SMALL CAP IDEAS: Will IQGeo shares rise further after 130% jump in the last year?

Some businesses can be summed up in a word or two.

As a geospatial network-management software provider, IQGeo requires a few more, but the value proposition of the rapidly growing AIM constituent makes it worth understanding.

At its core, IQGeo’s Software-as-a-Service (SaaS) technology stack makes it easier, cheaper and more efficient to roll out fibre broadband networks.

It does this through a concept very much at the cutting edge of the software industry: digital twins.

IQGeo’s Software-as-a-Service (SaaS) technology stack makes it easier, cheaper and more efficient to roll out fibre broadband networks

By precisely replicating a client’s fibre and electrical grid infrastructure in the digital sphere, IQGeo is able to run models, automatically plan new networks and manage operational workflows and network expansions.

If that sounds familiar, it may be because the world’s newest trillion-dollar company, Nvidia, is dedicating an extraordinary amount of capital to creating its own digital twin technology.

As one of the most capital expenditure-intensive industries in the world, few industries have the same level of SaaS sales potential as telecoms does.

To get an idea of the addressable market for such a product, over 60 per cent of households in IQGeo’s primary market, the US, are still not connected to fibre broadband.

The US is woefully behind the rest of the developed world on this front. To that end, the Biden administration has dedicated nearly $130 billion in federal, state and local subsidies to a range of broadband initiatives to support urban, rural and low-income areas.

In a recent interview, IQGeo’s chief executive Richard Petti says there is ‘something of a feeding frenzy in that market’.

Here in the UK, fibre broadband is nearly universal. However, ultrafast, full-fibre broadband (defined as 1Gbps or faster) covers less than half of urban premises and barely a third of rural homes, per Ofcom data.

Full fibre is a huge growth sector for UK telecoms and the number of alternative networks vying for a piece of the market is constantly increasing.

Petti predicted that the ‘wave of spending happening now’ across the global telecoms infrastructure industry ‘will continue for some years to come’.

Clearly, IQGeo’s addressable markets in both the US and UK are massive. Furthermore, though fibre roll-out is IQGeo’s bread and butter, its technology stack is versatile.

Utilities companies in the electricity and gas sectors can, and do, use IQGeo’s software for their own roll-out needs.

In the here and now, IQGeo has shown considerable aptitude in gaining and retaining customers.

Most recently, IQGeo secured expanded contracts with a major German broadband operator and a top-tier US telecom provider, both using IQGeo’s Network Manager Telecom software for their network growth and management.

The German contract, worth over €2million (£1.7million) annually for three years, will support the rollout of fibre broadband to 800,000 houses yearly for six years.

Under the $2million (£1.57million) US contract, IQGeo’s software will be used to upgrade the client’s geographic information system.

In July, IQGeo expanded its deal with one of Japan’s top electrical utility providers to help improve the efficiency of responding to emergencies. 

Petti touts IQGoe’s sticky and expanding customer base.

In the 2022 financial year, the group added 64 new customers, which combined with the €1million acquisition of continental Europe-focused automation and design software group Comsoft in August of that year, translated to 84 per cent growth in recurring revenue.

A fair vindication of Petti’s ‘land and expand’ software sales model then.

In the more recent interims posted in mid-July, recurring revenues (ARR) increased 73 per cent year on year.

This translated into an EBITDA-positive (underlying profit) six months to the tune of £2.5million, compared to less than a million for the entire 2022 financial year.

High growth, as seen with IQGeo, can be a double-edged sword, something any potential investor should be aware of, with cash-flow strain being the primary concerns.

For IQGeo’s part, Petti noted that much of the new sales are with existing logos, thus keeping the cost of sales down considerably while keeping organic growth sustainable.

As of June 30, IQGeo’s cash position was £11.1million, down around 8 per cent year on year, without any external debt burden.

This prudent expansion strategy has led to IQGeo shares jumping over 130 per cent to 299p in the past 12 months.

Does that make IQGeo overbought? Maybe a little, but not necessarily a lot.

What analysts say 

Analysts at finnCap still have 17 per cent of upside written into their price forecasts, and that’s just for the year ahead.

FinnCap recently upped its revenue guidance to £40.2million come the year-end, 22 per cent higher than previous estimates. For 2024, finnCap bumped the figure up by 14 per cent on previous guidance, predicting revenue would hit £43million.

Gross profit could well then come in at £24million and £27million respectively in 2023 and 2024, analysts forecast, marking a rise of around 10 per cent on previous estimates.

‘We expect platform economies of scale will drive strong growth in pre-tax earnings and free cash flow in 2023 and beyond,’ brokers explained.

If IQGeo is able to keep delivering on its growth strategy while keeping costs in check, it could be one AIM stock to keep a long-term eye on.

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This post first appeared on Dailymail.co.uk