Esker 1

Growth outlook maintained

Esker 21 September 2017 Outlook
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Esker

Growth outlook maintained

H1 results

Software & comp services

21 September 2017

Price

€48.81

Market cap

€257m

$1.199/€

Net cash (€m) at end H117

6.3

Shares in issue

5.3m

Free float

81%

Code

ALESK

Primary exchange

Alternext Paris

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.3

(2.6)

30.2

Rel (local)

(0.3)

(1.8)

8.8

52-week high/low

€53.1

€38.1

Business description

Esker provides end-to-end document automation solutions, offering on-demand and on-premise delivery models. The business generates c 50% of revenues from Europe, c 40% from the US and the remainder from Asia and Australia.

Next events

Q3 revenue update

17 October 2017

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Bridie Barrett

+44 (0)20 3077 5700

Esker is a research client of Edison Investment Research Limited

Esker’s investment in headcount and recent bolt-on acquisitions is generating strong growth for the company, with expectations for double-digit organic growth in FY17 re-confirmed. Esker’s strategy of producing software that improves the efficiency of customers’ business processes has proved successful, with very low levels of churn and high recurring revenues. Product development is focused on evolving the current product range to reduce complexity, improve functionality and increase buyer/supplier visibility. The longer-term aim is to provide a business collaboration network and to potentially offer supply chain finance.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

58.5

9.3

1.31

0.30

37.4

0.6

12/16

66.0

9.9

1.22

0.30

40.0

0.6

12/17e

75.4

12.2

1.45

0.33

33.6

0.7

12/18e

82.2

13.3

1.54

0.36

31.6

0.7

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Solid H117 results; on track to meet FY17 guidance

Esker reported 14% revenue growth (9% organic, constant currency) and an operating margin of 15.6% in H117. Net cash was €6.3m at the end of H117. The company continues to expect to generate double-digit organic growth in FY17 and expects an operating margin of c 15% for the year. In addition to integrating the recent e-integration acquisition during H1, Esker hired 25 heads, mainly in consulting and R&D, to support the growth of the business. Esker’s evolutionary approach to product development helps it retain its existing customer base (churn is less than 1% pa), achieve high levels of recurring revenues (80% in H117) and win new customers (orders +52% in H1).

Small increase in estimates; expect more M&A

In our forecasts we have reflected the stronger than expected contribution from e-integration in H1, as well as the effect of the dollar weakening against the euro, which reduces revenues at the same time as reducing dollar-based costs. Overall, this results in an upgrade to normalised EPS of 2.2% in FY17 and 2.5% in FY18. The company confirmed that it continues to seek out relevant acquisition targets, with EDI businesses and companies in the UK of particular interest; at the end of H117 Esker had gross cash of €22m, providing ample funds for acquisitions.

Valuation: Market pricing in strong growth

The stock has had a strong run over the last year, increasing 29%. It now trades towards the top end of its peer group, which reflects the fact that its revenue growth and profitability is also at the higher end of the group. Accretive acquisitions, and continued evidence of strong organic growth combined with margin expansion would be the key triggers for upside from this point.

Investment summary

Company description: Document automation specialist

Esker is a document process automation (DPA) software developer, specialising in moving business processes from paper-based to digital. Its software is used to automate the purchase-to-pay and order-to-cash cycles. The company principally operates a SaaS delivery model and the majority of revenues are generated from customers using its on-demand solutions. Esker’s revenues are well spread geographically, with 52% from Europe, 42% from North America and the remainder from Australia and Asia.

Financials: Double-digit growth

Esker reported revenue growth of 14% for H117 (9% organic constant currency growth). Operating profit grew 4% y-o-y to generate an operating margin of 15.6%. Share count increased over the period from a combination of option exercises and shares issued in part payment for e-integration. This resulted in reported basic EPS increasing 2.6% y-o-y. The combination of a stronger than expected contribution from the recent e-integration acquisition and the recent weakening of the dollar versus the euro drives a small increase to normalised and reported EPS.

Exhibit 1: Changes to forecasts

EPS (€)

PBT (€m)

EBITDA (€m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2017e

1.42

1.45

2.2

11.9

12.2

3.1

16.6

17.1

2.8

2018e

1.51

1.54

2.5

12.8

13.3

4.3

17.7

18.4

3.9

Source: Edison Investment Research

Valuation: Market pricing in strong growth

On an EV/sales basis, Esker is trading at a discount to DPA companies and at a premium to French small-cap software companies. Esker’s forecast revenue growth is better than both groups, as are its forecast operating margins. On a P/E basis, Esker trades at a premium to the DPA companies and broadly in line with French small-cap software companies for FY17 and FY18. In our view, the transition to SaaS is likely to suppress operating margins across the software sector (even after transition costs are taken into account). Esker is ahead of many peers in making this transition and is already generating strong growth and margins. The company has recurring revenues of c 80%, which gives a high level of revenue and cash flow predictability. Management continues to assess acquisition targets, preferring businesses that are international, profitable, have an existing customer base and have already made the move to a SaaS business model. The company has a strong net cash position and is forecast to build this over the next two years.

