Member Info for ElProfessor

I make it that the top 10 shareholders now hold around 140M share which equate to approx 56% of the company. That is pretty concentrated and suggests that this big fund managers have quite a lot of confidence in the company although from their end of the telescope it will be an infinitesimally small % of their funds under management. The good news is that if things start to pick up (which I think they will) their will probably not be many available shares sloshing around so we could see a quick price rise. The bad news of course if the opposite scenario which is if one of these large shareholders loses faith then them dumping the stock could cause significant downward pressure. I am not surprised that we are not hearing any sales news in August as it is always a pretty dead month, I do have high hopes that some of the Xuber deals that we were told by Ken Lever at the half year update, were in the contracting stage, make it over the line and get announced in September.

Interesting RNS today namely that Majedie Asset Management Limited passed the 5% threshold on 14th Aug. Their purchase that took them above the 5% was very small, just 125,000. It makes perfect sense that they should have been hovering just below the 5% threshold but why break cover to accumulate a further 125,000 unless you want to buy quite a lot more. Let us hope this is indeed the case and it will give the share some positive momentum.

'preferably legal but aggressive capitalisation' in the last paragraph was meant to read: 'perfectly legal but aggressive capitalisation"

With tangible assets you are meant to write them off over their expected life although there is nothing to stop you taking the full hit in year 1. There are some broadly accepted conventions (IT hardware over 3 years, cars over 5...) but ultimately provided it does not look too preposterous then your external auditors will sign off your accounts. With intangible assets it is even more of an art than science. How many years should you spread the cost that you have spent developing intellectual property over given that you usually have no precise idea of either the value of that IP or of how many years it will be of value for. In short a company can have depressed statutory profits because of decisions made in previous years as to accounting procedures but the one thing that can't be flexed is the amount of cash being thrown off. Now when a company impairs an asset, as Xchanging have just done with £47.7M of procurement intangible assets, at the half year what they are effectively doing is taking all the remainder of the capitalisation charges in that year and writing off the value of that asset. If the baker had crashed and uninsured van and had to write it off this would have a very real effect on his profits and cash as he would have to go and buy another on. If however the asset was intangible and it was decided that it no longer had any value then there are two important things to bear in mind: firstly it was contributing nothing towards profits and secondly, because of this there is no need to spend any money replacing it. In short, with the exception of horrible looking statutory profits in the year in which you write off the asset, nothing has changed on the cash front, and importantly statutory profits will be up in future years as there is no longer an amortisation charge. The key point is that the amount of cash the company is throwing off is exactly as before and that, as a shareholder is what I am really interested in. So coming back to the case of Xchanging, my guess as to what has gone on at the half year is that the Board decided to use the opportunity of the bad news on the Procurement performance, to also bring out their dead in the form of the impairment charge which most likely related to preferably legal but aggressive capitalisation of intangible assets under the old regime which were sitting on the balance sheet with little or no value. Notwithstanding the poor performance this year in procurement, the fundamental ability of Xchanging to throw of cash is unchanged despite the statutory loss for the year. I applaud the cleaning up of a messy legacy balance sheet.

There are lots of songs about money: 'Money, Money, Money', 'Give me Money (That's What I Want)', 'Money Makes the World Go Round' to name but a few. There are to my knowledge, no songs about 'Statutory Profits'. Cash it seems is king in the music world and so it is in business. Balance sheets of companies can be notorious opaque to the uninitiated. I have a theory that accountants like it that way because it makes them look clever when they are asked to explain the difference between, operating profit and EBIT and then onto EBITDA. Actually none of it is very difficult it is just made to look that way. Given that there are so many different numbers floating around to value companies it is of little surprise that you can usually find one that looks good, or should you be that way inclined, one that looks bad. Ultimately there is but one that matters and that is cash. I admit that others can be useful as early warnings of problems but if a company is spitting out large amounts of cash (and preferably increasing amounts of it) then that company is usually a pretty safe bet. One of the big variants between the amount of cash that a company spits out and the amount of profit it makes is the result of spreading the cost of assets acquired over a number of years. In many ways this makes a lot of sense - if a baker makes £10,000 profit per year but buys a bread oven worth £10,000, is it reasonable if you are trying to value his company to say that he makes no profit in that year? By spreading the cost of the oven over the ten years it is expected to last you get a far better view of the profits of that company which end up being £10,000 - £1,000, so £9,000. So in this year you have a cash position of 0 (£10,000 cash made but also £10,000 spent on the oven) but an accounting profit of £9,000. For the next nine years however, all else being equal, the cash position is £10,000 but the accounting profit is only £9,000 as each year a 'depreciation' charge of £1,000 is applied. When the assets are physical (tangible assets) we talk of depreciation and when they are non-physial (intangible assets) we talk of amortisation. It follows that a company can to a certain extent chose the profit it makes in a year both by choosing what it capitalises (the act of spreading the cost on the balance sheet over many years) and also by choosing how many years they spread it over. In the example of our baker if he chose to spread the asset cost over 5 years then the profit would fall to £8,000 per year for the first five years but would then increase to £10,000 per year for the next 5 years. Importantly nothing has happened to the amount of cash the company is throwing off, it is all down to accounting.

