FY21 and guiding to the upper half this year so far. The valuation sits below the takeout multiples of what we would regard as inferior business telco stocks, below recent and long-term history, and below software comparators, making this as an excellent entry point, in our view. Hence, we reiterate our 1800p TP and Buy recommendation.
The tech sector & equity market sell-offs created investor concern that price-based competition for cloud voice customers will stop GAMA from continuing to grow value at pace. We believed this to be an immaterial issue from the start since GAMA has experienced mid single-digit percent ARPU eros
Gamma’s H1 trading update, released today, reaffirms guidance and confirms that, despite wider market concerns, the company is seeing strong year-on-year adjusted EBITDA growth, with healthy progress in the UK and Europe, while meeting the challenges of inflation and the hardware supply chain.
1H22: solid performance with momentum We make no changes, having upgraded EPS by 6% at the AGM. Gamma is positive, outlook unchanged, all of its businesses remain as expected. While it has not seen any signs in the data yet, it flagged that it may not be immune to the macro. In its experience, utilities are often some of the last things to be cut by a customer, but in previous downturns some decisions to take on new products in its Direct business have been delayed. To mitigate, it put up prices for regulated products, along with cost discipline. Gamma remains highly recurring cash generative, with bad debt/churn at low levels and inventory robust. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
We estimate net cash generated in 1H FY22 was +16% YoY; FY22 EBITDA estimates should edge up again as well. GAMA keeps growing NPV at pace - demand for its products remains strong across the board, and the company continues to manage its costs and external pressures well. 1H FY22 results will be de
Interim update: Language around segment performance is near-identical to the AGM stage, and in our view is meant to demonstrate that performance has remained robust since May with no major variance to note. An added rider mentions “strong” y-o-y EBITDA growth in H1; on the inference that this means double-digit, this suggests only limited incremental growth is required H2 on H1 to hit our middle-of-the-range EBITDA number. Reference to select price increases in different product categories is also worth noting, considering bear stories of the last twelve months suggesting the opposite. Closing cash is implicitly tracking ahead of FY and seemingly implies strong CFFO / EBITDA conversion (again) with significant surplus cash now on the balance sheet. Recession-proofing: In any theoretical recessionary environment of widespread slowing corporate spend, Gamma is unlikely to be completely immune, but still a relative outperformer as i) >90% of revenue is of a recurring nature, and in key product categories (SIP and cloud PBX) we estimate over two-thirds of revenue to be contractually recurring on multi-year deals. Usage revenue is essentially communication, which we see as not directly correlated to economic conditions, ii) legacy voice has been under pressure for more than two decades, and price pressure in business telco is fairly standard, so quality businesses such as Gamma evolve bundled product and pricing propositions to create flexibility to deal with this; hence should be relatively able to adjust to worsening conditions versus point competitors, iii) high investment in product strategy in recent years means an array of new products and upsells, i.e. levers to pull. A thinning of the herd where there is a “long tail” of competition, such as in cloud PBX, may be advantageous for stronger players such as Gamma. Valuation / conclusion: The stock looks severely oversold to us and cash-backed with an attractive FCF yield here; we retain our 1800p TP. Buy.
Meeting Notes - Jul 11 2022
GAMA ENT SAGA DPH FRSX FSFL FTN FTF FTD FTSV FTV FWT FSF FSG FGFH FELPU HSW ENELF
Below we offer feedback from 'GX: Frontiers 2022', the flagship event of GAMA's UK Direct business for its mainly private and public enterprise customers. In FY21, UK Direct earned 23% of group gross profit. In May-22, GAMA reported the unit's "revenue growth will approach 10% (2022 against 2021)",
Excellent progress, deputy CEO to become interim CEO Deputy CEO Andrew Belshaw becomes interim CEO from Monday. Current CEO Andrew Taylor has guided GAMA through strategic and financial expansion over the past four years. There is a process to find a permanent CEO, with Mr Belshaw seen as a strong candidate who should hit the ground running. He has been at Gamma since 2007 and helped deliver strong margins and cash generation, as well as being key to strategic delivery. In 2022, Gamma has made “excellent progress”, in line with board expectations. Mr Belshaw presented at our TMT conference, see below for more. Buy, TP 1,890p. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com
CEO, Andrew Taylor, is unexpectedly to retire on 4-Jul-22 after 4 years in post (he’ll remain an advisor until his notice period expires in Jul-23). We think GAMA will not miss a beat - we expect Andrew Belshaw, a well-accomplished top GAMA executive and currently deputy CEO, will take the helm on
Meeting Notes - Jun 08 2022
GAMA CHG SWR WKP AVV PCO CMCX FSTA FCH MTO NXR RWS
We assess GAMA's notable cloud rivals
Gamma has today issued a Q1 trading update, coinciding with its AGM. The update confirms that the year has started positively, with revenue growth across all operating segments. Management expects this positive momentum to continue throughout the year, with full-year adjusted EBITDA and adjusted EPS being in the upper half of market estimates. We have tweaked our FY22 revenue estimate down (£495m to £488m) but left our earnings figures intact.
Ahead of its AGM today, GAMA reported EBITDA & EPS in FY22 will be in the upper half of the range of sell-side forecasts; UCaaS & CCaaS add-ons have now halted (until now) yearly ARPU erosion; minimal impact from continuing chip shortages; inflation is unlikely to hurt FY22 financials; UK I
Solid 1H22: 6% upgrade to FY22E EPS Through the noise of cost inflation, wage and recruitment pressures, macro weaknesses, and going back to the office, Gamma continues to make progress. Today’s AGM statement reassures us on recent investment focus points including that they do not expect any material impact from inflationary pressures. Trading leads us to upgrade EPS by 6%, with the Board “very positive” on the future. The sector has had a weak equity performance over the past few months; Gamma has not managed to avoid that. However, it still trades below the trend line of 17 peers we flagged in our last note. Buy. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
The AGM update messaging indicates consistent UK channel momentum of high single digit growth, a slight pickup in UK direct (c.3%-4% growth in H1) with excellent forward order indicators suggesting double digit growth to come in H2, and a broadly flat European performance. Supply-side pressures are being well handled, with no material impact from component shortages and with wage inflation rates lower than the technology industry average (i.e. <5%). In broad terms guidance implies that UK revenue growth should be high single digit in FY22E, brought back slightly by Europe to mid-to-high single digit at group level, with potential for slight upside to EBITDA margin, hence guidance towards the upper half of consensus. Through the UK channel volumes, gross margins and price per unit for key products are all robust, similar to last year, albeit overall metrics were stunted in FY21 by UK direct performance being flat. There are select opportunities to increase pricing in certain niches while ARPU curve on a per-customer basis is flattening, reflecting a product strategy full of upsell product opportunities. We adjust up our bottom-of-the-range forecasts to reflect guidance, mainly through better margins plus some tweaks further down P&L, tightening the consensus range. FY22E revenue now £471.2m (prev. £470.4m), EBITDA £104m (£101m) +3%, EPS 70.6p (66.6p) +6%, FY23E revenue £496.3m (£494.8m), EBITDA £110.1m (£105.9m) +4%, EPS 67.9p (63.9p) +6%. Gamma looks materially oversold to us, trading below the Daisy / Alternative Network reseller takeout multiples (c.11x NTM EBITDA), something we never expected to write. Consensus looks eminently achievable if not a touch conservative, and the financial profile of a consistent upwards grinder is what we expect from here. We retain Buy and, following widespread valuation compression of growth stocks, re-set our TP to 1800p reflecting a new FY23E EV/EBITDA multiple of 15x, expecting a significant bounce from here.