Sensitivities: Currency, on-demand transition, competition

Our forecasts and the Esker share price will be sensitive to the following factors. Currency: Esker is exposed to the US$/€ exchange rate. Competition: Esker competes with well-established, well-funded software companies and will need to maintain its technology to compete. Pace of adoption of SaaS solutions: As more customers move to on-demand software, Esker will see a decline in on-premise licence sales in favour of subscription-based revenues. Rate of decline of legacy business: The legacy businesses are very profitable maintenance revenue generators. The rate at which these businesses decline will have an impact on profitability. Reliance on datacentre providers: Esker leases datacentre capacity for its on-demand products. Changes in the availability and pricing of capacity will have an impact on Esker’s profitability.

Company description: Automating business processes

Esker is a document process automation software developer, specialising in moving business processes from paper-based to digital. The company made the transition to the SaaS delivery model earlier than many peers, and now the majority of revenues are generated from customers using its on-demand solutions.

Background

Esker was founded in 1985 by Jean-Michel Bérard, the current CEO. Management was originally focused on software consulting, and developed its first host access product in 1989. The company listed on the Nouveau Marché in 1997. From 1998-2000 the company made a series of acquisitions in the US host access and fax server markets. Esker launched the DeliveryWare platform in 2000, Mail on Demand in 2003, Esker on Demand (an automated on-demand mail and fax service) in 2004 and FlyDoc in 2006. The current SaaS products for accounts payable and accounts receivable were launched in 2009. The company’s listing was transferred from Euronext C to Euronext Alternext in 2010. The company has recently made some bolt-on acquisitions: TermSync and CalvaEDI in 2015 and e-integration in 2017. Esker’s revenues are well spread geographically, with 52% from Europe, 42% from North America, and the remainder from Australia and Asia.

Growth strategy – automating document processing

The majority of Esker’s revenues are generated from the Document Process Automation (DPA) software business (93% in FY16). The remainder of the business is grouped into Legacy Products, consisting of the Fax Server business (which automates fax sending and receipt) and the Host Access business (which enables customers to access mainframes from PCs). The company is focused on growing the DPA business – its software is positioned to support order-to-cash and purchase-to-pay business processes. Esker is working to broaden the functionality of its product suite and to ultimately join up the processes to create a business collaboration network. It is also exploring the opportunities that such a network could open up in the supply chain finance market. As well as increasing headcount in consulting and R&D to support organic growth, management is keen to acquire complementary businesses, with a particular focus on EDI1 and/or UK companies.

  EDI: electronic data interchange. This is the computer-to-computer exchange of information in a standard electronic format and is one of the methods used by companies to communicate with their customers and suppliers (an alternative to fax, paper invoice or email).

Well established management team headed up by founder

As described above, the company’s CEO, Jean-Michel Bérard, founded the company in 1985. Emmanuel Olivier joined the company in 1999, was originally the CFO and became COO in 2003. He previously worked at Ernst & Young in France and the US for seven years. The CEO’s brother, Jean-Jacques Bérard, is the EVP of R&D, having joined Esker in 1995. Other members of the management board include Eric Bussy (director of marketing and product management), Steve Smith (COO, Americas), Eric Thomas (VP business development) and Anne Grand-Clément (global director of professional services and technical support).

Document process automation software

Esker develops and sells DPA software operating in five areas: procurement, accounts payable, accounts receivable, sales order processing, and document delivery. These can be combined to fulfil two basic cash cycles as per Exhibit 2: order-to-cash (O2C) – to fulfil customer orders and collect payment; and purchase-to-pay (P2P) – to order and pay for goods and services.

Exhibit 2: Esker’s positioning

Source: Esker

Automating invoice & order delivery and receipt

DPA software for the other four processes operates in the following way. For receipt of documents (eg sales orders, supplier invoices), the software converts paper documentation into digital format, and populates standard templates with the data from the digital document. The software can also extract data from other sources such as emails, email attachments and faxes. The software is self-learning – if there is any doubt over the accuracy of the data, the user compares the original document to the digitised version and corrects it as necessary. The standardised data can then be fed into the customer’s ERP system and processed and viewed by the relevant people throughout the organisation before being archived automatically. For sending documents, the software generates orders or invoices in the format required, and if paper documents or fax services are required, Esker’s document delivery service can be used.

Document delivery the final step in the process

Document delivery services enable customers to send business documents via cloud fax or mail centres directly from their desktop or enterprise applications. Esker services on-demand document delivery through its fax servers located in France, the US and Australia and mail production centres located in France, Belgium, the UK, the US, Australia, Spain and Singapore.

Demand drivers: Efficiency, cash management, regulation

The software improves productivity by accelerating the cash conversion cycle, reducing errors, enabling faster processing, improving process visibility and improving customer service. It has the added benefit of reducing paper and paper-related costs and is environmentally friendly.

The software also meets government legislation around e-invoicing. In Europe, the EU has mandated that paper and digital invoices should be treated equally and lays out ways that documents can be authenticated. EU member states are obliged to implement the 2014/55/EU directive by November 2018: this specifies that businesses selling to government entities must use e-invoicing that is based on specified interoperability standards. This should increase demand for e-invoicing solutions. In Latin America, e-invoicing is government-mandated in order to ensure tax compliance and collection.

Most products are SaaS-based

Exhibit 3: DPA product range

Product

Details

DeliveryWare platform

On-premise software plus maintenance and services.

