Claranova — Clear path to profitability

Claranova has been through a long period of restructuring and now comprises three distinct businesses taking advantage of high-growth areas of internet and mobile technology: digital photo printing (PlanetArt), consumer software (Avanquest) and IoT (myDevices). Key investment considerations are as follows:

We forecast 44% group revenue growth for FY19 (24% organic) and 17% for FY20. With FY18 revenues already reported (24% growth y-o-y, all organic), we forecast a small positive group EBITDA for FY18 (2.1% margin), rising to a 7.2% margin in FY19e and 10.4% in FY20e. With limited capex requirements, this translates to operating margins of 7.0% in FY19e and 10.2% in FY20e, and a return to positive EPS in FY18e (on a normalised basis).

Taking into account the differing growth trajectories and profitability of each division, as well as the different levels of minority investment in each, we use a sum-of-the-parts approach to valuation and estimate a fair value of €1.08 per share.

In addition to the usual competitive pressures and the requirement to keep abreast of technology, our forecasts and the share price are sensitive to the pace and success of geographic expansion for PlanetArt, supplier dependence for PlanetArt’s printing service, changes to search engine policies for Avanquest, integration of acquisitions, and the US dollar/euro and sterling/euro exchange rates.

Claranova is a group consisting of three businesses focused on mobile and internet technologies with high growth potential. After a long period of restructuring and refocusing the business, the group is demonstrating strong revenue growth and improving profitability.

Claranova was originally founded in 1984 as a consumer software publisher called BVRP Software. In 1996, the company changed its name to Avanquest and listed on Euronext. From 2007 to 2012, it acquired multiple businesses. By 2013, growth had slowed and the company was loss-making – the decision was taken to restructure the business. The company raised €34.5m in equity in June 2015 through the issue of 345m shares at €0.10 per share. Also in FY15, it wrote off €10.7m of debt and converted €2.6m of debt to equity. As part of the restructuring, the company sold off a number of non-core businesses and restructured the remaining businesses into three divisions:

In July 2017, the company organised each division into its own legal entity – this has enabled the company to seek out minority investors in each of the divisions in order to accelerate growth. At the same time, it changed the company name from Avanquest to Claranova.

The company is focused on driving the growth of each business and returning each division to profitability. The PlanetArt business is exploiting the popularity of photography on smartphones – its FreePrints business enables consumers to order prints of their photos directly from their smartphones in a simple and cheap fashion. It has shown rapid growth, particularly in the UK and the US, and is about to launch the service in India. Future geographical expansion is likely to be focused on a small number of larger countries, rather than going for wide geographic coverage. The Avanquest consumer software business has been streamlined, shifting nearly all distribution online and getting rid of unprofitable lines. The acquisition of a group of Canadian businesses gives the division access to new monetisation tools to exploit the number of visitors to its websites. Finally, the myDevices IoT platform is at an early stage of commercialisation. Widespread use of the free Cayenne prototyping tool by more than half a million developers is raising awareness of the platform, and recent contracts signed with mobile network operators demonstrate the first material commercial contracts for the platform.

Claranova is headed up by Pierre Cesarini, CEO. Mr Cesarini joined the company in May 2013 to effect the restructuring of the group. He is supported by the management board: Sébastien Martin (CFO), Roger S Bloxberg (CEO PlanetArt, CEO Avanquest Software (North America)), Todd Helfstein (president PlanetArt, president Avanquest Software (North America)), Kevin Bromber (head of myDevices), Olivier Thirion (e-commerce business unit director for Avanquest), Phil Schnyder (director of online business development for Avanquest). The group is overseen by a Supervisory Board made up of three members: Caroline Le Bigot, Luisa Munaretto and Jean Loup Rousseau.