Below we explain why we think concerns about GAMA's scope to keep growing value at pace are not credible. We remain confident that in the 3 years to FY24, GAMA will grow revenue/EBITDA/EPS/FCFE by 9%/14%/13%/13% CAGR. Therefore, we continue to think GAMA is worth +63% vs. its last closing share pri
We have made no material changes to our P&L forecasts after re-thinking these in detail post FY21 results a week ago. We are confident to be at the top end of the range of sell-side forecasts, and we think the stock is great value at its current price. This is also because we have rolled forwar
A high-quality cash recurrer The share price has been punished since September, with delays from lockdowns and pressure from cheaper alternatives. The former is temporary and pipeline is “strong”. The latter is more about the quality of its products than the longevity of the smaller players. With ARPU-enhancing products showing strong attachment rates and headline price rises in the offing, we think it is time to look at Gamma: a c.90% recurring revenue model that in three years saw £200m+ operating cash before tax and £30m+ dividends. Versus 17 cloud telephony companies, it is at a double-digit discount. We increase our target price from 1,800p to 1,890p. Buy. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com 6-page note
Feedback from FY21 results call
FY21A: in line with expectations Another solid set of results: EBITDA of £95m was 1% ahead of our current estimates, but 13% ahead of what we had at the start of 2021. All things being equal and as we stand today, management is comfortable with our estimates tallying with all planned investments, annualisation, and salary rises. However, if something changes (eg group-wide salary rises) our costs may need to increase. Given this is uncertain at the moment, and we are already at the low end of expectations for FY22E, we keep our estimates unchanged. Gamma is trading on 3x CY22E EV/Sales, a c.18% discount to its most comparable peers. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
Results are marginally ahead of revenue / EBITDA expectations upgraded in January and c.6% ahead on EPS. We calculate group organic revenue growth as c.6%, with the UK business growing slightly faster than this and Europe broadly static. Gross margins were stable and good cost control meant a slight EBITDA margin rise, plus excellent operating cashflow once again (c.94% headline CFFO / EBITDA), driving another creditable result overall. We edge up forecasts for EBITDA and EPS through a variety of tweaks (see overleaf). The UK channel business remained consistently solid with healthy volumes of key product families such as SIP and cloud PBX, and solid attach rates for upsell opportunities such as Collaborate and Horizon Contact. Contrary to third party commentary around competition and price pressure since last year’s interims, gross margins and pricing metrics remain strong for both SIP and cloud PBX. Stripping out the Mission Labs acquisition, UK direct business gross profit was flattish H2 on H1, but this had already been flagged as a lag effect of COVID-interrupted 2020 order intake. The outlook here is now strong, and we think re-acceleration in UK growth is a realistic prospect in 2022. European revenue performance picked up slightly in H2 on H1 (albeit driven by Epsilon legacy revenue) with core cloud PBX seat growth in double digits. While the key delta of German UCaaS adoption represents a longer term play, any success would be incremental to forecasts that imply very limited growth, and there is latent potential to drive EBITDA margins closer to the UK profile. The valuation sell-off of growth stocks has been indiscriminate for several months, and Gamma is a prime example. The shares have broadly de-rated by about a third in the last six months, despite continued earnings upgrades. A good lesson from market corrections of the past is that best-in-class vendors in particular sub-sectors are usually first to recover and tend to perform best over time. Gamma certainly fits this definition, and so we retain Buy / TP.
Gamma’s results for the year ended 31 December 2021, released this morning, are broadly in line with our expectations. While revenue fell slightly short of our forecast, £447.7m vs our £455.6m estimate (£393.8m FY20), the company achieved higher margins than we had expected, yielding an Adj EBITDA figure just ahead of our forecast, £95.4m vs our £94.0m estimate (£79.0m FY20). The strong overall results reflected robust operating performance across the group – some areas very strong, some slightly less so, but combining to demonstrate why, in our opinion, Gamma remains a favoured, high-quality stock in the UK market.
We think GAMA's share price will recover materially around when the group details FY21 results/FY22 prospects on 22-Mar. The stock has drifted significantly due to the rotation out of tech shares, and, we think, unimportant concerns specific to GAMA. For FY21 to FY24, we confidently forecast EBITDA
FY21E: EPS in upper half of consensus range EBITDA/EPS are in the upper half of consensus range, hence another beat overall. We were already there so we make no changes. In the mix, stronger growth in higher margin software-enabled solutions offset lower margin/legacy products, meaning revenue is lower than expected. However, this is the way it should be. Net cash was 15% above expectations with stronger working capital. Like many highly-rated stocks, Gamma is off its September highs, trading on 14x CY22E EV/EBITDA vs UCaaS peers on 30x and our coverage universe on 17x. Buy this highly recurring, cash-generative mission-critical play. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
FY update: This is solid in guiding towards the upper end of EBITDA / EPS expectations, following two guidance upgrades in 2021. Exact revenue is not given, but to us commentary broadly implies mid-single digit organic revenue growth performance in H2 year-on-year (likely stronger at the gross profit level). Outlook: Key product volumes are said to remain healthy through the UK channel in H2. We see acceleration in UK direct performance as likely in 2022 after 2021 suffered from a lag effect in reported terms from COVID order inflow hiatus in 2020. Europe trends remained broadly similar in H2 to those in H1; there is significant optionality here, but given that the macro trend of German cloud PBX / unified comms adoption is the key delta to accelerating performance, this is best treated as a long-range, i.e. >5 year, prospect. Meanwhile, there has probably also been some travel and marketing cost normalisation in H2 to opex, following the initial COVID lockdown period. Forecast moves: We tweak gross margin assumptions upwards to drive uplifts in EBITDA / EPS on unchanged revenues. FY21E: revenue unchanged, EBITDA £94m (£90.5m) +4%, EPS 60.5p (57.6p) +5%, FY22E: revenue unchanged, EBITDA £100m (£95.5m) +5%, EPS 64.4p (61.2p) +5%. Cashflow: This is a standout with closing net cash a major beat (c.£49m vs £32m expected) on good w/cap control. Operating cashflow step-changed up both in H1 and implicitly in H2 (well over 10% up sequentially). As a result, trailing FCF yield hits the c.4% mark. To be conservative, we continue to only assume c.80% EBITDA / CFFO conversion in FY22E-FY23E, albeit near-100% conversion implied in FY21 could be a “new norm”. Valuation: This sits on a material discount to the trading average of the last few years. At <15x EBITDA, we see now a very attractive entry point. We rework our TP to 2100p (was 2550p) to reflect a c.20x FY22E EV/EBITDA, more in line with the historic norm, and reiterate Buy.
Gamma this morning issued a positive trading update for the 2021 period. Revenue is within the current consensus range, and both EBITDA and EPS are expected to be in the top half of the range of consensus expectations. Net cash is comfortably in line with our own expectations. The update also provides useful and positive detail on the various trading activities, and we look forward to additional granularity with the FY21 results due in March.
We upgrade our rating from Add to Buy because our unchanged target price is now +30% vs the last closing share price (currently, the stock is -32%/+5% vs its 12M high/low values). GAMA remains a quality company, with strong growth prospects.
Strengthening the Executive CFO Andrew Belshaw is being promoted to Deputy CEO, to oversee aspects of product, operations, strategy, M&A, talent, and culture. Given how fast paced it has been lately, he has been doing a lot of this already, but Bill Castell joining as CFO should allow him to go full steam ahead. Mr Castell joins with CFO and senior finance credentials from OVO, Virgin Media, and Barclays, including as CFO of Barclaycard Europe: just the experience Gamma needs. These changes should allow CEO Andrew Taylor to focus entirely on Gamma’s expansion into the medium/long term. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
Gamma’s Capital Markets Day (CMD) on 9 November focused on its European operations. The proceedings started with a restatement of the opportunity and plan in Europe, before presentations by the CEOs of Gamma’s businesses in Germany, the Netherlands and Spain. The full slide deck, video and script are available on Gamma’s website. In addition to providing insight into the company’s operations in Europe, the presentations provided reassurance that the level of professionalism and expertise investors have grown accustomed to as Gamma has built its UK operations is also present across Europe.
