Strong demand for data centre intelligence

Beta Systems 2 June 2020 Update
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Beta Systems

Strong demand for data centre intelligence

Technology

Scale research report - Update

2 June 2020

Price

€23

Market cap

€110m

Share price graph

Share details

Code

BSS

Listing

Deutsche Börse Scale

Shares in issue

4.8m

Last reported net cash at Q120, including €33m deposit; pre IFRS16

€43.1m

Business description

Beta Systems provides data centre intelligence solutions that enable efficient and secure bulk processing of data and identity access management solutions. The company’s headquarters are in Berlin and it has sales and support offices in 13 markets globally. Approximately 75% of sales are derived in the DACH region.

Bull

Market leader in mainframe environments and DCI in Europe.

Strong order profile indicates life remains in the mainframe market.

Strong balance sheet.

Bear

Mature mainframe market backdrop.

Subscale IAM business.

Strong dependence on DACH region.

Analyst

Edwin de Jong

+44 (0) 20 3077 5700

Beta Systems, a software provider for data centre intelligence (DCI) and identity access management (IAM), has reported both strong organic and inorganic growth in its H120 revenues to April. As one of few companies in the sector, the company has raised its FY20 guidance, driven by a strong order intake especially in the DCI unit. As a smaller player in the sector, Beta Systems trades at a discount of c 45% compared to international peers on an EV/EBITDA basis for 2020e.

Organic revenue growth of 10% in H120

Beta Systems reported solid H120 results with revenue growth of 41.5% to €38.1m, of which around 10% was organic, and over 30% driven by the acquisitions of HABEL/Akzentum Group and infinIT Codelab last year. It has a business model with a c 90% recurring nature because of its royalty licensing/maintenance model. EBITDA (post-IFRS 16 basis) increased 65% to €11.4m in H120, driven by acquisitions, strong growth in the Other Europe segment and the IFRS treatment of leases.

FY20 earnings guidance upgraded

In contrast with many other companies in the sector, Beta Systems has raised the upper range of its previous guidance on 7 May based on a good order position, especially in its DCI business and cost control. EBIT guidance is now €7–12m versus €7–10m previously. The new guidance has a higher degree of unpredictability due to the COVID-19 crisis. Revenue guidance was unchanged at €67–74m, implying 26–39% growth, and EBITDA guidance based on the new IFRS 16 rules stands at €11–17m, implying margins of c 19.9% at the midpoint, compared to 19.6% in FY19. Recently launched Symphony software in its DCI operations showed good demand.

Large EV/EBITDA discount compared to peers

With a market cap of €110m and a limited free float of below 30%, Beta Systems is a small player in the data centre/mainframe space, which is dominated by US and Asian tech giants. However, looking at the strong earnings performance and growth profile, it seems Beta Systems has gained access to an attractive market segment. Trading at an EV/EBITDA for FY20e of around 4.9x, Beta Systems is at a discount of c 45% compared to international peers.

Historical financials

Year
end

Revenue
(€m)

EBITDA
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

09/16

46.4

7

5.7

0.99

0.0

23.2

N/A

09/17

49.8

10.8

9.3

1.51

0.0

15.2

N/A

09/18

45.9

5.5

4.3

0.76

0.0

30.3

N/A

09/19

53.3

10.5

9.1

1.26

0.2

18.3

0.9

Source: Beta Systems data

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Financials

Beta Systems Software reported revenue growth of 41.5% to €38.1m in H120 to April, mostly driven by the acquisitions of HABEL/Akzentum Group in July 2019 and infinIT Codelab (80% of the shares) in December 2019. Organic growth was robust at around 10% and driven by an increase in the number of customers and increased spending at existing customers, especially in the Other Europe segment, where growth in licences was strong. Good demand for the new Symphony product offering in the DCI operations was also one of the revenue growth drivers.

Beta Systems has a business model with highly recurring revenue and is less affected by the COVID-19 crisis. The predominant rental model means that c 80%+ of the group’s licence and maintenance revenues are recurring, while a large portion of the services revenues also have a recurring feature. This takes total recurring revenues to more than 90% of the overall total.

EBITDA increased 65% to €11.4m in H120, partly driven by the IFRS 16 treatment of leases (effect in H120 of €1.4m) and by the higher revenues in a controlled cost situation. H119 EBITDA has not been adjusted for the IFRS 16 effect. Acquisitions had a positive effect of €1.2m on EBITDA. EBIT increased 48% to €8.9m, of which 42% organic. Net profit was 57% higher at €6.6m.

