Anticipating an acceleration in organic growth

StatPro’s software products are used by asset managers to measure the performance and risk profile of their funds under management. StatPro’s flagship product, StatPro Revolution, is a multi-tenant cloud services (or SaaS) application. The group has c 500 customers, including c 115 of the world’s top 500 asset managers, and the largest customer generates less than 5% of group revenues. The group's products are primarily used by middle office functions, but the acquisition of Delta in early 2017 has significantly extended the offering into front offices. The challenge now is to accelerate the organic growth rate through exploiting the digital transformation occurring in the asset management industry and by broadening the functionality on the group's cloud platform.

StatPro has always operated a rental business model, hence recurring revenues are high, and contracts are typically for three years. At end-2017, the group’s annualised recurring revenues (ARR) stood at £53.0m, underpinning our forecasts. StatPro has been profitable and generated positive free cash flows in each year since FY03. In FY17, StatPro Revolution grew by 91%, helped by a currency tailwind, a full period contribution from Investor Analytics and an initial eight months from Delta. The group's traditional software suite, Seven, has continued to prove more resilient than expected, growing by 5%. Operating cash flow jumped by 43% to £10.7m in FY17. We forecast operating cash flow to rise by 40% in FY18 to £14.6m and for net debt to edge up to £21.0m.

We highlight three key sensitivities: market volatility (the health of the equity and bond markets will partly determine the IT investment budgets of the asset management firms), competition (we continue to believe StatPro holds a significant first-mover advantage in this cloud computing space and that its new cloud products are difficult to replicate) and sector evolution (there is a risk that large tech companies could enter the asset management space, and that the robo/online advisory industry could pose a threat to the traditional asset management industry).

The active M&A environment continues to run unabated across the financial software sector with SS&C and ION acting as major consolidators. Most notably, the group’s key competitor, BISAM, was acquired by FactSet for 7.3x sales in March 2017, while Fidessa could be sold for more than 4x revenues. While StatPro is a small company, it has spent nearly a decade transitioning to the cloud and has the only cloud-based, multi-tenant portfolio analytics solution that can provide such a broad range of functions across performance, risk and regulation. With the heavy investment now beginning to pay off, we believe StatPro remains an attractive investment at 2.2x FY19 revenues.

StatPro is a specialist cloud-based analytics software provider, targeting the global asset management industry. The group’s flagship solution, StatPro Revolution, is an integrated, cloud-based performance and risk platform designed to increase productivity and lower costs. StatPro Revolution is used both for internal purposes and for client reporting. The cloud software includes functionality across both equity and fixed income, for performance measurement, attribution analysis and risk management. Cloud-based technology enables a software vendor to increase its operational efficiency while allowing its clients to handle a larger and more complex workload, without increasing headcount or technology costs.

The company has c 500 clients, including c 115 of the world’s top 500 fund managers and 10 of the top 15. The 500 clients also include c 50 asset service providers which can be viewed as StatPro Revolution resellers/distributors. However, they act as customers and handle their own support.

The complex portfolio analysis that StatPro’s products perform helps in two ways:

StatPro also has three traditional software modules that it maintains:

StatPro expanded its product suite and geographic position through a series of acquisitions over its 24-year history. Around 10 years ago, StatPro took the decision to build a cloud computing product. To achieve this, management exploited the group’s domain knowledge, technical skills and access to data to develop an entirely new software application from scratch, and that product is now the group’s flagship solution. The development and establishment of StatPro Revolution has focused management time for many years and the transition to cloud is a painful process for any software business to undergo. Now StatPro is emerging as a much more efficient and scaleable business with a solution at the forefront of the industry and 48% of FY17 revenues were from Revolution. The acquisition of Delta was a tremendous coup for StatPro, as it was able to acquire the business on very favourable terms. This was because UBS Delta’s technology needs to be refreshed and it is increasingly difficult for non-software businesses to maintain an application.

Management is now shifting its focus on driving the growth, exploiting the group’s high-quality client base, people talent and global office structure. Exhibit 3 below shows key staging points in the context of the company’s share price history.

StatPro Revolution is a multi-tenant product (ie a single instance of a software application can serve multiple customers in a similar way to Google or Facebook). An initial version was launched commercially in late 2011, and the core transaction-based performance processing functionality was added in 2016. This Performance module runs off the Amazon Web Services platform, which means the solution can leverage vast computing power to process data in minutes, as and when required, giving it a significant advantage over traditional vendors that can only utilise the computing power of the hardware on which they are installed.