PlanetArt offers photo-printing services to consumers via two businesses: FreePrints, which is focused on printing photos using apps on mobile devices (65% of FY17 revenues), and Web-to-print (35% of FY17 revenues), which hosts a number of websites that offer printing services. The two businesses share the same fulfilment infrastructure and marketing teams. The majority of PlanetArt revenues are currently generated in the US (72% in H118) and the UK (21%). The division has emerging revenues in France, Germany, Ireland, Spain and Italy, and is planning to launch the service in India imminently.

The FreePrints app was first launched in 2013, and is available for use on Apple and Android mobile devices. Customers are able to print photos that are saved on the mobile device or stored on popular websites such as Facebook, Instagram, Flickr and Dropbox. The offer varies by country. For example, in Europe, customers are offered 500 free prints per year, or 45 free prints per month, for which they pay postage only. In the UK, this works out at up to £4; in Europe, it costs up to €6. In the US, the offer is for 1,000 free prints per year, or 90 per month. The free prints offer is for prints of 6”x4”/15cmx10cm – if a customer wants larger prints, different shaped prints (eg square), borders, duplicates or different finishes, these are available for an additional charge. Once an order is placed, customers are then offered extra printing services, such as customised mugs or t-shirts.

In early 2016, the business launched the FreePrints Photobooks app, which offers a free 20-page softcover photobook every month, again for the cost of postage only (UK c £6, Europe €8). Upgrades are available for larger formats, more pages and for hardback covers.

Recently, PlanetArt launched the FreePrints Photo Tiles app. This enables customers to order one free PhotoTile (an 8”x8” canvas picture suitable to stick on the wall) per month, again for the cost of postage (£5.99 in the UK). This has so far been launched in the US, the UK and Ireland and is about to be launched in France.

The FreePrints, Photobooks and Photo Tiles apps charge for all printing on a per-job basis with no subscription required. This business is not particularly seasonal. We estimate that more than eight million customers have ordered via one of the apps at least once, and most return, making two to three purchases a year. Overall, 70–85% of monthly revenues come from returning customers; the average order value is in the range €7–8.

FreePrints is planning to launch in India later this year. Set-up costs relating to the launch include legal costs (consultation with regulators), localisation and adapting the software for the Indian market. Some mobile photo printing apps already exist in India, but have struggled with the delivery aspect of the service so have not received good reviews. Claranova is aiming to offer a better delivery service by contracting with a courier company for all deliveries (at a fixed cost), rather than using India Post, as well as using a network of printing companies to reduce the distance that prints have to be shipped.

Web-to-print was the original photo-printing service that has been offered by the company since the acquisition of SimplytoImpress in 2010. The business operates through four dedicated websites and generates most of its business in the US.

Although called Web-to-print, the majority of orders come from mobile browsers (as opposed to mobile apps).The business is very seasonal, with a large volume peak in November and December covering Thanksgiving and Christmas. This business typically has a higher order value ($70–80) than the FreePrints business. Customers tend to order less frequently than for FreePrints, typically once a year.

Since the advent of the smartphone more than 10 years ago, consumers have increasingly shifted from taking photos using digital cameras to using their phones for the majority of their photography. As people tend to have their phones on or close to them at all times, the number of photos taken has increased exponentially. InfoTrends estimates that 1.2 trillion photos were taken in 2017, up 9% compared to 2016, with c 90% taken with mobile devices (85% phones, 5% tablets). The majority of these sit on phones or photo-sharing services such as Instagram and Flickr and are never printed. Mobile apps for photo printing are designed to make the process simple and cheap. Alternatives include buying a home printer, which once specialist paper and ink is factored in, becomes an expensive option, using printing kiosks or uploading photos to web-based printing services.

Future Market Insights estimates that the market for global photo printing and merchandise will be worth $16.9bn in 2018 and is likely to grow at a CAGR of 2.6% to reach $22bn by 2028. This masks the shift in distribution channels – in 2018 c 49% of the value is expected to be generated from online services, forecast to grow to 55% by 2028, which implies a CAGR of 3.9%. Within this category, we expect a continuing shift from web-based to mobile app-based printing.

