Esker — Returning to pre-COVID-19 growth path

Esker is a document process automation (DPA) software developer, specialising in digitising business processes. Its software is used to automate the purchase-to-pay and order-to-cash cycles through a SaaS delivery model. Esker’s revenues are well spread geographically, with 56% from Europe, 38% from North America and the remainder from Australia and Asia. In recent years, the company has made small bolt-on acquisitions and we believe it would consider further acquisitions if they added technology expertise or geographic presence at a reasonable price. The company generates organic growth from a combination of winning new customers globally and deepening existing relationships. To accelerate the pace at which it can sign up and on-board customers, it is developing a network of partners to undertake implementation work and resell Esker software.

Esker expects to achieve cc revenue growth of at least 17% for FY21 with profitability at a similar rate to H121. Its target operating margin range of 13–15% is unchanged as the company continues to reinvest profits to drive growth on a long-term basis. Our forecast changes mainly reflect the phasing of costs, with non-staff costs increasing more slowly this year while staff costs are rising at a faster pace than we had forecast, through a combination of wage inflation and accelerated hiring. Net cash remains strong (€33.6m at the end of H121), providing the ability to make targeted acquisitions as opportunities arise.

The stock is up 65% year-to-date and on a P/E basis continues to trade at a premium to both a group of listed global DPA software companies and to French-listed small-cap software companies, in our view justified by revenue growth and operating margins at the upper end of both groups. Compared to US SaaS companies, which have a similar business model to Esker, the stock trades at a discount to average EV/sales and P/E multiples. However, over the last two years the stock has rerated and the discount to peers has substantially narrowed. We note that on average US peers are growing faster than Esker, although they are generating lower operating margins. 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. Esker has the added advantage of a strong balance sheet that does not require additional funding to support growth.

Our forecasts and the Esker share price are sensitive to the following factors. Currency: Esker is exposed to the US$/€ exchange rate as 38% of revenue is generated in North America while only 25% of staff are based there. Competition: Esker competes with well-established, well-funded software companies and will need to maintain its technology to continue this. Success of channel partner strategy: revenue growth and headcount needs will depend on the rate at which partners are able to resell and/or implement Esker software. Rate of decline of on-premise licensing and legacy business: these businesses are very profitable maintenance revenue generators. The rate at which these businesses decline will affect growth and profitability.

Esker is a DPA software developer, specialising in moving business processes from paper based to digital. The company’s SaaS delivery model generates high levels of recurring revenue and has proven robust during the COVID-19 pandemic.

Esker was founded in 1985 by Jean-Michel Bérard, the current CEO. Management was originally focused on software consulting and developed its first host access product in 1989. The company listed on the Nouveau Marché in 1997. From 1998 to 2000 the company made a series of acquisitions in the US host access and fax server markets. Esker launched the DeliveryWare platform in 2000, Mail on Demand in 2003, Esker on Demand (an automated on-demand mail and fax service) in 2004 and FlyDoc in 2006. The current SaaS products for accounts payable and accounts receivable were launched in 2009. The company’s listing was transferred from Euronext C to Euronext Alternext in 2010 (since renamed Euronext Growth). The company made bolt-on acquisitions: TermSync and CalvaEDI in 2015 and e-integration in 2017. The company has operations in 13 countries and its revenues are well spread geographically, with 56% from Europe, 38% from North America and the remainder from Australia and Asia.

Esker’s DPA SaaS software supports order-to-cash and purchase-to-pay business processes. The company is working to broaden the functionality of its product suite and ultimately join up the processes to create a business collaboration network. It is also exploring the opportunities that such a network could open up in the supply chain finance market. As well as increasing headcount to support organic growth, management would consider acquiring complementary businesses. Excluding acquisitions, growth in recent years has come from a combination of adding new customers and existing customers adding new processes and/or pushing higher volumes through Esker’s platform. To accelerate growth, Esker is building a network of partners to undertake implementation work and resell its software.

As described above, Esker’s CEO, Jean-Michel Bérard, founded the company in 1985. Emmanuel Olivier joined the company in 1999, was originally the CFO and became COO in 2003. He previously worked at Ernst & Young in France and the US for seven years. The CEO’s brother, Jean-Jacques Bérard, is the EVP of R&D, having joined Esker in 1995. Other members of the management board include Eric Bussy (VP marketing and product management), Steve Smith (COO, Americas), Eric Thomas (VP business development), Anne Grand-Clément (global director of professional services and technical support) and Claire Valencony (senior director, global strategic alliances).

