Virtual network operator Vanco issued a trading update this morning noting that, whilst trading has been strong in H1, cash flow has been below expectations to the tune of £10m. Vanco has signed £120m of new business in H1 which is more than double that signed in the previous half year. This gives the company a high level of visibility on revenues and profits for the full year even without taking account of regular moves, adds and changes work. All of this means that management is confident in consensus revenue and profit estimates for the year to January 2008.
On the negative side, Vanco will report a £20m free cash outflow in the first half against an expectation of an outflow of £10m. The statement notes the reason for the shortfall as delays in signing three customer contracts containing significant upfront payments. One of these contracts has now been signed, with the other two still pending.
Our view
The argument still rages in the City about Vanco - undervalued growth stock or flawed business model? We have to confess that we have not had the opportunity yet to really get under the bonnet at Vanco but we can see some merit in both sides of the argument. Vanco is an innovative fast growing company and should be applauded for it. However, cash flow is such a fundamental indicator of a company's health that, at the very least, we would argue that Vanco's cash flow profile should merit some valuation discount. Whichever argument turns out to be right, the bears were in the ascendancy again today and the shares dropped over 10%. This means that the shares are now some 35% lower than their all time high reached earlier this year. It seems to us that the only thing that will get the share price back on a sustained upward track is outperformance against expectations on cash flow.
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