FreePrints competes against large, multinational companies such as Snapfish, Photobox and CEWE, as well as local players such as Lalalab in France and Bob Books in the UK. Web-to-print competes against services from larger online players such as Shutterfly, Photobox and Vistaprint, as well as services offered by pharmacies and retailers such as Walmart, Walgreens, Boots and Tesco and by specialist photography companies such as Snappy Snaps and Jessops. PlanetArt is seeing a slight reduction of competition in this market, as some smaller players have been acquired or left the market.

Exhibit 3 summarises the main competitors. We note that PlanetArt has no legacy film printing services and does not own any printing or retail facilities. This affords it the flexibility to enter new markets.

PlanetArt aims to maintain its app store ratings at as close to 5/5 as possible as this is a key factor in consumers’ decision-making when downloading apps. Currently, it is rated at 4.8/5 on both the Apple App Store and Google Play. This compares favourably to competitors who receive lower average review scores on significantly fewer reviews. We note that the Photobox app is no longer available on Android devices, only iOS. The business also aims to maintain high rankings within both app stores, as this also influences consumer’s propensity to download. For example, in the UK today, FreePrints and FreePrints Photo Tiles are the No. 1 and No. 2 ranked free photography apps on Google Play. On the App Store in the UK, Freeprints ranks as the fifth most popular app in the Photography & Video category, after Instagram, YouTube, Snapchat and TikTok – so is in fact the top ranked photo printing app.

PlanetArt is targeting revenue growth from a combination of growing the customer base (with much more scope to grow FreePrints) and encouraging the existing customer base to order more frequently and buy a wider range of products. Advertising costs are almost completely variable, with spend being dialled up or down depending on the cost of advertising at any given time, and the availability of cash. The division’s experience is that this has a direct relationship with the number of new users acquired.

To win new customers, PlanetArt focuses its advertising on Facebook, where it can use micro-targeting, as well as on Twitter and Pandora (internet radio). Occasionally, the company buys TV advertising. To retain and encourage existing customers to spend, the business sends app notifications and emails with special offers and runs a loyalty programme. It also has a ‘refer a friend’ scheme. The business makes use of existing FreePrints customer base to sell the Photobooks service.

The cost to acquire a FreePrints customer is low- to mid-single-digit euro, which, with a typical order value of €7–8, is covered in roughly nine months. Web-to-print undertakes limited advertising, focusing more on encouraging its existing customer base to place orders. The cost to acquire a new Web-to-print customer is around 10 times that of a FreePrints customer, but due to the higher average order value and higher gross margin, the payback is almost immediate.

Advertising for the India FreePrints service will be undertaken on a flexible basis, trying different methods to ascertain the most effective and starting with a modest expenditure until the most successful methods are confirmed.

PlanetArt outsources all printing to one printer in the US and one in the UK. In India, PlanetArt has set up a network of several printers to ensure national coverage. As the mobile app service is less seasonal, PlanetArt is able to provide good volumes through the year, not just at Christmas time. During the Christmas peak, PlanetArt can push delivery out from five to 10 days to ensure stable pricing. The business typically prints more than one million photos per day, and 30–50m per month. Cumulatively, it has printed more than one billion photos. The company estimates that the IT system can cope with roughly three times the current volume before any upgrades are required. The system can manage localisation if a new country is added.

In September 2017, a group of investors including Cap Investissement, the family office of Groupe Riccobono (a French industrial printer), invested €11.4m in PlanetArt in return for a 7.1% stake.

When this business was launched, the aim was to reach critical mass without burning significant amounts of cash. It has grown rapidly since launch, reducing the EBITDA loss every year, with FY17 EBITDA close to break-even and in fact reporting positive EBITDA in H117 and H118, helped by seasonal strength in Q2, ie calendar Q4. The target is for double-digit profitable growth.