In contrast with many other companies, Beta Systems is raising the upper level of its profit guidance, which is based on the strong order position and controlled cost situation. FY20 visibility is relatively high, as turnover in the second half of the fiscal year is traditionally much lower compared to the first half because contract renewals are mostly realised in the first half of the year. Nevertheless, the company warns the new guidance has a higher degree of unpredictability due to the COVID-19 crisis. In its ad hoc announcement on 7 May 2020, Beta Systems increased its full-year EBITDA projection excluding the IFRS 16 effect to €9–14m from €9–12m and EBIT to €7–12m from €7–10m. Including the effect of IFRS 16, EBITDA guidance is now €11–17m. Full-year sales guidance is maintained at €67–74m.

Exhibit 1: Financial summary

€m

FY18

FY19

H119

H120

Change

2020e*

 

IFRS

IFRS

IFRS

IFRS

(%)

Management guidance

Revenue

45.9

53.3

26.9

38.1

41.5

67–74

o/w licence

11.8

13.6

8.3

11.3

35.2

 

o/w maintenance

24.9

28.9

13.5

17.1

26.6

 

o/w services

8.6

9.6

4.7

9.0

93.5

 

o/w other sales

0.6

1.2

0.4

0.7

68.8

 

EBITDA

5.5

10.5

6.9

11.4

64.7

11–17

EBITDA margin

12.0%

19.6%

25.7%

29.9%

 

 

EBIT

3.8

8.5

6.0

8.9

47.4

7–12

Profit before tax (as reported)

4.3

9.1

6.3

9.0

42.1

 

Net income (as reported)

4.0

6.0

4.2

6.6

56.9

 

EPS (as reported) (€)

0.76

1.26

0.88

1.38

56.8

 

Source: Beta Systems accounts. Note: *Management guidance includes IFRS 16.

Strengthened offering in DCI

Beta Systems strengthened its product portfolio in the DCI division recently through the launch of new Symphony software that it claims received a warm welcome in the market with good demand, although this was not quantified in its half year report. Beta Systems’ data centre software is mainly used for reliable and efficient processing of large amounts of data. For instance, Beta Systems’ Symphony software is used for IBM’s Z mainframe platform. Clients are mostly European and North American and more than half of revenues generated in the DACH region, with many customers from the financial sector.

The DCI market is structurally growing, with long sales cycles and orders typically between €0.1m and €3.0m. Beta Systems’ strong order situation reflects a better mainframe market, as big bank and insurance customers seek to optimise and modernise their equipment.

Beta Systems also has identity access management software for controlling and monitoring access to data and applications according to a client’s requirements. Clients are mostly in the financial arena. A third division, digitalisation, has been established via the acquisition of LYNET Kommunikation in 2018 and has now been strengthened by the recent acquisition of Codelab.

Beta Systems highlights that it may make further M&A deals, which should be supported by the strong balance sheet position (net cash was €43.1m at end-March 2020 on a pre-IFRS16 basis and including deposits) and operational cash flow of €13.9m in H120 (H119: €10.6m).

Low valuation compared to peers

With a market cap of €110m and a limited free float of just short of 30% (the majority shareholder is Deutsche Balaton, around 70%), Beta Systems is a small player in the data centre/mainframe space, which is dominated by tech giants mostly from North America and Asia.

However, looking at the strong earnings performance and growth profile, Beta Systems has gained access to an attractive market segment. It trades at an EV/EBITDA for FY20e of c 4.9x, based on the market capitalisation, net cash of €43.1m and the midpoint of FY20 EBITDA guidance. For a company with such a position and compared to the international peers, this reflects a large discount.

Exhibit 2: Peer group comparison

Market cap

P/E (x)

EV/EBITDA (x)

Company

(local CCY m)

2019

2020e

2021e

2019

2020e

2021e

Cisco

US$188.483

14.4

14.2

14.2

9.7

9.8

10.1

IBM

US$105.766

9.3

10.7

9.6

8.4

9.2

8.4

VMware

US$57.083

21.6

20.7

22.3

17.1

15.6

15.7

HPE

US$13.347

5.9

7.8

6.8

4.4

5.4

5.0

Citrix

US$16.879

24.0

24.3

22.2

16.7

16.3

15.4

Juniper Networks

US$7.724

13.6

15.1

13.0

8.1

8.6

8.0

Peer average

 

14.8

15.5

14.7

10.7

10.8

10.4

Beta Systems

€110

17.6

N/A

N/A

11.7

4.9*

N/A

Premium/(discount)

 

19%

N/A

N/A

9%

(45%)

N/A

Source: Refinitiv. Note: Priced at 20 May 2020. *Based on the midpoint of company guidance.

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