StatPro Group — Margins to expand with scale and growth

StatPro’s software products are used by asset managers to measure the performance and risk profile of their funds under management. StatPro’s flagship product, StatPro Revolution, is a multi-tenant cloud service (or SaaS) application. The group has c 500 customers, including c 115 of the world’s top 500 asset managers, and the largest customer generates less than 5% of revenues. While the group's products have been primarily used for middle office functions, the acquisition of Delta in 2017 significantly extended the offering into front offices. The acquisition of ODDO BHF’s regulatory risk services bureau in 2018 means the group can now offer a complete managed service, enabling customers to outsource their entire performance and risk functions to StatPro.

StatPro has always operated a rental model and contracts are typically for three years. The only non-recurring revenues are a small amount of professional services. At end-2018, the group’s annualised recurring revenues (ARR) stood at £55.7m, underpinning our forecasts, of which €33.4m were from cloud services – the primary growth segment. Operating margins dipped from c 25% in FY09 to sub-10% over FY14–17 as management took the decision to invest in an industry-leading cloud platform, which temporarily expanded the cost base. Nevertheless, StatPro is now emerging from the end of this investment phase and margins are now expanding sharply (up 320bp to 13.2% in FY18). We forecast margin improvements to continue as the platform scales and c £4m of costs savings are realised in the medium term from platform streamlining.

We highlight three key sensitivities: end-market vibrancy (mounting fee pressures and rising costs is spurring closures and mergers among asset management firms, though StatPro is largely insulated by its per-portfolio revenue model), competition (StatPro holds a significant first-mover advantage and its cloud products are difficult to replicate) and sector evolution (there is a risk that large tech companies could enter the asset management space, and that the robo/online advisory industry could pose a threat to the traditional asset management industry).

The active M&A environment continues to run unabated across the financial software sector with SS&C and ION acting as major consolidators. Most notably, the group’s key competitor, BISAM, was acquired by FactSet for 7.3x sales in March 2017, which translates to a price of c £6 for StatPro. While StatPro is a small company, it has spent a decade transitioning to the cloud and has the only cloud-based, multi-tenant portfolio analytics solution that can provide such a broad range of functions across performance, risk and regulation. With the heavy investment now beginning to pay off, we believe StatPro remains an attractive investment at 1.6x FY20 revenues.

StatPro is a specialist cloud-based analytics software provider, targeting the global asset management industry. The group’s flagship solution, StatPro Revolution, is an integrated, cloud-based performance and risk platform designed to increase productivity and lower costs. StatPro Revolution is used both for internal purposes and for client reporting. The cloud software includes functionality across both equity and fixed income, for performance measurement, attribution analysis and risk management. Cloud-based technology enables a software vendor to increase its operational efficiency while allowing its clients to handle a larger and more complex workload, without increasing headcount or technology costs.

The company has c 500 clients, including c 115 of the world’s top 500 fund managers and 10 of the top 15. The 500 clients also include c 50 asset service providers, which can be viewed as StatPro Revolution resellers/distributors. However, they act as customers and handle their own support.

From January, the business operates from three new divisions: Revolution (analytics division), Source: StatPro (data division) and Infovest (integration and data management division). This structure will make the operations of the business clearer, provide distinct divisional management focus and enable growth in each division based on specific divisional priorities.

Revolution is the analytics division, comprising the cloud-based Revolution along with Delta and Alpha, which are being integrated into it. It also includes the legacy software modules of StatPro Seven, which are migrating to the cloud along with StatPro Composites (SC), the group’s traditional software module, which enables the aggregation of individual portfolios representing a similar investment mandate and enables compliance with GIPS.

The division also includes the group’s expanded managed services business. In order to use the SaaS option, clients require headcount to operate the software. However, it is typically more cost effective for small and medium-sized institutions to outsource this function to specialists (eg fund administrators or StatPro), and to focus on analysis, trade decision making and execution.

StatPro: Source is the data division, with services including data revenues from market data, managed services, evaluated bond prices, index services, yield-curves and complex asset pricing.