Esker has developed a unified cloud platform to automate order-to-cash and procure-to-pay cash cycles. Its DPA software operates in five areas: procurement, accounts payable, accounts receivable, sales order processing and document delivery. These can be combined to fulfil the cash cycles as per Exhibit 1: order-to-cash to fulfil customer orders and collect payment; and procure-to-pay to source, order and pay for goods and services.

Features of the software include:

Esker’s DPA software operates in the following way. For receipt of documents (eg sales orders, supplier invoices), the software converts paper documentation into digital format and populates standard templates with the data from the digital document. The software can also extract data from other sources such as emails, email attachments and faxes. Esker has used machine learning for many years to train the software: if there is any doubt over the accuracy of the data, the user compares the original document to the digitised version and corrects it as necessary helping the software to learn. The standardised data can then be fed into the customer’s ERP system and processed and viewed by the relevant people throughout the organisation before being archived automatically. For sending documents, the software generates orders or invoices in the format required and if paper documents or fax services are required, Esker’s document delivery service can be used. The software provides a dashboard showing relevant key performance indicators and data analytics to support performance monitoring.

The software has certified integrations with the main ERP vendors, including SAP (including S/4HANA), Cegid, Oracle’s E-Business Suite and JD Edwards EnterpriseOne, Microsoft Dynamics NAV, Sage, Infor and NetSuite. Esker partners with Cegid to provide its supplier invoice processing software for Cegid’s XRP Flex solution.

Esker’s mobile solution, Esker Anywhere, can be used for procurement, accounts payable and sales order processing.

The business helps buyers and suppliers to collaborate by providing a portal for each process that they can both access, with features such as invoice status and chat. More recently, using AI it has developed a shared database of document recognition models for orders and invoices in pdf format. The longer-term goal is to connect these portals together to create a networking platform that would allow customers and suppliers to interact securely and could be used for direct exchange of purchase orders and invoices, payment of invoices, early payment discounting, dispute resolution and data clarification.

The software offers self-service online payment options such as credit cards, ACH, SEPA and direct debit, or can be integrated with the customer’s preferred payment processor. The company has integrated its order-to-cash software with Stripe Connect to offer the convenience of a single payment provider globally. The software also manages cash allocation automatically, using AI-driven recognition technology to intelligently capture data for three-way matching and accurate reconciliation.

Esker offers a credit management solution that allows companies to automate new customer on-boarding and secure their credit approval process. The solution includes customisable credit application templates, workflow rules and a customisable dashboard to monitor application status and tasks. Periodic credit reviews can be automated and a customer repository includes all customer-related documents, credit and business information to make informed decisions. Esker has partnered with Dun & Bradstreet globally, CreditRiskMonitor in North America and Ellisphere in Europe to provide access to external credit data.

Document delivery services enable customers to send business documents via cloud fax or mail centres directly from their desktop or enterprise applications. Esker services on-demand document delivery through its fax servers located in France, the US and Australia and mail production centres located in France, Belgium, the UK, the US, Australia, Spain and Singapore.

The software improves productivity by accelerating the cash conversion cycle, reducing errors, enabling faster processing, improving process visibility and improving customer service. It has the added benefit of reducing paper and paper-related costs.

The software also meets government legislation around e-invoicing. In Europe, the EU has mandated that paper and digital invoices should be treated equally and lays out ways that documents can be authenticated. EU member states have been subject to the 2014/55/EU directive since April 2019: this specifies that businesses selling to government entities must use e-invoicing based on specified interoperability standards. This should increase demand for e-invoicing solutions. In Latin America, e-invoicing is government mandated to ensure tax compliance and collection.

The table below details Esker’s product range for DPA, all of which are SaaS based. Esker on Demand is the main product; this multi-tenant solution was originally developed by Esker in 2004, ahead of many other software companies’ entries into the SaaS market. It started to gain traction from 2009 as customers were attracted by the lack of upfront investment and the usage-based payment mechanism. Esker has more than 6,000 SaaS customers and 600,000 SaaS users. The software is hosted out of six data centres: two leased by Esker (in France and the US) and four Microsoft Azure facilities (Australia, Canada, the Netherlands and Singapore).

