Claranova — Raising growth targets

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 (Mobile), consumer software (Internet) and internet of things (IoT). Key investment considerations are as follows:

We forecast 57% group revenue growth for FY20 (26% organic) and 19% for FY21. We forecast group EBITDA of €28.8m for FY20 (7.0% margin), rising to a 7.4% margin in FY21e. With limited capex requirements, this translates to normalised operating margins of 6.9% in FY20e and 7.3% in FY21e, and EPS growth (on a normalised basis) of 35% in FY20e and 44% in FY21e.

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 €13.74 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 the Mobile business, supplier dependence for FreePrints’ printing service, changes to search engine policies for the Internet business, 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 2017, Claranova 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. Reflecting its growth ambitions, the company has made acquisitions in the mobile and internet space over the last 18 months.

The company is focused on driving the growth and profitability of each business. Earlier this year, the company unveiled its ambitious five-year growth plan, which is targeting group revenues growing from €162m in FY18 to €700m by FY23 and a group EBITDA margin of 10% by FY23. The original target was to achieve €600m in revenue by FY23, but management has now increased the target to reflect the recent acquisition of Personal Creations in the US.

The Mobile 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 recently launched the service in India and Benelux. Future growth is expected to come from offering its customer base a wider range of products, enhanced by the recent acquisition of online personalised gifts provider Personal Creations in the US. The target for this division is to reach revenues of €500m by FY23 with an EBITDA margin of 5.0–10.0%.

The Internet consumer software business has been streamlined, with nearly all distribution shifted online and unprofitable lines withdrawn. The acquisition of a group of Canadian businesses at the beginning of FY19 has given the division access to new monetisation tools to exploit the number of visitors to its websites. The target for this division is to achieve revenues of €200m by FY23 at an EBITDA margin of 15–20%.

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. Recent contracts signed with mobile network operators demonstrate the first material commercial contracts for the platform and the division is seeing accelerating numbers of installations by end customers. As this division is still at the early stages of revenue generation, it has not been included in the five-year growth targets for the group.

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) and 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.

Historically the Mobile business (called PlanetArt) has been focused on providing photo-printing services to consumers. With the acquisition of Personal Creations in August 2019, the business has widened its offering into the market for mass customisation of consumer products. The division aims to provide easy-to-use services with a focus on value for money.

Photo printing is offered via two businesses: FreePrints, which is focused on printing photos using apps on mobile devices, and Web-to-print, which hosts a number of websites that offer printing services. The two businesses share the same fulfilment infrastructure and marketing teams. The majority of the division’s revenues are currently generated in the US and the UK, with a growing contribution from France, Germany, Ireland, Spain and Italy. The business launched the service in India, the Netherlands and Belgium during FY19.

The first FreePrints app was launched in 2013 (called ‘FreePrints’) and is available for use on Apple and Android mobile devices. This app allows customers 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” × 4”/15cm × 10cm – 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, fridge magnets or T-shirts. Building on the success of the FreePrints app, additional apps have since been launched:

In total, FreePrints-branded apps have been downloaded more than 45m times to date. All of the apps charge for printing on a per-job basis with no subscription required. This business is not particularly seasonal. Overall, 70–85% of monthly revenues come from returning customers; the average order value is in the range €7–8.

FreePrints launched in India in September 2018, initially just for photo prints but more recently also for photobooks. 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. The business has taken a flexible approach to advertising the service, trying different methods to ascertain the most effective, and keeping the cost at modest levels while assessing the economics of the service.

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 (rather than mobile apps). The business is very seasonal, with a large volume peak in November-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.

At the end of June 2019, the company announced that it had made a bid to buy Personal Creations, the online gifts business of FTD Companies, Inc (FTD), for $18.1m in cash. FTD was trading under Chapter 11 at the time. The deal was approved on 31 July and the acquisition completed on 2 August. Personal Creations (PC) operates two websites in the US (www.personalcreations.com, www.gifts.com). It differs from the existing PlanetArt services in that it does not depend on customer photos for personalisation.

