Esker 1

Processing power

Esker 4 May 2016 Outlook

Esker

Processing power

FY15 and Q116 results

Software & comp services

4 May 2016

Price

€28.40

Market cap

€145m

$1.11/€

Net cash (€m) at end FY15

9.0

Shares in issue

5.1m

Free float

67%

Code

ALESK

Primary exchange

Alternext Paris

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.2

(2.4)

17.9

Rel (local)

3.0

(5.9)

35.0

52-week high/low

€31.30

€23.31

Business description

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

Next event

Q2 trading update

12 July 2016

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

After a strong performance in FY15, Esker is on track to generate double-digit revenue and margin growth in FY16 and FY17. We upgrade our FY16 forecasts to reflect stronger revenue growth combined with increased investment in the business, and we introduce FY17 forecasts for 10% revenue and 16% earnings growth. Investment in product development, either internally or via acquisition, should support sustained growth.

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

46.1

5.9

0.90

0.24

31.6

0.8

12/15

58.5

9.3

1.31

0.30

21.8

1.1

12/16e

67.4

11.7

1.63

0.33

17.4

1.2

12/17e

74.4

14.1

1.89

0.36

15.0

1.3

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

FY15: Organic growth boosted by acquisitions

Esker reported strong revenue and earnings growth in FY15, benefiting from new customers generating services and traffic revenues, as well as the two recent acquisitions and the positive effect of the strong dollar versus the euro. Revenues in Q116 have continued this strong performance (+16% y-o-y underlying growth) and management expects to generate organic revenue growth of 13-18% in FY16.

Outlook: Double-digit growth

Technology 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. Management is keen to continue to invest in order to maintain strong growth; we have factored in a higher cost base to reflect this. We have upgraded our FY16 revenue forecast by 4.6% (15.4% y-o-y growth) and normalised EPS by 2.3% (24.7% y-o-y growth). We introduce FY17 forecasts for 10.4% revenue growth and 16.0% EPS growth. With net cash forecast to reach €15.7m by the end of this year, the company is in a strong position to make additional acquisitions to accelerate growth.

Valuation: Better value

On an EV/sales basis, Esker is trading at a discount to document process automation (DPA) software companies and at a premium to French small-cap software companies. Esker’s forecast revenue growth and operating margins are higher than both groups. On a P/E basis, Esker trades at a premium to the DPA companies and a discount to 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 achieved recurring revenues approaching 80% last year, which provides a high level of revenue and cash flow predictability.

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 c 50% from Europe, c 40% from the US and the remainder from Australia and Asia.

Financials: Strong revenue growth drives earnings upgrades

The company generated strong organic growth in 2015, boosted by acquisitions and a positive currency effect. 2016 has started in a similar vein, with Q116 revenues showing 16% organic growth. We revise up our FY16 forecasts, incorporating revenue growth of 15.4%, an operating margin of 17.2% and normalised EPS growth of 24.7%. We introduce FY17 forecasts for 10.4% revenue growth, 18.8% operating margin and 16.0% normalised EPS growth. The business is highly cash generative – we forecast net cash increasing to €15.7m by the end of FY16.

Exhibit 1: Changes to forecasts

EPS (€)

PBT (€m)

EBITDA (€m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016e

1.59

1.63

2.3

11.7

11.7

0.1

15.7

16.3

3.7

2017e

N/A

1.89

N/A

N/A

14.1

N/A

N/A

18.8

N/A

Source: Edison Investment Research

Valuation: Better value

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 a discount to 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 achieved recurring revenues approaching 80% last year, which gives a high level of revenue and cash flow predictability. Management has confirmed that it 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. In 2011 Esker opened its new mail production facility in Lyon, France. The company’s revenues are well spread geographically, with c 50% from Europe, c 40% from the US, and the remainder from Australia and Asia.

Automating document processing

The majority of Esker’s revenues are generated from the Document Process Automation (DPA) software business (92% in FY15). The remainder of the business is grouped into Legacy Products, and consists of the Fax Server business (which automates fax sending and receipt) and the Host Access business (which enables customers to access mainframes from PCs). All development is focused on the DPA business and we expect this to continue to grow and generate an increasing percentage of revenues. While the legacy business continues to be supported, the company is not actively chasing new business or developing new products.