The company lists the following as key attributes of the Revolution product: it is priced per portfolio with an unlimited number of users (with a minimum price level). This gives the product a significant advantage over its competitors, which require additional terminals;

The product roadmap includes fixed income attribution, scheduled for completion in July, and fund-of-funds functionality.

StatPro is currently working on a new growth strategy document, which sets out its ambitions to maximise shareholder value and more information will be given later this year. Meanwhile, from FY19, the group will be structured into three divisions as below:

Acquisitions form a key plank of StatPro’s strategy. Over the past three years it has acquired UBS Delta for €13.05m in May 2017, InfoVest (100% owned since February this year) and Investor Analytics (renamed StatPro Revolution Alpha). These acquisitions have cemented StatPro’s position at the forefront of the financial analytics space and help to accelerate the scalability of the platform. While strategically targeting accelerating organic growth, management will continue to target acquisitions consistent with its strategy and has the financial capability to do so.

StatPro effectively completed the acquisition of Delta from UBS in May 2017. Delta's roots are in fixed income and consequently it has established a special focus on fixed income attribution and risk. Delta is used by front offices of institutional investors for portfolio management and marketing purposes. As StatPro’s traditional solutions are focused on middle offices, Delta significantly enhanced the group’s position in front offices, while also strengthening the group’s fixed income and risk expertise.

The Delta team has swiftly integrated with StatPro and StatPro has already transitioned the business into profitability. Delta won additional business in 2017 from both new and existing clients. Delta has established a unique analytics offering, and has gained a strong reputation in the fixed income markets. The attractive price at c 0.8x revenues reflected the fact that Delta’s platform was 20 years old and needed to be upgraded. StatPro has implemented a plan to reach functional parity within three to four years, at which stage there will be no reason for any customer to remain with Delta. Until StatPro has fully integrated Delta’s functionality into Revolution, UBS will continue to operate and support Delta for its clients. However, the revenues and costs accrue to StatPro. Additionally, StatPro will enable an automated switchover for any Delta clients with all their portfolios to Revolution, which provides the opportunity for clients to take advantage of Revolution’s extensive functionality.

There are £3.6m of outstanding Delta acquisition liabilities, payable in FY19 and FY20.

In February 2016, StatPro exchanged its existing StatPro Seven compliance module (SPC) licence contracts for a 51% stake in InfoVest Consulting. The shareholding was increased in February 2017 to 72.7% and to 100% on 23 February 2018. StatPro is acquiring the remaining 27.3% at approximately six times EBITDA which it says is EPS enhancing.

InfoVest is a South Africa-based software provider, specialising in data warehouse, ETL (Extract, Transform and Load) and reporting software for the asset management industry. InfoVest partnered with StatPro for more than two years, providing support for all StatPro’s outstanding SPC contracts. SPC, which is StatPro’s compliance solution, ensures that customers’ portfolios are within predetermined parameters, such as the percentage that can be invested in specified asset classes. These parameters can relate to regulatory or in-house criteria and the solution is separate to StatPro’s risk solution. Additionally, InfoVest has standardised data solutions that are very useful for the process of streamlining customer data in the implementation of cloud transition contracts.

In February 2016, StatPro acquired Investor Analytics (IA), a US-based provider of cloud-based risk analytics solutions to hedge funds and asset managers, for c $10m over two years. IA is a front office-focused business and its Risk Factor and Monte Carlo models enable StatPro to provide a broader set of risk models to its customers. IA is integrated into the StatPro Revolution platform, and consequently performance has lagged since the acquisition. However, growth is expected once the integration is completed and StatPro anticipates that its existing equity-focused asset management clients will wish to subscribe for the additional functionality. Investor Analytics was rebranded as Revolution Alpha to reflect the increasing use among StatPro’s client based of risk analysis in the investment decision-making process.

StatPro's products are targeted at the global wealth management industry, which relies on assets under management (AuM) to provide a source of revenue from which to extract fees. StatPro provides solutions that enable its clients to increase their AuM and improve profit margins.

The outlook for fund managers has been showing improvements with global AuM rising by 7% to $69.1tn in 2016, according to Boston Consulting Group, compared with 1% growth in 2015. Growth in AuM comes from net inflows of capital from clients along with the market growth of asset prices. The world’s top 500 asset managers grew AuM by 5.8% in 2016, according to Willis Towers Watson. Alternatively, PwC estimated global AuM were $84.9m in 2016, and expected to rise to $111.2m in 2020 (7.0% CAGR) and to $145.4m in 2025 (6.2% CAGR). In its report Asset & Wealth Management Revolution: Embracing Exponential Change, PwC points out that the asset and wealth management (AWM) industry is a digital technology laggard and it warns that firms need to take action now if they are to survive the exponential change that lies ahead.

