Investing In Digital Customer Experience Will Attract More Global Telcos

Key Takeaways

• Cerillion's SaaS products offer cost-efficient modernization for telcos, potentially boosting revenue growth by appealing to cost-conscious customers and improving net margins.
  
• Expansion of workforce in lower-cost regions and partnerships with major customers could enhance operational efficiency and fuel substantial long-term revenue growth.
  
• Cerillion faces risks from sector contraction, unsustainable license revenue, lengthy sales cycles, working capital challenges, and competition impacting pricing and profitability.

Catalysts

Provides software for billing, charging, and customer relationship management (CRM) to the telecommunications sector in the United Kingdom, Europe, the Middle East, the Americas, and the Asia Pacific.

• Cerillion's SaaS-based BSS and OSS product suite allows telcos to modernize their processes with reduced total cost of ownership and quicker implementation, positioning them well to capture cost-conscious telcos, potentially driving significant future revenue growth.
  
• The company's unique ability to deliver an out-of-the-box system that requires no coding changes allows for easy upgrades and fast time-to-market, enhancing operational efficiency and potentially improving net margins.
  
• Strong R&D investment, including a significant focus on digital customer experience modules, is expected to increase product competitiveness and attract more telcos globally, supporting further revenue growth.
  
• Cerillion's plan to expand its workforce in Bulgaria, India, and other current locations indicates a strategic move to capitalize on lower-cost talent, which could enhance operational efficiency and improve net margins.
  
• The expansion and growth with significant Tier 1 customers, like Virgin Media, open possibilities for future contract expansions in large markets, which could significantly increase license and service revenues over time.

Cerillion Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cerillion's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.9% today to 32.3% in 3 years time.
• Analysts expect earnings to reach £19.5 million (and earnings per share of £0.65) by about January 2028, up from £15.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.6x on those 2028 earnings, up from 30.9x today. This future PE is greater than the current PE for the GB Software industry at 28.5x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Cerillion Future Earnings Per Share Growth

Risks

• The telecommunications sector is experiencing some contraction in capital expenditure, which may pressure Cerillion's ability to secure new contracts or renew existing ones, potentially impacting future revenues and profits.
  
• Although Cerillion has shown strong financial performance, there is an indication that maintaining the high level of license revenue, which significantly contributes to profit, might not be sustainable in the short term, possibly affecting net margins.
  
• Risks in lengthy sales cycles and delays in converting opportunities into revenue, as highlighted by the 12 to 18-month sales cycle, could create a backlog and delay potential earnings.
  
• An increase in accrued income and a fluctuation in receivables, which are timing-based, suggest that Cerillion might face potential challenges in working capital management, possibly impacting cash flow.
  
• Concerns about competition and pricing pressure, especially in large contracts, could impact Cerillion's pricing strategy and profitability, affecting net margins or revenue if they have to lower prices to win significant deals.

Valuation

• The analysts have a consensus price target of £20.51 for Cerillion based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £23.5, and the most bearish reporting a price target of just £16.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £60.5 million, earnings will come to £19.5 million, and it would be trading on a PE ratio of 37.6x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of £15.95, the analyst's price target of £20.51 is 22.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.