Infovest offers integration and data management services using the group’s data warehouse, ETL (‘Extract, Transform and Load’) and reporting tool, regulatory post-trade compliance tool StatPro Portfolio Manager and StatPro Enterprise Reporting.

StatPro has expanded its product suite and geographic position through a series of acquisitions over its 25-year history. In 2008, StatPro took the decision to build a cloud computing product. To achieve this, management exploited the group’s domain knowledge, technical skills and access to data to develop an entirely new software platform from scratch, and this product is now the group’s flagship solution. The development and establishment of StatPro Revolution has focused management time for many years and the transition to cloud is a painful process for any software business to undergo. Now StatPro is emerging as a much more efficient and scalable business with a solution at the forefront of the industry, and c 60% of end-2018 run-rate revenues are from Revolution. Management is now shifting its focus on driving the growth, exploiting the group’s high-quality client base, people talent and global office structure. The focus is on organic growth and increasing margins along with selected acquisitions.

Acquisitions form a key plank of StatPro’s strategy. Over the past three years it acquired UBS Delta for €13.05m in May 2017, InfoVest (100% owned since February this year) and Investor Analytics (renamed StatPro Revolution Alpha). These acquisitions have cemented StatPro’s position at the forefront of the financial analytics space and help to accelerate the scalability of the platform. While strategically targeting accelerating organic growth, management will continue to target acquisitions consistent with its strategy and has the financial capability to do so.

The acquisition of Delta was a tremendous coup for StatPro, as it was able to acquire the business on very favourable terms (we estimated at 0.8x sales). This was because UBS Delta’s technology needed to be refreshed and it was increasingly difficult for non-software businesses to maintain an application. The £3.6m of outstanding Delta acquisition liabilities are now payable in FY22. There will also be c £2m of cost savings when the transition has completed, at which point StatPro will no longer have to pay the vendor, UBS, support fees. During 2018 StatPro resolved issues so that there will be a seamless transition for all customers to Revolution.

In mid-2018, StatPro acquired ODDO BHF’s regulatory risk services bureau, for an undisclosed cash sum. The acquisition added a full managed service for regulatory risk reporting with the unit producing AIMFD reports, UCITS reports, liquidity reports, liquidity risk reports and Solvency 2 reports. The unit used a legacy technology that has transitioned to the StatPro Revolution platform and resulted in significant cost savings and a modernised solution. The unit has operated in the Germany and Luxembourg markets for more than a decade and it has 10 asset management and fund administration clients. StatPro plans to expand the service to other regions.

StatPro's products are targeted at the global wealth management industry, which relies on assets under management (AuM) to provide a source of revenue from which to extract fees. StatPro provides solutions that enable its clients to increase their AuM and improve profit margins.

The outlook for fund managers has been showing improvements with global AuM rising by 7% to $79.2tn in 2017, according to Boston Consulting Group, compared with 7% growth in 2016 and 1% growth in 2015. Growth in AuM comes from net inflows of capital from clients along with the market growth of asset prices.

Significant pressure on management fees has been encouraging asset managers to seek to manage their costs while increasing their service levels. Meanwhile, the rise in passive investing and the pressure on fees has been driving significant M&A activity in the investment management industry. Sector M&A reached a record 253 deals in 2018 (Sandler O’Neill), up from 210 in 2017 and surpassing the previous record of 243 in 2007.

In its Global Asset Management 2018 The Digital Metamorphosis report, BCG suggests that ‘Five years from now, asset managers will look very different from the way they look now, in part because of digital innovation and in part owing to structural shifts in the market’. StatPro is the first cloud-based analytics platform targeting the sector and is therefore well-placed to address the market. This is due to the scalability and efficiency of a native cloud platform. The group’s cloud solutions offer greater flexibility, along with evolving development, exemplified by self-service reports, configurable dashboards (which enable clients to specify precisely what each user can see) and the ability to link to other systems with APIs (application programming interface). The cloud solutions can also take advantage of elastic computing power.

StatPro is positioning itself to benefit from the outsourcing shift in the asset management industry by targeting asset service providers that resell the group’s software. According to StatPro, only c 10% of the crucial US market is outsourced, compared to c 95% in Australia, and there are strong commercial pressures that are encouraging asset managers to outsource. Indeed, that is why competitors that only supply fund managers are vulnerable.