CMD: Europe 2021 = UK 2014? At yesterday’s CMD, the international CEOs described their strategy out to 2025. We know the pandemic tempered headline growth but they flagged this is temporary and they expect the trend to UCaaS and CCaaS to be significant. Each region has its own nuances but each believes it will benefit from being part of Gamma. Moreover, signs point to Europe 2021 being equivalent to UK 2014. Yet tech has advanced in those seven years (eg speed and bandwidth), so the forward trend could be more positive. We reiterate our Buy rating with the long term in mind. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
GAMA has become one of only a few telecom service providers globally to, in effect, be recommended by Microsoft Teams (MST). As a result, GAMA now has an additional, and potentially material, route to market; in Jul-21, Microsoft had c.250m Monthly Active Users (MAUs) of MT and c.80m MAUs of MT pho
The risks to GAMA have been greatly exaggerated, and also now is a terrible time to do so. The latter is because (i) the C-19 crisis has accelerated people's move to the cloud, and GAMA's offering is very much of its time, and (ii) the company recently expanded into higher gross profit products suc
Stamp of approval from Microsoft There are two main takeaways from yesterday’s news that Gamma has been included on a select list of special partners for the Operator Connect for Microsoft Teams program. Firstly, it is kudos from a global brand that Gamma is worthy of recognition. Secondly, it pushes back further the potential of Microsoft doing more of the connectivity elements in the communications tech stack that Gamma does so well. After a weak equity performance following its interims and our downgrade from Add to Hold, we upgrade from Hold to Buy following yesterday’s positive news, retaining target price of 2,225p. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
Formalising the Teams opportunity Gamma has formally announced that it has joined Microsoft’s “Operator Connect” program as a launch partner, alongside just over twenty other carriers globally. Operator Connect was originally announced at Microsoft’s annual Ignite conference in March and this announcement acts as public confirmation that Gamma is involved. Operator Connect is a set of partnerships Microsoft is seeking to develop with select carriers / unified comms vendors to expand the functionality and therefore the footprint of Teams as much as possible, in improving and augmenting voice capabilities in particular. We think of unified comms vendors as generally coming from two original directions, one being collaboration software, the other being voice / business telecoms. Teams is very much in the former category, having been born out of the Lync product, whereas vendors like Gamma are the latter. Therefore, at the enterprise end of the unified comms market, combining the two is a powerful proposition, particularly in solving any voice functionality deficiencies of Teams. Integration to Microsoft Teams has been a key part of Gamma’s strategy in unified comms for the last few years, specifically in targeting the large enterprise end of the market. Direct routing to Teams (part of the “SIP trunk family” of products) has gone very well in the last year since launch. Launch of full Horizon cloud PBX integration to Teams happened recently. The Collaborate product is in a sense competitive, but we see this as a SME-focused product whereas Teams is more large enterprise. We wrote up Gamma’s positioning versus Teams, and how the two complement one another, recently here. We see the announcement as positive as the boundary between Teams and Gamma should become more clear to the market, i.e. the two are not direct competitors. Alongside this, to the extent that there was any background concern over Microsoft’s intentions to become a competitor following the Metaswitch acquisition in 2020, this should now end. Otherwise, the announcement demonstrates that Gamma has the critical mass, stature and technical capability to make a select list of the leading unified comms vendors in the world, as we assume inclusion criteria are relatively tough. There is a long tail of cloud PBX competition, and so the list further differentiates Gamma as a long term winner while smaller competitors fall away, something that could happen in future years - as it did in SIP trunking in recent years. We reiterate Buy and our 2550p TP.
GAMA's results for 1H FY21 and guidance for its FY21 financials were in line with our expectations, so we are unlikely to make material changes to our forecasts (we will publish our updated numbers as soon as we process the detail of today's announcement). In all honesty, we are somewhat relieved t
1H21: Steady as she goes – downgrade to hold Gamma has had a tremendous LTM share price run. But the c.23% since its July trading update appears overdone, given not much has changed. Today’s interims see UK continuing to perform well but International a bit underwhelming. Overall, our EBITDA for FY21-23E goes up 2%. We downgrade our recommendation from Add to Hold and upgrade our target price to 2,225p (5% downside). Whilst we continue to rate Gamma’s business model, strategy, and management team for the longer term, it could travel sideways in the short term as it continues to see pressure from Covid-19 and as competition invests in price. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
Interims are implicitly tracking ahead of our FY expectation; we calculate H1 saw 9% organic revenue growth for the group overall, versus 6% modelled for FY21E. Having upgraded at the interim update stage, we leave forecasts for key P&L metrics unchanged, but these look more than comfortable and capable of possible upside nearer the FY stage. The H1 result is primarily due to UK core performance. Volume adds for cloud PBX / unified comms are consistent with previous periods, with Collaborate upsell looking decent. As a “product family”, SIP trunking has actually accelerated volumes, with this principally due to success in selling direct routing to Microsoft Teams. Recently released cloud contact centre functionality has also had a good early reception; together with Teams integration, this is important in keeping the portfolio current and relevant for the channel. Still, results are mostly down to the “old favourites”, and new product releases of late represent a longer term opportunity. The European asset delivered flat gross profit in H1 on H2 last year. We see this as down to: i) the Spanish direct business under pressure from the poor macro, ii) more of a “legacy” mix in general within European businesses, iii) a slight forex headwind from sterling strength (c.£400k). Underlying all this, cloud PBX seat growth is healthy at c.6% from the start to the end of the half and we believe is at least keeping share. We continue to see EBITDA (c.£4m in H1) as suppressed by ongoing investment and set-up to deliver long term scale. The global chip shortage has potential to exacerbate competitive difference in the cloud PBX market. Gamma has inventory in the short term and is in a strong buying position with the key handset supplier, leaving it in a better position than many smaller vendors, which may not be in as fortunate a position. We retain our Buy with our new TP of 2550p representing c.25x FY23E EV/EBITDA and c.40x EV/NOPAT, in line with current FY21E metrics.
Gamma continues to produce consistently good results with these interims reflecting a strong business performance in both the UK and European businesses. We increase estimates by c. 2% to reflect updated guidance and note the positive outlook comments in the announcement. The European business continues to evolve its footprint as the Group looks to accelerate the long-term growth in its Cloud PBX business. Margins are settling into a more consistent level in the UK Indirect business while mix, including the influence of acquisitions, is driving margins in the UK Direct and European businesses. We see clear execution of Gamma’s Unified Communications as a Service (UCaaS) strategy together with further product development and geographic expansion. Noting the sentiment in the outlook statement, we look forward to a positive second half performance.
Gamma’s trading update for H1 2021E notes another good performance, with growth in line with market expectations for that of the full year. Management expects that the full year results will be in the upper half of the range of market consensus estimates and we upgrade our numbers accordingly for FY 2021E with knock-on increases for the subsequent two years of our forecast horizon. Despite the restrictions associated with the pandemic, the Group continues to show the financial resilience that comes from its high level of recurring revenue (>90%) and monthly billing. In addition, cancellations remain at very low levels and bad debt remains ‘negligible’. Gamma continues to deliver well in a positive long-term growth market with all trends leading to an ongoing increase in the adoption of cloud services.
1H21: continuing on, no changes to estimates Gamma is pleased with the performance that has come despite lockdowns in its countries (restricting sales activities), thanks to its robust business model continuing to generate 90%+ recurring revenue. Churn at very low levels, bad debt remains negligible. Its UK Direct business was the driver in 1H21: slightly ahead of expectations. Gamma continues to roll-out its product pipeline: it launched PhoneLine+ and Horizon Contact and, by the end of July, all customers will be able to integrate Horizon Cloud with Microsoft Teams. With closing net cash at £25m and 2H21 left to go, Gamma continues to have firepower for more M&A. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
More of the same: The first half is best characterised by saying volume adds for key product segments have remained healthy, and basically in line with adds in H2 last year. The recent Capital Markets Day highlighted a number of new product opportunities (see here for details) with several releases in Q2 and Horizon integration to Teams to come in Q3, but the financial impact of these is likely more mid-term. Hence we see H1 growth as the product of a continued healthy performance from the core. UK Direct resilient: The slight positive surprise this time is the UK direct business, which had a soft Q2 for orders in 2020 which was expected to lead to a lagged effect into reported figures in H1/21; this has not really transpired and reported performance has remained strong. Meanwhile, Europe is performing in line with expectation overall, while recent acquisition Mission Labs is marginally ahead (albeit on small numbers). Adjusting out acquisition payments and dividend, net cash of c.£25m implies good underlying cashflow. Forecast upgrades: Management have now guided twice to the upper half of consensus expectation in recent months, and so we adjust up our bottom-of-the-range figures. Essentially, marginally higher revenues, higher gross margins and opex efficiencies (partly including travel & expense savings due to lockdowns) drive mid-single digit EBITDA / EPS upgrades, which we will refine further with detailed numbers at the interims. FY21E: revenue £446.8m (£442.4m) +1%, EBITDA £90.5m (£86.0m) +5%, EPS 57.6p (54.9p) +5%, FY22E: revenue £470m (£466.4m) +1%, EBITDA £95.5m (£91.0m) +5%, EPS 61.2p (58.2p) +5%. Our view: We retain our Buy and 2250p TP, and continue to see the stock as a core holding.
