Esker — Setting its sights higher

Esker is a document process automation (DPA) software developer, specialising in moving business processes from paper-based to digital. Its software is used to automate the purchase-to-pay and order-to-cash cycles. The company principally operates a SaaS delivery model and the majority of revenues are generated from customers using its on-demand solutions. Esker’s revenues are well spread geographically, with 58% from Europe, 37% 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 has raised its group revenue growth target from double-digit to 20% and maintained its 15% operating margin target. While SaaS-related revenue growth is at this level already, the rate of decline of legacy product and on-premise licence revenues (which made up 10% of H1 revenues) will influence the group target. In H119 the company made progress towards these targets, with constant currency revenue growth of 15% and an operating margin of 14.4%. We have made small changes to our estimates and forecast net cash to increase to €26.3m by the end of FY20.

The stock has gained 23% over the last year 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 company trades at a material discount on all valuation metrics. We note that on average they are growing faster than Esker, although they are generating lower operating margins than 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 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. 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. Reliance on datacentre providers: Esker leases datacentre capacity for its on-demand products. Changes in the availability and pricing of capacity will have an impact on Esker’s profitability.

Esker is a document process automation (DPA) software developer, specialising in moving business processes from paper-based to digital. The company made the transition to the SaaS delivery model earlier than many peers, and now the majority of revenues are generated from customers using its on-demand solutions.

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. Esker’s revenues are well spread geographically, with 58% from Europe, 37% 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, the company is building a network of partners to undertake implementation work and resell Esker software.

As described above, the company’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 (director of marketing and product management), Steve Smith (COO, Americas), Eric Thomas (VP business development) and Anne Grand-Clément (global director of professional services and technical support).

Esker has developed a unified cloud platform to automate order-to-cash and purchase-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 purchase-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 has certified integrations with the main ERP vendors, including SAP (including S/4HANA), Cegid, Oracle’s E-Business Suite, JD Edwards EnterpriseOne, Microsoft Dynamics NAV, Sage, Infor and NetSuite.

The software provides a dashboard showing relevant KPIs and data analytics to support performance monitoring. For accounts receivable, 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 software also manages cash allocation automatically.

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.

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 that is 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.

Esker on Demand is Esker’s main product. This multi-tenant, SaaS solution was originally developed by Esker in 2004, ahead of many other software companies’ entry 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’s longest-standing product is DeliveryWare, an on-premise solution. Typically, new business is for Esker on Demand, although some customers prefer to use the on-premise solution for security reasons. The company has more than 5,000 SaaS customers and 600,000 SaaS users.

Esker upgrades the Esker on Demand software every 15 days. Every three years, Esker takes the previous SaaS upgrades and incorporates them into one large upgrade of the DeliveryWare software. The software is hosted out of four data centres: two leased by Esker (France, US) and two Microsoft Azure facilities (Netherlands, Singapore).

The table below shows the development of the platform in terms of functionality.

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 has started partnering to provide access to technology that augments its products. Last year it partnered with Rimilia, a UK-based company with a SaaS-based product that provides automatic matching of cash receipts to invoices, for Esker’s order-to-cash solution. The company recently made a 40% investment in the initial seed finance round for a US start-up called B/2BNOW; B/2BNOW provides EDI solutions for SAP S/4HANA Cloud ERP systems. Steve Smith, COO of Esker US, has joined the board of B/2BNOW.

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. Esker also sells its software to several companies on a white-label basis.

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. The company 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, eg more departments, more geographies. Some customers then go on to use Esker for additional processes. In H119, the company created a customer experience team to strengthen the relationship with customers and to minimise churn.

To accelerate the pace at which it can sign up and on-board new customers, Esker is starting to build a network of channel partners. These partners are providing consulting and implementation services, and in some cases are reselling Esker’s technology. In 2018, the company signed a partnership with Optima ECM Consulting in the US, systems integrator Viveris in France and IBIZ Consulting Services in Asia.

To add capability in Asia, in February, the company announced that Fuji Xerox would market Esker’s accounts payable automation solution as part of its offering to optimise accounts payable management processes in Japan, and soon Australia, Hong Kong and Singapore. Esker and Fuji Xerox already work together in New Zealand where customers in the construction, retail, business and education sectors have signed up to use Esker’s accounts payable solution. Fuji Xerox is a 75/25 joint venture between FUJIFILM and Xerox; its direct salesforce covers Japan and the Asia-Pacific region including China. Esker generated 4% of its revenues in Asia-Pacific/Australia in FY18. As the agreement also includes Fuji Xerox providing consulting, implementation and support to customers that choose to buy the software, this agreement could accelerate Esker’s penetration of this region without Esker incurring substantial sales and consulting costs.

In June, the company signed a reseller agreement with KPMG Netherlands. KPMG will market Esker’s cloud-based accounts payable solution as part of its RPA and Finance Transformation offering.

The company noted in its H119 results that it closed its first deal with KPMG Netherlands in H1 and has a number of deals in the pipeline that it hopes to close in H2. It expects the Fuji Xerox relationship to have a material impact on revenues from FY20.

Esker sold its software on a white-label basis through Neopost in France for several years and in 2015 entered into a joint venture (JV) with Neopost to expand the scope of this agreement. The JV (owned 70% Neopost, 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. In FY18, Esker reported a €317k contribution from its share in the joint venture, and the joint venture generated c 7% 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.

