Esker — Sticking with tried and tested growth strategy

Esker (PAR: ALESK)

Last close As at 18/06/2024

EUR182.00

4.00 (2.25%)

Market capitalisation

EUR1,103m

More on this equity

Research: TMT

Esker — Sticking with tried and tested growth strategy

Esker reported FY22 revenue growth of 19% (13% constant currency (cc)), operating profit growth of 29% and normalised diluted EPS growth of 29%. SaaS revenue grew 23% (17% cc) and now makes up 80% of group revenue. Bookings intake increased 19% cc y-o-y on an annual recurring revenue basis, providing support for growth in FY23 and FY24. Management maintained its guidance for FY23; we have trimmed our FY23 forecasts, which sit within the guidance range, and introduce forecasts for FY24. We forecast EPS to decline 1% in FY23 (as the currency benefit and accrual reversal are not expected to repeat) and increase 17% in FY24.

Katherine Thompson

Written by

Katherine Thompson

Director

Esker_resized

TMT

Esker

Sticking with tried and tested growth strategy

FY23 results

Software and comp services

28 March 2023

Price

€129.7

Market cap

€752m

$1.08/€

Net cash (€m) at end FY22

32.7

Shares in issue

5.8m

Free float

78%

Code

ALESK

Primary exchange

Euronext Growth Paris

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

(14.7)

(16.4)

(18.9)

Rel (local)

(11.8)

(22.2)

(23.8)

52-week high/low

€178.0

€108.6

Business description

Esker provides end-to-end SaaS-based document automation solutions supporting order-to-cash and procure-to-pay processes. In FY22, the business generated 52% of revenues from Europe, 42% from the United States and the remainder from Asia and Australia.

Next events

Q123 revenue update

18 April

Analyst

Katherine Thompson

+44 (0)20 3077 5700

Esker is a research client of Edison Investment Research Limited

Esker reported FY22 revenue growth of 19% (13% constant currency (cc)), operating profit growth of 29% and normalised diluted EPS growth of 29%. SaaS revenue grew 23% (17% cc) and now makes up 80% of group revenue. Bookings intake increased 19% cc y-o-y on an annual recurring revenue basis, providing support for growth in FY23 and FY24. Management maintained its guidance for FY23; we have trimmed our FY23 forecasts, which sit within the guidance range, and introduce forecasts for FY24. We forecast EPS to decline 1% in FY23 (as the currency benefit and accrual reversal are not expected to repeat) and increase 17% in FY24.

Year

end

Revenue
(€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/21

133.6

18.0

2.37

0.60

54.8

0.5

12/22

159.0

23.4

3.03

0.65

42.8

0.5

12/23e

180.1

24.2

3.01

0.70

43.0

0.5

12/24e

205.4

28.7

3.52

0.75

36.9

0.6

Note: *PBT and EPS are normalised and fully diluted, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY22: Underlying growth boosted by currency

FY22 revenue was in line with our forecast, with reported revenue and operating profit benefiting from the strength of the dollar versus the euro. Despite this, operating profit came in below our forecast as costs were 2% higher than expected, partly due to investment in recently acquired Market Dojo. This resulted in a 13.5% operating margin, within the guidance range of 13–15%. Operating profit included a €1.4m accrual reversal, which if excluded results in a margin of 12.6%. Year-end net cash of €32.7m was after paying €9.3m for Market Dojo and reflected higher than typical working capital at year-end due to a late payer (who has since paid).

Profitable growth strategy unchanged

For many years, Esker has focused on driving double-digit revenue growth while generating low to mid-teen operating margins. Investment in people has been key to its growth plans (headcount increased 16% in FY22) and we expect it to continue to reinvest incremental revenue in the business. Guidance for FY23 targets constant currency organic revenue growth of 12–14% and an operating margin of 12–15%. We have slightly reduced our FY23 forecasts to reflect the strengthening of the euro against the dollar and the higher FY22 cost base; our revenue forecast is at the upper end and our margin forecast at the lower end of guidance.

Valuation: Reflects recurring revenue potential

Based on EV/sales and P/E ratios, the stock continues to trade at a premium to French software peers (CY P/E c 29x), we believe due to its high level of recurring revenue, history of and potential for double-digit profitable growth and strong balance sheet, and at a discount to US SaaS peers (CY P/E c 70x). The company is well-funded to take advantage of opportunities to make bolt-on acquisitions, which in the current environment may become more affordable.

