Five years after hitting rock bottom, when its banks and creditors were calling for the company to be sold off, business-to-consumer software group Portrait’s recent resurrection has proved nothing short of remarkable. Now it boasts more than 200 clients across more than 20 countries and a market valuation of nearly £20 million.

Instead of the touted trade sale when Protrait was at its low point, in rode white knight Nick Randall. As chief executive he set about a major restructuring, trimming fat and paying off debt with a £20.5 million refinancing supported by his long-time collaborator, US-based venture capitalist Bessemer.

Strategy
On arrival, Randall was impressed with the potential of a new software suite AIT had created – the fruit of almost £30 million worth of development. Based on this software, Portrait now operates in a field it describes as business-to-consumer (B2C) customer interaction management (CIM), a niche territory in the increasingly ubiquitous realm of customer relationship management (CRM).

Around 200 clients worldwide provide Portrait with sterling recurring revenues as well as the potential to sell new software and services.

In 2005, Randall added an analytics capability to Portrait’s suite of CIM software through the acquisition of Quadstone, which enables financial services companies to analyse the needs of all their existing customers in order to sell them new products more effectively. In addition, Portrait’s offering allows organisations to analyse details from a potential customer and come up with a range of ideal products. This has been described by industry research experts Gartner as a ‘visionary’ product.

Management
Portrait’s management team have all been involved in growing or recuperating small software businesses. Randall is an engineer by training who set up his first business in the 1980s.

With the money from the sale of this company, he bought and turned around ailing defence company AirTech. After floating it on AIM he eventually orchestrated a merger with US-based Remec.

From AirTech, Randall recruited finance director Matthew White, an able numbers man with whom he has worked since 1998. Prior to AirTech, White ran a corporate financial services team at Arthur Andersen in London, gaining seven years’ experience in international corporate recovery and six years in audit practice.

Manning the board as chairman is John O’Connell, the man who founded and grew business process software specialist Staffware from a small AIM stock to a Full List player operating profitably in 22 countries.

As a result of Bessemer’s 14.5 per cent stake in the business, Randall has brought two of its experienced venture capitalists, Felda Hardymon and Rob Stavis, onto the board as non-executive directors. They are joined by Neil Pearce from recent £1.3 million investor Advent Venture Partners, which, Randall says, has a few smaller portfolio companies on its books that could prove to be suitable ‘infill’ acquisition candidates for Portrait.

Prospects
Guided by management with considerable gravitas and back on a stable footing, prospects rest on three pillars of growth. The first is Portrait’s recurring revenues from its clients.

The second is to create alternative means of getting to market by developing partnerships with other software producers. These are based on an application platform suite called Portrait Foundation, which allows other software companies to build better ‘customer-critical’ applications more quickly.

Since Portrait possesses the only CIM software built on Microsoft’s “.net” framework, the group is in a unique position to work with the computer giant and is helping it sell to top-tier B2C manufacturers.

The third strategic pillar is to build new software applications to be sold directly or through re-sellers. This means Portrait now looks to deliver specific solutions to customer problems rather than simply the tools that allow them to build their own solutions, making its sales process smoother because selling applications is easier than selling a whole platform. Moreover, the more applications it sells the more Portrait increases its high-margin software licence and support revenue as a percentage of total sales.

New applications developed include the Interaction Optimizer, described as ‘a turbo charger for making traditional CRM systems more intelligent and responsive’. Furthermore, the Metropolitan Police is using one newly developed application to take 999 calls that Portrait hopes to sell into other markets.

Valuation
Results for the year to March came in ahead of forecasts and contained pleasing news of an 89 per cent increase in licence sales to £3.4 million, showing that strategic moves to increase the share of high-margin applications are bearing fruit. Support revenues grew nine per cent to £6.1 million and services 17 per cent to £4.9 million. Profits before goodwill amortisation, exceptional items and charges for share-based payments trebled to £600,000. Cash in the bank at the year-end amounted to £4.3 million with gross debt at £3.8 million.

For March 2008, investors might expect a 24 per cent sales rise to a predicted £16 million, from which pre-tax profits should double to potentially £1 million, increasing earnings to 1.1p a share. Based on market forecasts, the shares are trading on a prospective price to earnings ratio of 17.1 times, which drops below ten times for 2009, representing a large discount to the sector average. That looks unwarranted considering earnings are forecast to swell 111 per cent this year and 73 per cent next. Price to earnings growth (PEG) ratios closer to zero than one imply Portrait is very good value indeed, with the anomaly possibly reflecting a volatile share price performance over the past few years.

We believe Portrait is a gem yet to be unearthed by the wider market. Added spice might come if one of its partners, or a larger competitor, decides to snap the company up. Portrait, offering terrific earnings growth itself as well as potential strategic value as an eventual target, is a good long-term buy.

This article is from the September 2007 issue of What Investment.