In CY17, PC generated revenues of $116m and in CY18 it was reported to have grown revenues by 9% to $126m. In CY18, EBITDA was slightly negative, after several profitable years. Claranova expects Personal Creations to generate positive EBITDA in the first year of ownership, albeit on potentially lower revenues, and sees synergies in terms of marketing and administrative costs. We would expect the management team to focus on integrating Personal Creations into PlanetArt and returning it to profitability before considering expansion beyond the US and would expect the company to consider developing a mobile app for Personal Creations.

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. This shift is only likely to continue as smartphone manufacturers constantly improve the camera technology on phones – the recently launched iPhone 11 Pro has three camera lenses to provide nearly equivalent functionality to a DSLR camera.

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; in 2017 InfoTrends estimates that c 38bn photos were printed (only 3% of photos taken). 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.

In 2018, Future Market Insights estimated that the market for global photo printing and merchandise would 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.

The market for personalised gifts is a much larger than the photo printing market – according to data presented by the company, the personalised gift market is worth c $26bn and is growing at c 10% per annum.

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. The division has seen a slight reduction of competition in this market, as some smaller players have been acquired or left the market, however the recently announced Shutterfly/Snapfish merger is likely to alter the competitive landscape.

Exhibit 3 summarises the main competitors. We note that the Mobile business has no legacy film printing services and does not own any printing or retail facilities. This affords it the flexibility to enter new markets at lower cost and with less risk.

In June, private equity firm Apollo Global Management announced that it planned to acquire Shutterfly for an EV of $2.7bn. Shutterfly had been undergoing a strategic review so news that it was being acquired was not totally unexpected. Linked to this deal, Apollo announced it was also acquiring Snapfish and that it plans to merge the two businesses (the Snapfish acquisition is contingent on the completion of the Shutterfly acquisition) once the deals complete (target Q4). Snapfish is currently owned by District Photo, a large printing company that prints photos for its own brands (Snapfish and Truprint) as well as businesses such as Walgreens, Amazon and Tesco in the US and Europe. The price for this deal has not been disclosed, although press articles suggest a figure of $300m.

Shutterfly consists of three businesses, only one of which, Shutterfly Consumer, competes with Claranova’s Mobile business in the US. The business offers both web-to-print and mobile printing of both photos and personalised products, with mobile-generated business making up 32% of Shutterfly-branded revenues in its last quarterly results. Snapfish is active in the US and the UK with a presence in France, Germany, Ireland, Italy, Australia and New Zealand. We understand that it has a higher mobile presence than Shutterfly. We would expect that the initial focus for the combined business will be to merge the two businesses operationally while servicing the debt put in place to make the acquisitions. In the short term, we do not expect Claranova’s Mobile business to suffer from increased competition from the merged entity, although it is possible in the longer term.

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 not available on Android devices, only iOS. The business also aims to maintain high rankings within both app stores, as this also influences consumers’ propensity to download. For example, in the UK today on Google Play, in the free photography apps category, FreePrints is ranked No. 1, FreePrints Cards No. 5 and FreePrints Photobooks No. 9. On the App Store in the UK, FreePrints ranks as the fourth most popular app in the Photography & Video category, after Instagram, YouTube and Snapchat, – so is in fact the top ranked photo printing app.

The division targets revenue growth from a combination of growing the customer base and encouraging the existing customer base to order more frequently and buy a wider range of products. The recent acquisition of Personal Creations brings a whole new range of products that could be sold into FreePrints, and vice versa.

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, the division 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 the FreePrints customer base to sell the Photobooks, Photo Tiles and Cards services.

The cost to acquire a FreePrints customer is low- to mid-single-digit euros, 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.

The division outsources all printing to one printer in the US and one in the UK. In India, it has set up a network of several printers to ensure national coverage. As the mobile app service is less seasonal, it is able to provide good volumes through the year, not just at Christmas time. During the Christmas peak, it can push delivery out from five to 10 days to ensure stable pricing. The business typically prints on average 50m photos per month. The company has built the IT systems to manage high volumes and if a new country is added, the system can manage localisation.