Significant pressure on management fees has been encouraging asset managers to seek to manage their costs while increasing their service levels. Meanwhile, the rise in passive investing and the pressure on fees has been driving significant M&A activity in the investment management industry. Sector M&A reached an eight-year high in 2017, in value terms, although the number of transactions was relatively low, as the deals were focused on mid-sized players.

Asset managers have a reputation for being slow to adopt digital technology, but StatPro believes this is now changing. It says that many clients are now transforming the technology and the middle office, where StatPro is strong, is part of this process. StatPro is the first cloud-based analytics platform targeting the sector and is therefore well-placed to address the market. The group’s cloud solutions offer greater flexibility, along with evolving development, exemplified by self-service reports, configurable dashboards (enable clients to specify precisely what each user can see) and the ability to link to other systems with APIs (application programming interface).

We highlight the following growth drivers.

Margin pressures: the pressures on the asset management sector continue to increase, exacerbated by the onset of MiFID II. StatPro’s cloud-based technology offers asset managers a route to improving efficiency, reducing costs and upgrading legacy systems.

Fund administration channel: the company has begun to see significant acceleration in additional portfolios being subscribed to by fund administrators. This is largely due to the launch and roll-out of the Performance module in 2016, which has completed the offering.

New functionality: a priority will be to strengthen the group’s front office and there are plans to expand functionality in the portfolio modelling space. Additionally, the Investor Analytics acquisition has yet to be fully realised.

Leveraging intellectual property: StatPro is seeking to leverage its Data division, where it believes it has not fully exploited the potential of its data.

Conversions: there remains £6.3m of traditional software that StatPro plans to convert to cloud over the next two to three years. There is typically a premium on conversions since the cloud solution offers cost efficiencies and a more powerful, modern solution.

Outsourcing: the group’s cloud solutions offer the opportunity for customers to make greater use of outsourcing, eg reducing their hardware footprint.

New markets: StatPro wants to be the provider of portfolio analytics solutions for the growing number of financial information platforms. Many fund administrators and investment banks have these or are building them. Integration using APIs is the key to this strategy.

Acquisitions: the acquisition of Delta was a tremendous coup for StatPro, as it was able to acquire the business on very favourable terms. This was because UBS Delta’s technology needs to be refreshed and it is increasingly difficult for non-software businesses to maintain an application. Acquisitions such as Investor Analytics create the potential for cross-selling.

StatPro sells directly to fund managers and also uses the indirect sales channel, via asset service providers. StatPro has a team of 23 salespeople primarily focused on the direct sales channel. The strategy has evolved as Revolution has gained in sophistication, with the group hiring more senior salespeople. The team operates out of North America, Europe (London) and Asia Pacific (Sydney).

Direct channel: targeting investment managers of all types and sizes as they look to replace legacy technology and improve their digital distribution strategy. Profit margin pressure and competition are forcing asset managers to look at their technology footprint to ensure they are efficient, and allowing the business to focus on core operations and clients.

Indirect channel: primarily focused on fund administrators that are “gate keepers” to large pools of portfolios. These third parties effectively outsource their IT to StatPro, implementing the solution on a white-label basis. Historically, many of these players spent significant sums developing their own in-house solutions, which cost a lot to maintain. StatPro Revolution makes these solutions obsolete.

As StatPro Revolution gains scale, StatPro believes it will increasingly benefit from the viral effect of people sharing portfolio access with each other.

The StatPro Revolution cloud services platform replaced a legacy system at this new client. National Australia Bank (NAB) provides the solutions, on a white-labelled basis, to its own asset management and pension fund clients. The key factor in the win was Revolution’s then newly added functionality, which covers the new Australian Standard Risk Measure (SRM). SRM is a method used by Australian superannuation funds to describe investment risk and is an Australian Prudential Regulation Authority (APRA) requirement. StatPro’s cloud platform has made the process of adding functionality like this far more viable. The new functionality was developed after rigorous research, and saves customers the time and costs associated with developing their own SRM tool in house. Further, the solution was fast to implement and customers benefit from the scalability, speed and cost efficiency of the cloud computing platform.