Management

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. He previously worked as R&D team manager for Arthur Andersen Consulting in Lyon. 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: document delivery, procurement, accounts payable, accounts receivable and sales order processing. These can be combined to fulfil two basic cash cycles: order-to-cash (O2C) – to fulfil customer orders and collect payment; and purchase-to-pay (P2P) – to order and pay for goods and services.

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, the UK, the US, Australia, Spain and Singapore.

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.

Esker’s software has several attractive features:

It improves productivity – it accelerates the cash conversion cycle, reduces errors, enables faster processing, improves process visibility and improves customer service.

It is environmentally friendly.

It reduces paper and paper-related costs.

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. In Latin America, e-invoicing is government-mandated in order to ensure tax compliance and collection. In many countries, suppliers to government organisations are required to use e-invoicing.

On-premise and SaaS products

Exhibit 2: 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

DeliveryWare is the longest-standing product and is an on-premise solution. Esker started developing a multi-tenant SaaS product, Esker on Demand, in 2004. This started to gain traction from 2009 as customers were attracted by the lack of upfront investment and the usage-based payment mechanism. Typically, new business is for Esker on Demand, although some customers prefer to use the on-premise solution for security reasons. It is rare for an on-premise customer to convert to the SaaS solution, although they sometimes take the SaaS product for new divisions or processes. The company has more than 5,000 SaaS customers with over five million users.

Technology development

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. The main areas of focus for product development are:

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.

Adding 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 Paymetrics to offer the ability to pay invoices by debit or credit card or ACH (automated clearing house). The company is looking for a European partner to offer similar functionality in Europe.

ERP integration: the software has been integrated with a wide range of ERP systems; Esker has built-in certified integrations with SAP, JD Edwards Enterprise One and Microsoft Dynamics NAV ERP software and is seeking certification for Microsoft Dynamics AX.

Vertical solutions: developed on a country-by-country basis, depending on the industry focus in each country. Examples include pharmaceuticals, medical devices, food, luxury goods and B2B distribution.

Recent acquisitions expand functionality

In 2015, Esker made two acquisitions, TermSync and CalvaEDI. TermSync is a US cloud-based invoice processing platform provider. TermSync’s solution is designed to improve the efficiency of the accounts receivable function, and includes the ability to track invoices, schedule reminders, and analyse performance. TermSync’s business model is similar to Esker’s: customers pay a monthly subscription fee plus a fee per invoice processed. Esker is using the TermSync solution to enhance its existing accounts receivable offering in the US, and in France is planning a soft launch in June 2016, with full launch expected in early 2017.

CalvaEDI is an EDI network service provider, providing gateways between its customers’ different computer systems. EDI is defined as 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). CalvaEDI has more than 300 customers in transport and logistics, predominantly based in France. The business model is similar to Esker’s on-demand DPA, with customers charged on a usage basis rather than upfront licence fees. EDI has typically been implemented by large customers but Esker sees the acquisition as an opportunity to extend the technology to smaller customers. CalvaEDI continues to trade under its own name and will work with Esker on developing new services over time, in particular, to offer Esker customers with automated order-to-cash cycles the benefit of EDI integration.

Medium-term goals: Business collaboration network; 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. 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 financing market, and has yet to decide whether to enter it via partnership or acquisition.

Market: Esker competes by process

Esker competes against a different group of companies for each business process. 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. 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. More than 11,000 companies globally use Esker software, including BASF, GE Healthcare, Honeywell, Philips, Samsung, Siemens and Whirlpool.

Accounts payable is the most competitive area – when Esker wins business it tends to be for customers who 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 Lexmark, Basware and OpenText. Lexmark built up its position via acquisition (Brainware 2012, Readsoft 2014, Kofax 2015), but has recently agreed to be bought by an Asian consortium for $3.6bn.