Esker on Demand

Hosted service, charged for monthly on basis of volumes. Also charge service revenues.

FlyDoc

Simpler version of Esker on Demand, charged for in the same way; targeted at SMEs and individuals. Represents an electronic post office (automates fax sending/receipt, mail sending, archiving). Only in France and the US.

Product

DeliveryWare platform

Esker on Demand

FlyDoc

Details

On-premise software plus maintenance and services.

Hosted service, charged for monthly on basis of volumes. Also charge service revenues.

Simpler version of Esker on Demand, charged for in the same way; targeted at SMEs and individuals. Represents an electronic post office (automates fax sending/receipt, mail sending, archiving). Only in France and the US.

Source: Esker

Esker on Demand is Esker’s main product. This multi-tenant, SaaS solution was originally developed by Esker in 2004, ahead of many other software companies’ entry into the SaaS market. It started to gain traction from 2009 as customers were attracted by the lack of upfront investment and the usage-based payment mechanism. Esker’s longest-standing product is DeliveryWare, an on-premise solution. Typically, new business is for Esker on Demand, although some customers prefer to use the on-premise solution for security reasons. The company has more than 5,000 SaaS customers and 320,000 SaaS users.

Esker upgrades the Esker on Demand software on a quarterly basis. Every three years, Esker takes the previous SaaS upgrades and incorporates them into one large upgrade of the DeliveryWare software.

Recent product developments

Reducing complexity: Esker has developed out-of-the-box solutions for all processes and continues to work on reducing the complexity of software. While this reduces the scope for implementation revenues, it leads to a shorter sales and integration cycle. This should make the product more attractive to customers and accelerates the start of traffic generation. It also makes it easier for channel partners to resell the technology.

Improving user visibility: the company has added dashboards to all solutions so that customers have better visibility and can therefore manage their business processes more efficiently. Esker also offers a customer issue management tool as an add-on for its sales order processing solution.

Providing payment functionality: a natural evolution from supporting the invoicing process is to provide the means for customers to settle invoices. In the US, Esker partners with Paymetric to offer the ability to pay invoices by debit/credit card and Jack Henry for ACH (automated clearing house) payments. In Europe, the company is partnered with SlimPay for SEPA and card payments.

ERP integration: the software has been integrated with a wide range of ERP systems; Esker has built-in certified integrations with SAP, Cegid, Oracle’s E-Business Suite and JD Edwards EnterpriseOne, and Microsoft Dynamics NAV ERP software.

Acquisitions have added additional solutions

Esker acquired TermSync and CalvaEDI in 2015 and e-integrations in early 2017. TermSync is a US cloud-based invoice processing platform provider. Its solution improves the efficiency of the accounts receivable function, and includes the ability to track invoices, schedule reminders, and analyse performance. Esker is using the TermSync solution to enhance its existing accounts receivable offering in the US, and launched the solution in France earlier this year. CalvaEDI is an EDI network service provider, providing gateways between its customers’ different computer systems. CalvaEDI has more than 300 customers in transport and logistics, predominantly based in France. EDI has typically been implemented by large customers but Esker wants to extend the technology to smaller customers. CalvaEDI continues to trade under its own name and is working with Esker to develop new services, in particular, to offer Esker customers with automated order-to-cash cycles the benefit of EDI integration. e-integration is a German-based EDI business, further strengthening Esker’s EDI offering. Its online exchange network has c 7,000 members and c 600 active clients, mainly German industrial companies, some with international exposure.

Sales strategy – mainly direct with boost from JV

Esker has a direct sales presence in Europe (France, Germany, Italy, Spain and the UK), the US and Asia-Pacific (Australia, Malaysia and Singapore). The company has sales representatives in Miami (to target South America, in particular Argentina, Brazil, and Colombia), Brussels (to target European-headquartered US companies) and Montreal. Both South America and Canada are serviced out of the US and Belgium out of France, although it is likely that staff will be hired in the relevant countries once the business grows. Esker also sells its software on a white-label basis to several companies.

Land and expand strategy

The salesforce tends to target those responsible for business processes – in most cases this will be the finance department, although sometimes it is customer services. The company will also work with the customer’s IT department, but this is mainly to work on integrating the software rather than to sell to. As the implementation process takes time and can be disruptive, most customers tend to select Esker for one process initially. Esker may then benefit from growth within that process, eg more departments, more geographies. Some customers then go on to use Esker for additional processes.

As hiring appropriately qualified staff for implementation work in the relevant countries can be challenging, the company is seeking smaller system integrators to do this work on behalf of Esker, aiming to convert some of them into resellers over the next few years.

Joint venture with Neopost to target SMEs

Esker sold its software on a white-label basis through Neopost in France for several years and in 2015 entered into a joint venture with Neopost to expand the scope of this agreement. The JV (owned 70% Neopost/30% Esker) is focused on selling Esker’s software to SMEs in France and the US. This is a market that Esker’s direct salesforce tends not to target. In FY16, Esker reported a €123k contribution from its share in the joint venture, and the joint venture generated c 5% of group sales.

