Ncc Group (LON:NCC) is another of those intriguing tech stocks I've found with a strong stream of recurring income. It's not easy to explain exactly what it does; it has some consulting operations, but those contribute by far the smallest share of its income. It also has an assurance testing arm, but the lion's share of its revenue comes from escrow solutions.
You probably know escrow from eBay, where for large value deals, escrow delivers both buyer and seller additional certainty by 'parking' funds in a third party account and releasing them only once the product has been delivered. Software escrow involves the source code for third party software being held by a third party, so if the software vendor goes bust, or can't maintain the software, the purchaser has access to the source code and can maintain or update it.
Like many insurance-style services, software escrow can be very profitable for the provider - and it has a strong recurring income stream. After all, you don't insure your house for ten years and then decide, since it hasn't burned down or been burgled yet, that you'll skip your insurance payment this year. Equally, while you might not bother with software escrow for an Oracle or Microsoft implementation, if you're buying mission critical software from a smaller, specialised vendor - like one of the financial software firms quoted on AIM - your finance director might well tell you that escrow is vital to meet the requirements of the risk management review.
It's not perhaps a surprise then that NCC has strong cash flow, claiming a cash conversion ratio of 119% of operating profits [1] . The company expects to be debt free by July when its banking facilities come to an end [2] .
It has high renewal rates, too, even in the testing division where monitoring revenues have 89% renewal rates [3] - even better, renewing customers tend to increase their spend by 20% a year as they find more useful things that NCC can do for them.
Besides, the company has a wide range of customer sectors, with finance, the largest, still only accounting for 18% of revenues, 13% coming from computer and software services, and 12% from retail [4] . It is also international,…
