Arcontech’s interim report wasn’t well received by the market earlier this week. Revenue increased by 4.7% but not enough to prevent the share price falling by almost 15%. New chairman Geoff Wicks highlighted the difficult sales environment:
“The prevailing market conditions have meant that the sales cycle is taking much longer than in normal times.”
The outlook for the rest of the year also sounded pretty gloomy:
“We expect conditions in the second half of the year to remain challenging. It seems unlikely that our sales team will have greater access to customers until at least the end of the year”
The unsatisfactory length of the sales cycle and a lack of sales to new customers are not new themes for Arcontech. Pretty much all of their annual reports of the last several years contain some variant along the same lines. Here’s a few recent examples:
|Year||Quote From Annual Report|
|2020||“sales to new customers in the year have not been what we had hoped due to extending sales cycles…”|
|2019||- “The length of the sales cycle continues to be longer than we would like”
- “sales to new customers have not been significant during the year”
- “[prospects] need to be tempered by the traditionally long and complex sales cycles”
|2018||“The length of the sales cycle has been longer than we would like”|
The reality for Arcontech is that sales to new clients do not (and have never) come along very often. Right now they are even harder to come by because of potential clients delaying purchasing decisions. But I think that Arcontech’s prospects might be more positive than those rather downbeat quotes might suggest. Arcontech’s sales cycles are long primarily for two reasons:
- Arcontech is offering its potential clients alternative (software) solutions (for publishing and receiving real time market data) to those that they will already have in place (for example from data providers such as Bloomberg or Refinitiv). In order to win a new client Arcontech typically has to displace an incumbent vendor who is likely to have an existing multi-year contract in place for their services.
- Arcontech’s potential customers (typically large financial institutions) move slowly. Purchase decisions involve multiple departments and they usually require extended evaluation periods before a purchase agreement can be made.
It’s a frustratingly long and difficult sales process. But….when a new client win happens:
- Arcontech’s products have the potential to become very embedded. That long and complex sales cycle now starts to work in their favour protecting their products from the rival vendors that they have worked so hard to displace.
- It opens up an internal marketplace where it is much easier to sell more products without going through that whole long sales process again. Arcontech essentially sells end user licenses for its software products. A single new client can open up opportunities to sell many more end user licences within their organisation.
The infrequency of new clients means that Arcontech tends to increase its revenues predominantly by taking advantage of the two bullet points outlined above to sell more into their existing clients. This has enabled the company to achieve fairly modest revenue growth of around 7% over the last few years. Importantly though, Arcontech also has a very stable cost base that provides the operational gearing for that revenue growth to have a much greater impact on profits:
And profit growing faster than revenue has resulted in steadily increasing profit margins:
Current sales conditions might be even more challenging than normal for Arcontech but I don’t think that anything in the interim report has fundamentally changed the longer term outlook.
New client wins will continue to be infrequent in the near term due to the length of the sales cycle. The recent expansion of their (very small) sales team has though added the potential to initiate more sales processes and increase the frequency of future client wins. The intricate and drawn out nature of the sales process means however that this is unlikely to have an immediate material impact on revenue.
In the meantime any new client wins are worth paying attention to as they could potentially be very significant for Arcontech. On that point the 2018 Annual report noted that Arcontech currently had trials running at 6 potential new clients (did I mention the long sales process?).