Future direction: Build a business collaboration network; offer supply chain finance

The company’s medium-term plan is to provide a business collaboration network and it is progressively adding functionality to achieve this. Currently, Esker provides a portal for each process and is encouraging the use of its portals by buyers and suppliers through the provision of functionality such as invoice status and chat. The longer-term goal is to connect these portals together to create a networking platform that would allow customers and suppliers to interact securely and could be used for direct exchange of purchase orders and invoices, payment of invoices, early payment discounting, dispute resolution and data clarification. The network should enable full visibility of invoice status (ie it should be possible for both supplier and buyer to see that an invoice has been approved for payment), at which point it should be possible to provide supply chain financing to either party.

Several invoice networks are active in this space, for example Taulia and Tungsten, offering invoice factoring, reverse factoring and/or dynamic discounting. Esker is evaluating the supply chain financing market, and we believe it is most likely to enter the space via partnerships with banks or factoring companies rather than trying to offer the financing itself. We note that in some cases, banks are already acting as referral partners for Esker. For a bank to offer supply chain finance, it needs good visibility over the customers’ invoicing processes – there are certain banks that have realised that if their customers use Esker’s software, they will be able to make more informed decisions about providing finance to those customers.

Competitive positioning: Esker competes by process

Esker competes against a different group of companies for each business process and by geography. As well as specialist DPA software companies, the company also sees competition from business process outsourcers such as Accenture and Xerox.

Esker has the advantage that its software can be used across all processes, reducing the number of software suppliers a company deals with and simplifying the implementation process. More than 11,000 companies globally use Esker software, including GE Healthcare, Hyundai, Samsung, Siemens, Vodafone and Whirlpool. Esker has more than a decade’s experience in SaaS delivery and has achieved various SaaS certifications such as SSAE16 and ISAE3402, providing a level of confidence regarding business continuity and data security.

Accounts payable is the most competitive area – when Esker wins business it tends to be for customers that have decided to move from manual to automated processing, rather than winning business from an existing supplier (although this occasionally happens). Accounts receivable has historically been the strongest area – the customer owns the process so the document format is set in-house and therefore data recognition is more straightforward. Due to European legislation around electronic signatures, demand for automated accounts receivable processing is growing, as companies move from paper to digital invoices. Esker sometimes replaces mail houses in this market. The most complex market from a technical perspective is sales order processing. This is because end-customers send orders to Esker’s customers in many different non-standard formats such as faxes, emails, or within email attachments. This market has the fewest suppliers and Esker has a very high win rate.

The table below shows the most common competitors for each process. Competition tends to be country-specific; for example, Billtrust for accounts receivable in the US, ITESOFT for accounts payable in France. Global competitors include Basware, Kofax and OpenText.

Exhibit 4: Competitive environment – DPA software suppliers

Company

Accounts receivable

Accounts payable

Sales order processing

Esker

x

x

x

Basware

x

x

Billtrust

x

Concur

x

Conexiom

x

ITESOFT

x

Kofax*

x

OmPrompt

x

OpenText

x

x

x

SAP (Ariba)

x

Taulia

x

Tradeshift

x

x

Tungsten (OB10)

x

Yooz

x

Source: Esker, Edison Investment Research. Note: *Owned by Thoma Bravo.

Document delivery has a different group of mail-focused competitors, including j2 Global, Docapost, and Maileva (both subsidiaries of Le Groupe La Poste), and OpenText.

Supplier/buyer networks present an opportunity for Esker

Many customers use Esker’s software to enable them to join supplier networks such as Ariba or OB10. These networks usually require e-invoicing and Esker’s software enables them to produce invoices according to the requirements of the networks. In other cases such as Taulia, the networks rely on invoices that are approved for payment in order to provide supply chain financing. As Esker’s software provides dashboards to show this type of information, Esker is able to introduce customers with the necessary volume of approved invoices to the networks.

Legacy Products (7% of FY16 revenues)

Esker’s Legacy Products division includes fax servers and host access products. While the legacy business continues to be supported, the company is not actively chasing new business or developing new products.

Fax Servers: Fax servers were developed to send the fax directly via a word processing programme, or to receive a fax and send it directly to the recipient’s inbox. Esker Fax works on Windows 2000/2003/XP operating systems and is compatible with electronic messaging systems including IBM Lotus Notes, Microsoft Exchange and SMTP. VSI-Fax is designed for UNIX and Linux operating systems.

Host Access: This division supplies terminal emulator software that enables users to access mainframes from PCs. Tun PLUS supports access to SCO Linux, Linux, IBM AIX, HP-UX, IBM 390 and IBM AS/400 servers, and SmarTerm supports access to Digital (Vax Open VMS), Data General and IBM servers. Esker mainly generates maintenance revenues from this business, although occasionally it wins new business as the number of host access suppliers reduces.

Sensitivities

Our forecasts and the Esker share price will be sensitive to the following factors:

Currency: While Esker has some natural hedging, the R&D and central function teams are based in France, resulting in exposure to the US$/€ exchange rate. If the US dollar weakens against the euro from the current level, this would have a negative effect on revenues and profitability.

Competition: Esker competes with well-established, well-funded software companies and will need to maintain its technology to compete.

Pace of adoption of SaaS solutions: As customers move to on-demand software, Esker is seeing a decline in on-premise licences (which are recognised when the contract is signed) in favour of subscription-based revenues (which are recognised over the life of the contract). The pace at which customers make this move will influence revenue growth and profitability.