Exhibit 3: Competitive environment – DPA software suppliers

Company

Accounts receivable

Accounts payable

Sales order processing

Esker

x

x

x

Basware

x

x

Billtrust

x

Conexiom

x

ITESOFT

x

x

Lexmark (Brainware, Kofax, ReadSoft)

x

x

x

OmPrompt

x

OpenText

x

x

x

SAP (b-process)

x

Taulia

x

Tradeshift

x

x

Tungsten (OB10)

x

Yooz

x

Source: Esker, Edison Investment Research

Management’s view is that its software has been designed as an end-to-end solution and therefore provides an integrated process flow, whereas some competitors provide a solution made of various disparate products, eg OCR (optical character recognition) plus process flow plus archiving, which require a greater amount of integration work. Esker also believes its SaaS product sets it ahead of competitors that are predominantly focused on on-premise solutions. Esker has 10 years’ 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.

Sales strategy

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 need to be hired in the relevant countries once the business grows. 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.

Joint venture with Neopost to target SMEs

Esker has 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 sales force tends not to target.

Esker also sells its software on a white-label basis to Paragon, Ricoh Belgium and Asterion International.

Legacy Products (9% of FY15 revenues)

Esker’s Legacy Products division includes fax servers and host access products.

Fax Servers: With the growth in PC usage in the 1980s and 1990s, users wanted to be able to send and receive faxes via their workstations, rather than physically sending or picking up a fax from the office fax machine. 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 has two fax server products: Esker Fax and VSI-Fax. Esker Fax works on Windows 2000/2003/XP operating systems and is compatible with the main electronic messaging systems including IBM Lotus Notes, Microsoft Exchange and SMTP. VSI-Fax is designed for UNIX and Linux operating systems. Esker has an installed base of 15,000 fax servers.

Host Access: This division supplies terminal emulator software that enables users to access mainframes from PCs. The two product lines are Tun PLUS, which supports access to SCO Linux, Linux, IBM AIX, HP-UX, IBM 390 and IBM AS/400 servers, and SmarTerm, which supports access to Digital (Vax Open VMS), Data General and IBM servers. The company 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.

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 couple of 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 4 for historic and forecast divisional performance.

Exhibit 4: Revenues by division and type of business

€m

FY13

Growth

FY14

Growth

FY15

Growth

FY16e

Growth

FY17e

Growth

DPA revenues

35.3

5.0%

40.3

14.1%

51.1

26.9%

59.2

15.8%

65.9

11.3%

Legacy products

5.8

-12.6%

5.8

-0.8%

5.4

-6.0%

5.0

-7.9%

4.8

-4.0%

Acquisitions

0

N/A

0

N/A

1.9

N/A

3.2

68.5%

3.8

16.5%

Total

41.1

2.1%

46.1

12.0%

58.5

26.9%

67.4

15.4%

74.4

10.4%

Traffic

21.9

14.2%

27.0

23.4%

36.6

35.5%

46.2

26.0%

54.1

17.3%

Upgrades & maintenance

8.9

-6.8%

8.8

-0.3%

9.3

5.7%

8.6

-8.0%

7.9

-8.0%

Services

6.1

-4.8%

5.9

-3.9%

8.7

48.1%

9.6

10.0%

9.8

2.0%

New licenses

3.5

-20.6%

3.6

1.0%

2.8

-20.5%

2.4

-15.0%

2.0

-15.0%

Fax card sales/hardware

0.7

-0.4%

0.7

7.4%

0.9

25.2%

0.7

-26.0%

0.5

-20.0%

41.1

46.1

58.5

67.4

74.4

Source: Esker, Edison Investment Research

Strong FY15 revenue performance: Esker reported FY15 revenues of €58.5m (+27% y-o-y), made up of 13% organic growth, 4% from acquisitions and an 8% boost from the weak euro versus the dollar. Cloud-based revenues showed underlying growth of 24% y-o-y to make up 71.6% of revenues (FY14: 65.7%) and recurring revenues (maintenance and traffic) made up nearly 80% of revenues. Traffic revenues grew 36% in FY15, from a combination of acquisitions, new on-demand customers starting to use the software (Esker signed up 130 new customers in FY15) and existing customers processing more documents. New licence sales dropped 21% in FY15. Despite the availability of new out-of-the-box solutions, services revenues grew 48% in FY15, as the number of customer implementations increased significantly. TermSync (consolidated from 1 January 2015) contributed revenues of $360k/ €327k, with pro-forma growth of 92%. CalvaEDI (from 1 May 2015) contributed revenues of €1.6m, with pro-forma growth of 6%.