Interesting quote from Jeremy Thomas, manager of the Bruner Investment Trust, who has recently been adding to his holding of Xchanging, according to Jennifer Hill at Citywire, on the back of its evolution into a technology company: ‘It’s enormously misunderstood and undervalued’.

Now emotions and 'gut feeling' which the best fund managers put great store by, are ultimately different sides of the same coin. The important point is that the star manager finishes with gut feeling, in other words puts all the hard work in of gaining as much information as possible, analysing it and controlling their emotions before letting their 'gut feeling' which psychologists often refer to as the sub-conscious mind, do its thing. In short all the above explains why we do not all value a share in the same way, which is fortunate as otherwise there would be no market. In theory if anyone was an expert in valuing companies it should be analysts, they have the resources to dig out the extra information and they should have the skills to analyse that information and to keep their emotions in check. If they do not have these skills you have to wonder whether they are in the right trade. I wonder therefore what kind of thought process the analysts are Liberum go through that allows them to value Xchanging at 220p and then a week later at 100p. We know that bounded rationality means they cannot know everything about the company but it would have to be a pretty ground breaking unveiling of new information to more than halve their valuation of the company, which I am not convinced that underperformance, no matter how drastic, of a division that accounts for just 6.5% of total revenues of the business, qualifies for, particular when accompanied by the news that the other 93.5% of the business has had a record performance and is ahead on sales to boot. Even Investec's reaction of cutting their guidance from 250p to 185p seems a little over the top although I would put that down to the 250p being over optimistic rather than the 185p being too low and at least this revaluation I can understand. Liberum's strikes me as being down to nothing more than emotions running wild and trends being slavishly followed which is utterly unacceptable to see in a serious analyst firm.

The theory of perfect markets tells us that that the all knowing market takes into account all information available and then spits out a perfect price that matches buyers and sellers which in turn perfectly values the company. This is of course utter drivel for two reasons, the first because of what economists call 'bounded rationality' the second because humans are fundamentally irrational beings, driven as much by emotions and perceptions as by facts. 'Bounded rationality' is ultimately something we just have to live with, we will never know everything there is to know about either the company or the environment in which it operates therefore we have a 'bounded' view of the facts which limits our ability to value the company. For example it may be that the CEO of a company is planning to retire but until he shares that fact publicly the shareholders cannot price this fact in. Of course this is a pretty straightforward example, another might include the economic environment in which the company operates, for example interest rise may appear earlier than expected which, in certain sectors may negatively impact, or in others positively impact, the share price. Generally bounded rationality impacts all participants in the market equally, not least because regulators have pretty comprehensive rules in place to ensure information is released to all market participants simultaneously. Now of course some market participants have a head start here and that groups is the directors as well as the PDMR (person dispensing managerial responsibility) which is why share purchases and sales by these two groups are of such interest to the investor; purchases a lot more than sales as a sale could be simply because the person needs the money whereas a purchase is always a conscious decision. The emotional nature of investors is the other factor that prevents a company being priced perfectly. Most of us tend to place too much importance on trends, believing that the share that has been climbing for a long period will continue to climb and that conversely the share that has been falling for a long time will continue to fall. In many way this is a spin off of 'group think' as we believe that if people are broadly positive or negative on a share then we fall in with that view. Now the issue of bounded rationality, as I mentioned above, impacts all market participants, having said that more information can be unearthed through effort and some market participants are prepared to put that work in whereas others are not. In addition the information is often not in a ready to use form but needs to be interpreted which some market participants will be better at than others. That is why you have star fund managers. The other reason you get star managers is that they are better at keeping their emotions in check; they will never eliminate them but they will control them and let hard facts guide them rather than emotions.

