SMALL CAP IDEA: Newmark’s Safetell secures strategy success

“As higher gross margins and operating leverage are realized, we would anticipate rapid earnings growth,” Allenby said in a 14-page research note.

New brandSafetell’s Safetell operation specializes in physical assets such as security doors, screens, safes and cash handling devices, while its Grosvenor Technology division focuses on human capital management (HCM) and access control.

Simply put, Grosvenor products and systems help businesses and organizations provide safe and secure work environments. As we will see later, HCM is the key driver of Newmark’s growth program and its “five pillars” strategy.

Digging deeper into the recent earnings announcement, two messages emerge. The first is that Newmark has managed the loss of a major client, human resources applications group Ultimate Kronos Group (UKG), without hardly missing a beat.

And at the same time, the numbers reveal that Newmark’s strategy is gaining traction in a business that was once synonymous with security hardware and now generates a significant revenue base from the software and services it provides.

On the loss of the UKG contract, CEO Marie-Claire Dwek is optimistic: ‘Many of our investors were concerned about the loss of UKG, which was one of our first blue-chip clients in the United States.

‘Although UKG bought many products from us, the margin was low and they did not accept any services. The new clients we are adding have healthier margins and are also accepting our services.”

Looking ahead, the plan is to grow the recurring revenue base (which was up 77% year-on-year in the first half to £2.3m) by onboarding new customers, but also gaining a greater share of wallet of existing users of your products.

As mentioned above, Newmark’s Grosvenor operation will be key in this regard, and its strategy (those ‘pillars’ also mentioned above) can be summed up in just five words: continue, attach, drive, displace and diversify.

Therefore, it will “continue” to seek and onboard new HCM partners; It will also “attach” services to all new businesses and “push” services to existing customers.

At the same time, the goal is to “displace” others to obtain a larger share of the portfolio and “diversify” by being the go-to provider of HCM products and services for large enterprise and HR systems providers.

Grosvenor has expanded its offering with GT Connect, GT Protect and the GT4-Lite device, with the aim of improving customer engagement and adoption of the products offered.

GT Connect is a secure cloud-based platform that facilitates real-time connectivity, remote diagnostics and comprehensive data management by integrating multiple devices into a single network.

GT Protect offers a robust hardware warranty service, ensuring fast response times, next-day device replacement, and priority technical support. This complements Grosvenor’s strategy of progressive device suite upgrades, in line with third-party HCM software subscription models, by introducing a per-employee-per-month revenue framework.

The GT4-Lite terminal, noted for its competitive pricing and flexibility, serves a broad market spectrum, allowing Grosvenor to challenge lower-cost rivals while supporting software updates remotely.

As part of its expanded offering, it also offers customers hardware with a lifetime warranty, secure cloud access and 24-hour technical support through GT Services.

This business model shift toward software revenue and cloud-based, hardware-enabled services “substantially increases Grosvenor’s addressable market and the scope of recurring revenue,” broker Allenby said.

All this forgets Safetell, which Allenby says has been “revitalised” by new management after several years of revenue contraction.

This has involved an update of product lines, while attention has shifted to the automotive door maintenance management sector, which is substantially larger than Newmark’s historical markets.

This has resulted in a return to growth in the last financial year and Safetell entered 2024 with an expanding pipeline prospects, Allenby said.

Now that your strategy is clearly starting to gain commercial traction, what can we expect in 2024 and beyond?

“We are halfway through the second half of our financial year and it has been a good period so far with healthy pipelines in all areas of the business – HCM, access control and Safetell,” says CEO Dwek.

Newmark has acquired three blue-chip clients, primarily in the US, which will help underpin growth in the second half of the financial year.

Longer term, that focus on growing the recurring revenue base and aggressively targeting a larger share of the wallet positions Newmark as a turnaround play. Revenues are increasing and profit margins are expanding, “especially with software services, which gives us more ‘sticky’ customers,” says CEO Dwek.

“We also have a great reputation,” he adds. ‘We are a niche company, but we are one of the key players and we grow year after year. We had a tough couple of years after Covid, we returned to profit last year and we expect to be very profitable (going forward).’