Rate of decline of legacy businesses: Both the Host Access and Fax Server businesses are very profitable maintenance revenue generators. The rate at which these businesses decline will have an impact on profitability, although as these businesses make up a decreasing proportion of revenues, the effect is reducing.

Reliance on datacentre providers: Esker leases datacentre capacity for its on-demand products. Changes in the availability and pricing of capacity will influence profitability.

Financials

Revenues – on-demand business is the driver

Esker reports revenues in two ways: 1) split by business line, ie DPA and Legacy Products, on a quarterly basis; and 2) split by type of revenue: traffic, maintenance fees, licence sales, hardware and services, on an annual basis. Traffic revenues are generated on a per transaction basis from Esker on Demand and FlyDoc customers. Licence and maintenance fees are generated from DeliveryWare on-premise licence sales and the Fax Server and Host Access businesses. Hardware sales are generated by the Fax Server business. Service revenues are generated from on-premise and on-demand DPA business. Older DPA subscription sales were structured on a traffic-only basis, with service revenues charged for the initial integration of the software. For the last few years, Esker has sold on a hybrid subscription model that guarantees minimum monthly revenues plus transaction-based revenues, reducing Esker’s dependence on the speed at which a customer implements the software. On-demand contracts are typically signed for a minimum of 12 months, and most commonly are for three years. See Exhibit 7 for historical and forecast divisional performance.

High level of recurring revenue provides good visibility

In H117, recurring revenues2 made up 80% of the total, up from 79% in FY15 and FY16. Esker has a strong record of retaining customers – management estimates that churn is less than 1% per annum. As each new customer comes on board, this adds another layer of recurring revenues. In H117, the company won orders worth €5.7m (+52% y-o-y) – this is the amount of revenue the company is contracted to earn over the (usually) three-year life of the contract, and does not include variable traffic fees, which can make up the same amount again over the three years.

  Traffic plus maintenance revenues.

Review of H117 results

Esker reported revenue growth of 14% for H117, of which organic constant currency growth was 9%. It noted that e-integration contributed revenues of €1.8m (+25% y-o-y pro-forma) – this was higher than our €1.5m forecast. Reported operating profit grew 4% y-o-y to generate an operating margin of 15.6%. The higher level of legacy product licences (recognised upfront and at a close to 100% gross margin) signed in H116 contributed to the higher margin of 17.1% in H116. However, the H216 operating margin declined to 12.3% and FY16 operating margin was 14.8%. Despite a net cash position of €6.3m at period end, the company generated a net financial charge, mainly due to the weaker pound versus the euro. The tax rate of 29% was lower than the FY16 rate of 32% and lower than our full year forecast of 33%. Share count increased over the period from a combination of option exercises and shares issued in part payment for e-integration. This resulted in reported basic EPS increasing 2.6% y-o-y.

Exhibit 5: H117 results highlights

€m

H116

H117

Y-o-y

Revenues

33.2

37.8

13.8%

EBITDA

8.3

8.8

6.2%

EBITDA margin

24.9%

23.3%

-1.66%

Reported operating profit

5.7

5.9

3.9%

Operating margin

17.1%

15.6%

-1.50%

Reported net income

4.0

4.2

5.8%

Basic EPS (€)

0.78

0.80

2.6%

Diluted EPS (€)

0.74

0.75

1.4%

Net cash

9.7

6.3

-34.5%

Source: Esker

Changes to forecasts

Management has maintained its outlook for double-digit organic growth in FY17, despite slightly lower growth in H117 (9%). As H116 saw the benefit of licences for legacy products €1m higher than in H117, this made a tough comparison for the period. The company saw a much lower level of legacy licence sales in H216, which should make the comparison much easier. Management also highlighted that the operating margin was likely to be in the region of 15% (H117 was 15.6% on a reported basis). We have made the following changes to our forecasts:

Revenues: we have slightly reduced our forecast for FY17, as currency effects offset higher e-integration revenues. We slightly increase our FY18 forecast to reflect a better result for e-integration, partially offset by currency.

Staff costs: we have slightly increased our forecast for headcount additions, bearing in mind that the company has already grown from 427 to 488 employees over the period. We forecast headcount of 496 at the end of FY17 rising to 530 by the end of FY18. Offsetting this, the euro has strengthened against the dollar, which reduces US-based staff costs.

Operating profit: this increases in both years on a normalised and reported basis, due to the currency effects on costs and slightly higher revenues in FY18. We forecast a reported operating margin of 15.5% for FY17 and 15.6% for FY18.

Dividend: we have reduced our forecasts to €0.33 in FY17 (from €0.36) and €0.36 in FY18 (from €0.39). We had expected a dividend of €0.33 to be announced for FY16 – instead the company maintained the dividend at the same level as FY15 (€0.30) but added a 10% loyalty bonus to shareholders who had held their shares for more than two years. Working backwards, we estimate that this was roughly 30% of the shareholder base. It is not clear whether the company will maintain this policy in future years.