Hi Moorey, Sorry to hear that you have taken such a pounding on this one; it is always a difficult decision whether to crystallise a loss or to hold on for recovery. I know that I have held on far too often and taken ever increasing losses. For me if I had bought at £1.85 I think I would be tempted to hold at this level for at least a partial recovery. Ultimately it is a question of whether you feel the factors that led you to buy at that price have change so substantially as to make the share bad value at half your original purchase price. What is for sure is that investing sayings don't help as for every one that tells you do to something there is another one that tells you to do something else. The one suggestion I would have, if you have not already sold and have not watched it already, is to invest 45 minutes in watching the mid year results presentation (easily found on the Xch web page). Having watched it twice (I always do this, once to get the sentiment and once for the facts) I am reasonably optimistic (see previous two posts). Of course there is reason for concern, perhaps most fundamentally that Xch laid out a strategy based on BPS being the cash cow and Technology and Procurement the engines for growth, only to now tell us that one of those engines is looking decidedly questionable. Ultimately however Procurement is a minnow in Xch and I think people are getting overhung up on it, in addition they are double counting having already hammered the share price at the Q1 announcement concerning Procurement's problems.Overall I like the fact that the heavy capital investment has been done (acquisitions, tech investment and restructuring) and that not only are the sales pipelines starting to fill nicely but much of the tech sales should have awesome margins. No investment is ever risk free but if I had a pile of free cash I would be severely tempted to make a heavy purchase in Xch at this price. By the same logic therefore I am keeping my significant holding invested at this price too. Good luck with whatever decision you make. El Prof.

.... The real excitement however comes from Sales. The signs are there, some subtle others less so, that Xchanging are turning the corner. In the revenue and profit bridge that David Bauernfeind presented, the two numbers that jumped out at me were for revenue growth. The revenue growth per se was £23.3M for the half year with the profit impact of revenue growth at £12.6M. That makes a margin of 50% which is staggering. Separately Ken referred to the sales targets that were set for both in year sales revenue and total contract sales revenue as having been delivered on an slightly exceeded. He also referred to the maturing sales pipeline and interestingly that none of the Xuber opportunities have gone away, that they are progressing as anticipated, that Xchanging is at preferred supplier stage for a number of these and is even at contracting on one or two. Total Objects has had more wins in H1 than in all of last year. In short this is a different language to that which we have seen in previous results. Now I accept that there may be some positive language been rolled out to counter the bad news on the Procurement front but I don't think that professional accountants like Ken Lever do irrational exuberance. The most exciting of all his comments was that the growth prospects are such that Insurance Software could see £100M revenues over three years with margins at 25% and that Applications Services could also see £100M revenues over that time frame although the margins would be lower. He then referred to a blended margin rate for the two businesses in line with the current BPS margins which would suggest over 20%. So what does the future hold? I am pretty sure that it is up as I agree with Ping Pong and PhonixChi that this is now pretty cheap. As for tomorrow and the next few days, I hope that people move quickly away from the emotional phase and look at the facts. When they do they should hopefully realise that this sell off is overdone. With regards to returning to what I see as fair value I fear that could take a little longer as the market is not going to give Xchanging the benefit of the doubt for a while yet. I get the feeling from the way that Ken Lever was talking in today's presentation that we will hear some positive news on Xuber sales before too long and that should help. Ultimately the best hope for quick share price growth has got be acquisition by either a company that can the value and potential that the market is currently missing or that has a business model for whom the synergies are appealing at this price.

We can be pretty sure that Tom Lehrer was no thinking of Xchanging when he wrote 'The Masochism Tango', not least because he did so over 25 years before Xchanging was founded, but shareholder in this company could certainly adopt it as a theme tune. On the whole I am pretty relaxed about today; now don't get me wrong, I enjoy having a quarter of the value wiped out in a significant holding within the pace of an hour as much as the next man, but therein lies the important point. The market got the mid year statement at 7a.m and by 8a.m has written a quarter of the value of the company off. Had anyone read beneath the headlines? To me it smacks of a knee jerk reaction possible out of fear that this is February 2010 all over again. After all there are couple of important elements in common: a large write-off and the CEO departing. The write off in procurement is interesting but little more. It does not relate to the recently acquired technology procurement businesses, Spikes Cavell and MM4, but to the legacy procurement business; in short this is one of the last write offs in tidying up the old mess. The departure of Ken Lever is hardly a surprise (good call a few months ago Filshare); he is not a young man and he had been there for nearly 6 years of which over 5 as CEO. He is an accountant who came in to be CFO and who got the top job. Ken has many qualities but I think he would agree himself that he may not be the world's slickest salesman. He has done a fantastic job in cleaning out the Aegean stable that was Xchanging's accounting and has also done the heavy lifting on cost out and simplification. As he said himself at the end of the today's presentation, the next stage of the Xchanging journey needs a new profile. This is clearly a good natured departure otherwise he would not be hanging about for six months until his successor was in the chair - remember David Andrews' departure, it was announcement and out on the same day (with the out becoming I suspect before the announcement). Now you can't get away from the fact that the Procurement results are not pretty. They have clearly got problems to sort out and these are about more than just cost out, however Procurement is a minnow. It makes up less than 6.5% of the group's revenues. To me the more interesting news today was the positive stuff. Both BPS and Technology are having record years and are performing in line, or ahead of targets. Look at the margins here: BPS is up from 18.4 % to 21.2% and Technology from 5.7% to 7.8%. In terms of revenue, despite the headwind of £28M in Insurance (this is the fall off in revenues that everyone knew were coming this year - and importantly this is the last year of them), the BPS revenues are just down £8.1M (from £142.1M to £134M) and profits are up from £26.1M to £28.4M. In Technology revenues are up from £47.1M to £52.4M with profit up from £2.7M to £4.1M.