Gamma’s recent Capital Markets Day (CMD) focused on its market opportunity and product portfolio. There were also demonstrations of three of its Unified Communications as a Service (UCaaS) and Cloud Contact Centre (CCaaS) products. For those that missed the CMD, the three demonstrations are available on Gamma’s website along with the slide deck. We have picked up on some of the main points of interest from the CMD – although it is by no means an exhaustive representation of what we consider to be an extremely useful and well-run set of presentations.
Meeting Notes - Jun 11 2021
GAMA HYVE MTO PCA TPK SNN GROW STEM
Yesterday, GAMA updated investors mainly on its much expanded product offering. Separately, last month, the company said it thinks FY21 revenue, adjusted EBITDA and adjusted EPS are likely to "be at the higher end of the range of market forecasts", absent another lockdown. Because of this, the CMD
Gamma’s CMD contained a lot of detail on an array of product offerings, primarily in the unified communications market, that may seem unfamiliar as they are relatively newly presented. This note is a primer that attempts to explain what these products do, and how they fit into different business telecoms customer segments. The push into contact centre functionality, and into the micro companies segment, are newly described opportunities. Contact centre offerings such as Horizon Contact and SmartAgent offer attractive ARPU products in a growing unified comms sub-sector, while potential replacement of c.3m single business users lines by micro company products CircleLoop and Phoneline+ is a significant opportunity. However, a lot of apparently “new” product also represents a deepening of the existing core product sets in terms of features and functionality. This reflects that the growth story is evolving beyond simply core volume adds in SIP and cloud PBX, to be more complex and multi-layered, meaning that Gamma is still “sticking to the knitting”. A segment of the product strategy also reflects the part that Microsoft has to play in unified comms, particularly at the upper end of the SME and at the enterprise end of the market. In our view, Microsoft’s strategic direction increasingly validates Gamma’s positioning related to Teams, and opportunities around direct routing and Horizon integration to Teams are material according to third party forecasts. While currently UK-centric, the product strategy outlined also has long-run portability across to European markets. As a result, we see the current product strategy as fully rounded in addressing every segment of UK and European customer segmentation, from micro companies up to large enterprise. We retain Buy with a reworked TP of 2250p (was 2100p).
YTD performance leads to small upgrade already Gamma has been busy since the start of the year with multiple product launches including its contact centre solution. The integration of its most recent acquisition, Mission Labs, is also proceeding well and performance is in line with expectations. Once again, Gamma’s bad debt remains at historically low levels despite the continued macro environment. Due to the performance to date, Gamma is confident it will end the year at the higher end of expectations. As a result, we increase our EPS by 4% for FY21E. Unexpected announcements notwithstanding, Gamma is talking to the market next at its CMD on 10 June. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
Gamma’s AGM trading update confirms the continued momentum in the business during Q1 2021E as the group sees its mix of acquired and organic growth bear fruit with additions of key products ‘in line with historical levels’. The announcement states that revenue, adjusted EBITDA and adjusted EPS for FY 2021E are expected to be at the higher end of the current range of market forecasts. With our estimates for the latter two metrics roughly in mid-range, we leave our numbers unchanged while noting the upside risk which is building. Gamma continues to exhibit its resilience in the current operating environment as its bad debts remain at low levels, and it retains a range of growth opportunities in both the UK and European unified communications (UCaaS) markets. We look forward to further positive updates and await more news on Gamma’s new products across its business segments during the Capital Markets Day event scheduled for 10 June 2021.
The AGM update guides to the top end of the consensus range, but there is a rider; that “the UK will not enter into another lockdown period”. We are bottom of the range, and based on the rider, keep forecasts unchanged for now, but acknowledge that our forecasts now represent a “going wrong” scenario, as opposed to “business as usual”. The basic numerical support to this is that the 2020 run-rate of business (+£11.5m organic EBITDA addition) plus pro-forma adjustment for European acquisitions in 2020 gets to a low-90s (£m’s) outcome for EBITDA. The update lists out a slate of Q2 product releases, to be explained in detail at the forthcoming CMD. The new news is the availability of “SoGEA” broadband (single order generic ethernet access) which, put simply, is business broadband without requiring line rental. We see this as an additional offering for the group’s data access portfolio alongside standard broadband and ethernet, albeit part of SoGEA’s relevance is that a combination with Phoneline+ is cheaper than traditional line rental and broadband. SoGEA adoption cannibalises wholesale line rental within the “traditional” segment, albeit this is not financially material (FY20 c.£15m revenue, teens % GM). Phoneline+ and the associated CircleLoop digital product is the Q2 launch with long-run transformational potential, in simplistically being a cut-down UCaaS product for the millions of business single user lines, and being easily portable internationally, albeit at a lower price point than “classic SIP”. Full-scale integration of the Horizon cloud PBX with Teams is set for availability in Q3. Pricing is still to be finalised, but this could be for a possible increment on standard Horizon pricing. Gamma remains a core recommendation for us; we retain Buy and revise our FCF scenario analysis which drives a new target price of 2100p (1900p).
Model update following results Following the FY20 results last month (which beat our already increased estimates), we are updating our model and confirming our new estimates. We work off of the basis of the 2H20 performance (given this is a recurring revenue business model) and include 10 months of the recent acquisition of Mission Labs. As a result, our FY21E EPS rises 2%, but FY22E goes up by 6%. We remain within the range of consensus expectations for these years. Given its continued outperformance, our upgrades, and the recovery following the sell down, we retain our Add, but increase our target price from 1,706p to 1,852p. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
GAMA's growth prospects remain excellent. The company traded very well through the C-19 crisis because of the continued high quality of its products and execution; its robust recurring revenue model, and the fact that its offerings enable businesses which have had to work remotely. Looking ahead, w
FY20: slight beat and an upgrade EBITDA ended the year at £79.0m, 2% ahead of our already upgraded numbers. The margin increased by c.1pp to 20%, with more accretion than expected, due to fewer lower-margin installs and hardware sales. The board is positive about the outlook for Gamma in 2021E and beyond, with both its contact centre solution going live on 2 March 2021, and in 2Q the company expects to release functionality that allow its Horizon users to integrate with Microsoft Teams. Given the 2H20 strength, we upgrade FY21E and FY22E EBITDA by c.4%. James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com, Damindu.Jayaweera@peelhunt.com
The recent acquisition of Mission Labs was one of strategic importance to Gamma, in our view. It exemplified the progress that the Group has made in following its strategic plan to add to its scale and enhance product development capabilities through combining good organic growth with complementary acquisitions. The FY 2020 results reflect the success that Gamma has had to date in exploiting the significant growth opportunities that it has produced. We upgrade estimates to reflect the strong adjusted EBITDA performance just reported and to add the contribution of Mission Labs. We also introduce first-time numbers for FY 2023E. In all, we continue to expect good growth in profitability.
Acquisition to expand its reach Mission Labs brings in both enterprise cloud contact centre software and cloud telephony for micro-businesses. Two areas that Gamma is not yet in; both strong growth markets over the coming years. At first glance, this acquisition is towards the top end of what Gamma has paid in the past. An initial consideration of £40.2m for annual run rate revenue of c.£8m as of today equates to c.5x forward sales. However, it is investing for growth and this compares to its software peers on c.6x CY21 sales. This acquisition is in line with our thesis as Gamma continues on its path to be the go-to place for all business communication needs. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com
Boosts UCaaS, CCaaS and Digital
FY20: small EPS upgrade but much more cash for FY21 Another year and another beat against expectations. Gamma expects EBITDA/EPS to be slightly ahead of the range. We were at the top of that range, hence we only increase our EPS by 2%. But net cash at £48m was 73% ahead of us due to the sale of The Loop on 31 December 2020. Its ending cash is, after £48m spent on M&A during the year, maintaining its dividend policy, and not receiving any government funding or support. Reasons why this business continues to trade at a premium. As a result of the cash from selling The Loop, and the beat today, we increase our target trice by 5% to 1,706p, maintaining our Add. James.Lockyer@peelhunt.com, Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
Gamma’s trading update for its financial year to the end of December 2020 reflects another strong year for the Group and we adjust our FY 2020E numbers upwards by 2-3% to reflect guidance of an above-consensus outturn for adjusted EBITDA and EPS numbers. Following the sale of Gamma’s Manchester-based fibre business, the period-end cash balance of £54.1m was higher than expected and a touch up over the year - despite the Group spending £48m on acquisitions in the period. Gamma’s European business is now firmly established in Germany, Spain and the Netherlands while the Group retains a strong balance sheet position. The business continues to display resilience in the current operating environment as cancellations and bad debts remain at low levels, and it retains a range of growth opportunities in both the UK and European unified communications (UCaaS) markets.