Cost of sales consists of printing costs (including the cost of items such as mugs or t-shirts), shipping costs, and payment processing fees. FreePrints earns an estimated gross margin in the region of 35%, with the photo printing service earning an estimated 33–34% (we estimate 23–25% for basic photo printing, 60–65% for add-ons), and photobooks an estimated 40–45%. We estimate that Web-to-print generates gross margins of c 60–65%.

Operating costs include variable costs such as marketing spend, and others that are more fixed in nature: support, marketing staff (staff in the US as well as several people in Paris to manage European marketing), developers, general admin and share of corporate costs (based on revenues). We note that the business hires temps to cover increased support demands during the seasonal peak of the web-to-print business in November/December, which results in higher staff costs in H1.

The company has reported FY18 divisional revenues but will not report EBITDA profitability until 2 October when full results are released. PlanetArt revenues grew 37% y-o-y, or 47% on a constant currency basis. Growth reaccelerated in Q418 to 43% (51% constant currency), up from the 25% reported in Q318 (37% constant currency). We forecast a moderation of growth in FY19e and FY20e – this does not factor in material revenues from India. We assume that FreePrint revenues grow faster than Web-to-print. As the operating cost base is relatively fixed, aside from marketing costs, we forecast growth in EBITDA margins over FY18e–20e. We assume the majority of India start-up costs were incurred in FY18.

Claranova has been developing and selling consumer-focused software since the company was founded in the 1980s. It sells a mixture of third-party software (85–90% of revenues) and own-IP software (10–15%). The division sells more than 500 products from 200–300 licensors; software is typically from less well-known brands and would not include household names such as Adobe, Microsoft or Norton. The software falls broadly within one of the four categories:

The business has seen a decline in revenues in recent years, partly due to a process of weeding out unprofitable product lines. The division is now focused on reaching critical mass through acquisition and monetising traffic, which, combined with recent restructuring, should result in improved profitability.

The business employs several specialists who manage software developer relationships on a daily basis, including the types of products, the geographies in which they are available and the level of discounts that can be offered. Developers often start by supplying one product for one geography, then if the product proves popular, extend the contract to incorporate more products or geographies. The software is tested before Avanquest lists it for sale. It will stop selling a product if revenues are too low or if feedback indicates that the quality is not high enough.

Avanquest used to have more in-house developers, but refocused many of them on PlanetArt to develop the photo-printing services. The division therefore has a number of legacy products and uses freelancers to keep them up-to-date.

The division has a number of niche products where it has looked at the most commonly used functionality of popular software such as Photoshop, and developed a simplified version so that a consumer can use the software without being an expert. InPixio is an example of this kind of software. Niche products are developed on an opportunistic basis.

One final category of software is where Avanquest can see a need for certain functionality but does not want to develop it in-house. In this case, it will own the brand but license-in the software from a third party. Architect 3D is an example of this.

At the beginning of July, Claranova acquired 50.1% of a group of made up of three Canadian businesses: Adaware, Lulu Software and Upclick. Total consideration for the 50.1% stake is €26.9m; Claranova paid €9.9m in cash in initial consideration and has deferred consideration of €17m/$20m to pay within the next year. Avanquest expects to put in place debt of c €17m, and to repay the debt over five to six years out of the cash flows of the business. The group generated revenues of $34.7m/€30.8m and EBITDA of $5.3m/€4.7m (15.3% margin) in CY17. The remaining 49.9% of the group could be sold by the founders in return for Avanquest shares (exchange ratios not disclosed; dependent on certain performance conditions).

The table below summarises the products offered by each business. All software IP is owned by the businesses. Avanquest already has a good working relationship with the group – it already rebrands Soda PDF as Expert PDF and uses Upclick to process around half of its e-commerce transactions. The Adaware products should be complementary to Avanquest’s OneSafe PC Cleaner products.