Moorhey, I am sorry to read that you are sitting on a substantial loss. Do you mind the question as to what your average point of entry is? It is true that the past since Nov Xch has been a pretty unpleasant ride and it is certainly true that since IPO it has been a bouncy one. My view is that it is currently significantly undervalued. The volumes traded of this stock are comparatively low so it can swing massively based on sentiment. The Q1 update was pretty much taken as a profit warning despite the fact it said no such thing. It basically said that one segment was a bit behind but would make it up within the year. Even if it does not given that it such a small segment at present (although great growth potential and the awards are testimony to this) any shortfall will easily be made up by the other sectors. As Fil has pointed out we get the midyear update next Thu (30th Jul). I don't think that it will be spectacular but I do expect them to say they will hit the numbers they originally committed to for the year (which is also what they said in Q1 but nobody listened). I expect to see a gradual increase in the price thereafter as the realisation dawns that the numbers are solid. The analyst are still calling an average of £2 and as I have said before I think that it not far from fair value. Ken Lever always said that this was the last year with a head wind from big contracts falling away (£28M in the Insurance space) thereafter we should see Sales contribute more to growth rather than arresting the decline. Add to that the fact that the investment has been made in technology and acquisitions and we should also now see far more of sales dropping through to the bottom line as profit. In short I remain confident although like you I confess that my patience does at time wear at little thin.

Part of me wishes he would focus on Xchanging however the fact that the Board have given him the green light and the fact that he feels he has the bandwidth to do this suggest to me that both he and the Board are confident that the heavy lifting at Xchanging has been done and that all is on the right track. If there was a worry that Xch would miss its numbers this year then I can't see that this would be happening. Let's hope that the AGM tomorrow is a positive affair and that we see a return of confidence.

The market pricing of Xch is perfect if you define perfect pricing as that which matches buyers and sellers. This however is a circular argument and we can all point, albeit most of us with the benefit of hindsight, to companies that were priced completely wrong, sometimes for quite some time, in terms of intrinsic value. I would put Xch in that category at present. The current price matches buyers and sellers because after a long fall, and one third in less than six months is pretty impressive, there is a nervousness to buy and for those who have seen a third of the value of their holding wiped out, a fear of further loss hence a propensity to sell. Of course the latter will have applied all the long of the journey down as stop losses get taken out and selling takes place regardless of the fundamentals and the holder's feelings, which is both the strength and the weakness of a stop loss. There are a number of ways that you can look at the current price and come to the conclusion that it is too low. PE is the obvious one and as I have written before a rise to177.5 equates to a trailing PE of just 15 and I certainly don't think that there is any risk of profits falling this year. Another way to price is to do so historically: Xch announced the AgencyPort (and Total Objects) deal last July and the share price jumped 50p over a short period. The uncertainty while the CMA review went through eroded all that 50p but now that they have confirmed that the deal can go ahead the price is just 120p. If you take the 50p off you get a price of 70p which again is clearly wrong. Now I am not saying that the 50p rise last year post deal was necessarily right but the price then and the price now does point to an inconsistency in the market. The final pointer is the view of the professionals. The analysts (and yes I do generally have a very low opinion of them particularly when for a smallish company like Xch most of them have just left school) have barely moved their price over the past 6 months and have a consensus just shy of £2. They are churning the numbers based on their various models and that is what they come out with as fair value. Now I am not saying that they are inherently right in their valuation (although I think that they are not too far out) but I am interested in the fact that they have not moved their valuation over the past 6 months while the share price has taken a tumble. Ultimately, as PingPong wrote a few posts ago, the share is not loved by the City at the moment and it is hard to rise in that environment. It strikes me that at present, regardless of how good the news is, such as the CMA final clearance, it is broadly ignored by the markets, and regardless how anodyne any news with the slightest smell of risk, it is a prompt for a sell off, i.e. the Q1 update. The AGM is in a couple of weeks, Ken and David need to use it to redress the unduly pessimistic view on Xch although the real catalyst for a rise will be consistent sales