We understand that the company’s main priorities for product development include:

As well as in-house product development and acquisitions of companies with relevant technology, Esker partners with other companies to provide access to technology that augments its products. For its procure-to-pay suite, it recently announced a partnership with Sis ID, a French fintech company specialised in combatting bank transfer fraud. Sis ID’s technology can be directly integrated into the new supplier registration process. Customers contract directly with Sis ID and provide their credentials to Esker to connect the two solutions and enable automatic verification of a company’s identity and bank details on Sis ID’s platform.

In 2019, Esker made a 40% investment in the initial seed finance round for a US start-up called B/2BNOW, which has since changed its name to Highview. Highview provides EDI solutions for SAP S/4HANA Cloud ERP systems. Steve Smith, COO of Esker US, joined the board of Highview.

Esker has a direct sales presence in Europe (France, Germany, Italy, Spain and the UK), the US and Asia-Pacific (Australia, Hong Kong, Malaysia and Singapore). Esker has sales representatives in Miami (to target South America, in particular Argentina, Brazil and Colombia), Brussels (to target European-headquartered US companies) and Montreal.

The salesforce tends to target those responsible for business processes; in most cases this will be the finance department, although sometimes it is customer services. Esker also works with the customer’s IT department, but this is mainly to work on integrating the software rather than to sell to. As the implementation process takes time and can be disruptive, most customers tend to select Esker for one process initially. Esker may then benefit from growth within that process, for example, more departments, more geographies. Some customers go on to use Esker for additional processes. The company has a customer experience team to strengthen the relationship with customers and to minimise churn.

The main gating factor for Esker’s growth is the availability of consultants. To accelerate the pace at which it can sign up and on-board new customers, Esker is developing a network of channel partners. These partners offer a mix of consulting and implementation services, pure reselling and technology integration. Exhibit 3 shows partners signed up over the last two to three years.

Management noted that in H121, 8% of bookings were generated by partners and it is targeting 30% in three years. This assumes both direct and partner sales grow over this period, rather than partner sales replacing direct sales. Management also noted this is a long-term strategy, as the time it takes for each partner to become productive can be lengthy, once training of the partner, creation of an execution plan and the 12–18-month sales cycle is taken into account.

Esker sold its software on a white-label basis through Quadient (previously called Neopost) in France for several years and in 2015 entered into a JV with Quadient to expand the scope of this agreement. The JV (owned 70% Quadient, 30% Esker) is focused on selling Esker’s software, marketed as Neotouch, to SMEs in France, the US and the UK (Esker’s direct salesforce tends not to target the SME market) and to date has c 3,500 end customers. Neotouch is a hybrid mail solution, converting internet mail into physical form for transfer to postal services. In FY20, Esker reported a €0.5m contribution from the JV and the JV generated 10.5% of group sales.

Esker competes against a different group of companies for each business process and by geography. As well as specialist DPA software companies, the company also sees competition from business process outsourcers such as Accenture and Xerox.

Most of the companies that Esker competes with operate in either the order-to-cash or purchase-to-pay markets. Esker has the advantage that its software can be used across all processes, reducing the number of software suppliers a company deals with and simplifying the implementation process. More than 6,000 companies globally use Esker software, including BMW, Bristol-Myers Squibb, Chubb, GE Healthcare, Heineken, Microsoft, Murata, Samsung and Siemens Healthineers. Esker has more than a decade’s experience in SaaS delivery and has achieved various SaaS certifications such as SSAE18, ISAE3402 and ISO27001, providing a level of confidence regarding business continuity and data security.