Q116 revenues confirm continued momentum: Esker reported Q116 revenues of €16.3m, equating to y-o-y growth of 20% (reported) and 16% like-for-like in constant currency. SaaS-based revenues grew 27% y-o-y (20% in constant currency) to make up 74% of total revenues and recurring revenues remained close to 80%.

Positive revenue outlook: the company estimates that it could generate organic revenue growth in the range 13-18% for FY16. We expect continued strong, double-digit growth in traffic in FY16 and FY17. We expect licence revenues will continue to decline in FY16 and FY17 as new customers opt for on-demand services, and we expect this to also lead to a slight decline in upgrade and maintenance revenues. We forecast an increase in service revenues in FY16 and FY17 as new customers are signed up. CalvaEDI is likely to grow at a similar rate to FY15 whereas TermSync growth could accelerate from the high level achieved in FY15.

Improving profitability

The company reported FY15 operating profit of €8.7m (14.9% margin). Excluding goodwill and other acquired intangibles amortisation of €0.3m and exceptional costs of €0.2m, Esker achieved a normalised operating profit of €9.3m (15.8% margin, up from 12.4% a year ago). The tax rate on reported PBT was 26%. Reported basic EPS was up 33.6% y-o-y.

Exhibit 5: Actual vs estimates and changes to forecasts

€m

FY15e

FY15a

diff

y-o-y

FY16e old

FY16e new

change

y-o-y

FY17e new

y-o-y

Revenues

58.5

58.5

-0.1%

26.9%

64.4

67.4

4.6%

15.4%

74.4

10.4%

EBITDA

14.2

13.4

-5.5%

49.3%

15.7

16.3

3.7%

21.9%

18.9

15.7%

EBITDA margin

24.2%

22.9%

-1.3%

24.4%

24.2%

-0.2%

1.3%

25.4%

1.2%

EBIT*

10.2

9.3

-9.6%

62.4%

11.6

11.6

0.2%

25.5%

14.0

20.5%

EBIT* margin

17.5%

15.8%

-1.7%

18.0%

17.2%

-0.8%

1.4%

18.8%

1.6%

PBT*

10.3

9.3

-9.9%

57.3%

11.7

11.7

0.1%

25.8%

14.1

20.3%

Net income

7.8

6.9

-11.3%

49.2%

8.8

8.8

0.1%

27.8%

10.6

20.3%

Normalised EPS (€)

1.47

1.31

-11.1%

45.7%

1.59

1.63

2.3%

24.7%

1.89

16.0%

Reported EPS (€)

1.49

1.30

-12.8%

33.6%

1.61

1.65

2.5%

26.8%

1.92

16.6%

Net cash

6.9

9.0

29.4%

-27.9%

13.9

15.7

12.5%

74.8%

23.2

48.1%

DPS (€)

0.26

0.30

15.4%

25.0%

0.28

0.33

17.9%

10.0%

0.36

9.1%

Source: Esker, Edison Investment Research. Note: *Normalised: excludes amortisation of acquired intangibles, exceptionals and share-based payments.

The two key cost lines are staff costs and external purchases and other costs. We forecast an increase in staff costs of 10% in FY16 and 8% in FY17. This assumes a 7% increase in headcount in FY16 and 5% in FY17. We forecast increases in external purchase and other costs of 10% in FY16 and 9% in FY17. Operating expenses are partially offset by capitalised development costs: Esker capitalised costs of €3.8m in FY15 and we forecast growth to €4.2m in FY16 and €4.4m in FY17. This results in normalised operating margin forecasts of 17.2% in FY16 rising to 18.8% in FY17. We increase our FY16 EPS forecast by 2.3%, equating to EPS growth of 24.7%. We introduce a forecast for EPS growth of 16.0% in FY17.

Dividends

Esker has proposed a dividend of €0.30 for FY15 (+20% y-o-y, payout ratio 23%). We increase our FY16 and FY17 forecasts reflecting payout ratios of 20% and 19% respectively.