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. An additional €0.8m was invested in April 2018, for a total minority investment of 7.7%.

When this business was launched, the aim was to reach critical mass without burning significant amounts of cash. It has grown rapidly since launch and moved into EBITDA profitability in FY18. The target now is to generate revenues of €500m by FY23 at an EBITDA margin of 5.0–10.0%. This implies a CAGR for revenues of 29.8% from FY19 to FY23. Once the addition of Personal Creations is taken into account from FY20, we estimate a CAGR of 17.2% will be required to hit the target.

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 and December, which results in higher staff costs in H1.

In FY19, divisional revenues grew 44% y-o-y, or 40% on a constant currency basis. The division achieved an EBITDA margin of 6.2% in FY19, up from 5.2% in FY18, despite a 67% increase in marketing spend over the year. In FY20, we factor in Personal Creations from the beginning of August. We forecast a moderation of growth in the original business in FY20e and FY21e. To reflect the lower profitability of Personal Creations, we forecast a flat EBITDA margin in FY20, rising to 6.4% in FY21 as synergies are realised.

The Internet division includes Avanquest, an online software reselling business, and the three Canadian businesses acquired at the start of FY19 (Adaware, SodaPDF and Upclick). The division is focused on four key verticals (photo editing, pdf, security/privacy and financial services) and as well as selling software online, monetises the traffic that visits its online properties via advertising, commission and transaction-based fees.

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 and own-IP software. 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. Software sold by this legacy business falls broadly within one of the four categories:

The legacy business saw declining revenues in FY16–18, partly due to a process of weeding out unprofitable product lines. However, this was reversed in FY19, when it reported growth of 16% (14% constant currency).

At the beginning of July 2018, Claranova acquired 50.1% of a group made up of three Canadian businesses: Adaware, Lulu Software and Upclick. The table below summarises the products offered by each business. All software IP is owned by the businesses.

Prior to acquisition, Avanquest already had a good working relationship with the group; it rebranded Soda PDF as Expert PDF and was using Upclick to process around half of its e-commerce transactions. As part of the Internet division, the acquired businesses have kept their existing business models and brands.

While the division has achieved some cost synergies from sharing of group infrastructure, the main focus is on maximising the opportunity from the combined customer base and internet traffic. The division has phased out the use of its proprietary e-commerce platform and shifted all e-commerce onto Upclick’s platform.

The legacy business 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. Management is making use of the acquired group’s expertise in traffic generation as well as taking the opportunity to cross-sell to the combined customer base. 30% of FY19 revenues from the Internet segment is from the monetisation of traffic (c €25m), all as a result of the acquired businesses.

The division generates revenues in four different ways:

The company presents these four revenue-generation methods in a slightly different way (Exhibit 7), providing examples of how traffic to its sites can be monetised. Where originally Avanquest would only earn revenues in the first category (direct sales), it has developed multiple ways to earn revenues from internet traffic, particularly in light of consumers’ increasing reluctance to pay directly for software or services. So where it would previously earn on average $1 from each visitor to its sites, it can now earn more like $2.63 per visitor. Bearing in mind the cost of acquiring this traffic, the business can now make more profit, or pay more to acquire additional traffic.

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 the business 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. In FY19, 37% of Internet segment revenues came from the sale of third-party software, versus 80% in FY18 (growth of 7% y-o-y).

The legacy business 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 the business 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.

In FY19, the sale of own IP (proprietary) software made up 33% of Segment revenues compared to 20% in FY18 (growth of 283% y-o-y), due to the contribution of the software from the acquired businesses.

The company announced that it has developed a new service for Adaware called PayAware. This is designed to provide a secure and private way to make purchases online. The user registers with PayAware and provides details of a debit or credit card. Using the PayAware browser, when a user wants to pay for an item online, they press the PayAware button. This provides a one-time use card number that auto-fills in the payment page. By providing the one-time use number, even if it is intercepted it cannot be used again for another transaction. The transaction will show up on the user’s credit card statement as a PayAware transaction. Via a separate dashboard, the user can log in and view all transactions made in this way.