StatPro is the only SaaS provider of performance, attribution and risk solutions and it also offers APIs and a full managed service. StatPro stands to benefit as customers increasingly become more relaxed about operating in the cloud. Exhibit 4 highlights the key areas for StatPro’s sales focus.

Reseller channel (asset service providers). Around 20% of group revenues are from the reseller channel, principally fund administrators. StatPro expects this channel to continue to grow and to be a major factor in driving organic growth.

Outsourced managed services. StatPro sees this as a significant driver of growth, since many smaller asset service providers lack the technical skills and business knowledge to run StatPro’s software. Exhibit 5 shows how the outsourced managed service utilises all three of the group’s divisions, while a third-party approach, via a fund administrator, utilises two divisions.

Under-utilised data assets. The group’s data business is a critical component of software services. As the focus has been on the cloud strategy, management has not spent time on commercialising the group’s data assets. However, the group has now appointed a CEO for its Source: StatPro data division who will concentrate on commercialising these assets. The analogy of stock exchanges growing their data assets into significant cash cows gives some indication of the potential here.

Acquisitions: Scaling up the platform is expected to boost margins. The acquisitions of Delta and the regulatory service bureau from ODDO BHF highlight the opportunities that are available to pick up assets at attractive prices to bolt on to the business.

StatPro has two main sets of competitors: the major data suppliers (notably Bloomberg and FactSet) and smaller specialist players (including BISAM, now owned by FactSet), SS&C (Sylvan, Anova and HiPortfolio), Eagle (owned by BNY Mellon) and others. The data suppliers use mainframe systems and are multi-tenant by definition, but these platforms are much more expensive to run. Also, data suppliers lack data controls and users need to ensure the data are accurate before use.

StatPro’s Performance module runs off Amazon Cloud, which means users can leverage vast processing (CPU) power when required so data can be processed at very high speed, while mainframe systems and traditional software installations can only use the CPU power on their systems. Most established players lack a pure cloud solution. While start-ups are likely to embrace the cloud, there are significant barriers to entry: business knowledge, technological know-how and, crucially, the data (which need to cover all assets and be accurate).

In the risk space, StatPro competes with heavyweights MSCI (RiskMetrics) and SunGard (owned by FIS), as well as a number of smaller players.

StatPro has always operated a rental model, with payments in advance, meaning the model is highly cash generative. A key objective has been to grow its annualised recurring revenue book, which has begun to accelerate, with the help of acquisitions, as shown in Exhibit 8. StatPro sells its software on a per-portfolio basis (similar to a per-user model) with a minimum subscription of around $30–40k. Sales cycles are typically six to nine months and StatPro aims to lock clients into multi-year deals; contract terms are typically three years. Taking professional services is typically recommended to ensure that customers are making full use of the products.

StatPro sells directly to fund managers and uses the indirect sales channel, via asset service providers. StatPro has a team of 20 salespeople primarily focused on the direct sales channel. The strategy has evolved as Revolution has gained in sophistication, with the group hiring more senior salespeople. The team operates out of North America, Europe (London) and Asia-Pacific (Sydney).

Direct channel: targeting investment managers of all types and sizes as they look to replace legacy technology and improve their digital distribution strategy. Profit margin pressure and competition are forcing asset managers to look at their technology footprint to ensure they are efficient and allowing the business to focus on core operations and clients.

Indirect channel: primarily focused on fund administrators that are ‘gate keepers’ to large pools of portfolios. These third parties effectively outsource their IT to StatPro, implementing the solution on a white-label basis. Historically, many of these players spent significant sums developing their own in-house solutions, which cost a lot to maintain. StatPro Revolution makes these solutions obsolete.

As StatPro Revolution gains scale, StatPro believes it will increasingly benefit from the viral effect of people sharing portfolio access with each other.

Group revenue grew by 11%, or 13% at constant currencies, to £54.8m (we forecast £54.7m), helped by six months’ contribution from the ODDO-BHF risk services acquisition. Overall organic growth was flat. Adjusted operating profit rose by 47% to £7.2m, with the operating margin lifting by 320bp to 13.2%.