Avanquest does not intend to change the Canadian companies’ existing business models and will maintain their brands. We expect some cost synergies from sharing of group infrastructure, but the main focus will be on maximising the opportunity from the combined customer base and internet traffic. The existing Avanquest business has seven million unique visitors per month, three million downloads per month, 30 million software products installed and a customer base of 14 million. Combined, the division has c 25 million unique visitors per month, 16 million monthly downloads, more than 500 million software products installed and a customer base of 40 million.

Avanquest has always been good at monetising emails, with revenue generated per 1,000 emails at more than twice the industry average. It also has a decent level of web traffic but much of this is paid for. Avanquest sees the opportunity to benefit from the acquired group’s expertise in traffic generation as well as cross-selling to the combined customer base. The division is also keen to phase out the use of its proprietary e-commerce platform and shift all e-commerce on to Upclick’s platform.

Taking into account the newly acquired businesses, Avanquest generates revenues in four different ways:

Avanquest used to sell nearly all of its products through major retailers. In many cases, this was a very cash-consumptive way to sell and also was no longer reflecting the way that consumers buy software. Three years ago, the business decided to progressively reduce its retail activities, and now only has limited retail activity in Germany and a larger presence in the US. As retailers in the US have shorter payment terms, this does not consume so much working capital for Avanquest, and also helps when signing up some third-party software suppliers. The main channels through which Avanquest sells now are:

Avanquest sells across Europe and North America, where there is sufficient ability to pay for software. In those regions where the cost of software could be prohibitive (South America, India, Africa), the business is considering whether it is possible to monetise traffic instead.

The market for consumer software is made up of:

Avanquest falls into this last category, along with companies such as Avast, Kape and IronSource. Avast (LSE-listed, market cap £2.5bn) and Kape (AIM-listed, market cap £199m) both sell cyber-security and PC hygiene tools and have been actively buying software providers in the space. IronSource is a private Israeli company selling monetisation and distribution tools for software and app developers. Its InstallCore software download tool is one of the most widely used and operates a similar model to Adaware’s H2O tool.

The company views Avanquest’s key skill as marketing, rather than software development. Through the Canadian acquisitions, it now has access to a wider product range that generates revenues in several different ways. In addition, the acquired software products were developed in-house so will earn a higher margin. Using the acquired businesses’ expertise in generating and monetising web traffic, the division expects to be able to return to organic growth. Avanquest has suggested that it would like to move more in the direction of the type of business operated by IAC, a US-listed media and internet company that owns 150 brands, including Ask.com, Dictionary.com, Dotdash, Investopedia, Match, Tinder, and Vimeo. IAC revenues arise from the traffic generated on its websites – either through subscription services (eg dating websites, Vimeo video services) or advertising. IAC’s Applications division is most similar to Adaware’s business – it provides browser extensions that enable users to run search queries directly from their browser tab, as well as mobile applications and device cleaner and security tools. In 2017, IAC generated $578m of revenues from its Applications division and $362m from its Publishing division. In our view, consumers have become used to receiving online services for free (for example, Facebook or free anti-virus tools) and it is harder to persuade them to pay for software upfront. Monetising consumer software sales via advertising or by offering freemium services is the direction in which the industry is moving and the acquisition of this group of companies should help Avanquest address this market shift.

The division would also consider additional acquisitions, targeting profitable companies with high levels of web traffic.

The existing Avanquest business has seen a gradual revenue decline, partly due to the discontinuation of unprofitable products. Exhibit 7 shows the quarterly revenue progression over the past three years – this business sees a seasonal peak in Q2 (ie CQ4). The cost of products (ie royalties paid to third-party software providers) ranges from 10–30% of sales. Other costs of sales include bank fees, distribution costs for physical goods and server hosting (c 15%), resulting in a gross margin of 60–65%. Operating costs break down as advertising (c 20%), marketing (c 20%), administrative (c 10%) and R&D (c 3%). The division operates with single IT, marketing and finance teams. The target for this business is for an EBITDA margin in the range of 5–6%.