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 5,000 companies globally use Esker software, including Cap Gemini, Experian, GE Healthcare, Heineken, Microsoft, Samsung and Siemens. Esker has more than a decade’s experience in SaaS delivery and has achieved various SaaS certifications such as SSAE16, 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. Esker sometimes replaces mail houses in this market. 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.

Many customers use Esker’s software to enable them to join supplier networks such as Ariba or OB10. These networks usually require e-invoicing and Esker’s software enables them to produce invoices according to the requirements of the networks. In other cases such as Taulia, the networks rely on invoices that are approved for payment to provide supply chain financing. As Esker’s software provides dashboards to show this type of information, Esker is able to introduce customers with the necessary volume of approved invoices to the networks.

Esker’s Legacy Products division includes fax servers and host access products. While the legacy business continues to be supported, the company is not actively chasing new business or developing new products.

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

Esker reports revenues in two ways:

SaaS revenues are generated on a per-transaction basis from Esker on Demand and FlyDoc customers. Licence and maintenance fees are generated from DeliveryWare on-premise licence sales and the fax server and host access businesses. Hardware sales are generated by the fax server business. Consulting revenues are generated from on-premise and on-demand DPA 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. On-demand contracts are typically signed for a minimum of 12 months, and most commonly are for three years. See Exhibit 5 for historical and forecast divisional performance.

SaaS-related revenues (which include SaaS and consulting revenues) have shown significant growth in recent years. On a like-for-like, constant currency basis, these grew 20% in FY16, 21% in FY17, 20% in FY18 and a further 19% in H119 (SaaS +21%, consulting +7%). Management noted that growth in consulting revenues in H1 was held back by the number of consulting staff involved in training new hires or channel partners but that growth should rebound in H2. Licence-based DPA revenues (licences, consulting and maintenance revenues) declined 3% in FY16, 23% in FY17, 1% in FY18 and 16% in H119, now making up only 7% of revenues.

The company is targeting 20% growth for group revenues. As we expect a continuing decline in licence-based and legacy product revenues, this implies that SaaS-related revenues would need to accelerate above 20% to achieve the targeted growth rate at the group level. While our group revenue forecasts show lower growth than the 20% target, we see potential upside from the growing number of channel partnerships.

In H119, recurring revenues2 made up 80% of the total, versus 78% in FY17 and FY18. 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. In H119, Esker won orders worth €11.4m (+52% 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 reported 18% y-o-y growth in revenues in H119 (15% on a constant currency basis). EBITDA increased 11% y-o-y, as operating costs increased at a faster rate than revenues. Staff costs increased 19% y-o-y, as the company increased headcount by 60 from the end of FY18 to the end of H119 (+17% y-o-y), with the majority of new heads in consulting and sales and marketing. Purchases and external costs increased 20% y-o-y, reflecting the higher headcount and higher marketing spend. Depreciation and amortisation increased from €3.2m in H118 to €3.7m in H119 reflecting increasing amortisation of capitalised development costs and a higher level of tangible capex in H119. Reported operating profit increased 9% y-o-y, to reach an operating margin of 14.4%. This is close to the company’s operating margin target of 15%.

The JV with Neopost is adding a growing contribution, at €251k in H119 versus €151k in H118 and €67k in H117. The company used an estimated tax rate of 31% for H119; compared to the 25% rate achieved in FY18 this appears conservative.

The company ended H119 with a net cash position of €15.0m, down from €16.6m at the end of FY18. In H1, the company generated operating cash flow of €6.5m. As well as paying the prior-year dividend of €2.2m, the company paid down €2.2m of debt. Gross cash was €22.2m at period end (including €3m recorded in fixed assets), providing ample funds for acquisitions and investment. We forecast that net cash will increase to €20.8m by the end of FY19 and €26.6m by the end of FY20.

The company invests in tangible fixed assets for its mail centres and offices and capitalises development costs (€5.7m in FY18). In H1, the company also paid c €0.5m to acquire the property in which its Italian business is based. In H1, it capitalised €3.2m of development costs and amortised €2.3m. We expect a gradual increase in both capitalisation and amortisation in FY19 and FY20 reflecting the growing R&D headcount.

We have made small changes to our forecasts. We reflect H119 costs and increase our capex assumptions for both years, based on H1 capex. We have used a 31% tax rate for FY19 and FY20 (up from 28%), although this may prove to be conservative.

With 37% of revenues in the US but a lower proportion of the cost base in US dollars, the company is exposed to changes in the dollar-euro exchange rate. The company noted that the stronger dollar versus the euro in H119 resulted in a €1.2m benefit to reported revenues and a €0.5m boost to reported operating profit. In our cost calculations, we use a rate of $1.13/€ for FY19 and $1.11/€ for FY20. Any weakening of the dollar could have a material negative impact on our forecasts.

We have compared Esker’s valuation to a group of listed global DPA software companies and to French-listed small-cap software companies (Exhibit 8). The stock gained 23% over the last year and continues to trade at a premium to both peer group averages on a P/E basis, in our view justified by revenue growth and operating margins at the upper end of both groups.

We note that most companies in both peer groups are not predominantly SaaS companies, whereas Esker has been operating a SaaS business model for more than a decade. The US SaaS companies in Exhibit 9 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 the added advantage of a strong balance sheet that does not require additional funding to support growth.

In Exhibit 10, we show how Esker (marked in red) compares to its US SaaS peers when considering average revenue growth and average EBIT margins over the next two years. 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 150 for either year).