In terms of monetisation, the service is free to the user; PayAware acts as the card issuer and therefore earns the issuer fee from the merchant. The transactions use the traditional card networks so Visa/Mastercard continue to earn their transaction fees. The merchant does not see any difference in the process. This service is in beta test and will initially be launched in the US and Canada. The company is also considering white-labelling the service.

The business 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 the business, and also helps when signing up some third-party software suppliers. The main channels through which it sells now are:

The business 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:

The Internet division 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 the division’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 earn a higher margin. Using the acquired businesses’ expertise in generating and monetising web traffic, the division has already managed to return to organic growth. The business is keen to increase the level of recurring revenue, mainly through offering software on a subscription basis, and is already seeing the benefits of this shift: recurring revenues made up 35% of divisional revenues in FY19 compared to only 8% in FY18.

Management 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, 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 2018, IAC generated $582m of revenues from its Applications 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 the Canadian companies is helping the business address this market shift.

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

Exhibit 8 shows the quarterly revenue progression over the past three years; this business sees a seasonal peak in Q2 (ie calendar Q4). 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.

In FY19, the Internet business reported revenue growth of 132%. Stripping out the businesses acquired in July 2018, the legacy business grew 16%, or 14% on a constant currency basis. We estimate that the acquired businesses grew at 38% compared to revenue generated in the year prior to acquisition. The FY19 EBITDA margin of 12.4% was significantly higher than the 2.0% reported in FY18, with the organic business generating a margin of 2.9% and the acquired businesses a margin of 21.9%.

The target for this business is to reach revenues of €200m at an EBITDA margin of 15–20% by FY23. This implies a CAGR for revenues of 24.6% from FY19 to FY23. The division is already close to reaching the lower end of the target margin range. Our forecasts reflect growth for the legacy business of 7% in FY20e and 5% in FY21e and growth of the combined acquired businesses at 24% in FY20 and 18% in FY21. We assume that this growth translates to EBITDA margin expansion over the forecast period to within the target range.

Claranova has developed a management platform for internet of things (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 400 different devices from 175 hardware manufacturers.

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, and invested a further $3m over the course of January and February this year.

The IoT market is in a strong growth phase – IDC estimates that total spending on IoT hardware, software, services and connectivity was $646bn in 2018 and is likely to grow at a double-digit rate to exceed $1tn by 2022. 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. Last month, the company announced that 250 customers had deployed myDevices IoT solutions over the previous six months.

In January 2018, Claranova announced that Sprint (the 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. Sprint is currently in the process of merging with T-Mobile, although the completion of the deal is currently being delayed by various regulatory investigations and lawsuits. It is not clear at this point what the merger would mean for the Sprint IoT Factory.

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.

Through the course of FY19, the company signed up the following partners:

Exhibit 11 shows the quarterly revenue progression over the past three years. The division is still generating some revenues from legacy solutions; this should decline to zero over the next two to three years. As customers pay to use myDevices on a per device subscription basis, revenues are building up slowly, but as customers become familiar with the platform, the expectation is that they will decide to use the service for more devices in more locations. Customers to date include hotels, hospitals, restaurants, catering businesses, colleges and sports clubs.

Headcount includes support engineers as well as staff to manage the relationships with MNOs and distributors. 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 small increase in the cost base over the forecast period, with rising revenues as the Sprint relationship progresses and distributor partners start to win customers.

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:

Claranova reported FY19 revenues in August (see Boosting organic growth with US acquisition). FY19 EBITDA of €16.0m was 310% higher than a year ago and 12.7% ahead of our forecast, resulting in an EBITDA margin of 6.1% (vs 2.4% in FY18). EBITDA came in above our forecasts for Mobile and Internet (both 16% ahead) whereas the IoT division incurred higher costs than forecast resulting in an EBITDA loss €1m larger than expected. Depreciation and amortisation (excluding amortisation of acquired intangibles) was minimal, resulting in normalised EBIT of €15.5m and an EBIT margin of 5.9% (vs 2.1% in FY18). Net cash at the end of FY19 was higher than we forecast, as most of the deferred consideration for the Canadian acquisitions was paid in early July rather than the end of June. The company generated €7.3m cash from operations, with €14.8m generated prior to working capital requirements. As much of the group’s business is consumer focused, Claranova tends to receive cash from customers before paying suppliers. However, with the addition of the new businesses in the Internet division, more activity is business-to-business and therefore consumes more working capital.