Exhibit 6: Changes to forecasts

€m

FY17e old

FY17e new

change

y-o-y

FY18e old

FY18e new

change

y-o-y

Revenues

75.6

75.4

-0.3%

14.2%

82.0

82.2

0.3%

9.1%

EBITDA

16.6

17.1

2.8%

15.1%

17.7

18.4

3.9%

7.4%

EBITDA margin

22.0%

22.7%

0.7%

0.2%

21.6%

22.3%

0.8%

-0.4%

Normalised EBIT

11.6

12.0

3.1%

20.9%

12.6

13.1

4.4%

9.2%

EBIT margin

15.4%

15.9%

0.5%

0.9%

15.3%

16.0%

0.6%

0.0%

Reported EBIT

11.4

11.7

2.3%

26.5%

12.4

12.8

3.6%

9.5%

Reported EBIT margin

15.1%

15.5%

0.4%

1.5%

15.1%

15.6%

0.5%

0.1%

Normalised PBT

11.9

12.2

3.1%

23.0%

12.8

13.3

4.3%

9.1%

Normalised net income

8.0

8.2

3.1%

20.8%

8.6

8.9

4.3%

9.1%

Normalised dil. EPS (€)

1.42

1.45

2.2%

18.9%

1.51

1.54

2.5%

6.2%

Reported basic EPS (€)

1.48

1.51

2.3%

25.9%

1.56

1.62

3.6%

7.3%

Net cash

14.4

14.7

2.0%

7.3%

18.7

19.4

3.7%

32.1%

DPS (€)

0.36

0.33

-8.3%

10.0%

0.39

0.36

-7.7%

9.1%

Source: Edison Investment Research

Exhibit 7: Revenues by division and type of business

€m

FY14

Growth

FY15

Growth

FY16

Growth

FY17e

Growth

FY18e

Growth

DPA revenues

40.3

14.1%

51.1

26.9%

58.2

13.8%

64.3

10.6%

71.1

10.5%

Legacy products

5.8

-0.8%

5.4

-6.0%

4.4

-19.1%

3.4

-22.6%

3.2

-5.9%

Acquisitions

0.0

n/a

1.9

n/a

3.4

78.9%

7.6

121.7%

8.0

4.1%

Total

46.1

12.0%

58.5

26.9%

66.0

12.9%

75.4

14.2%

82.2

9.1%

Traffic

27.0

23.4%

36.6

35.5%

43.4

18.4%

53.4

23.0%

60.8

14.0%

Upgrades & maintenance

8.8

-0.3%

9.3

5.7%

8.6

-7.4%

7.9

-9.0%

7.1

-10.0%

Services

5.9

-3.9%

8.7

48.1%

10.6

21.8%

11.4

7.5%

12.1

5.9%

New licenses

3.6

1.0%

2.8

-20.5%

2.6

-8.0%

2.2

-16.0%

1.8

-17.7%

Fax card sales/hardware

0.7

7.4%

0.9

25.2%

0.7

-21.4%

0.5

-25.5%

0.4

-20.0%

Total

46.1

58.5

66.0

75.4

82.2

Source: Esker, Edison Investment Research

Currency impact

With 42% of revenues in the US but a lower proportion of the cost base in US dollars, the company is exposed to changes in the $/€ exchange rate. The rate was 1.106 in Q117 and 1.06 in Q217, but a recent strengthening of the euro has seen the spot rate increase to 1.199. In our cost calculations, we use a rate of 1.13 for FY17 and 1.19 for FY18. Any further weakening of the dollar could have a material negative impact on our FY18 forecasts (as $-based revenues outweigh costs).

Strong cash position

The company ended the period with a net cash position of €6.3m. It paid out €4m for acquisitions in H117 (we estimate the majority for e-integration and the remainder the earn-out for TermSync). During H1, the company took out a loan of €10m and invested €1.6m in bonds, which are recorded as fixed assets. Gross cash was €22.3m at period end, providing ample funds for acquisitions. We forecast that net cash will increase to €14.7m by the end of FY17 and €19.4m by the end of FY18.

No change to capex trend

The company invests in tangible fixed assets for its mail centres and offices (€2.1m in FY16) and capitalises development costs (€4.8m in FY16). In H117 it capitalised €2.6m of development costs and amortised €1.7m. We expect a gradual increase in both capitalisation and amortisation in FY17 and FY18.

Valuation

The stock gained 29% over the last year. We have compared Esker’s valuation to a group of listed global DPA software companies and to French-listed software companies with a market cap of €80-800m. On an EV/sales basis, Esker is trading at a discount to DPA companies and at a premium to French small-cap software companies. Esker’s forecast revenue growth is better than both groups, as are its forecast operating margins. On a P/E basis, Esker trades at a premium to the DPA companies (once loss-making Basware is excluded) and more in line with French small-cap software companies for both years.

In our view, the transition to SaaS is likely to suppress operating margins across the software sector (even after transition costs are taken into account). Esker is ahead of many peers in making this transition and is already generating strong growth and margins. The company generates recurring revenues of c 80%, which gives a high level of revenue and cash flow predictability. Management continues to assess acquisition targets, preferring businesses that are international and profitable, have an existing customer base and have already made the move to a SaaS business model. The company has a strong net cash position and we forecast this to build over the next two years.

