Synety. Software & Computer Services

Synety

Software & Computer Services

Speculative Buy, 93.5p, Market Cap. £7.8m*

Synety is an AIM quoted cloud software and telecoms company. It develops and provides a suite of cloud based software products and services known as CloudCall. Typically, many CRM platforms do not log telephony voice calls and call recordings are usually run on separate systems. The company’s CloudCall services are based on the premise that businesses wish to use CRM software to log, analyse and track their electronic and paper communications, but these systems are not well-adapted to process voice calls in the same way. However, Synety represent a speculative investment opportunity given its early stage of development and hence is not without risk. On 18 March 2015, the company announced full year 2014 results showing revenues growing 198% to £1.63m with the operating loss (before non-recurring items) increasing to £5.35m, noting that the latter was in line with its revised expectations and reflecting its ongoing investment in the UK and launch in the US. It also separately announced that it had raised £2.82m (gross) in a conditional placing at 90p per share with certain institutional and other investors. The proceeds will be used for investment in the UK and US and for working capital purposes. There is also an open offer of up to £750,000. The fundraise is subject to shareholder approval in General Meeting on 7 April 2015. Application will be made for the new shares to be admitted to trading on AIM and it is expected that dealings in the new shares will commence on 8 April 2015. In addition, Synety announced Peter Simmonds as a Proposed Non-Executive Director effective from, and conditional upon the above admission, the current Deputy CEO of dotdigital.

Key Strengths

• CloudCall provides a solution to a known problem by integrating CRM platforms with existing telephony infrastructure via a tiered product suite.

• Has a number of income streams but majority of visible revenues from SaaS and telecoms.

• CRM market is large with Gartner’s 2014 CRM Market Share Update forecasting global CRM software revenues of US$23.9bn in 2014.

Key Weaknesses

• Early stage SaaS/telco company and growth in revenues to point of profitability dependent on customers adopting CloudCall.

• Pace of technological change, competition advances with greater operational and financial resources and is reliant on third parties for network, equipment and associated services.

• Set to remain loss making short-term as continues to expand the business.

Important Notice

This is a marketing communication.

The report has not been prepared in accordance with the FCA rules on independent research. See also page 5. Shares in issue Pre*

Post placing AIM Ticker 52 week high/low Price spread (p) NMS Analys 8,432,956 TBA SNTY 374.35p/92.02p 92p/95p 1,000 Trisha Reay Year end 31 Dec. 2013A Revenue £m 0.55 LBT £m (3.0)

Loss per share (p)

Backdrop

Synety is an AIM quoted cloud based software and telco company. It develops and provides a suite of cloud based software products and services known as CloudCall which are aimed at enabling organisations to use their communications more effectively. In April 2014, shareholders approved a placing and open offer to raise £5m (gross) to expand the company’s UK operations, increase the CloudCall platform’s resilience, capacity and territorial reach and initiate entry into the US market. Synety launched its US spoke in July 2014.

Typically, contacts, calls and recordings use multiple systems with Synety’s CloudCall solution providing a tiered service offering from a simple click-to-call to call centre functionality. This CloudCall suite of products thus enables companies to integrate their telephony systems into their existing software allowing calls to be made, recorded, logged, categorised and reports generated.

In brief CloudCall:

• Represents four elements in one … - telco, PBX*, call recording and CRM.

• Can operate as an ‘overlay’ on an existing phone system. • Cloud based service

- No capex and easy to deploy.

• API** driven – any CRM platform can integrate. * PBX – private branch exchange or switchboard ** API – applications programming interface

Synety operates a ‘hub’ and ‘spoke’ structure which also benefits from shared resource cost efficiencies. The hub reflects centralised core services in a single location, including its 24/7 global platform management, customer support, provisioning and support functions. The hub optimises customer services through its support of the spokes (both UK and US) which focus on sales, marketing and partner management. Furthermore, through this cloud-based model, the company is able to minimise the deployment costs of new product features as these can be rolled out instantly via the cloud.

The company has two main visible recurring revenue streams namely recurring SaaS service fees and telecoms income with additional recurring revenues via add-ons such as enhanced support and one-off income such as set up fees and telephony hardware sales. Currently, the overall gross margin from these combined revenue streams is 73%.

The company believes that the market dynamics in which it operates in continues to remain attractive. Currently, it estimates that the addressable UK market from integrated CRM platforms has approximately 1.7m end users and the US has approximately 20m end users. In addition, Gartner’s 2014 CRM Market Share Update stated that global CRM software revenues were forecast to be US$23.9bn in 2014, with the US representing 54% of those revenues, enforcing the company’s belief that the US represents a significant market opportunity.

SaaS Offering

The company currently provides the following CloudCall tiered service offering:

CloudCall Click (“Click”)

This is the company’s basic call-control solution:

• Allows click-to-call and call recording from within existing business software such as Microsoft Outlook, Salesforce and other CRM platforms.

• Streamlines the processes of calling contacts/customers and logging call notes for review at a later date.

• Recorded conversations can be recalled from the user’s CRM platform.

• Includes analytics tools enabling an activity review from a web portal.

CloudCall Enterprise (“Enterprise”)

• An on-demand communications system replacing traditional PBX and phone lines.

• Allows customers wanting both CloudCall Click call control functionality and a hosted PBX to source both services. CloudCall Contact Centre (“Contact Centre”)

• All features of Click and Enterprise as well as adding in-bound call functions, such as screen pop-ups, and conference calling.

• Introduced CloudCall Campaigns in April 2014 to help manage in-bound call flows and automate the outbound calling process

• Launched CloudCall Chrome in December 2014 - a plug-in that works from within the Google Chrome web browser and with any browser-based software.