StatPro has two main sets of competitors – the major data suppliers (notably Bloomberg and FactSet) and smaller specialist players (including BISAM, now owned by FactSet), SS&C (Sylvan, Anova and HiPortfolio), Eagle (owned by BNY Mellon) and others. The data suppliers use mainframe systems and are multi-tenant by definition, but these platforms are much more expensive to run. Also, data suppliers lack data controls and users need to ensure the data are accurate before use.

StatPro’s Performance module runs off Amazon Cloud, which means users can leverage vast processing (CPU) power when required so data can be processed at very high speed, while mainframe systems and traditional software installations can only use the CPU power on their systems. Most established players lack a pure cloud solution. While start-ups are likely to embrace the cloud, there are significant barriers to entry – business knowledge, technological know-how and, crucially, the data (which need to cover all assets and be accurate).

In the risk space, StatPro competes with heavyweights MSCI (RiskMetrics) and SunGard (owned by FIS), as well as a number of smaller players.

StatPro has always operated a rental model, with payments in advance, meaning the model is highly cash generative. A key objective has been to grow its annualised recurring revenue book, which has begun to accelerate, with the help of acquisitions, as shown in Exhibit 8. StatPro sells its software on a per-portfolio basis (similar to a per-user model) with a minimum required of $18k per annum ($1,500 per month). Sales cycles are typically six to nine months and StatPro aims to lock clients into multi-year deals; contract terms are typically three years. Taking professional services is typically recommended to ensure that customers are making full use of the products.

Group revenue grew by 31%, or 26% at constant currencies, to £49.3m (we forecast £48.9m), helped by eight months’ contribution from Delta, which grew by 1-2%. Alpha has lagged, having lost a few hedge fund clients during the transition, and StatPro does not expect to see growth from Alpha until FY19. Overall organic growth was 2%. Excluding conversions to Revolution, StatPro Seven was up 3% in constant currency terms. Adjusted operating profit rose by 45% to £5.0m, with the operating margin lifting by 100bp to 10.2%.

ARR grew 35% to £53.0m, driven by the acquisition of Delta and by the 13% organic growth in ARR in StatPro Revolution, while organic growth was 1%. Adjusted earnings per share rose 74% to 5.9p. The annual dividend was maintained at 2.9p.

There were acquisition-related restructuring costs of £3.53m. £2.3m relates to Delta, of which £1.02m were for transaction costs and the remainder were redundancies and onerous contracts. £1.23m relates to restructuring of the core business following the Delta acquisition, predominantly relating to the restructuring of the European sales and support team.

Exhibit 9 shows the ARR distribution profile for StatPro Revolution. The average ARR per client has jumped for three reasons. First, the acquisition of Delta has added customers with significantly higher levels of ARR – c £126k per customer based on the data published at the time of the acquisition. Second, StatPro has been shifting away from smaller customers, has a minimum price of $18k and is trying to encourage the small customers to take additional services. Third, the asset service providers have started to take more portfolios.

StatPro introduced a set of SaaS-based KPIs in 2015. The average cost of acquiring customers is calculated by dividing the sales and marketing spend by the number of new customers. The implied customer lifetime is 1 divided by the churn rate (currently 11%). The implied customer lifetime value is the implied customer lifetime multiplied by the ARR per customer. The data show the impact of the inclusion of Delta, which has added an additional boost to both the cost of acquiring customers and revenue per customer, and there has also been an increase in churn. The aim is the boost the LTV:CAC ratio, which has fallen back to a still highly respectable 7.8. This means that the value generated from a typical customer is 7.8x the cost of acquiring a customer; a ratio of 3 is seen as minimum in the SaaS industry and 5 is seen as good.

StatPro said it started FY18 in line with the board’s expectations and is on course to show solid revenue and profit growth. Sales activity accelerated in the fourth quarter of FY17 and the new sales team has a very good pipeline in North America and Europe, along with a small amount in Asia, and a growing pipeline of larger prospects. Relationships with fund administrators have been maturing, and key fund administration clients have started to increase their use of Revolution significantly. One customer recently increased its number of portfolios from 100 to 1,200, and has since upped it again to 2,500. StatPro says that the combination of the two channels means the company should enjoy good organic revenue growth and profitability growth in FY18. StatPro said that InfoVest had a good end to the year and has strong growth prospects for 2018. Additionally, the company says it is engaging with a number of parties about partnering with their platforms to offer an enhanced combined service. As a result of the new business activity, management expects revenue to accelerate in FY19 and FY20.