GAMA today said FY20 adj. EBITDA and adj. EPS will be "slightly ahead of the range of market forecasts". Clearly, GAMA's products are of their time and they support businesses forced to work remotely. In addition, we continue to think customers will transition to the Cloud faster after the C-19 cri
Gamma has delivered this morning another strong set of results for H1 to June. Despite the COVID-19 challenges, the business has grown organically, and the acquisition programme is delivering well on its promise of European expansion. The group is positioned well to build revenues on and around Microsoft Teams, which is clearly benefiting from the work-from-home trend. We raise our profit estimates for all three forecast years as a sign of confidence in ongoing growth and look forward to further strong performance (and potentially even further M&A) into H2 and beyond.
Growth rates are excellent year-on-year across all key metrics, and impressive given the wider context. The shape of numbers is that after a strong second half last year, Q1 carried on in the same vein, before a slowdown across the business in Q2 for COVID. As a result, organic revenue growth dipped to 9% in H1 (implying limited growth in Q2, versus 13% in H2 last year) with organic gross profit growth of c.15%. However, the outlook references a return to normality since period end in terms of sales activity. For SIP trunking and cloud PBX, volume adds were lower than in previous periods, but still healthy. Gross margins were up for both products. Gross margin strength was a wider feature of H1. Part of this is lower installations and new business upfront revenues; this affects revenue slightly, but helps margin. For cloud PBX, Collaborate adds performed well in H1 (now c.5% attach rate, much more to go), and the forthcoming release of “informal contact centre” functionality opens up an interesting unified comms niche. Forecasts are upgraded c.8% at EPS level for FY20E and FY21E. Upgrades are a mixture of tweaks on organic performance, acquisition contribution, gross profit growth and margin. Following this, H2 expectations still look conservatively set, and there could be further upside in due course. European asset integration is progressing well overall, but EBITDA contribution has been immaterial to date, i.e. performance has been coming out of the UK core. This has been by design, as the idea is not to maximise Europe profit immediately; cost has been incurred to set the platform up for growth in future years. Europe’s materiality should now rise from H2 onwards as including HFO and GnTel (acquired in July) implies a run-rate European business of >£60m revenues, >100k cloud PBX seats, and pro-forma EBITDA in the high single digit millions. We retain Buy with a reworked TP of 1800p; Gamma remains a core holding.
Gamma’s performance continues to speak for itself. The positive trading update for H1 20 reflects a similar tone to that of its recent AGM statement, containing an acknowledgement of the current operating environment while reporting a good performance for the six months. A high rate of recurring revenue, ‘minimal’ contract cancellations and no increase in bad debts remain key features. It was a busy first half with continued demand (albeit COVID-19 affected in Q2) for Cloud PBX and UCaaS (Unified Communications as a Service) products in the UK. Acquisitions in Spain and the UK were swiftly followed by the HFO deal in Germany in early July and the purchase of GnTel in the Netherlands last week. Management expects that EBITDA and EPS will be ahead of consensus for the year. We note the strong momentum in the business but, as we are at the upper end of the consensus range, we leave our estimates unchanged at present.
Interim update language suggests that EPS is likely to be 5%-10% ahead of our expectation. We place forecasts under review pending more detail at interims on 8 Sep. The beat is a mixture of organic outperformance plus acquisitions performing ahead of plan. For the former, we expected a significant slowdown in FY20E at c.5% organic revenue growth versus c.13% in H2 last year, with no incremental new business adds expected in SIP and cloud PBX. While there was some slowing in Q2, trading was more resilient than forecast. Net adds appear now to be recovering fairly quickly, and data around the Collaborate product is encouraging, likely reflecting cloud PBX / unified comms being a strategic priority for all types of business at present. H1 saw significant steps taken towards establishing a pan-European unified comms asset, with an initial acquisition in Germany, and an acquisition in Spain. At a proforma c.£8m 2019 EBITDA i.e. >10% of group, Europe has now started to become more tangible and material to the investment case, as opposed to an interesting optionality. The acquisition of GnTel in Holland adds c.£1m of additional proforma EBITDA, further critical mass with c.40k cloud PBX seats, and an IT partner-focused channel, to combine with Dean One’s more classic telco-channel characteristics. On the basis of initial consideration paid, Gamma’s European asset in total has cost c.£68m so far at a trailing EV/EBITDA of 8.5x, rising to 9.9x including deferred consideration. At the very least this appears to be a sensible earnings stream at a sensible price. The upside case is far greater; the leading emerging European cloud PBX asset, with a massive overall TAM and c.5% penetration to date, suggesting in theory that tens of millions of incremental EBITDA could be layered on – but it is early days yet. We retain Buy with a reworked FCF scenario driving an upgraded TP of 1580p from 1530p, and view the stock as a core holding.
Gamma is acquiring around 80% of HFO Holding AG (HFO), one of the leading SIP Trunk providers in Germany, for an initial consideration of €20.4m in cash with an option to purchase the remaining shares over the next three years. In line with its stated strategy, Gamma can invest and use its commercial strength and expertise to accelerate HFO’s growth and replicate the Group’s success in the UK by developing a market leading position in Germany. Noting net debt of €2.9m when the deal closed, the implied historical EV/EBITDA multiple of about 10x compares with Gamma’s equivalent of 18.7x. We estimate that the deal will be 4% earnings enhancing in the first full year of ownership and our estimate upgrades reflect that. The European markets for cloud telephony in which Gamma is now represented will ultimately overtake the UK in size, providing Gamma with significant future growth potential. We view this acquisition as another significant step in Gamma’s strategic aim to expand into Europe via exposure to another lucrative market opportunity.
Gamma’s AGM statement contains a sensible degree of caution around the impact of COVID-19 on the economic backdrop, mixed with its continuing growth story. The group is seeing strong demand for Cloud PBX and UCaaS (Unified Communications as a Service) products in the UK but notes some slowdown in new orders and a lengthening of sales cycles. The business model has successfully moved to home working and, with a high (93%) proportion of recurring revenue, the outlook remains bright. We take a prudent view in reducing our revenue estimates although the impact on EBITDA is more muted. The Group has a strong balance sheet, is cash generative and retains its previously announced dividend payment.
The key AGM update messages are resilience and cautious optimism. H1 trading detail includes: i) a surge of interest towards the end of Q1 for cloud PBX and unified comms, as part of a higher prioritisation of comms spend, but then followed by ii) extension of new business acquisition sales cycles in Q2. This largely relates to restrictions on travel and physical meetings, and so should be temporary. However, the duration is unknown at this stage, iii) continued volume adds in SIP trunking and cloud PBX despite the above, and iv) no real change in churn or bad debt, but product “hibernation” for <5% of the user base leading to c.£1.2m lost EBITDA, which is strictly a Q2 effect. After c.13% organic revenue growth in H2 last year, our various product line assumptions boil down to a c.5% group organic growth rate in FY20E, so a new business acquisition slowdown lasting through the year should already be factored in. In fact, commentary that cloud PBX and SIP trunk adds have continued tends to suggest possible upside. However, we keep forecasts unchanged for now, as opposed to jumping to conclusions. Considering events in cloud PBX so far in 2020, Gamma’s moves in 2019 look timely. COVID-19 has acted as a major spur in interest for unified comms functionality; Gamma’s Collaborate was released in 2019, and the group’s SMB base gives a long upselling runway lasting years. At the enterprise end of the market, Microsoft Teams has consolidated its position as a particularly strong player. Acquiring Exactive, as a leading UK Teams managed support house, means Gamma should benefit here. While this was a small deal initially, so was the 2012 Varidion purchase (now >£35m revs in 2019). SIP trunk integration to Teams is another growth avenue. We retain our TP and Buy, seeing an essentially unchanged strategy and likely continued financial outperformance, across a range of economic scenarios.