Currency impact

With 40% of revenues in the US but a lower proportion of the cost base in US dollars, the weakness of the euro versus the dollar had a strong positive effect on FY15 results, contributing 8% to revenue growth. The $/€ exchange rate averaged 1.10 in Q116 (compared to 1.11 for FY15) and Q2 to date has averaged 1.13. Our forecasts for FY16 and FY17 assume a rate of 1.11.

Cash flow and balance sheet

The company ended the year with a net cash position of €9.0m, after paying €11.7m for the two acquisitions. We forecast operating cash flow post tax and interest of €14.0m in FY16 and €15.3m in FY17. Capex is predominantly made up of capitalised development costs, with a smaller amount of expenditure on tangible fixed assets. We forecast that net cash will increase to €15.7m by the end of FY16 and €23.2m by the end of FY17.

Valuation

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 €30-700m. 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 a discount to 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 achieved recurring revenues approaching 80% last year, which gives a high level of revenue and cash flow predictability. Management has confirmed that it 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 is forecast to build this over the next two years.

Exhibit 6: Peer group operating and valuation metrics

Company

EBIT margin

EBITDA margin

EV/sales

P/E

CY

NY

CY

NY

CY

NY

CY

NY

Esker

17.2%

18.8%

24.2%

25.4%

2.0

1.8

17.4

15.0

Software companies with DPA software offerings

Basware

-5.3%

1.3%

0.0%

6.5%

3.5

3.1

N/A

47.7

Bottomline

18.4%

22.5%

22.4%

24.1%

2.7

2.4

13.7

15.9

ITESoft

9.6%

10.6%

11.8%

12.7%

0.8

0.7

13.6

11.8

Lexmark

10.3%

10.9%

16.8%

18.0%

0.6

0.7

10.7

10.5

OpenText

32.9%

33.9%

37.0%

37.4%

3.8

3.6

14.1

13.0

Average

13.2%

15.8%

17.6%

19.7%

2.3

2.1

13.0*

12.8*

French small-cap software companies

Gameloft SE

7.6%

9.7%

15.1%

16.6%

2.2

2.1

52.7

33.5

Cegid Group

14.7%

15.5%

27.6%

28.6%

2.0

2.0

19.7

17.8

Lectra

13.7%

15.0%

15.9%

16.5%

1.4

1.3

15.9

14.0

Axway Software

14.6%

15.5%

15.1%

15.7%

1.2

1.1

11.7

10.2

Linedata Service

20.3%

20.7%

26.4%

26.8%

1.8

1.7

13.4

12.7

ESI Group

9.9%

10.9%

11.2%

11.6%

1.3

1.2

18.7

15.9

Harvest

23.2%

23.3%

24.4%

24.4%

2.3

2.1

16.3

15.7

Avanquest software

-3.4%

-1.0%

-0.2%

2.1%

0.2

0.2

N/A

N/A

Sidetrade

8.8%

15.3%

14.3%

20.7%

1.9

1.6

33.3

17.0

Average

12.2%

13.9%

16.7%

18.1%

1.6

1.5

22.7

17.1

Source: Thomson (as at 4 May), Edison Investment Research. Note: *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 9%, long-term growth of 2%, working capital/sales of 0.4% and capex/sales of 8.0% (including ongoing capitalisation of development costs), revenue CAGR of 3.9% for 2018-25 and average EBITDA margins of 25.4% from FY17 are required to reach the current share price. Based on the market potential and current levels of profitability this appears conservative.

Exhibit 7: DCF sensitivity analysis

Increase by 1%

Decrease by 1%

Per share value (€)

Upside/(downside)

Per share value (€)

Upside/(downside)

WACC

24.83

-12.6%

32.71

15.2%

Revenue growth

29.61

5.4%

26.46

-5.8%

EBITDA margin

29.49

4.9%

26.67

-5.1%

Source: Edison Investment Research

Exhibit 8: Financial summary

€'000s

2012

2013

2014

2015

2016e

2017e

Year end 31 December

French GAAP

French GAAP

French GAAP

French GAAP

French GAAP

French GAAP

PROFIT & LOSS

Revenue

 

