Accounting Problems, Regulation In Tech & Cybersecurity Insurance

Small Cap Earnings Review 06/05/22

Stay tuned for a new trade idea: DiscoverIE PLC, and the small cap of the month of May: Alfen NV. Both will be published in the next two weeks.

Truecaller (mcap: 25614 SEK)

The anti-spam app's sales are up 116% in Q1. Truecaller continues to benefit from increasing smartphone penetration in emerging countries.

A highlight for the quarter is the growth of Truecaller for business, which provides a secure communication channel between customers and businesses. The segment was up over 10% quarter-on-quarter, with the company announcing lots of additions to the product.

Margins are down, but probably not as much as the market expected, as the company clearly guided for margin contraction due to investments in R&D and marketing.

Finally, in an environment where add business models are significantly under-performing expectations and guiding weak, Truecaller's overall cpm is up from 0.89 in Q1 2021 to 1.24 in Q1 2022. Guidance is unchanged at 45% revenue growth and 30% EBITDA. The fact that most of its sales come from India and other developing economies means that the cpm has a long way to go, unlike other add based revenue models that focus on developed markets.

Is this too good to be true ? Well, according to this article, it seems that Truecaller’s business model is rather dubious, at least ethically. Regulation could be a significant headwind in the future. Perhaps the Truecaller IPO was an opportunity for insiders to cash out before the business gets effectively should down by Indian regulators.

If not, its not hard to imagine how much bigger this business could be in a few years. Time will tell.

Beazley PLC (mcap £2598 )

Beazley's stock has been under quite some pressure lately.

This makes sense, as the business is exposed to tail risks that materialised (war, interest rates, cybercrime).

However, the Q1 trading update was less dramatic than expected. Beazley estimates that the war exposure is 50m of gross premiums written. The investment loss totaled 92m.

On the other hand, the business can start to take advantage of improved rates for investments, and the cyber & executive risk practice continues to drive growth with 27% growth in gross premiums combined.

The company restated its guidance of 90% combined ratio, however, it admitted that the uncertainty is much higher.

If the business manages to weather the storm without to much damage, structurally higher rates and a leading position in cyber-risk, with a favourable pricing environment, could drive high returns on equity in the next few years.

S4 capital plc (mcap: £1935m)

After a worrying audit delay, S4 capital published its unaudited 2021 FY results.

The audit issue was due to revenue recognition, cost of sales recognition, and IFRS 15 at one of S4 capital's two original companies: Media.Monks.

The dramatic growth in the number of clients has increased the complexity in revenue recognition, and the finance team was not up to the task. This makes sense as each contract is client specific, making it hard to properly manage the different payment schedules & billing procedures.

Nonetheless, this highlights the scrappy nature of the business underlying the neatly consolidated revenues, and casts doubts on the ability of senior management to hold everything together.

The stock is now trading at 2.2x Forward EV/Revenues, and operating margins should be around 10% at maturity. On the other hand, S4 guides for 25% organic growth over a market growth of 17% CAGR in the next few years.