SMALL CAP IDEAS: Will IQGeo stock continue to rise after a 130% gain over the past year?

Some companies can be summed up in a few words.

As a provider of geospatial network management software, IQGeo requires a few more, but the value proposition of the fast-growing AIM component makes it worth understanding.

At its core, IQGeo’s Software-as-a-Service (SaaS) technology stack makes it easier, cheaper and more efficient to deploy fiber broadband networks.

It does this through a concept that is very leading in the software industry: digital twins.

By accurately replicating a customer’s fiber and power grid infrastructure in the digital sphere, IQGeo can run models, automatically plan new networks, and manage operational workflows and network expansions.

If that sounds familiar, it could be that the world’s newest trillion-dollar company, Nvidia, is spending an extraordinary amount of capital creating its own digital twin technology.

As one of the most capital-intensive industries in the world, few industries have the same level of SaaS sales potential as telecom.

To get a sense of the addressable market for such a product, more than 60 percent of households in IQGeo’s primary market, the US, are still not connected to fiber broadband.

The US is woefully behind the rest of the developed world on this front. To that end, the Biden administration has allocated nearly $130 billion in federal, state and local grants to a range of broadband initiatives to support urban, rural and low-income areas.

In a recent interview, Richard Petti, CEO of IQGeo, says there’s “something of a food frenzy going on in that market.”

Here in the UK fiber broadband is almost universal. However, according to data from Ofcom, ultra-fast full-fibre broadband (defined as 1 Gbps or faster) covers less than half of urban buildings and barely a third of rural homes.

Full fiber is a huge growth sector for UK telecom companies and the number of alternative networks vying for a share of the market is constantly increasing.

Petti predicted that the “surge of spending now taking place” in the global telecom infrastructure sector “will continue for years to come.”

Clearly, IQGeo’s addressable markets in both the US and UK are huge. Additionally, while the fiber rollout is IQGeo’s bread and butter, the technology stack is versatile.

Utilities in the electricity and gas industries can use IQGeo’s software for their own deployment needs.

In the here and now, IQGeo has shown considerable aptitude for acquiring and retaining customers.

Most recently, IQGeo signed extensive contracts with a major German broadband operator and a leading US telecom provider, both of whom use IQGeo’s Network Manager Telecom software for their network growth and management.

The German contract, worth more than €2m (£1.7m) a year over three years, will support the roll-out of fiber broadband to 800,000 homes a year over six years.

Under the $2 million (£1.57 million) US contract, IQGeo’s software will be used to upgrade the customer’s geographic information system.

In July, IQGeo expanded its deal with one of Japan’s largest electricity suppliers to help improve emergency response efficiency.

Petti praises IQGoe’s sticky and growing customer base.

In fiscal year 2022, the group added 64 new customers, which combined with the €13 million acquisition of continental Europe-focused automation and design software group Comsof in August of that year, translated into an 84 percent growth in recurring revenue .

A fair justification of Petti’s ‘land and expand’ software sales model.

In the more recent interims published in mid-July, recurring revenue (ARR) rose 73 percent year over year.

This translated into a six-month EBITDA positive (underlying profit) of £2.5 million, compared to less than one million for full-year 2022.

High growth, as seen with IQGeo, can be a double-edged sword, something every potential investor should be aware of, with cash flow tension being the main concern.

On the part of IQGeo, Petti noted that many of the new sales are with existing logos, keeping cost of sales significantly low while organic growth remains sustainable.

As of June 30, IQGeo’s cash position was £6.9 million, down about 8 percent year-on-year, without any external debt.

This prudent expansion strategy has seen IQGeo shares rise more than 130 per cent to 299p in the past 12 months.

Does that make IQGeo overbought? Maybe a little, but not necessarily a lot.

What analysts say

Analysts at finnCap have still written 17 percent of the upside into their price forecasts, and that’s just for the year ahead.

FinnCap recently raised its revenue forecast to £40.2m at the end of the year, 22 per cent higher than previous estimates. For 2024, finnCap raised the figure by 14 per cent over previous forecasts, predicting revenue to reach £43 million.

Gross profit could then reach £24m and £27m respectively in 2023 and 2024, analysts predict, an increase of about 10 per cent on previous estimates.

“We expect economies of scale from the platform to drive strong growth in pre-tax earnings and free cash flow in 2023 and beyond,” brokers explained.

If IQGeo can continue to deliver on its growth strategy while keeping costs under control, it could be an AIM stock to watch in the long run.

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