 

40,260

41,116

46,061

58,457

67,438

74,436

EBITDA

 

 

6,637

6,598

8,979

13,405

16,336

18,893

Operating Profit (before amort and except)

 

 

4,265

3,883

5,700

9,257

11,616

13,993

Amortisation of acquired intangibles

0

0

0

(302)

(500)

(500)

Exceptionals and other income

(16)

60

53

(245)

0

0

Other income

0

0

0

0

0

0

Operating Profit

4,249

3,943

5,753

8,710

11,116

13,493

Net Interest

38

6

220

(6)

100

100

Profit Before Tax (norm)

 

 

4,303

3,889

5,920

9,312

11,716

14,093

Profit Before Tax (FRS 3)

 

 

4,287

3,949

5,973

8,765

11,216

13,593

Tax

(1,286)

(761)

(1,323)

(2,292)

(2,804)

(3,398)

Profit After Tax (norm)

3,012

3,140

4,609

6,877

8,787

10,570

Profit After Tax (FRS 3)

3,001

3,188

4,650

6,473

8,412

10,195

Average Number of Shares Outstanding (m)

4.7

4.7

4.8

5.0

5.1

5.3

EPS - normalised (c)

 

 

64

67

97

138

172

200

EPS - normalised fully diluted (c)

 

 

60

62

90

131

163

189

EPS - (IFRS) (c)

 

 

64

68

97

130

165

192

Dividend per share (c)

14.00

18.00

24.00

30.00

33.00

36.00

Gross margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

16.5

16.0

19.5

22.9

24.2

25.4

Operating Margin (before GW and except) (%)

10.6

9.4

12.4

15.8

17.2

18.8

BALANCE SHEET

Fixed Assets

 

 

8,764

9,437

12,552

25,184

25,716

26,276

Intangible Assets

5,521

6,458

7,709

19,603

20,336

21,146

Tangible Assets

2,835

2,450

4,470

4,985

4,784

4,534

Other

408

529

373

596

596

596

Current Assets

 

 

24,358

26,834

33,894

36,110

44,703

54,322

Stocks

100

89

93

161

161

161

Debtors

11,567

12,144

15,110

18,073

19,954

22,025

Cash

11,393

13,411

17,559

16,295

23,006

30,555

Other

1,298

1,190

1,132

1,581

1,581

1,581

Current Liabilities

 

 

(15,551)

(16,164)

(19,827)

(24,789)

(27,077)

(28,860)

Creditors

(15,551)

(16,164)

(19,827)

(24,789)

(27,077)

(28,860)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

(2,019)

(1,450)

(5,113)

(7,317)

(7,317)

(7,317)

Long term borrowings

(2,019)

(1,450)

(5,113)

(7,317)

(7,317)

(7,317)

Other long term liabilities

0

0

0

0

0

0

Net Assets

 

 

15,552

18,657

21,506

29,188

36,024

44,421

CASH FLOW

Operating Cash Flow

 

 

6,163

6,539

9,245

14,307

16,742

18,605

Net Interest

122

90

310

(27)

100

100

Tax

(1,366)

(645)

(1,075)

(1,165)

(2,804)

(3,398)

Capex

(3,548)

(3,434)

(4,028)

(3,909)

(5,753)

(5,960)

Acquisitions/disposals

0

0

22

(11,700)

0

0

Financing

400

628

(694)

1,324

0

0

Dividends

(550)

(659)

(877)

(1,208)

(1,574)

(1,798)

Net Cash Flow

1,221

2,519

2,903

(2,378)

6,711

7,549

Opening net debt/(cash)

 

 

(8,526)

(9,354)

(11,961)

(12,446)

(8,978)

(15,689)

HP finance leases initiated

(393)

0

(2,293)

(1,090)

0

0

Other

(0)

88

(125)

0

(0)

(0)

Closing net debt/(cash)

 

 

(9,354)

(11,961)

(12,446)

(8,978)

(15,689)

(23,238)

Source: Esker, 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

(%)

Odyssée Venture

9.3

Jean-Michel Bérard

7.6

Thomas Wolfe

5.8

Treasury shares

3.6

Companies named in this report

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

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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