Thursday Notes from Mello 2018

As noted elsewhere, not to mention in the Financial Times, the Mello 2018 conference in Derby last week was like no other. With fascinating key-note presentations, numerous companies of investable quality and a who's who line-up of names from the private investor universe it was the place to be. While I spent some time looking after directors presenting in one of the satellite rooms I nevertheless made time to see the companies below; all are worthy of attention.


I first heard about Cerillion just over a year ago at this Sharesoc Company Seminar. At the time CEO Louis Hall spoke about the history of the business and how they were looking to drive growth by moving into new sectors and geographies. Providing enterprise CRM and billing software will remain at the heart of their offering but they'd also like to diversify to fill in around the edges of the product portfolio. Financially this shouldn't be a problem as the bulk of revenues are from existing clients and these clients tend to stick around as it can take 3 years to switch to a new system (some clients have been on-board for 20 years!).

The real difficulty for Cerillion is that it's still a minnow in a pond full of competitors - from large software vendors (Oracle) and equipment vendors (Ericsson) to small software companies (Ansen). The board are mitigating this by filling a niche with mission-critical billing software and partnering with Nokia so that Nokia on-sells the Cerillion solution as part of bigger deals (Nokia has no in-house billing system). They are also diversifying into other verticals away from telecoms and pushing a new cloud-based solution. Nevertheless I can't help feeling that the company is finding is hard to grow dramatically and they're suffering from some small-company issues such as the impact of FX changes: most of their revenue is from Europe and US so GBP strength is hurting them because, as advised, they have little hedging. Still they're not too expensive and might be worth tucking away and waiting for the business to be acquired itself some time in the future?

Aeorema Communications

I'd never heard of nano-cap Aeorema Communications (just £2.5m market cap) prior to Mello 2018 but Steve Quah and Andrew Harvey (joint MDs) certainly put on an entertaining presentation. On the other hand you'd rather expect this given that they're in the business of creating immersive experiences for blue-chip clients like Microsoft and Vodafone. This means that they, under the Cheerful Twentyfirst brand, imagine and orchestrate things like the takeover of a chateau in Cannes for News International and the re-creation of an abandoned tile-shop in London as a thrilling destination for Oath and 1000 privileged guests. These flagship events are absolutely those that large clients are willing to throw a lot of money at and it seems that Aeorema aren't exposed to much fixed-price contract risk since they have a long track-record of risk assessment and raising unexpected issues with their clients. Still I'd want to dig a little deeper into this exposure before investing since revenues are bound to be lumpy in this type of business and one bad contract could make life very difficult.

Possibly, though I don't know for sure, this is why the company struggled (as Cheerful Scout) since listing in 2001 and wound up merging with Twentyfirst in 2009 as a route into live events? There's also the fact that two large shareholders exited the company last year, triggering a management restructure, and I got the feeling that they weren't driving the company aggressively? Still Steve and Andrew persuasively outlined how they're running a lean team, with strong cost control and high project margins, which leads to excess cash generation. Right now they've got around £1m tucked away in the bank and this means that acquisitions are an option and could lead to synergies as overlapping operating costs are removed (although they've no interest in over-paying for other agencies). Having some rigour here around pricing is valuable since agencies, like Aeorema, are people businesses and their key assets walk out of the door every day. This is why you need to hold them with some equity and good creative engagement; for example directors own 26% of the company here and aren't planning to disappear any time soon! At such a low valuation, just 0.33x of revenue, this could be a heck of an opportunity if your risk tolerance is high.