Exhibit 8: Peer group operating and valuation metrics

Company

Share price

Market cap

Rev growth

EBIT* margin

EBITDA margin

EV/sales

P/E

m

m

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

Esker

€48.10

€257.4

14.2%

9.1%

15.9%

16.0%

22.7%

22.3%

3.2

3.0

33.6

31.6

Software companies with DPA software offerings

Basware

€39.89

€574.5

2.4%

7.9%

-5.9%

0.9%

0.4%

7.4%

3.9

3.6

-57.5

1049.7

Bottomline

$30.85

$1,246

6.5%

9.4%

17.3%

18.7%

21.5%

22.3%

3.5

3.2

29.1

24.6

ITESoft

€4.01

€24.6

1.4%

2.7%

13.4%

14.1%

1.2

1.1

9.3

8.2

OpenText

$32.14

$8,493

3.9%

-3.1%

35.1%

35.8%

37.9%

40.9%

3.8

3.9

11.8

10.8

Average

3.6%

4.2%

15.5%

18.5%

18.3%

21.2%

3.1

3.0

16.8**

14.5**

Median

3.2%

5.3%

17.3%

18.7%

17.4%

18.2%

3.7

3.4

10.6

17.7

French small-cap software companies

Axway Software

€22.39

€474

4.9%

5.2%

37.1%

37.0%

16.6%

18.3%

1.6

1.5

15.1

13.0

Claranova

€0.49

€182

17.8%

2.8%

3.3%

1.0

97.2

ESI Group

€50.93

€306

10.2%

9.0%

10.6%

11.7%

11.6%

13.0%

2.5

2.2

29.6

24.4

Harvest

€61.87

€87

6.9%

8.8%

17.6%

20.0%

3.3

3.1

30.9

24.6

Lectra

€24.80

€781

8.8%

8.7%

15.0%

14.9%

17.6%

17.5%

2.3

2.1

23.2

21.3

Linedata Service

€37.30

€272

10.9%

1.4%

18.6%

18.7%

26.5%

29.0%

1.7

1.7

14.9

14.2

Sidetrade

€57.90

€80

22.7%

21.6%

9.0%

13.3%

12.7%

17.3%

3.3

2.7

44.5

24.6

Average

11.8%

9.1%

15.5%

19.1%

15.1%

19.2%

2.2

2.2

36.5

20.4

Median

10.2%

8.8%

12.8%

14.9%

16.6%

17.9%

2.3

2.2

29.6

22.9

Source: Bloomberg (as at 19 September), Edison Investment Research. Note: *Normalised. **Excludes Basware.

Reverse discounted cash flow

We have performed a reverse 10-year DCF to calculate what we believe the market is factoring into the current share price. Using a WACC of 8.5%, long-term growth of 3%, working capital/sales of 0.3% and capex/sales of 7.5% (including ongoing capitalisation of development costs), a revenue CAGR of 10% for 2018-26 and EBITDA margins trending up to a terminal level of 27.1% are required to reach the current share price. This implies the company can maintain its double-digit revenue growth trajectory while growing margins over the next 10 years – in our view this is possible, but leaves little margin for error.

Exhibit 9: DCF sensitivity analysis

Increase by 1%

Decrease by 1%

Per share value (€)

Upside/(downside)

Per share value (€)

Upside/(downside)

WACC

40.38

-17.3%

61.17

25.3%

Rev growth

51.66

5.8%

46.61

-4.5%

EBITDA margin

54.5

11.7%

43.87

-10.1%

Source: Edison Investment Research


Exhibit 10: Financial summary

€'000s

2012

2013

2014

2015

2016

2017e

2018e

Year end 31 December

French GAAP

French GAAP

French GAAP

French GAAP

French GAAP

French GAAP

French GAAP

PROFIT & LOSS

Revenue

 

 

40,260

41,116

46,061

58,457

65,990

75,379

82,249

EBITDA

 

 

6,637

6,598

8,979

13,405

14,871

17,113

18,372

Operating Profit (before amort and except)

 

 

4,265

3,883

5,700

9,257

9,934

12,013

13,122

Amortisation of acquired intangibles

0

0

0

(302)

(200)

(300)

(300)

Exceptionals and other income

(16)

60

53

(245)

(474)

0

0

Other income

0

0

0

0

0

0

0

Operating Profit

4,249

3,943

5,753

8,710

9,260

11,713

12,822

Net Interest

38

6

220

(6)

(108)

100

100

Profit Before Tax (norm)

 

 

4,303

3,889

5,920

9,312

9,949

12,236

13,345

Profit Before Tax (FRS 3)

 

 

4,287

3,949

5,973

8,765

9,275

11,936

13,045

Tax

(1,286)

(761)

(1,323)

(2,292)

(2,950)

(3,939)

(4,305)

Profit After Tax (norm)

3,012

3,140

4,609

6,877

6,785

8,198

8,941

Profit After Tax (FRS 3)

3,001

3,188

4,650

6,473

6,325

7,997

8,740

Average Number of Shares Outstanding (m)

4.7

4.7

4.8

5.0

5.3

5.3

5.4

EPS - normalised (c)

 

 

64

67

97

138

128

155

166

EPS - normalised fully diluted (c)

 

 

60

62

90

131

122

145

154

EPS - (GAAP) (c)

 

 

64

68

97

130

120

151

162

Dividend per share (c)

14.00

18.00

24.00

30.00

30.00

33.00

36.00

Gross margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

16.5

16.0

19.5

22.9

22.5

22.7

22.3

Operating Margin (before GW and except) (%)