While the gross margin (after cost of services) dipped in FY18, management seeks to drive the margin higher as the business scales. It also expects R&D/sales to decline as the business scales. Sales and marketing costs have declined as the sales headcount slipped by three to 20, and the fund administrator (reseller) channel continues to gain in importance.

ARR grew 5% to £55.7m, driven by the acquisition of ODDO-BHF risk services and by the 4% organic growth in ARR in StatPro Revolution, while organic growth was 1%. Adjusted earnings per share rose 26% to 7.3p. The annual dividend was maintained at 2.9p.

There were acquisition-related restructuring costs of £2.98m, of which £1.27m primarily relates to the acquisition of the regulatory risk service from ODD-BHF while £1.71m related to the restructuring of the core business as part of the creation of three divisional operating units.

Exhibit 9 shows the ARR distribution profile for StatPro Revolution. The average ARR per client has continued to rise as the group continues to shift away from smaller customers (StatPro has a minimum price of $18k and is trying to encourage the small customers to take additional services) and as its asset service provider resellers take more portfolios.

StatPro introduced a set of SaaS-based KPIs in 2015. The average cost of acquiring customers is calculated by dividing the sales and marketing spend by the number of new customers. The increase in the last two years, along with the increase in average ARR per customer, reflects the focus on larger customers. The implied customer lifetime is 1 divided by the three-year trailing churn rate, which stands at 11% (FY18’s churn rate was 8%). The implied customer lifetime value is the implied customer lifetime multiplied by the ARR per customer. The data show the impact of the inclusion of Delta, which has provided an additional boost to both the cost of acquiring customers and revenue per customer, and there has also been an increase in churn. The aim is to boost the LTV:CAC, ratio which was a highly respectable 8.5 at FY18. This means that the value generated from a typical customer is 8.5x the cost of acquiring a customer; a ratio of 3 is seen as minimum in the SaaS industry and 5 is seen as good.

StatPro noted that ‘2018 ended strongly, providing good visibility into the first half of 2019 with a solid pipeline of well-qualified prospects. The group will maintain its focus on improving margins in the current year and continues to trade in line with expectations.’ The focus is on organic growth, increasing margins along with selected acquisitions. A key determinant of the outlook will be the impact of the new group structure, with the three new divisions providing greater clarity along with the potential to drive more out of the group’s data assets.

In early April, StatPro announced a $1.2m contract extension for Revolution via a major fund administrator. This shows the fund administration channel is continuing to gain traction and StatPro says it expects to see further growth from major fund administrators during the course of the year.

We have maintained our revenue forecasts. However, we have amended the revenue mix, which reflects the strength of InfoVest, and we have introduced FY21. Our forecasts reflect 4.2%, 5.2% and 5.4% organic growth for FY19, FY20 and FY21. We have cut our depreciation forecasts while increasing interest forecasts and hence our EPS forecasts are broadly maintained. We forecast operating margins to rise by 40bp in FY19, 100bp in FY20 and 200bp in FY21, driven by the scalability of the platform. We also note that in the medium term the group could potentially generate c £4m in annual cost savings from streamlining its platforms: c £2m when the transition of Delta to Revolution has completed (which covers support functions that are currently handled by UBS) and £2m (primarily from hosting costs) when the StatPro Seven transition is completed.

Revenues by category: we forecast traditional software revenue to decline by £2.0m annually. This largely reflects the conversions to Revolution. We forecast Revolution to jump by 16% in FY19, 14% in FY20 and 13% in FY21, driven by organic growth, conversions and a full year contribution from the regulatory risk service bureau acquisition in FY19. We forecast data revenues to grow by 5% in FY19 and by 4.5% in FY20, aided by the new initiatives to exploit the data IP. We forecast professional services to grow at 2% pa.

Costs: we forecast operating costs (excluding net capitalisation of development costs) to rise by 4% to £19.1m in FY19, by 4% to £50.8m in FY20 and by 3% to £52.3m in FY21.