The Internet division acquired 50.01% of a group of Canadian businesses on 1 July 2018. The total consideration for the deal was €68.5m. This consisted of initial cash consideration of €9.9m, deferred cash consideration of €18.6m (€4.1m paid in June 2019, €14.5m paid in July 2019) and the issue of preference shares to the vendors for the remaining 49.99% of the businesses. The preference shares are convertible into shares of Avanquest Software SAS (the parent company of the Internet division) at a variable conversion ratio dependent on certain performance conditions. Under IFRS 9/IAS 32, the preference shares were classed as a hybrid financial instrument and were accounted for as a debt instrument, valued at €41.0m at the date of acquisition. The valuation of the Internet business, on which the conversion ratio for the preference shares depends, was deemed to have increased from $87m at the start of FY19 to $162m by the end of FY19. The increase in value of €44.6m has been reported as an exceptional financing item. As the necessary performance criteria have been met, the conversion ratio is now fixed and the debt instrument reclassified in equity as at the end of the year. Going forward, there will be a minority interest deduction in the income statement.

Other related exceptional items include €1.1m unwind of the discounted deferred cash consideration (included in financing costs) and the deemed €2.9m value of preference shares issued to the financial intermediary who arranged the deal (included in as an exceptional item at the operating profit level).

We have revised our forecasts to reflect a slightly more conservative growth rate in the Mobile business, the higher cost base in the IoT division and the minority interest deduction for the Internet business. Net financial costs take into account the convertible bond (ORNANE) issued in June 2018 (€29m at an annual interest rate of 5%) and the bonds issued in June 2019 (€19.7m at an annual interest rate of 6%). We have assumed a 23% rate for tax for FY20 and FY21, as the bulk of profits are likely to come from the US and the UK with corporate tax rates of 21% and 19%, respectively. We understand that the company has unused tax losses in France, Germany and the US, which could reduce the amount of tax paid over the next few years.

In Exhibit 15, 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 FY20e (1.4x for Mobile (this excludes Shutterfly acquired at a valuation of 1.2x forward sales), 4.0x for Internet and 0.8x for IoT), we arrive at a sum-of-the-parts valuation for Claranova of €14.08 per share. However, we believe that these multiples are not reflective of the growth and profitability prospects for each division. In Exhibit 16, our sum-of-the-parts valuation is based on adjusted FY20e EV/sales multiples by division, as discussed in more detail below. The EV/sales multiple for FY21e and the EV/EBITDA multiples for FY20e and FY21e are implied based on the EV/sales multiple used for FY20e.

We have used an EV/sales multiple for Mobile at a small premium to its peer group. We previously used a higher premium reflecting the strong organic growth of this division. However, as our FY20 revenue forecast incorporates c $90m in revenue from Personal Creations, which is likely to be at close to break-even, we believe it is appropriate to use a lower multiple to reflect the impact on profitability. This results in an implied EV/EBITDA multiple at a premium to peers, reflecting the Mobile business’s lower EBITDA margins. As the photo printing business 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, we estimate that the division’s profitability is much closer to that of its peers.

We have used a multiple for Internet that is at a large discount to its peers (and to the transactions in Exhibit 17). Looking at revenue growth in FY20, the business is likely to grow at a slightly 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.

For IoT, we have used an EV/sales multiple for FY20 that is at a premium to its listed peer group. 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 17), which show that IoT platforms command price/sales multiples anywhere between 4.2–8.9x sales.

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 Internet business (which, in turn, is likely to lead to better profitability), returning Personal Creations to profitability, launch of the PayAware solution and distributors selling myDevices in the US and China.

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.