Shares in data services provider IS Solutions (LSE: ISL) have soared by over 20% after it released a highly encouraging update. In fact, IS Solutions now expects revenue and profitability for the current year and for next year to be significantly ahead of market expectations, with investors clearly satisfied with this step change in the company’s outlook.
A key reason for it is stronger-than-expected demand for the company’s key analytics products, IS Solutions and Celebrus. They provide high margins and also excellent cross-selling opportunities, with the potential for a significant amount of recurring revenue too.
In addition, IS Solutions has secured two major projects with new and existing customers within the retail and financial services sectors. They’re due to add revenue of up to £2m in the current year and more than £250,000 in each year following that. And with IS Solutions being on track to establish a US office and adding to its European sales force, it seems to be very much on the up as a business.
With IS Solutions trading on a price-to-earnings growth (PEG) ratio of just 1 prior to today’s update, it offered good value for money. However, with it now being expected to post much higher levels of profitability, it seems to offer a risk/reward ratio that may be of great interest to less risk-averse, long-term investors.
Short-term pain
While shares in IS Solutions have soared today, shares in support services company Lakehouse (LSE: LAKE) have slumped by 55% after it released a profit warning.
Despite Lakehouse having increased its number of framework contracts by 22% in the current year, it’s operating against a backdrop of active cost reductions that are taking place among its customers. This is partly due to social landlords being required to cut rents by 1% per year for the next four years and means that the expected level of tenders from the frameworks hasn’t been recorded at the anticipated rate. As such, financial forecasts for the regeneration division have now been lowered.
Furthermore, Lakehouse’s energy services division is also being hurt by funding pressure on social landlords. This means that insulation contracts are being won at lower margins, while the smart meter roll-out programme has been delayed beyond September 2016. This will hurt profitability yet further in the current year, although Lakehouse remains optimistic regarding its long-term future.
Clearly, today’s update is highly disappointing and while the company may still have a bright long-term future, it appears as though the next few years will be tough due to industry-wide cost cutting. Therefore, now may not be the time to buy a slice of the business – especially when there are a number of other high quality stocks trading on low valuations.
