Key points:
- Itim Group shares are down 22% today
- The interims don't, on the surface, look that bad, so why?
- We've got to get used to including inflation in our calculations
Itim Group (LON: ITIM) shares are down 22% this morning which looks bad. But the results are, in fact, worse than they look – because we've got to think about inflation here. Not just specifically when thinking about Itim Group of course, but much more generally across the market. Any comparisons of revenues – most especially revenues in fact – against the same trading period last year for example. We cannot say – not in this inflationary environment – oooh, that's good! We must first account for inflation and then try to make sense of matters.
When we do this it's possible to say that Itim revenues for the half year are in fact down, not up. But of course costs are not going to go down in the same manner – that's not how inflation works. There's a certain amount here of using ITIM shares as an example, rather than this being an exploration of the specifics of the company. But it's an example, a lesson, we need to understand. Otherwise we're going to get blindsided by share price reactions to reported results that just don't seem to make sense – but will once we add that inflation into our analysis.
Itim Group works in SaaS for physical retail outlets. The SaaS usual measures are revenue growth – how many new customers added – plus recurring revenues – are customers retained at contract end? Itim is doing well enough by the second measure: “Recurring revenue percentage of Group revenue 82% (HY21: 77%, FY21: 77%)”. However, the growth number is less pleasing: “Group revenues of £6.8m (Half Year 2021 (“HY21”): £6.4m, Full Year 2021(“FY21″): £13.5m)” Even thought that's ahead, that's not good enough for a reason that needs explaining.
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The problem is that inflation, as per the ONS, was up at 8.8% over the past 12 months – exactly how much depending upon which month we take. That means that simply to stand still in revenue terms a company must raise income by 8.8% over that trailing 12 month period. Itim has revenues up – for the H1 period – £400k on £6.4 million, that's 2.5%. That's not growth in revenue at all, that's a fall in inflation adjusted revenue.
Of course, costs don't stand still – that's what inflation is, a rise in what it costs to buy stuff. So, a rise in costs, along with the general rise in the price of stuff, but no comparable growth in income – margins are going to be suppressed. But it goes further than this. We're not seeing growth in income at all. Which tells us either that the offering from ITIM isn't as persuasive as all that, or – and probably both – Itim has little pricing power over its customer base. This is not good news for the future of Itim Group's finances.
The real point of this here though is to use Itim Group as an example of a larger lesson for us as investors and traders. An inflationary world is different. Costs can be assumed – it's not right but it's a good assumption – to rise with the general inflation rate. Which means that for profits to be maintained then income must grow at least as fast as that same inflation rate. Those companies that can't do that, can't grow revenue at that 8 and 9% rate, are going to therefore fall ever further behind.
We must, simply must, get used to adding inflation into our calculations.
