Esker — Favouring growth over short-term margin boost

Esker reported Q421/FY21 revenue in January. Revenue was therefore in line with our forecast, up 19% y-o-y (H121: +18.6%, H221: +19.3%). While EBITDA grew 17% y-o-y and normalised operating profit grew 21% y-o-y, they were both below our forecasts, mainly due to higher-than-expected staff costs. At €84.1m compared to our €82.7m forecast, staff costs increased 22% y-o-y. Headcount stood at 840 at year-end, up 10% from the end of FY20. Other than the increase in heads, staff costs were elevated due to:

The reported operating margin was 12.4% for FY21, 0.3pp higher y-o-y. The margin in H121 was 14.2% implying a margin of 10.8% in H221, explained by the increases in staff costs described above.

The joint venture with Quadient contributed €1.0m, up from €0.5m a year ago and ahead of our €0.8m forecast. Net finance income of €0.2m was also ahead of our €0.1m forecast. Overall normalised diluted EPS was 7.6% below our forecast and up 20.2% y-o-y.

The company closed the year with net cash of €38.6m (FY20: €30.3m), made up of gross cash of €35.0m, cash-like investments classed as fixed assets of €4.8m and debt of €1.2m (COVID-19-related loans worth €14m were repaid in the year).

Esker reported group revenue growth of 19% y-o-y, with 23% growth for the SaaS part of the business (subscription licensing and volume-related revenue), 19% growth in implementation services and a 10% decline in legacy product sales. SaaS revenue growth rebounded from the 14% reported in FY20, which was affected by COVID-19 restrictions. Implementation service revenue growth reflected the increase in signed contracts during the year.

The company received bookings worth €3.65m in ARR in Q421, slightly down from the €3.78m in Q420, which was a record quarter for Esker and reflected a catch-up in orders after pandemic-related delays earlier in FY20. The company noted that the resurgence of the pandemic delayed the signing of some contracts in Q421. The ARR of orders received in FY21 was €13.2m, 25% higher year-on-year. The lifetime value of orders received in FY21 was €48.0m, 38% higher than in FY20 (this includes the value of SaaS subscriptions only, with volume-related fees excluded from this measure as they are variable). This implies an average contract length of 3.6 years for contracts signed in FY21 compared to 3.2 years in FY20.

The company has been busy over the last six months releasing product upgrades and entering into strategic partnerships.

In October, it launched Esker Pay, a comprehensive portfolio of integrated payment solutions that are fully integrated with Esker’s Procure-to-Pay and Order-to-Cash suites. Esker has partnered with a number of fintechs including Corpay, Jack Henry, Payroc, Pytheas Capital Advisors, SisID, SlimPay, Stripe and Wind River Financial. Payment services offered include bank cards, direct debits, national or international bank transfers, automated supplier payments, supply chain financing, collection of discounts for early payment or negotiation of discounts in real time, and verification of bank details.

Esker has released a new solution to automate claims and deductions for Order-to-Cash. This allows customer services and finance departments to quickly process complaints and track partial payments (for example, when amounts are received after deductions for things such as marketing contributions, penalty fees or promotional discounts). Deductions approved in the Esker software are automatically posted to the ERP system as credit notes or posted to a general account.

The company launched a customer inquiries management solution add-on to help customer service departments address inquiries faster and free-up staff to focus on customer-facing activities. This integrates with Esker’s Order Management solution. The solution serves as a digital assistant for the customer service email inbox, using artificial intelligence to classify and route messages to the right recipient or right process.

Esker has entered into a strategic partnership with LSQ, a US-based provider of solutions to optimise working capital. Esker will integrate LSQ FastTrack finance solutions with Esker Pay and Esker’s Procure-to-Pay solution, so that Esker software users can directly access supply chain financing and dynamic discounting. As part of the deal, Esker has invested in a less than 1% stake in LSQ for €3.5m.

Esker recently signed a partnership with Fujitsu Asia, who will provide consultation, implementation and support for Esker’s Procure-to-Pay and Order-to-Cash suites to customers in Singapore. Management is optimistic this relationship will help drive sales in Asia Pacific, estimating that in two years, Fujitsu Asia could generate a third of orders in the region.

We previously wrote about Esker’s planned acquisition of Market Dojo (Positive outlook). Management expects deal to complete by the end of this quarter or early in Q2.

The company expects to achieve organic revenue of c €155m for FY22 (+16% y-o-y) with stable profitability (we assume this refers to margin rather than absolute value). The company maintained its target operating margin range of 12–15%. We have slightly reduced the revenue contribution from Market Dojo, shifting our estimate of the deal completion date from 1 March to 1 April. We have increased our forecasts for the cost base in FY22 and FY23, reflecting the higher level of staff costs in FY21. In our view, the company is more focused on driving sustainable revenue growth than on expanding operating margins and will reinvest profits above the 12–15% range to accelerate growth. Even within the range, the company tends to err on the side of exploiting opportunities rather than enhancing margins. We continue to forecast operating margins within the company’s guidance range, albeit at the lower end of the range. Our normalised diluted EPS forecasts are reduced by 10.2% for FY22 and 4.6% for FY23.

The stock has had a rollercoaster ride over the last few years. Over 2020, the share price rose 93% (from €92 to €178), and over 2021, gained 103% (from €178 to €361.5, its peak). By 24 March, the stock had declined 46%, partly due to the shift from growth to value stocks. Over the same period, 63 US SaaS companies that we follow declined on average 17% and the Euronext Growth AllShare index declined 13% (after a flat performance in 2021). The stock declined a further 17% on 25 March, reacting to lower-than-expected profitability in H221.

We have compared Esker’s valuation to a group of listed global DPA software companies and to French-listed small-cap software companies (Exhibit 4). We have also included aggregate data for a group of US SaaS software companies. We note that many of the companies in the first two peer groups are not predominantly SaaS companies, whereas Esker has been operating an SaaS business model for well over a decade.

US SaaS companies on average are growing faster than Esker, although they are generating operating margins below the level of Esker. The typical growth path for US SaaS companies involves investing heavily in sales and marketing to gain market share as fast as possible, with little focus on achieving profitability in the short term. Esker’s model sits somewhere between low-growth, high-profitability on-premise software businesses and US SaaS companies’ high-growth operating model, aiming for a happy medium of double-digit revenue growth while achieving mid-teen operating margins.

We believe that Esker deserves a premium rating compared to non-SaaS peers as its c 80% level of recurring revenue provides good visibility, it has the potential for multi-year profitable double-digit growth and has a strong balance sheet that does not require additional funding to support growth.

We have performed a reverse discounted cashflow analysis, using FY22 and FY23 forecasts, a WACC of 8% and a long-term growth rate of 3%. The current share price implies a CAGR in revenue of 16.7% from FY23–FY31 and an average operating margin of 16.2% over the same period. The table below shows how the per share value varies if WACC, revenue growth and EBITDA margin are increased/decreased by 1%.