The company plans further enhancements in 2015 for CloudCall.

Financial Results

On 18 March 2015, the company announced its full year 2014 results having provided a Trading Update in mid-January. Revenues rose 198% to £1.63m and the operating loss (before non-recurring items) increased to £5.35m. Synety noted that the latter was in line with its revised expectations and reflected the continuing investment in the business. Recurring revenue continued to build throughout 2014, albeit not as quickly as the company’s original estimates, due in the main to implementation on-boarding times lengthening as customers became larger and more complex. Cash and cash equivalents as at 31 December 2014 stood at £2.36m with a remaining R&D tax credit of £60,000 outstanding with Synety having received over £133,000 in early February 2015.

Key Strengths

• CloudCall provides a solution to a known problem by integrating CRM platforms with existing telephony infrastructure via a tiered product suite.

• Has a number of income streams but majority of visible revenues from SaaS and telecoms.

• CRM market is large with Gartner’s 2014 CRM Market Share Update forecasting global CRM software revenues of US$23.9bn in 2014.

Key Weaknesses

• Early stage SaaS/telco company and growth in revenues to point of profitability dependent on customers adopting CloudCall.

• Pace of technological change, competition advances with greater operational and financial resources and is reliant on third parties for network, equipment and associated services. • Set to remain loss making short-term as continues to expand

the business.

Conclusion

The company represents a speculative investment opportunity and hence is not without risk given it is still at an early stage of development. The conditional placing and open offer is subject to approval in General Meeting as Synety looks to build on its progress and continue to expand its UK and US business.

Annualised Recurring Revenue No. of end users Recurring Revenue per user

Av. New users per month No. of licences Av. Users per customer £0.15m 564 £22.80 55 794 5.8 £0.87m 2,678 £24.10 224 5,160 10.1 £3.02m 7,705 £30.48 419 19,221 11.7 +247% +188% +26% +87% +272% +16% £3.46m 8,779 £30.73 537 23,798 13.7 Q4 31/12/12 Q4 31/12/13 Q4 31/12/14 Growth in 2014 28/2/15

In addition, Synety also announced the following key performance indicators:

The company noted that it is encouraged by current trading and believes that the added investment that the placing (see Fundraising section below) will provide will further enhance its longer term growth prospects.

Fundraising

On 18 March 2015, Synety announced it had conditionally raised £2.82m (gross) in a placing of 3,129,084 new ordinary shares at 90p a share from certain institutional and other investors. It is proposed that the net proceeds from the placing (£2.57m) will be used as follows:

• Increase sales, pre-sales and marketing personnel in the UK as well as fund further product development (£1m). • Gradual expansion of the US sales and marketing operations

(£750,000).

• General working capital purposes (£820,000).

In addition, there is an open offer to raise up to a further £750,000 with any proceeds received under the open offer element to be used to further expand the sales and marketing teams in both the UK and US and for working capital.

This fundraise is subject to shareholder approval in General Meeting which will be held on 7 April 2015. Application will be made for the new shares to be admitted to trading on AIM with dealings expected to commence on 8 April 2015.

Board Composition

On 18 March 2015, Synety announced Peter Simmonds as a Proposed Non-Executive Director, whose appointment to the Board would take effect from, and is conditional on, the above admission. A Chartered Accountant, he has over 20 years’

Core Activities

AIM quoted cloud software and telecoms company. It develops and provides a suite of communications software known as CloudCall.

Financial Diary

Executive Directors

Non-Executive

Shareholders above 3%

notifiable interest level

(1) &, (2)

M Seemann Mellinckrodt 2

Herald Investment Management Aquaglow

J Kendall Commerz Real S Cleaver

Investec Wealth & Management 1. Source: Company

2. Pre-placing

Income Statement

Year ended 31 December £000 Revenue

Cost of sales Gross profit

Sales & marketing expenses Total administrative expenses R&D expenses

Operating loss before recurring items

Net finance income

Loss before tax

Tax

Loss for the year

Weighted number of shares in issue Basic loss per share (p)

Balance Sheet

Year ended 31 December £000 Non current assets

Current assets Total assets Current liabilities

Net current assets

Total assets - current liabilities Non current liabilities

Total liabilities

Net assets

Cashflow Statement

Year ended 31 December £000

Net cash absorbed by operating activities Net cash absorbed by investing activities Net cash from financing activities Cash at start of period

Cash at end of period Decrease/increase in cash

Group Financial Summary

2013A 547 -173 374 -648 -2,258 -509 -3,041 9 -3,032 159 -2,873 5,363,000 -0.54 2013A 1,715 2,573 4,288 -467 2,106 3,821 -1,450 -1,917 2,371 2013A -2,224 -94 1,914 2,704 2,300 -404 2014A 1,629 -445 1,184 -1,505 -4,004 -1,026 -5,351 25 -5,326 257 -5,069 not available -0.64 2014A 1,786 3,103 4,889 -2,445 658 2,444 -176 -2,621 2,268 2014A -4,407 -522 4,893 2,300 2,359 59 December March September May Chairman Chief Executive Chief Financial Officer

Disclosure List

Author: Trisha Reay, Analyst.

Material sources: Any facts historical or present relating to the Company, its senior management team or market conditions contained

within this report have been obtained from public sources and sources of information that are made available to market professionals such as SVS Securities. The price quoted on page 1 of this report represents the mid-price on 18 March 2015.

Publication date: 18 March 2015.

Recommendations: During the 3 months ended 31 December 2014, 0 of SVS Securities principal recommendations have been on

a hold basis and 2 of SVS Securities principal recommendations has been on a speculative buy basis.

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