Preparing for accelerating growth

TIE Kinetix provides solutions for digitalising the supply chains of its customers via its in-house developed software platform FLOW Partner Automation, which converts documents into a digital format that can be easily distributed. TIE Kinetix’s H122 results (for the period ending 31 March 2022) showed a decline of 3.4% y-o-y in revenues, largely due to the announced reclassification of consultancy revenues to SaaS revenues and the expected decline in maintenance and licence revenues. As announced on 2 February 2022, TIE Kinetix will reclassify consultancy revenues to software-as-a-service (SaaS) revenues in FY22 (in compliance with IFRS 15). This has a direct impact on the consultancy revenues (-26% y-o-y in H1), but will only gradually contribute to SaaS revenues as these are spread out over 36 months. As expected, the legacy licence products showed a further decline, particularly in the United States where the market is lagging behind in switching to SaaS. As a result of the lower licence income, the related maintenance and service revenues also showed a sharp decline of 38% y-o-y and now only represent 8% of total revenues.

More importantly, SaaS revenues increased 14% y-o-y to €5.4m and now represent 75% of total revenues. This perfectly fits the company’s strategy, which is focused on 100% SaaS. We estimate that 2–3% of this revenue growth came from the reclassification of the consultancy revenues to SaaS revenues and therefore the underlying SaaS revenue growth was a strong 11–12%.

As announced at its capital markets day (CMD) on 2 March 2022, TIE Kinetix aims to accelerate growth in SaaS revenues to >20% pa by investing heavily in sales and marketing. The associated costs will put pressure on results in FY22, with the revenue acceleration becoming increasingly visible in FY23. Reported EBITDA declined from €1.6m in H121 to break-even, because of €0.3m lower revenues, €0.3m higher cost of sales, €0.5m higher opex and the absence of the COVID-19 related subsidy in the United States of €0.5m in H121. As announced at its CMD, the higher costs will result in a net loss for the year and in H122 the company reported a net loss of €0.7m.

The company’s financial position remains sound with net cash of €9.5m, up from €9.2m in FY21, whereby the negative cash flow of operations of €0.5m, due to the net loss, and the higher capex were compensated for by the proceeds of the conversion of warrants during the first half (proceeds of €1.6m). There are still 67k warrants outstanding that can be converted to shares before the end of 2023 at a fixed price of €7 per share, potentially delivering €0.5m additional cash.

For the first time, TIE Kinetix paid a dividend per share of €0.50 (on 29 April). Shareholders representing 65% of the total shares outstanding chose a stock dividend, resulting in 34k new shares during the first half and reducing the total cash component of the dividend to €0.3m.

From October 2021 (which is the start of the current financial year), TIE Kinetix has been fully focusing on 100% SaaS by digitalising the document streams of its customers in their supply chain. This year, investments will be made to accelerate revenue growth from FY23. After having centralised its back office (eg marketing, billing and finance), the company is currently centralising the front office including customer implementation and set up. Mappings to connect suppliers now takes place centrally in the Netherlands and the company developed a web shop in this country (which also will be rolled out to its other regions). These actions might take two to three years to be fully realised, with efficiency gains gradually becoming visible.

The company has divided its sales into customer success teams and new business teams:

We believe the current efforts in marketing and sales will fuel an acceleration in SaaS revenue growth in FY23 towards 15–20% with >20% growth by FY25.

TIE Kinetix has not provided specific guidance for FY22 but in its press release commented that EBITDA is on plan for the year. Given that EBITDA was break-even in the first half and that the new hirings will weigh on costs for the full year, we assume the EBITDA for FY22 will be slightly negative. At its CMD, management commented to expect a net loss in FY22 due to the investments and that it expects to quickly return to net profit in FY23, driven by accelerating revenue growth in SaaS and lower expenses when compared to FY22. In order to cope with the current inflation, TIE Kinetix has increased its hourly rates by 5% and subscription rates by 7.2% effective per April 2022.

The orderbook (gross sales value) was up 5% y-o-y, which is a good performance given the strong comparison base with last year when the market recovered from the COVID-19 pandemic. Because realising new business takes time (training staff and sales cycle), we assume that the company’s order book will show a gradual increase with a clear acceleration during FY23. All the current efforts and investments in sales and marketing should lead to the company realising its targets for FY25: an accelerating SaaS revenue growth to >20% pa and an EBITDA margin of 20%.

We have slightly raised our revenue estimates as the decline in consultancy revenues was lower than we had anticipated. We still expect 15% growth in SaaS revenues in FY22, with an increasing contribution from the customer success teams, but have lowered somewhat our optimistic estimate for FY23 from 20% to 18% as the contribution of new business might kick-in more gradually than we anticipated. We estimate further accelerating growth to 20% SaaS revenues growth in FY24 and higher for FY25. As the decline in revenues from licences and maintenance is expected to come to a halt in FY22, the stronger growth in SaaS revenues will weigh much more on group revenues, resulting in our estimated revenue growth of 14% in FY23, 18% in FY24 and 21% in FY25.

We have lowered our FY22 EBITDA estimate somewhat as the hired staff during the first half will fully weigh on costs in the second half, resulting in a negative EBITDA in the second half after break-even in the first half. For FY23, we still expect a recovery in EBITDA as the additional investments in FY22 will not re-occur in full force, although we are now a bit more conservative with a margin of 11.2% versus 13.8% previously. For FY24, we leave our EBITDA estimate unchanged with the full benefit of higher revenue growth and further efficiency gains. TIE Kinetix for instance sublet part of the space in its head office in the Netherlands from 1 April 2022 and the lease of its building in Germany was terminated on 31 December, while the lease of its US building will terminate in summer 2022. TIE Kinetix will be fully working remotely in Germany and the US. We estimate total savings of the lower rent/lease at about €0.2m. Our estimates still anticipate a CAGR in overall revenues of 12% in FY21–25 and an EBITDA CAGR of 34%.

TIE Kinetix is entirely focused on SaaS solutions; the resulting increase in more predictable recurring revenues should underpin its valuation. For the valuation of TIE Kinetix we look at peer multiples and discounted cash flow. Please refer to our initiation note for more details.

For our DCF, we have made only one change in our assumptions, which is to raise the risk-free rate from 2.5% to 3.0%. In combination with our adjusted estimates, this delivers a fair value of €25 per share (versus €26 previously).

The company is trading at an EV/sales multiple of 1.8x in FY22e compared to an average of 3.2x for European peers and 7.4x for US peers. There might be several reasons for explaining the lower valuation when compared to peers, such as the smaller size, the below-average profitability, the low liquidity in the shares, the recent track record and the lower share of SaaS revenues. If the company manages to tackle several or even all these factors, its valuation might tend towards those of its international peers.