The Canadian businesses operate at a much higher EBITDA (15.3% in CY17) as they develop their own software. We note that Avanquest already sells Soda PDF under the name Expert PDF, so consolidated revenues will need to reflect this and Avanquest will no longer incur the royalty payments to Lulu Software when selling Expert PDF.

On a pro-forma basis, the division expects to generate annual revenues of at least €65m at an EBITDA margin of c 10%. In the longer term, the division is targeting revenues of €100m at an EBITDA margin of 15–20%, taking into account €2–3m of synergies at the EBITDA level. Our forecasts reflect flat revenues for the original Avanquest business, and growth of the acquired business averaging out at 6.6% in FY19e and 9.8% in FY20e, as the division learns how to accelerate the growth of the Adaware business in particular.

Claranova has developed a management platform for IoT applications. Its IoT in a Box turnkey solution is designed to enable businesses and consumers to remotely monitor assets.

After developing the platform in 2015, the business decided to encourage use of the technology by launching a developer tool, Cayenne, in early 2016. Developers use the drag-and-drop IoT project builder to develop prototypes. Cayenne can be used on Raspberry Pi and Arduino boards and is designed to work on LoRaWAN.1 The Cayenne developer tool has since been downloaded more than 500,000 times. myDevices also runs a manufacturer programme called Cayenne IoT Ready, which provides a process for hardware manufacturers to integrate their products into the Cayenne platform. Currently, the platform supports more than 200 different devices.

myDevices plans to monetise the platform by selling its IoT in a Box solutions on a B2B basis through telecom operators, system integrators and other resellers. The standard IoT in a Box solution contains the following:

The diagram below shows how a typical IoT network is structured.

The solution is designed to be plug-and-play. The user first downloads the myDevices app, then plugs in the gateway and scans a QR code on the gateway, which registers it on to the network. Then all sensors are scanned via QR code to add them to the network and positioned where necessary. Within the app, the user then edits operating ranges for each sensor, so that SMS and/or email alerts can be sent if any sensor operates outside of the target range. The user can schedule regular reports and can access detailed sensor history via the app. The app also provides the ability to visualise the location of every sensor.

Customers can ask for the IoT in a Box solution to be customised, using the gateway and sensors of choice. myDevices works with a number of hardware suppliers to ensure a wide range of gateways and sensors are available to suit every requirement.

myDevices has already developed white-label solutions for temperature and humidity monitoring, property monitoring, air quality monitoring and rodent control, with multiple versions available for a variety of different users, eg restaurants, supermarkets, commercial buildings, holiday rentals, perishable food manufacturing and healthcare.

The LoRa radio frequency protocol was designed by chip-maker Semtech, which then founded the LoRa alliance in 2015. The LoRa alliance is dedicated to the standardisation of low-power, wide area networks and the global promotion of the LoRaWAN open standard. myDevices is a member of the LoRa alliance, alongside 500 other members including chip manufacturers, gateway and sensor manufacturers, software companies, system integrators and telecom companies. In January 2017, Semtech invested $3m in myDevices in return for a 13% stake.

The IoT market is in a strong growth phase – IDC estimates that total spending on IoT hardware, software, services and connectivity was c $800bn in 2017 and is likely to grow at a CAGR of c 15% to reach $1.4tn by 2021. A large proportion of the IoT market is dominated by enterprises spending on applications in the manufacturing, automotive, logistics, utilities and smart cities sectors. The consumer IoT market includes applications such as wearables (eg Fitbit, Apple Watch) and domestic automation (eg Nest temperature controls, Ring home security). myDevices is positioned somewhere between the two markets, with a focus on simplifying the use of IoT for SMEs.