Accounts payable is the most competitive area; when Esker wins business it tends to be for customers that have decided to move from manual to automated processing, rather than winning business from an existing supplier (although this occasionally happens). Accounts receivable has historically been Esker’s strongest area; the customer owns the process so the document format is set in-house and therefore data recognition is more straightforward. Due to European legislation around electronic signatures, demand for automated accounts receivable processing is growing, as companies move from paper to digital invoices. The most complex market from a technical perspective is sales order processing. This is because end-customers send orders to Esker’s customers in many different non-standard formats such as faxes, emails or within email attachments. This market has the fewest suppliers and Esker has a very high win rate. The newest area for Esker is purchasing (launched in 2014), which contributes less than 1% of revenues. This is a sub-set of the procurement software market, which is dominated by cloud provider Coupa. Esker’s purchasing solution covers the procurement process from purchase requisition to invoice payment authorisation, but over time we expect the company to extend the functionality of the solution to encompass the earlier part of the procurement process. Esker typically sells this solution to existing accounts payable customers to support the full purchase-to-payment cycle. Exhibit 4 shows the most common competitors for each process. Competition tends to be country specific; for example, Billtrust for accounts receivable in the US, ITESOFT for accounts payable in France. Global competitors include Basware, Kofax, OpenText and SAP.

Document delivery has a different group of mail-focused competitors, including j2 Global, Docapost, and Maileva (both subsidiaries of Le Groupe La Poste) and OpenText.

Esker’s technology is receiving growing recognition by market research analysts, which should raise its visibility with potential customers. Examples include:

Esker’s Legacy Products division includes fax servers, host access products and DeliveryWare (on-premise DPA software). While the legacy business continues to be supported, the company is not actively seeking new business or developing new products.

Esker has had an active approach to ESG for some time. By automating business and document processes, Esker’s software helps companies to significantly reduce their use of paper, water and energy. At the same time, it is working to reduce its impact on these resources internally. The company is signed up to the UN’s Global Compact and is concentrating its efforts on meeting the following UN sustainable development goals (SDGs):

In early 2001, the company received ISO 14001 certification for its environmental management system by Lloyds’ Register Quality Assurance.

Esker was awarded an Ecovadis Gold Medal for its corporate social responsibility performance, placing it in the top 4% of the companies assessed by Ecovadis. The company is aiming for a platinum medal, which is restricted to the top 1% of companies.

Our forecasts and the Esker share price will be sensitive to the following factors:

On a quarterly basis, Esker reports revenue by business line. This recently changed to account for the fact that it no longer actively sells licences for its DPA software. Esker reports three business lines: SaaS (subscription and transaction-based revenue), implementation services and legacy products. Maintenance revenue relating to previously sold DPA licences is now included in legacy products, along with revenue from the fax server and host access products. On a half-yearly basis, Esker also reports by type of revenue: SaaS, maintenance fees, licence sales, hardware and consulting. Exhibit 6 shows historic performance and our forecasts on both bases.

SaaS (or traffic) revenues are generated on a per-transaction basis from all SaaS DPA products customers. Licence and maintenance fees are generated from DeliveryWare on-premise licence sales and the fax server and host access businesses (although as DeliveryWare has been discontinued there will no longer be any licence sales from this product). Hardware sales are generated by the fax server business. Consulting (or service) revenues are generated from the SaaS business. Older DPA subscription sales were structured on a traffic-only basis, with consulting revenues charged for the initial integration of the software. For the last few years, Esker has sold on a hybrid subscription model that guarantees minimum monthly revenues plus transaction-based revenues, reducing Esker’s dependence on the speed at which a customer implements the software. Management recently noted it is aiming to increase the monthly subscription fee and reduce the per-transaction fee to add more predictability to revenues. SaaS contracts are typically signed for a minimum of 12 months and are most commonly for three years.

SaaS revenue has shown significant growth in recent years: 18.5% in FY17, 17.7% in FY18 and 24.8% in FY19, before dipping to 12.4% in FY20 because of COVID-19. We forecast 20%+ growth in SaaS revenue in FY21 and FY22 as new orders are translated into revenue and existing customer volumes normalise after the pandemic. We expect consulting revenue growth to lag behind as it is constrained by the number of consultants.

In H121, recurring revenues2 made up 81% of the total, versus 79% in FY19 and 81% in FY20. Esker has a strong record of retaining customers – management estimates that churn is less than 1% per year. As each new customer comes on board, this adds another layer of recurring revenues. Esker saw a weaker order environment in H120, with orders up only 3% y-o-y, but demand rebounded from Q320 and Q420 saw record order intake. In H121, Esker won orders worth €21.3m (+76% y-o-y); this is the amount of revenue the company is contracted to earn over the (usually) three-year life of the contract and does not include variable per document fees, which can make up the same amount again over the three years. Esker also discloses the ARR for bookings. This was €6.5m in H121, up 64% y-o-y. Management noted that 37% of H121 SaaS revenue growth (c €3.5m) came from contracts signed over the previous 12 months, with €1.1m from contracts signed in H121 and €2.4m from H220.