Review of FY22 results

Exhibit 1: FY22 results versus estimates and FY21

€m

FY21

FY22e

FY22

difference

y-o-y

Revenues

133.6

158.9

159.0

0.0%

19.0%

EBITDA

25.7

34.1

31.8

(6.8%)

24.0%

EBITDA margin

19.2%

21.5%

20.0%

(1.5%)

0.8%

Normalised EBIT

16.8

24.1

21.7

(10.0%)

29.0%

Normalised EBIT margin

12.6%

15.2%

13.6%

(1.5%)

1.1%

Reported EBIT

16.5

23.8

21.4

(10.1%)

29.4%

Reported EBIT margin

12.4%

15.0%

13.5%

(1.5%)

1.1%

Normalised PBT

18.0

25.4

23.4

(7.7%)

30.2%

Normalised net income

14.1

19.3

18.3

(5.1%)

29.5%

Reported net income

14.2

18.7

17.9

(4.5%)

25.4%

Normalised diluted EPS (€)

2.37

3.20

3.03

(5.1%)

28.5%

Reported basic EPS (€)

2.44

3.21

3.03

(5.5%)

24.4%

Reported diluted EPS (€)

2.38

3.10

2.96

(4.5%)

24.4%

Net cash

38.6

37.2

32.7

(12.1%)

(15.4%)

DPS (€)

0.60

0.65

0.65

0.0%

8.3%

Source: Esker, Edison Investment Research

With Esker having reported Q422 revenue in January, FY22 revenue was in line with our forecast. Revenue increased 19% or 13% in constant currency (cc). SaaS revenue increased 23% y-o-y (17% cc) to make up 80% of group revenue (FY21: 78%). Within SaaS revenue reported in FY22, transaction volume only grew 6% compared to more than 30% growth for the subscription element. This was partly due to lower economic activity during the year and partly due to a gradual change in subscription licensing, which is incorporating a higher proportion of monthly subscription revenue versus transaction fees. Professional services revenue increased 12% y-o-y (7% cc), making up 16% of group revenue. This saw a slow start to the year due to COVID-related issues. Legacy products declined 13% (21% cc), continuing the downward trend seen in previous years. Legacy products now make up less than 4% of group revenue.

EBITDA and EBIT came in below our forecasts, mainly due to higher than expected ‘purchase and external expenses’, which increased 32% y-o-y. This expense line includes travel and marketing costs, which increased €2.5m y-o-y as the business returned to pre-COVID behaviour. ‘Personnel and related taxes’ were in line with our expectations, including the €1.4m reversal of the tax accrual for share-based payments. Headcount increased 16% y-o-y to 972 full time equivalents (FTEs), which includes 22 heads from the acquisition of Market Dojo. Average headcount increased 13% to 917 for FY22. All expense lines were affected by currency translation. Overall, reported operating profit increased 29% y-o-y with an operating margin of 13.5%, within the company’s guidance range of 13–15%. With c 40% of revenues from North America but a lower proportion of costs in that region (most R&D is based in France), the company saw a €2.2m currency translation benefit to operating profit in FY22 versus FY21. The company noted that Market Dojo (acquired 1 June 2022) contributed revenue of €0.8m and an operating loss of €0.7m, reflecting increased investment in the business as Esker works to integrate it into the group.

Net interest income (€0.3m vs our €0.1m forecast) and the contribution from the Quadient JV (€1.5m vs our €1.2m forecast) were higher than forecast and the effective tax rate of 22% was lower than our 24% forecast. Altogether, net income and normalised diluted EPS were 5% below our forecast.

Net cash at the end of the year stood at €32.7m (this includes €4.7m held in long-term investments). This came in below our €37.2m forecast mainly due to higher-than-expected year-end working capital. Management noted that Quadient had delayed payment at year-end (since received), resulting in days sales outstanding increasing to 85.3 from 78.9 at the end of FY21. Earlier in 2022 the company took out a €17m five-year loan paying interest at less than 1%. The intention is to reserve this for potential M&A.

Improving gross margin

The company reports its income statement on a functional basis and according to French GAAP; we forecast based on the French GAAP presentation. Looking at the cost lines on a functional basis, growth was highest for customer experience (CX) and support costs, as the company invested in this function to support customer retention and upselling. Marketing costs increased as the company reverted to in-person marketing events post-COVID.