FY 2019 was, as expected, a strong year for Gamma in financial terms with growth in Adjusted EBITDA of 31% a touch higher than we were expecting. Notably, that was achieved in a period where management has been pursuing its updated strategy which included investing in future growth and spending time assessing and undertaking acquisitions. The Group delivered well on its strategic aims during the year and it has announced further acquisitions in 2020. Gamma retains a strong balance sheet and we expect to see more deals in the future. It saw strong growth in the UK while its Dutch businesses were integrated and DX Groep saw a pick-up in H2. The near term business outlook is somewhat overshadowed by Covid-19 and we exercise a degree of conservatism as we upgrade our estimates to reflect the FY 2019 performance and the recent acquisitions. Nonetheless, the combination of organic and acquired growth produces a 5% upgrade in Adj. EBITDA for the current year which anticipates 15% growth on FY 2019’s strong number.
FY19 results are 6%-8% ahead of expectations on EBITDA and EPS, with double-digit organic revenue growth (c.11%, and just for the record, stronger in H2 than H1), >20% organic gross profit growth, and EBITDA margins cracking 20% for the first time despite plenty of ongoing investment (digitisation spend c.£1.7m, M&A diligence costs, third party consulting on optimising European operations) to deliver the stated strategy. Core products are in good shape with no major slippage in volumes in H2/19. Incremental market share for SIP continues to be high (>50%). Along with the ISDN30 switchover, there are a number of ISDN2 and single company lines (c.10%-15% of volumes) converting, meaning the total addressable market is higher than originally thought. Peak years for volume will probably be FY18-FY19, but solid volume growth out to 2025 (when ISDN is end-of-lifed) looks a reasonable scenario. FY20E-FY21E forecasts are upgraded by c.8%-9% at EPS level. The acquisitions of Telsis and Exactive are included for the first time; excluding these, FY20E organic revenue growth forecast is c.5%. We have not yet included VozTelecom, although closure in April is almost certain; in any case, incremental EBITDA upside is immaterial and cost is <1 year of FCF (c.£30m). There are several potential COVID-19 impacts. An environment where remote working and communication become more important will likely accelerate adoption of unified comms; Gamma is one of the leading UCaaS players in Europe. Over 90% of revenues is of a recurring nature, with roughly two-thirds being rental, i.e. contractually recurring, and customer concentration is not a risk. It is too early to be definitive, but new business acquisition likely gets much tougher from here; however, FY20E forecasts are conservative in only requiring half the organic growth rate delivered in FY19, and flat margins. We retain our Buy and TP; Gamma is now more of a core holding than ever.
The acquisition of Exactive builds on last year’s purchase of Telsis, as Gamma seeks to become the leading provider of Unified Communications as a Service (UCaaS) in Europe. Exactive is one of a small number of Microsoft Teams Voice Partners operating in the UK. Having previously worked on joint projects with Exactive, Gamma will now own the ability to offer a complete range of services for Microsoft Teams – an area which could prove to be a good source of future revenues. Paying 11.3x EBITDA historical EBITDA, the deal is immediately earnings enhancing. That multiple could fall to 5x targeted 2021 EBITDA if the full contingent consideration is earned. Adding Enterprise sector focused IP and building Gamma’s relationship and accreditation with Microsoft, we see the deal as a useful addition which will enhance the Group’s UCaaS credentials. We make no changes to estimates ahead of the upcoming results and will review our assumptions on organic and acquired growth at that stage.
Exactive sells a managed services wrap to large enterprise customers that want to use the Microsoft Teams product, with particular accreditations in voice. Teams is often used as an internal collaboration product, but Exactive’s own-IP helps integrate Teams with a SIP trunk, transforming Teams more towards being a full cloud PBX / unified comms platform. Critically, Exactive does not resell Teams licences at scale and is not a “reseller” in any sense; rather, it is a managed services player incorporating proprietary IP. Strategically, we see Exactive as complementary to Gamma’s existing Horizon cloud PBX in being targeted at a different market segment. Horizon is UK number one in the SMB segment (sub-500 seats) whereas Exactive / Teams is more of a sell to large enterprise who would tend to buy Microsoft anyway. As a result, we see Gamma as now addressing the full spectrum of unified communications, in terms of market segments, in the UK. Exactive is accretive but not material to the P&L as it stands (c.1% revenue, <1% EBITDA pro forma), but we would draw comparison to the Varidion business bought in 2012, which now forms a material part of the Direct business (>£80m revenue 2019) and was a broadly similar size when bought. We plan to update forecasts more generally at FY results in two weeks and so will fold in changes for Exactive then, along with general trading, and possibly also VozTelecom in Spain. Folding all changes in together likely suggests upside of 5%-8% to FY20E EBITDA / EPS forecasts. The price looks keen as usual at 1.2x trailing sales on initial consideration and 2x trailing revs on full consideration (assuming the business more than trebles EBITDA FY19-FY21E, to £1.5m, implying a 5x stretch EBITDA multiple). We retain our Buy and TP; following Friday’s indiscriminate sell-off, the stock looks better value, and is even more of a core holding in a scenario where remote / distributed working and communications become more prevalent.
Gamma has made an offer to acquire VozTelecom (currently trading on the Mercado Alternativo Bursátil), one of the leading Cloud PBX providers in Spain, for an implied enterprise value of around €30.5 million (£25.3 million). In our view, the deal represents further progress in delivering on the Group’s strategy of expanding its footprint in Western Europe through an acquisition in another of its previously-identified target markets. Spain has a sizeable PBX market with a low level of cloud penetration and provides Gamma with the opportunity to invest in accelerating VozTelecom’s growth in an attractive market. The price implies an EV/EBITDA multiple of 12.2x VozTelecom’s pro forma (including recent M&A) 2019 EBITDA compared to our respective estimate of 19.3x for Gamma. Gamma’s net cash position stood at £53.8 million at the end of 2019 and the deal will be financed from that cash resource. We leave estimates unchanged ahead of Gamma’s upcoming full-year results and note that the acquisition will progress as a takeover offer under the relevant Spanish legislation.
Gamma has announced the proposed acquisition of VozTelecom, a Spanish cloud PBX business quoted on the Mercado Alternativo Bursatil (MAB, analogous to AIM in the UK). The EV of the deal is c.£25m, implying a c.38% premium to be paid, 2x trailing EV/sales and 12x trailing EBITDA. The deal will be paid for in (surplus) cash, with Gamma sitting on >£50m at year-end. We see this prospective acquisition as a case of applying the Gamma formula into European markets, in buying the leading independent cloud PBX vendor (c.5% market share, competitors are large fixed / mobile operators) that has an established channel of hundreds of vendors servicing mid-market corporates. Voz has been tracked and diligenced for a year (and as a public company, has relatively transparent financials), and is something of a “mini-Gamma” at an earlier stage considering the Spanish cloud PBX market (slightly smaller than the UK, but still 18m seats) is only 5% penetrated. Based on the MAB announcement, irrevocables are c.54%, but forecasts are left unchanged for now until the transaction closes (we presume in March). Our forecasts are technically still under review after the last update (where we stated we expect 4%-7% EBITDA / EPS upgrades), to be delivered with results in March. Voz financials are not material with c.£13m of pro forma 2019 revenue and c.£2m of EBITDA (<5% of Gamma in both cases), this being before any future investment to accelerate growth. The financial rationale can be characterised as invest-to-grow, rather than any major restructuring. We retain our Buy and TP; as stated at the 2019 Gamma capital markets day, part of the group’s strategy out to 2023 is to build a channel-driven cloud PBX asset in major European countries (France, Germany, Spain, Benelux) both organically and by acquisition, and so this move forms part of the execution.
Gamma has this morning published a 2019 trading update which provides strong evidence of two key trends – the UK business continues to take market share and deliver strong profits and cash, and the nascent expansion into Europe is faring well, with good growth and integration on track. Given that the metrics appear materially in line with our (and consensus) estimates, we make no changes to our forecasts, but note the positive commentary around performance relative to expectations.