Research from BCG forecasts incremental spending by companies on IoT of €250bn by 2020, over and above normal technology spending. Of this, it expects €15bn to be spent on IoT platforms. BCG’s view is that a complete IoT platform should offer three capabilities:

Unlike in some other markets, no one platform provider is dominant. In 2017, BCG counted more than 400 different IoT platform providers, of which c 50 offered all three capabilities. Providers of IoT platforms include large hardware and/or software vendors such as Bosch, Cisco, GE, IBM, Microsoft, PTC, SAP, Siemens and Software AG, as well as smaller IoT platform-focused companies such as Ayla Networks, EVRYTHNG, relayr, Telit Communications and thethings.IO. By focusing on the SME niche, where ease of use is the key selling point, myDevices should avoid competing against the larger platform providers that focus on supporting enterprises with complex IoT networks.

As this is effectively a start-up business, myDevices is taking a flexible approach to monetising its technology. It has signed two major contracts with mobile network operators (MNOs). MNOs are offering IoT applications to their SME and consumer subscribers, which are typically sold as add-on services on monthly contracts. This is an attractive market for MNOs, at it represents an additional use for their cellular networks and should improve customer retention. IoT in a Box is also available for resellers and distributors.

In January, Claranova announced that Sprint (fourth-largest MNO in the US, owned by SoftBank) had signed up to use the myDevices platform for its IoT offering, called Sprint IoT Factory; the IoT Factory launched in May.2 Customers can buy off-the-shelf solutions or use the platform to develop their own solutions. myDevices is providing the technology and is responsible for managing the webstore/marketplace as well as managing the ecosystem, which includes taking care of deliveries of hardware, in return for a share of revenue. Sprint is responsible for sales and marketing, network provision, support and payment. In FY18, Sprint contributed $2m/€1.7m of the division’s revenues.

In August 2017, myDevices signed a partnership agreement with Dr Peng, the fourth-largest Chinese MNO, to provide localisation and distribution of the Cayenne platform under licence in China. Dr Peng will manage the scheme and will pay royalties to myDevices. At the same time, Dr Peng took a minority stake in myDevices, investing $3.5m to obtain a 16% stake. In December 2017, myDevices announced that IoT in a Box and Cayenne had been launched in China, with customised solutions in Mandarin available under the Peng Devices brand.

Exhibit 10 shows the quarterly revenue progression over the past three years. The division is still generating some revenues from legacy solutions (we estimate c 30% of FY18 revenues); this should decline to zero over the next two to three years. The division has a headcount of c 30, which includes support engineers as well as staff to manage the relationships with Dr Peng and Sprint. The company does not anticipate growing headcount materially unless there is a significant uplift in demand. The division uses Amazon Web Services for storage of all data uploaded to the platform. We model a relatively flat cost base over the three-year forecast period, with rising revenues as the Sprint relationship progresses. We have not factored in material revenues from the Dr Peng relationship or reseller agreements – these could add upside to our forecasts.

In addition to the usual competitive pressures and the requirement to keep abreast of technology, our forecasts and the share price are sensitive to the following factors:

Exhibit 12 shows our divisional forecasts down to the EBITDA level. We note that all central costs are allocated to the divisions. The company has low capex requirements, hence depreciation is very low. The company has not capitalised development costs since FY16, so these are nearly completely amortised.

Net financial costs take into account the convertible bond (ORNANE) issued on 19 June. This totalled €29m at an annual interest rate of 5%. We have treated the €17m still owing for the Canadian acquisition as long-term debt and assumed a notional interest charge of 5% pa.

We have assumed a 23% rate for tax for FY19e and FY20e, as the bulk of profits are likely to come from the US and the UK with corporate tax rates of 21% and 19%, respectively. According to the FY17 annual report, the company has unused tax losses of c €4m in Germany, c $45m in the US and c €52m in France, so the amount of tax paid in the next few years is likely to be very low.

As explained earlier in this report, there are minority investors in each of the three divisions. This results in a material minority interest deduction from net income. The company does not plan to pay a dividend.