10.6

9.4

12.4

15.8

15.1

15.9

16.0

BALANCE SHEET

Fixed Assets

 

 

8,764

9,437

12,552

25,184

28,324

36,600

38,420

Intangible Assets

5,521

6,458

7,709

19,603

22,381

30,447

32,017

Tangible Assets

2,835

2,450

4,470

4,985

5,158

5,368

5,618

Other

408

529

373

596

785

785

785

Current Assets

 

 

24,358

26,834

33,894

36,110

42,024

53,801

60,541

Stocks

100

89

93

161

101

101

101

Debtors

11,567

12,144

15,110

18,073

19,523

22,304

24,337

Cash

11,393

13,411

17,559

16,295

21,338

30,335

35,041

Other

1,298

1,190

1,132

1,581

1,062

1,062

1,062

Current Liabilities

 

 

(15,551)

(16,164)

(19,827)

(24,789)

(28,299)

(30,697)

(32,451)

Creditors

(15,551)

(16,164)

(19,827)

(24,789)

(28,299)

(30,697)

(32,451)

Short term borrowings

0

0

0

0

0

0

0

Long Term Liabilities

 

 

(2,019)

(1,450)

(5,113)

(7,317)

(7,657)

(17,757)

(17,757)

Long term borrowings

(2,019)

(1,450)

(5,113)

(7,317)

(7,657)

(15,657)

(15,657)

Other long term liabilities

0

0

0

0

0

(2,100)

(2,100)

Net Assets

 

 

15,552

18,657

21,506

29,188

34,392

41,948

48,752

CASH FLOW

Operating Cash Flow

 

 

6,163

6,539

9,245

14,307

16,303

16,730

18,094

Net Interest

122

90

310

(27)

(127)

100

100

Tax

(1,366)

(645)

(1,075)

(1,165)

(1,456)

(3,939)

(4,305)

Capex

(3,548)

(3,434)

(4,028)

(3,909)

(7,021)

(7,166)

(7,370)

Acquisitions/disposals

0

0

22

(11,700)

(948)

(4,000)

0

Financing

400

628

(694)

1,324

(581)

905

0

Dividends

(550)

(659)

(877)

(1,208)

(1,550)

(1,633)

(1,813)

Net Cash Flow

1,221

2,519

2,903

(2,378)

4,620

997

4,706

Opening net debt/(cash)

 

 

(8,526)

(9,354)

(11,961)

(12,446)

(8,978)

(13,681)

(14,678)

HP finance leases initiated

(393)

0

(2,293)

(1,090)

83

0

0

Other

(0)

88

(125)

0

0

0

0

Closing net debt/(cash)

 

 

(9,354)

(11,961)

(12,446)

(8,978)

(13,681)

(14,678)

(19,384)

Source: Esker accounts, Edison Investment Research

Contact details

Revenue by geography

10 rue des Emeraudes
69006 Lyon
France
+33 472 834646
www.esker.fr/www.esker.com

Contact details

10 rue des Emeraudes
69006 Lyon
France
+33 472 834646
www.esker.fr/www.esker.com

Revenue by geography

Management team

President of the board and CEO: Jean-Michel Bérard

COO: Emmanuel Olivier

Mr Bérard received his computer engineering degree in 1984 from the Lyon Institut National des Sciences Appliquées and shortly after co-founded Esker. He is responsible for defining and executing Esker's business plan. He also represents Esker to potential partners, the European technological community, IT analysts and the trade press.

Mr Olivier leads Esker's operations worldwide, covering sales, marketing and consulting activities. He also supervises Esker's finances and is in charge of financial communication and IR. He joined Esker in 1999 as CFO and was promoted to COO in 2003. He previously worked as an audit manager for Ernst & Young for seven years, including two years in the US. He has an MBA from SKEMA Business School, Nice Sophia Antipolis, France, and earned a CPA qualification from the state of Pennsylvania, US.

Management team

President of the board and CEO: Jean-Michel Bérard

Mr Bérard received his computer engineering degree in 1984 from the Lyon Institut National des Sciences Appliquées and shortly after co-founded Esker. He is responsible for defining and executing Esker's business plan. He also represents Esker to potential partners, the European technological community, IT analysts and the trade press.

COO: Emmanuel Olivier

Mr Olivier leads Esker's operations worldwide, covering sales, marketing and consulting activities. He also supervises Esker's finances and is in charge of financial communication and IR. He joined Esker in 1999 as CFO and was promoted to COO in 2003. He previously worked as an audit manager for Ernst & Young for seven years, including two years in the US. He has an MBA from SKEMA Business School, Nice Sophia Antipolis, France, and earned a CPA qualification from the state of Pennsylvania, US.

Principal shareholders

(%)

Jean-Michel Bérard

7.3

Thomas Wolfe

5.0

Treasury shares

3.5

Financiere de l’Echiquier

2.9

Grandeur Peak Global Advisors

2.9

Credit Agricole

2.5

Sycomore Asset Management

2.2

Companies named in this report

Basware (BAS1V), Bottomline Technologies (EPAY), ITESOFT (ITE), OpenText (OTEX), Tungsten (TUNG)

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Esker and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Esker and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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