Exhibit 2: Functional income statement

€m

FY21

FY22

y-o-y

Revenue

133.58

158.99

19.0%

Cost of Sales

(42.09)

(44.79)

6.4%

Gross profit

91.49

114.19

24.8%

R&D

(14.23)

(15.18)

6.6%

Selling costs

(28.23)

(35.62)

26.2%

CX and support costs

(8.51)

(11.37)

33.5%

Marketing costs

(11.87)

(15.71)

32.4%

G&A costs

(12.07)

(14.91)

23.5%

Operating profit

16.58

21.41

29.1%

Gross margin

68.5%

71.8%

Operating margin

12.4%

13.5%

Source: Esker

Gross margin increased by 3.3pp, helped by better gross margins in the SaaS business due to higher platform utilisation. Esker has been building out its partner ecosystem over the last few years and the cost of supporting new partners until they are ready to sell and implement Esker’s software themselves is factored into professional services cost of sales. As these partners become more independent, professional services revenue and costs are likely to decline as a percentage of group revenue and costs. Management estimates that the SaaS gross margin could expand into the high 80s.

Exhibit 3: Gross profit by business line

€m

FY21

FY22

y-o-y

FY21

FY22

y-o-y

SaaS revenue

103.48

127.45

23.2%

PS* revenue

22.98

25.63

11.5%

SaaS cost of sales

(18.13)

(21.23)

17.1%

PS cost of sales

(20.83)

(23.37)

12.2%

SaaS gross profit

85.35

106.22

24.5%

PS gross profit

2.15

2.26

4.9%

SaaS gross margin

82.5%

83.3%

PS gross margin

9.4%

8.8%

Source: Esker. Note: *PS = professional services

Bookings growth supports future growth

For FY22, the company reported bookings with a lifetime contract value of €61m (+27% y-o-y). The annual recurring value (ARR) of FY22 contracts was €16.6m (+26% y-o-y, +19% cc), equating to an average contract length of 3.7 years. As a reminder, the ARR only includes the subscription fee element of the contract and does not include the volume-related element. Bookings were strong in the Americas (+23%) and Asia-Pacific (+45%), whereas customers in Europe were more cautious (+3%).

Outlook and changes to forecasts

The company expects to generate constant currency organic revenue growth of 12–14% for FY23 and maintains its operating profitability target range of 12–15%. With the euro stronger against the dollar than when we last updated our forecasts, we have revised down our revenue estimate for FY23. This equates to constant currency revenue growth at the top of the company’s guidance range. Reflecting the FY22 cost base, we have reduced our FY23 operating profit forecast by 5%, equating to an operating margin of 12.3%, at the lower end of the target margin range. We introduce forecasts for FY24 for revenue growth of 14% and an operating margin of 13%.

Exhibit 4: Changes to estimates

€m

FY23e old

FY23e new

change

y-o-y

FY24e new

y-o-y

Revenues

181.6

180.1

(0.8%)

13.3%

205.4

14.1%

EBITDA

35.1

33.9

(3.2%)

6.7%

39.7

17.0%

EBITDA margin

19.3%

18.8%

(0.5%)

(1.2%)

19.3%

0.5%

Normalised EBIT

23.6

22.5

(4.8%)

3.8%

27.0

19.9%

Normalised EBIT margin

13.0%

12.5%

(0.5%)

(1.1%)

13.1%

0.6%

Reported EBIT

23.4

22.2

(4.9%)

3.8%

26.7

20.1%

Reported EBIT margin

12.9%

12.3%

(0.5%)

(1.1%)

13.0%

0.7%

Normalised PBT

25.0

24.2

(3.5%)

3.1%

28.7

18.7%

Normalised net income

19.0

18.4

(3.5%)

0.3%

21.8

18.7%

Reported net income

18.8

18.2

(3.5%)

1.7%

21.6

18.9%

Normalised diluted EPS (€)

3.10

3.01

(2.9%)

(0.7%)

3.52

16.8%

Reported basic EPS (€)

3.17

3.08

(2.9%)

1.7%

3.60

16.9%

Reported diluted EPS (€)

3.07

2.98

(2.9%)

0.7%

3.49

17.0%

Net cash

45.4

41.6

(8.5%)

27.3%

51.5

24.0%

DPS (€)

0.70

0.70

0.0%

7.7%

0.75

7.1%

Source: Edison Investment Research

Exhibit 5: Financial summary

€'000s

2018

2019

2020

2021

2022

2023e

2024e

Year end 31 December

French GAAP

French GAAP

French GAAP

French GAAP

French GAAP

French GAAP

French GAAP

PROFIT & LOSS

Revenue

 

 

86,871

104,188

112,274

133,580

158,987

180,096

205,427

EBITDA

 

 

18,279

20,054

21,927

25,653

31,802

33,927

39,700

Operating Profit (before amort and except)