Based on trading update commentary, we anticipate EBITDA / EPS to be c.4%-7% ahead of our expectations. Net cash is c.5% ahead of plan, which implies another strong period for cash conversion. Forecasts are placed under review, to be finalised when the exact detail of FY results are available on 17 March, but we would broadly anticipate upgrades for FY20E to mirror the beat delivered for FY19. The basic message is that nothing really fundamentally changed in H2, with volume adds and revenue growth for both SIP trunking and cloud PBX remaining strong throughout H2, similar to H1 performance. Nothing additional is worth calling out on the macro versus what was said at H1 results. The direct business has also grown strongly and the order book suggests FY20 will deliver another excellent performance. The release of Collaborate unified comms functionality consolidates SME segment market leadership in cloud PBX, and the strategic position is healthy, but competition is high and the group has to keep investing and building out the feature set. Collaborate has not been explicitly forecast to date and so represents optionality in financial terms; the exact blend of volume growth and pricing optimisation has not yet settled (which is as expected), but channel reaction is effusive. Acquiring Telsis now allows a build-out of “contact centre for SMEs” functionality and we expect more detail on UCaaS product strategy along with FY results. We retain Buy and our 1530p TP; the shares have had a very strong run and may now mark time in the short term, but ongoing upgrades through the year from a combination of solid organic growth in FY20, a bit more operational gearing, plus likely M&A accretion in due course – where care is rightly being taken to land the right asset – is an attractive combination to us.
H1 results are well ahead of implicit expectations, mainly due to strong operational gearing showing through. This is a combination of gross margin strength through product mix, and tightly controlled opex build. As a result, core business EBITDA margin has cracked through the 20% barrier with relatively strong organic growth for the UK channel business in particular. Organic growth performance is strong at c.10% revenue / 18% gross profit with volume adds for SIP and cloud PBX (both +10%) solid and the group still taking share, and being market segment leader in both cases. Upsells such as SIP Trunk Call Manager are protecting pricing and margins. The Collaborate unified comms product had a successful introduction in Q2 with c.4k paying users; the upsell opportunity into the existing base (c.480k) is theoretically material, but functionality is strong to the point that channel partners are initially using the product to win new cloud PBX business at the “large SME” end of the market. Overseas business is tracking well at c.£1.2m trading EBITDA in H1/19 versus our c.£1.8m FY19E expectation; however, contingent deferred consideration (which we assumed paid) was for higher stretch targets which will not be achieved. Therefore, the contingent cash payment drops out of our FY19E cashflow, driving a substantial cashflow upgrade for FY19E-FY20E. Adj CFFO / EBITDA conversion also tracked ahead in H1. We edge up revenue forecasts, while profit / EPS forecasts are upgraded 10% / 8% for FY19E-FY20E. In an increasingly uncertain macro environment for corporate spend, we see Gamma as a core “Brexit-defensive” holding, with >90% recurring revenues (primarily rental), “run-the-business” type products that are cheaper than legacy alternatives, conservative forecasting (limited H2 on H1 progression implied on new forecasts), and possible further M&A accretion in due course.
As presaged in Gamma’s July trading update, the first half of 2019 has been another strong period of trading for the Group. We are upgrading our revenue estimates by between 3% and 6% and adjusted EBITDA by between 11% and 19% across our three-year forecast horizon. The results show further good growth in the UK across both the direct and indirect businesses while the acquisitions in the Netherlands settled into Gamma ownership with a solid first half. With strong growth across the major product groups in what is proving to be an increasingly competitive market, we believe that the interims provide further evidence that Gamma is continuing to balance near-term delivery with the execution of the its longer-term strategy. Given another strong half year, the outlook comments in the announcement are, unsurprisingly, positive about the Group’s future performance.
Our inference from the interim update’s commentary over performance versus consensus is that FY19 EBITDA is tracking c.4%-5% ahead of our expectation, and EPS c.5%-7% ahead respectively. We plan to update forecasts at the interim stage, when more granular detail is available on segment performance, but the basic message is that 2019 is shaping up as another year of strong growth, due to the usual drivers of SIP, cloud PBX and data product volumes through the channel, and the direct business being in relatively rude health. The launch of Collaborate in H1/19 marked the group’s move into unified-communications-as-a-service, and initial channel feedback is positive, to the point that partners seem to be using Collaborate initially as a tool for winning new business, as opposed to upselling to the existing customer base. “Classic” growth drivers are therefore what delivered H1/19, with any financial upside from Collaborate likely to show through in the medium term (as expected). Dean One is tracking in-line with management expectations, with cloud PBX performing well and traditional voice under pressure. The statement plainly highlights the potential for further M&A, possibly in H2. Something like a channel-led cloud PBX business in Germany could be slightly bigger than Dean One, but not materially so, and the approach is similar. We reiterate our Buy with a tweaked TP (see full report). FY19E looks set fair, but looking longer term, we like Gamma as an outperformer across a range of wider business condition scenarios. The track record suggests strong upgrades carry on in a healthy environment, whereas if conditions were to tighten, high recurring revenues (+90%), the nature of products delivered (cheaper than legacy alternatives, run-the-business type essential products), and conservatively set forecasts mean than an upgrade profile could be maintained.
GAMA GFTU JMAT MCRO OGN WOSG JDW SDRYN
Our inference from the interim update’s commentary over performance versus consensus is that FY19 EBITDA is tracking c.4%-5% ahead of our expectation, and EPS c.5%-7% ahead respectively. We plan to update forecasts at the interim stage, when more granular detail is available on segment performance, but the basic message is that 2019 is shaping up as another year of strong growth, due to the usual drivers of SIP, cloud PBX and data product volumes through the channel, and the direct business being in relatively rude health. The launch of Collaborate in H1/19 marked the group’s move into unified-communications-as-a-service, and initial channel feedback is positive, to the point that partners seem to be using Collaborate initially as a tool for winning new business, as opposed to upselling to the existing customer base. “Classic” growth drivers are therefore what delivered H1/19, with any financial upside from Collaborate likely to show through in the medium term (as expected). Dean One is tracking in-line with management expectations, with cloud PBX performing well and traditional voice under pressure. The statement plainly highlights the potential for further M&A, possibly in H2. Something like a channel-led cloud PBX business in Germany could be slightly bigger than Dean One, but not materially so, and the approach is similar. We reiterate our Buy with a tweaked TP (see overleaf). FY19E looks set fair, but looking longer term, we like Gamma as an outperformer across a range of wider business condition scenarios. The track record suggests strong upgrades carry on in a healthy environment, whereas if conditions were to tighten, high recurring revenues (+90%), the nature of products delivered (cheaper than legacy alternatives, run-the-business type essential products), and conservatively set forecasts mean than an upgrade profile could be maintained.
Gamma’s H1 trading update reports another strong performance. In light of that, while management expects full year revenue to be within consensus range, it anticipates that EBITDA and EPS for FY 2019E will be slightly above the range of market expectations. As a result, we are assuming greater overhead efficiency than we had previously allowed for and we are increasing our FY 2019E EBITDA estimate by £1 million to £56.5 million - with the expectation of reassessing this further (positively) at the time of the interims in September. The update confirms that there has been continued growth in the UK across both direct and indirect channels. Cloud PBX sales have performed well again but there is a nod to the effects of an increasingly competitive market in the statement. Additionally, during the period, Gamma implemented the first phase of its digital transformation program in the Direct business. In all, this represents another strong period of growth for Gamma which, as CEO Andrew Taylor notes, balances near-term delivery with the execution of the Group’s longer term strategy.
Gamma’s FY 2018 results show the anticipated continuation of the healthy performance which the Group has provided in recent years. In particular, they feature adjusted numbers which are 3-5% ahead of our estimates which were upgraded after January’s trading update. Importantly, the commentary and the numbers are consistent with recent trading updates and the evolution of Gamma’s strategy which was announced in some detail at the recent Capital Markets Days (CMD). The channel showed further growth during FY 2018 with more contract wins while the direct business also enjoyed a good 2018 – helped by a useful tailwind from contracts won in 2017. The outlook comments are positive and note the visibility afforded by the Group’s recurring revenue base. We make some small positive changes to adjusted estimates for FY 2019E and FY 2020E and introduce estimates for FY 2021E. In viewing the continued momentum in the business, we see our numbers as conservative and we expect to see Gamma further exploit the growth opportunities which it has identified.
Gamma held a very useful Capital Markets Day (CMD) which focused on strategy for the medium to long term. The CMD ran through the approach which the Group has taken to form its “2023 Strategic Plan”. It explored the size of the market, expected changes in marketplace, the competitive environment and the main anticipated trends – together with how Gamma will place itself to best take advantage as the market evolves. The resulting key strategic priorities mean that Gamma will adopt a ‘highly focused organic and inorganic strategy’. This approach will allow the Group to evolve its strong cloud telephony position into the UCaaS (Unified Communications as a Service) market, particularly for SMEs. The group will also build on its fixed and mobile telecom strengths, expand into Europe to gain continued growth and scale, and build on its digital capabilities to ‘assure agility and sustain competitiveness’. We summarise the main points from the CMD and outline the refocussed strategy, together with its targeted impact on the direct and indirect businesses.