Zoo Digital

I've heard a lot of the buzz around Zoo Digital over the past year and that's hardly a surprise with its share price appreciating by 10x in just 12 months! However I've always been put off by the lengthy history of losses, since listing in 2000, and the stratospheric valuation being applied as the company moves into making profits. Still there's no point looking backwards with a share like this and so I was keen to hear about the future from Stuart Green, CEO. Essentially the key change is that streaming services, which kicked off in 2006, have fundamentally reshaped the home entertainment market as content can now be delivered to anyone globally at any time. This is great for the content studios but it's also a challenge; rather than just localising a DVD to contain a handful of key languages now they need to cover a vast array of languages and cultures. This is where specialists, such as Zoo Digital, come in since they can adapt content to match numerous target markets and ensure that it's so much more than a literal translation. That said some regions prefer subtitles (UK) and some prefer dubbing (Europe) and for the last 5 years Zoo Digital have mainly provided subtitling and digital packaging services for studios and over-the-top providers.

Now subtitling is a decent market but dubbing is both much larger, ~70% of the spend on translation services, and much more expensive as it relies on audio studios with actual voice actors and support staff. Up till now it's been difficult to improve this service (as the audio output must be top-notch) but Stuart believes that they've created a virtual platform which will disrupt the industry. The idea is that functions (acting, editing, directing) are split so that each person can work remotely at a convenient time; the secret sauce is that Zoo Digital's cloud software coordinates, records and analyses voice actor input to make sure that it meets quality standards and has nothing missed out. All the freelance actor needs is a controlled environment for recording, which can be at home, and apparently many freelancers already have just such a set-up. Now the group is just 6 months into trialling this approach but it seems that clients are very happy with the dubbed content being delivered (and they're also receiving it more quickly than via a traditional route). So Zoo Digital might just be in exactly the right place to capitalise on all of the client investment which it has made in the last decade - hence the share price reaction. With a forward P/E well over 100 there's no room for a misstep but I can't deny that this looks like one of the most exciting investment opportunities around.


This is another company which I've heard a lot about in the past although originally it was known as Synety (when it acquired a listed shell back in 2012). Apart from the name change quite a few things have remained the same over the last six years - Simon Cleaver is still in charge, although he's CEO rather than Executive Chairman, and the focus is still on cloud-based software and communications. More specifically CloudCall integrates telecoms and communications into CRM platforms in a bid to improve efficiency, accountability and satisfaction. The problem is that there are an awful lot of CRM systems out there, many in very particular niches, and the company started by trying to integrate across this vast range. Unsurprisingly this was a Sisyphean struggle and shareholders suffered substantial losses for quite a few years, along with being heavily diluted, as the company tried to make headway. Then, in 2015, this strategy was substantially revised with Peter Simmonds, from dotDigital, taking over as Chairman and the focus switching to more deeply integrating with a small number of the most popular CRMs (such as Salesforce and Microsoft Dynamics). A further change came as the company partnered up with Bullhorn, a market-leading CRM provider, to integrate the CloudCall software directly within Bullhorn. A smart idea since Bullhorn are the market leader in the recruitment sector, with 100,000 users, and are directly exposing them to a much larger client base.

So from a difficult birth it feels as though CloudCall is making real progress towards profitability or, at least, break-even in the reasonably near future. At the moment 75% of income is recurring - this grew by 55% vs 2016 - with 12% repeating and 13% non-recurring. These sales come with a very high gross margin of 80%, since the business owns all of its software, and there is still £6.7m left in the bank as cash burn has reduced somewhat. Also sales are now being made to larger customers, with the average number of users up to 27, which may be a result of selling in the US. Simon did quote some interesting numbers around the cost of acquiring and setting-up users coming in at £5600 while their implied lifetime value is £90,000. Hard to know what to make of that but the business is definitely growing. On this front the company are shortly launching messaging and social media products which will be very helpful for recruiters looking to attract younger candidates as quickly as possible (as well as being more sexy). By the sounds of it these products are highly integrated and allow data to be managed across many different channels while also helping to ensure that GDPR compliance is maintained and logged; essentially a frictionless solution which is what you need in a call-centre. Personally I'm happy to wait until profitability is reached but if, as Simon mentioned, 80% of the clients who take a trial end up buying the software then they must be doing something right.

Disclaimer: the author does not hold any of the shares discussed here

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