 

 

11,955

12,843

14,037

16,844

21,672

22,490

26,963

Amortisation of acquired intangibles

(344)

(425)

(425)

(263)

(263)

(263)

(263)

Exceptionals and other income

(88)

(62)

0

0

0

0

0

Other income

0

0

0

0

0

0

0

Operating Profit

11,523

12,356

13,612

16,581

21,409

22,227

26,700

Net Interest

(57)

268

(67)

202

272

125

125

Profit Before Tax (norm)

 

 

12,215

13,634

14,462

18,048

23,441

24,165

28,688

Profit Before Tax (FRS 3)

 

 

11,783

13,147

14,528

18,188

22,879

23,902

28,425

Tax

(2,940)

(3,402)

(2,966)

(3,907)

(5,015)

(5,736)

(6,822)

Profit After Tax (norm)

9,168

10,106

11,509

14,171

18,303

18,365

21,803

Profit After Tax (FRS 3)

8,843

9,745

11,562

14,281

17,864

18,165

21,603

Ave. Number of Shares Outstanding (m)

5.4

5.4

5.7

5.8

5.9

5.9

6.0

EPS - normalised (c)

 

 

170

186

203

242

310

311

364

EPS - normalised fully diluted (c)

 

 

165

179

199

237

303

301

352

EPS - (GAAP) (c)

 

 

164

180

204

244

303

308

360

Dividend per share (c)

41

33

50

60

65

70

75

Gross margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

21.0

19.2

19.5

19.2

20.0

18.8

19.3

Operating Margin (before GW and except) (%)

13.8

12.3

12.5

12.6

13.6

12.5

13.1

BALANCE SHEET

Fixed Assets

 

 

39,635

47,201

48,987

57,229

71,650

75,600

79,200

Intangible Assets

28,096

29,323

30,787

33,644

47,651

50,151

52,151

Tangible Assets

7,050

10,434

10,036

9,896

8,986

8,886

8,886

Other

4,489

7,444

8,164

13,689

15,013

16,563

18,163

Current Assets

 

 

49,016

52,022

72,918

71,534

90,671

103,740

120,788

Stocks

147

185

257

341

512

512

512

Debtors

25,551

30,015

31,440

35,548

46,158

50,328

57,407

Cash

22,794

21,357

40,421

34,978

42,887

51,786

61,755

Other

524

465

800

667

1,114

1,114

1,114

Current Liabilities

 

 

(30,072)

(34,300)

(50,150)

(45,872)

(45,533)

(48,375)

(51,787)

Creditors

(30,072)

(34,300)

(38,650)

(44,703)

(45,533)

(48,375)

(51,787)

Short term borrowings

0

0

(11,500)

(1,169)

0

0

0

Long Term Liabilities

 

 

(10,810)

(8,276)

(6,342)

(2,497)

(18,148)

(18,148)

(18,148)

Long term borrowings

(9,318)

(6,516)

(3,644)

0

(15,034)

(15,034)

(15,034)

Other long term liabilities

(1,492)

(1,760)

(2,698)

(2,497)

(3,114)

(3,114)

(3,114)

Net Assets

 

 

47,769

56,647

65,413

80,394

98,640

112,817

130,053

CASH FLOW

Operating Cash Flow

 

 

18,366

20,290

24,389

28,844

22,410

32,599

36,032

Net Interest

63

352

(30)

253

866

125

125

Tax

(2,795)

(3,329)

(884)

(3,420)

(5,074)

(5,736)

(6,822)

Capex

(7,789)

(10,995)

(10,167)

(11,140)

(12,492)

(14,100)

(15,000)

Acquisitions/disposals

(225)

(486)

(492)

(5,491)

(8,902)

0

0

Financing

785

1,449

48

2,769

792

0

0

Dividends

(1,756)

(2,237)

(1,896)

(2,897)

(3,555)

(3,988)

(4,367)

Net Cash Flow

6,649

5,044

10,968

8,918

(5,955)

8,900

9,969

Opening net debt/(cash)

 

 

(10,016)

(16,576)

(21,018)

(30,285)

(38,609)

(32,653)

(41,552)

HP finance leases initiated

0

0

0

0

0

0

0

Other

(90)

(602)

(1,701)

(594)

(1)

(0)

0

Closing net debt/(cash)

 

 

(16,576)

(21,018)

(30,285)

(38,609)

(32,653)

(41,552)

(51,521)

Source: Esker, Edison Investment Research


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United Kingdom

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