Moljen, Odey it appears is holding 3% actual shares with the other 7% in CFDs. If you take the five biggest shareholders they now hold 110M shares, if you add Odey's 3% you get just 118M, just short of half the total in Xchanging, whereas if you count his CFDs then you get the 6 biggest shareholders with 134M. Ownership is therefore pretty concentrated so you are right that the free shares are limited. I do wonder how Odey and the two others managed to push their shareholdings up so much with so little positive movement in the share price. Today turned out worse than I expected when I said at 0753 that I thought the market would just see the grey in the statement. At the end of the day people are being inconsistent; the drop following full year results was driven by the fact that Xch was low on revenue. It has just said that it is still on target to hit both revenue and profit with the only cloud being that costs it will take a bit longer than anticipated to move Procurement, which is a minnow compared to BPO, back into profit but that the profit will be met from elsewhere in the group, and the share dives. I remarked a few weeks ago that we were out of the irrational fear phase, that may be so but there is still not a lot of confidence in the company and in any statement the majority of good is being overlooked any negative statement picked up on and reacted to in a knee jerk manner.

I sometimes despair of Xchanging's PR. The key message is that they are still confident of hitting their numbers for the year and achieving pretty much everything they said they would so in 2015 with the exception of Procurement returning to profit in year although even then it will be at run rate profitability by year end. The whole tone of the statement however is grey and so the market is most likely to latch onto the negative not the positive.

Moljen, Interesting to see Odey go above 10%. Given how bearish he is on stocks as a whole at present (I think it was he who was saying we would see a crash to be remembered for 100 years) it is a significant vote of confidence that he is hoovering up so much of Xch. He is a contrarian investor most of the time but often right. Let us hope he is wrong about the big crash and right about the big X. Prof

Moljen, Well spotted, I confess that I had not spotted that. I agree that some broker was earning his pennies. Let us hope we are on a new takeoff although I have to say this share never ceases to amaze me by its ability to do something completely different to what I expect. I would have expected the CMA provisional clearance to have been enough for us to see this back in the 160s but it had limited effect (although it did stop the long slide). Perhaps the confirmation of the CMA clearance (no later than 24 May) will have the intended effect.

OK it was only an intraday break through but it happened yesterday for the first time in ages - the share price broke through the 50 day MVA. The 20 day MVA has now levelled out after months of decline and is going to start moving up over the next few days barring some disastrous fall in the share price (unlikely). I would then expect the share price to move through the 50 day MVA over the next month which is always a good sign. The other positive change that shows the returning confidence in the share (or at least that the period of irrational fear is over) is that despite big falls in the major indexes Xch has stayed broadly constant. A few weeks ago the opposite was happening, the indexes were soaring and Xch was still plummeting.

If you look hard enough on the Xchanging website (its not even under News but under RNS) you will find a single release of half a dozen lines, stating, in purely factual prose, that the CMA have given provisional clearance to the Agencyport merger. Now I know that the clearance is provisional and so that puts Xchanging in a slightly difficult position of not wanting to be too triumphant too soon however they should be making a little more of this significant news than a well buried RNS. After all the threat of the merger not being allowed , supported by a slight undershooting on revenues, is what has destroyed a third of the market cap of this company all other key indicators (profits, EPS, PE, margins...) being excellent. Alexandra, I do hope that as Head of Communications you monitor key blogs on Xchanging such as this one, so if you are reading this please try and be a bit more proactive when there is great news such as this. You may like to think that the key players will pick up all this information anyway but some of them do need to be spoon fed. On a separate note, with regards to the ruling being provisional, my analysis is that this would be important had the decision gone against Xchanging as they would now be going back to the CMA with mitigating actions that they would be prepared take in order to get the green light (i.e. selling off the bits of Agencyport that were of concern to the CMA). With the ruling being in Xchanging's favour, however, the period between now and the formal decision can be viewed as a formality as all relevant information has already been submitted.