We have reduced our FY19 and FY20 net debt forecasts, as we now forecast the remaining c £3.6m acquisition liabilities for Delta to be settled in FY22. Consequently, we now forecast the group to end FY19 with net debt of £21.2m (previously £22.6m), which falls to £16.5m a year later (£20.4m).

Investment: we assume the group spends 15.3% of revenue on R&D in FY19, declining by 37.5bp per annum over the forecast period, of which c 73% is capitalised and amortised over three years.

Tax: we assume a 15% tax rate in FY19, rising to 19% in FY20 and to 20% in FY21.

FY18 operating cash flow jumped by 20% to £12.8m, which follows a 43% rise in the previous year. After interest of £1.9m, tax of £0.8m and capitalised development costs of £6.9m and purchase of PPE of £0.9m, free cash flow was £2.4m, up from £2.1m in FY17. Excluding acquisition-related restructuring costs of £1.9m, the free cash flow was £4.5m, compared with £5.2m in FY17. After £3.4m of acquisition costs, £0.1m of share issues, £2.0m of dividends and £1.6m of currency movements, net debt increased by £4.4m to £24.6m.

For 2019 we estimate operating cash flow will rise by 22% to £15.7m, comfortably accommodating net interest, tax and capex outlays of £10.0m. Dividend payments of £1.9m and acquisition expenditures of £0.4m (final c €0.4m payment for the regulatory risk bureau of ODDO-BHF) lead to our expectation of net debt falling by £3.5m to £21.2m as at the end-FY19. There are also €4.25m (£3.6m) of acquisition liabilities relating to Delta that are due to be settled in FY22.

The group’s asset management customer base is one of the most high-beta sectors in the market and has been undergoing significant consolidation. Robo-advisers have been entering the market and there is a threat that tech giants could also do so. However, StatPro took the bold decision a decade ago to transition its business model to the cloud and, following years of heavy investment, its technology platform is industry leading and comfortably ahead of its major peers.

We highlight the following sensitivities:

StatPro is a rare example of a traditional software company that has successfully transitioned to the cloud, and, indeed, is one of the few predominantly cloud companies quoted in London. In addition, it is a rare cloud software business in the quoted financial software space and, as far as we are aware, unique in the asset management vertical.

While the stock is exposed to the volatile asset management sectors, this is tempered by the fact that 96% of group revenues are recurring in nature and 60% of the ARR is now cloud services (or SaaS). StatPro has always been conservatively financed, and has a reputation for generating healthy cash flows, having generated £114m of operating cash flow and £33m of free cash flow over the last 13 years. These numbers are after exceptional costs, which includes £1.9m in FY18.

We highlight the following points on the group’s valuation.

Sector M&A: M&A activity remains elevated in the financial software industry with Deutsche Borse in recent days announcing the acquisition of privately owned Axioma, a StatPro competitor in the risk space, for $850m or c 8.5x annual contract value (ACV) revenues. Deutsche Borse plans to combine Axioma with its index business, which will result in c €30m of pre-tax synergies. While Axioma generated 23% ACV CAGR since 2010, we understand that it is loss making. Axioma operates predominantly a traditional software business model and has a nascent cloud platform.

SS&C bought Eze Software (31 July 2018) for $1.45bn or c 5.2x revenues, while State Street acquired Charles River (20 July 2018) for $2.6bn or c 8.7x revenues. SS&C has been the key sector consolidator, making a string of acquisitions including Advent and DST and also attempted to acquire Fidessa.

FY17 saw a number of transactions that make StatPro look attractively priced. Key competitor BISAM was acquired by FactSet in March for $205.2m or 7.3x sales. Separately, LSE acquired Yield Book (a key competitor of Delta) along with Citi Fixed Income Indices from Citi for 6.4x sales, although we understand that majority of the $685m price related to the indices. Additionally, in September 2017, Nasdaq announced the acquisition of eVestment, a subscription-based analytics and content provider to asset managers, for $705m, or c 8.7x FY17 revenues.

Across the broader financial software sector, M&A has been very active, eg ION has acquired Openlink and Fidessa (for c 4x revenues) and BlackRock has acquired a majority stake in the financial and risk business of Thomson Reuters.