Esker generated 19% y-o-y revenue growth for H121 (22% cc). SaaS revenue grew 26% cc while consulting revenues grew 13% cc. Legacy products also generated 6% cc growth, benefiting from a one-off sale in the US in Q221. The company reaccelerated hiring during H1, with headcount increasing by 85 or 12% y-o-y; this combined with pay rises and higher sales commissions resulted in staff costs increasing 21% y-o-y. Other operating costs (excluding depreciation and amortisation) declined 4% y-o-y, as travel and marketing costs remained low and a higher level of development costs were capitalised (although the percentage of R&D costs capitalised declined from 63% in H120 to 61% in H121). Overall, this resulted in a 47% increase in reported operating profit and a 2.8pp increase in the operating margin year-on-year.

The JV with Quadient saw a large decline in volumes in H120. This rebounded in H121, with a contribution of €621k versus €174k in H120.

Overall, diluted EPS increased 35% y-o-y, lower than the increase in operating profit due to the inclusion of a €0.85m exceptional tax credit in H120.

In H1, Esker generated operating cash flow of €10.7m. As well as paying the prior-year dividend of €2.9m, the company repaid the €11.5m government-backed loans it took out last year at the height of the COVID-19 pandemic. The company invests in tangible fixed assets for its mail centres and offices and capitalises development costs. In H1, Esker capitalised €4.3m of development costs, amortised €2.9m and spent €0.7m on tangible assets. We expect a gradual increase in both capitalisation and amortisation in FY21 and FY22, reflecting the growing R&D headcount.

Gross cash was €30.7m at period end (excluding a further €5.3m recorded in fixed assets), providing ample funds for acquisitions and investment. The company ended H121 with a net cash position of €33.6m (including the investments recorded in fixed assets). We forecast that net cash will increase to €38.2m by the end of FY21 and €47.9m by the end of FY22.

Management maintained revenue guidance for FY21, expecting cc growth of at least 17% (revenue of at least €130m) and profitability in line with H121.

Our revenue forecast for FY21 is unchanged while we have slightly reduced our assumption for FY22 to better reflect the mix of revenues. We have updated our cost and JV contribution forecasts to reflect H121 performance (ie higher staff costs and lower other operating costs) and the assumption that operating margins will not exceed 15% as any excess above this level will be reinvested. This results in a 4.4% increase in our FY21 normalised diluted EPS forecast and a 3.7% reduction in FY22.

With 38% of revenues from the US but a lower proportion of the cost base in US dollars, Esker is exposed to changes in the dollar-euro exchange rate. In our cost calculations, we use a rate of $1.21/€ for FY21 and $1.20/€ for FY22. Any weakening of the dollar could have a material negative impact on our forecasts.

The stock has gained 65% year-to-date and 109% over the last year and is trading close to its all-time high of €303.5; this compares to growth in the Euronext Growth index of 4% year-to-date and 43% over the last year. We have compared Esker’s valuation to a group of listed global DPA software companies and to French-listed small-cap software companies (Exhibit 9). We have also included aggregate data for a group of c 40 US SaaS software companies. We note that most companies in the first two peer groups are not predominantly SaaS companies, whereas Esker has been operating a 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.

Esker has re-rated over the last two years, with its P/E multiple moving much closer to the US SaaS peer group. We believe this is due to the value placed on businesses with high levels of recurring revenue, providing visibility through a period of economic uncertainty. In addition, Esker 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.

In Exhibit 10 we show how Esker (marked in green) compares to a selection of US SaaS peers when considering current year revenue growth versus current year EV/sales multiple. Exhibits 11 and 12 show how the peer group is trading on a P/E basis compared to revenue forecasts this year and next (we have excluded any companies trading on a P/E above 200 for either year). In Exhibit 13 we compare average revenue growth and average EBIT margins over the next two years.