At the end of FY18, the company held 139k shares in treasury. As part of a new share buyback scheme, the company bought back 1.18m shares in July. The programme allows for a maximum of 7m shares to be bought back, at a price of up to €1, up to a maximum total cost of €5m.

The company typically generates a cash inflow from working capital – both the PlanetArt and Avanquest businesses receive cash from customers in advance of paying suppliers. As noted above, capex requirements are low and the company no longer capitalises development costs.

The convertible bond issued in June consisted of 26.36m bonds at a par value of €1.1 per bond, resulting in proceeds of €29m. The bonds are redeemable at par on 1 July 2023. The bondholders have the right to convert the bonds from 19 June 2018 to the 29th trading day before the normal or early redemption date, at a rate of one share per bond. Claranova can opt to satisfy the conversion entirely in cash, entirely in new/existing shares or a combination of both.

In Exhibit 13, we show Claranova’s valuation and operating metrics versus four peer groups: photo printing companies, online software retailers, IoT companies and French software companies. As Claranova is a combination of the first three groups and there are material minority investors in each business, we use a sum-of-the-parts approach to fully capture the value of the group.

Based solely on average peer group EV/sales multiples for FY19e (1.5x for PlanetArt, 4.2x for Avanquest and 1.2x for myDevices), we arrive at a sum-of-the-parts valuation for Claranova of €0.96 per share. However, we believe that these multiples are not reflective of the shape and growth prospects for each division. In Exhibit 14, our sum-of-the-parts valuation is based on adjusted FY19e EV/sales multiples by division, as discussed in more detail below. The EV/sales multiple for FY20e and the EV/EBITDA multiples for FY19e and FY20e are implied based on the EV/sales multiple used for FY19e.

We have used an EV/sales multiple for PlanetArt at a 50% premium to its peer group as we are forecasting revenue growth (all organic) well above the average for the peer group. We note that Shutterfly’s 70% revenue growth in FY19e reflects its acquisition of Lifetouch earlier this year. This results in an implied EV/EBITDA multiple at a premium to peers, reflecting PlanetArt’s lower EBITDA margins. As PlanetArt has a fully outsourced production model, it has minimal depreciation and amortisation, and we would expect its EBIT margin to be very close to its EBITDA margin. On this basis, PlanetArt’s profitability is much closer to that of its peers.

We have used a multiple for Avanquest that is at a large discount to its peers (and to the transactions in Exhibit 14). Looking at organic revenue growth in FY20, Avanquest is likely to grow at a slower rate than its peers. In addition, it is generating substantially lower profitability than its peers on an EBITDA and EBIT margin basis. We note that the Canadian group of businesses was acquired at a trailing price/sales multiple of c 1.8x. We would expect that as part of a larger group, Avanquest should be able to accelerate the growth of the acquired businesses as well as generate cost synergies.

For myDevices, we have used an EV/sales multiple for FY19 that is at a substantial premium to its listed peer group. However, this drops to a more reasonable multiple in FY20, reflecting the acceleration in revenues. We note that the number of pure-play listed peers for this market is low, and their forecast growth is substantially lower than for myDevices. We therefore think it is more appropriate to apply a multiple based on recent transactions (see Exhibit 15), which show that IoT platforms command price/sales multiples anywhere between 4.2–8.9x sales. We note that the first minority investment in myDevices by Semtech in January 2017 valued the business at $24.3m post-money (€20.9m).

Clearly, if the company does not achieve our forecasts, there could be downside to the share price. Factors that could provide upside to the valuation include faster-than-expected growth of the Avanquest business (which, in turn, is likely to lead to better profitability), material upside from the launch of FreePrints in India and new contracts with mobile operators for myDevices.

In the table below, we summarise recent transactions in each of the three markets. In both the IoT and consumer software markets, the range of multiples is very wide, reflecting the differing growth rates of the acquired businesses. We note also that definitive information regarding historical and forecast growth is not available for most of these transactions.