We have eased our FY18 forecasts, with revenues rising by 15% and operating profits by 35% for a 12.0% operating margin. We forecast revenues to rise by 3.5% to £58.5m in FY19, with the operating margin expanding to 12.7%, and for growth to accelerate to 4.5% in FY20, with the margin expanding to 13.7%.

Revenues: we forecast traditional software revenue to decline by £2.2m in FY18 and £2.0m annually thereafter. This largely reflects the conversions to Revolution. We forecast Revolution to jump by 39% in FY18 and by 11% in FY19, driven by organic growth, conversions and a full year contribution from Delta in FY18. We forecast data revenues to grow by 2% in FY18 and by 5% in FY19, aided by the new initiatives to exploit the data IP. We forecast professional services to grow at 2% pa.

Costs: we forecast operating costs (excluding net capitalisation of development costs) to rise by 11% to £48.8m in FY18, by 2% to £49.8m in FY19 and by 3% to £51.4m in FY20.

Investment: we assume the group spends 15.5% of revenue on R&D in FY18, and 15% going forward, of which 75% is capitalised and amortised over three years.

Tax: we assume a 14% tax rate in FY18, rising to 17% in FY19 and to 20% in FY20.

FY17 operating cash flow jumped by 43% to £10.7m. After interest of £1.2m, tax of £0.1m and capitalised development costs of £6.0m and purchase of PPE of £1.2m, free cash flow was £2.1m. This compares with a £0.8m outflow in FY16. Excluding acquisition-related restructuring costs of £3.1m, the free cash flow was £5.2m, compared with £0.7m in FY16. After £10.3m of acquisition costs, £0.9m of share issues , £2.0m of dividends and £0.9m of currency movements, net debt increased by £10.2m to £20.2m.

For 2018 we estimate operating cash flow of £14.6m, comfortably accommodating net interest, tax and capex outlays of £10.7m. Dividend payments of £1.9m and acquisition expenditures of £2.8m (assumed final payment for SiSoft, and £1.9m for Infovest) lead to our expectation of net debt being a touch higher at end 2018, at £21.0m.

StatPro expanded its facility in 2017 with Wells Fargo to £40.5m, from the original £20m. This includes a £10m committed revolving credit facility, £19m in committed term loans and £4m in committed deferred drawdown loans. There is also a £7.5m uncommitted additional facility. The facility is available for acquisitions, share buybacks or other general corporate purposes. The covenants of the facility are based on an absolute level of recurring revenues.

The group’s asset management customer base is one of the most high-beta sectors in the market and has been undergoing significant consolidation. Robo-advisers have been entering the market and there is a threat that tech giants could also do so. However, StatPro took the bold decision a decade ago to transition its business model to the cloud and, following years of heavy investment, its technology platform is industry leading and comfortably ahead of its major peers.

We highlight the following sensitivities:

StatPro is a rare example of a traditional software company that has successfully transitioned to the cloud, and indeed, is one of the few predominantly cloud companies quoted in London. It is rare as a quoted financial software company business that is predominantly cloud, and, as far as we are aware, unique in the asset management vertical.

While the stock is exposed to the volatile asset management sectors, this is tempered by the fact that 96% of group revenues are recurring in nature and 82% of StatPro’s software sales are now SaaS. StatPro has always been conservatively financed, and has a reputation for generating healthy cash flows, having generated £101m of operating cash flow and £31m of free cash flow over the last 12 years. These numbers are after exceptional costs, which includes £3.1m in FY17.

We highlight the following points on the group’s valuation.

Sector M&A: M&A remains highly active in the sector. SS&C has been the key sector consolidator, making a string of acquisitions including Advent and DST and it has shown an interest in Fidessa.

FY17 saw a number of transactions that make StatPro look attractively priced. Key competitor BISAM was acquired by FactSet in March for $205.2m or 7.3x sales. Separately, LSE acquired Yield Book (a key competitor of Delta) along with Citi Fixed Income Indices from Citi for 6.4x sales, although we understand that majority of the $685m price related to the indices. Additionally, in September 2017, Nasdaq announced the acquisition of eVestment, a subscription-based analytics and content provider to asset managers, for $705m, or c 8.7x FY17 revenues. In February, Fidessa announced that it had agreed to be acquired by Temenos for £1.32bn or 3.7x FY17 revenues and since then both SS&C and ION have shown an interest, with Fidessa now trading at over 4x sales.

Across the broader financial software sector, M&A has been very busy, eg ION has acquired Openlink, BlackRock has acquired a majority stake in the financial and risk business of Thomson Reuters and SS&C is acquiring DST Systems at c 2.4x 2018 sales.