In a trading update ahead of this week’s Capital Markets Days, Gamma has announced that EBITDA for the year ended 31 December 2018 is anticipated to be at the top of the range of market expectations with revenue and adjusted EPS in line with consensus. This reflects strong demand for its key UK products. The channel showed further growth with more contract wins while the direct business also signed ‘significant’ new contracts. Gamma’s new “Collaborate” product will launch later in Q1 2019. The integration of Dean One in the Netherlands (acquired in October 2018) is progressing ‘in line with expectations’. In December, Dean One launched Mobile Wholesale, a strategic partnership with T-Mobile. The Group has also formed Gamma Ireland. Given that we are at the lower end of the consensus range for EBITDA and EPS (although mid-range on revenue), we take this opportunity to adjust our margin assumptions and upgrade our Adj. EBITDA estimates by 5%-6% over our forecast horizon. That produces a 6%-10% increase in our Adj. EPS estimates.
Gamma has announced the acquisition of DX Groep BV (Dean One), a leading telecoms group based in the Netherlands and one which it has known for some time. Funded from its existing cash resources, Gamma will pay up to €27.2 million with an initial consideration of €13.2 million and up to €14.0 million payable next year. Total consideration will be based on 7.5x the 2019 EBITDA of the acquired business which compares to Gamma’s historical ratio of over 21x. This attractively-priced acquisition represents Gamma’s first entry into a local channel in a new geographic market. The Board notes that Dean One can be ‘a focal point through which Gamma can broaden its geographic footprint in the medium term’. This evolution of Gamma’s strategy brings the opportunity to build a business which taps strong market growth in the Netherlands in the same way that it has succeeded in the UK. It also suggests that other European markets may be considered in the future. In addition, Gamma notes that a number of revenue synergies have already been identified. We increase estimates to reflect the acquisition with the main impact on FY 2019E and FY 2020E where our Adjusted EBITDA numbers increase by 4%.
Gamma has reported another half year of strong growth. In particular, Cloud PBX and SIP Trunking continue to shine. The Group’s performance underlines the success of its focus on supporting its channel partners and driving the direct business in the direction of larger enterprises and public sector customers on longer term contracts. Gamma is building a good pipeline of new business and a number of product launches and updates are planned for the second half. The reported numbers reflect the adoption of IFRSs 9, 15 and 16. As previously flagged, in combination (but predominantly IFRS 15) they reduce EBITDA but leave adjusted EPS relatively unaffected. The decision to treat share-based payments as a non-adjusting item means that there is some impact on Adjusted EPS from that source, though. Prior year numbers have been restated to give a like-for-like comparison. We adjust our estimates for the healthy growth in the business and to reflect the accounting standards that Gamma has adopted and the treatment of share-based payments. Our estimates remain conservative, in our view, and we look forward to further positive trading news.
Gamma’s trading update for the first half of its current financial year highlights strong revenue and margin growth across all business areas. The upbeat announcement says that management expects the results for the full year ‘to be at the higher end of the range of Board expectations’. With the Group required to report its interims under new accounting standards in September, we are leaving estimates unchanged at present but will update numbers to reflect first half trading and the effects of IFRSs 9, 15 and 16 at that time. We note, however, that the Group ended the half year with a healthy cash balance which is ahead of our current year-end estimate. New CEO Andrew Taylor took over from Bob Falconer following May’s AGM with the handover ‘well received and successfully completed’. In all, the update presents a welcome continuation of momentum and growth.
Gamma has reported Adjusted EBITDA 2% ahead of our estimate at £41.6 million. Overall, revenue, margins and earnings increased despite the continued decline of the traditional business in the partner channel. While the mobile proposition has been slower to become established in the channel, it is now growing and Gamma’s Cloud PBX and SIP Trunking products continued to grow ahead of the market. Gamma launched its initial fixed/mobile converged offering in December and its new high capacity national optical network project remains on schedule. The direct business announced a number of significant contracts as it produced its best year to date with the Public Sector base securing new wins. The outlook statement states that the Group is ‘in great shape for 2018 and the foreseeable future’. Gamma has also announced the appointment of new CEO Andrew Taylor who will take over from Bob Falconer following May’s AGM. We have upgraded estimates for FY 2018E and FY 2019E to reflect good growth prospects, and we introduce new FY 2020E estimates.
Gamma’s trading update for FY 2017E reflects continued strong growth in all its non-traditional products. Adjusted EBITDA is anticipated to come in slightly ahead of market expectations. Given that we are at the top end of consensus, we leave estimates unchanged although we note that the year-end cash position is better than our number. As expected, momentum from a good first half looks to have continued through the rest of the year. Consequently, we expect to see good profitability in both the direct business and the growth products in the indirect business when results are reported in March. For the year as a whole, Gamma’s Cloud PBX and SIP Trunking products continued to grow ahead of the market while the direct business announced a number of ‘significant’ contracts. As flagged, Gamma launched its converged offering before the year-end. In all, Gamma looks to have delivered a strong performance in 2017, living up to the potential seen in the interim results.
Gamma Communications (LON:GAMA) is a communications services provider to the UK business market, with a focus on specific services where the company has a competitive edge. The share price has dramatically outperformed UK business telco peers in recent years (chart p2). In this report we focus on some of the key differentiators.
Gamma has reported strong interim results with near 10% revenue growth and adjusted EBITDA at half our annual estimate for FY 2017E – the latter reflecting good profitability in both the Direct business and the growth products in the Indirect business. Adjusted EPS increased by 15% and the Group has declared a 12% interim dividend increase. Superior performance from Cloud PBX and SIP Trunking continues and growth in data products was also c.20%. The direct business reported a pleasing number of key new business wins and the indirect business saw Channel Partner numbers increase again. Gamma saw increased data traffic on its new mobile network and the Group remains on track to launch its converged fixed/mobile product later in 2017. The outlook statement is positively enthusiastic. At this stage, we make modest increases to our FY 2017E estimates to reflect the strong interim performance and prospects for the second half. We think the balance of risk remains on the upside. Our estimates for FY 2018E and FY 2019E also increase to reflect the adjustments to the current financial year.
Gamma has this morning published a trading update covering H1 2017 (six months to June). The group is described as “perform[ing] well” and having delivered “another period of solid growth”. We leave forecasts unchanged until we see the detail of H1 in early September, but the balance of risk to numbers is clearly on the upside.
Gamma’s FY 2016 revenues, Adjusted EBITDA and Adjusted EPS numbers were a touch ahead of our estimates. We make small upward adjustments to forecasts for all three years of our forecast horizon reflecting that performance. Gamma is capitalising on its position as a nimble player in an attractive marketplace. It made strong progress in 2016 as Voice over IP technology drove uptake of SIP Trunking and Hosted PBX services - both areas where Gamma has strong platforms. In addition, data services reflected Gamma’s investment in its network, channel partner numbers increased again and the indirect business accordingly showed strong revenue growth. The Direct Business also produced good growth and won some significant new contracts. The outlook statement is ’enthusiastic’ about the current year and comments that the Board ‘remains open to suitable M&A opportunities and areas for strategic capital investment’. Overall, an optimistic picture, in our view.
Gamma operates in the UK market for corporate voice and data connectivity. The group sells mainly through reseller “Channel Partners” (numbering almost 1,000) and Gamma is geared up to support and assist these (generally small) organisations in building their bases of end customers. Advances in technology are driving companies to adopt new platforms, where Gamma has a competitive offering. We initiate coverage with above-consensus estimates, and in this note detail our reasons for this optimism.
Gamma has released strong H1 results showing impressive revenue and margin improvements, which highlight the success of its leading position in the SIP market and its channel partner (CP) strategy. A number of factors look set to continue to drive revenues and margins and support market sentiment: ongoing expansion in the number of CPs, up 8% in H115, further large customer wins, the launch of MVNO cellular services in H116, mobile convergence services in 2017 and the opening of the UK government market to SME tenders, for which Gamma is well positioned.
.png)
