Esker — Strong new business supports growth outlook

Esker is a document process automation (DPA) software developer, specialising in digitising business processes. Its software is used to automate the source-to-pay and order-to-cash cycles through a SaaS delivery model. Esker’s revenues are well spread geographically, with 53% from Europe, 41% 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 has developed a network of partners to undertake implementation work and resell Esker software.

In its recent Q323 revenue update, the company maintained its guidance; it expects to achieve organic constant currency revenue growth of 14–15% for FY23 with a target operating margin range of 11.5–12.5%. We forecast reported revenue growth of 13.3% in FY23 and 14.0% in FY24. Our operating margin forecast is at the lower end of the guidance range for FY23 (11.7%) and we forecast an increase to 12.8% in FY24 as various cost containment and pricing measures take effect. Esker had net cash of €34.1m at the end of Q323 and we forecast this to increase to €38.6m by the end of FY23 and €46.1m by the end of FY24, providing the ability to make targeted acquisitions as opportunities arise. At the current share price, the company is considering buying back shares.

The stock is down 10% over the last year as earnings expectations for FY23 have reduced. On a P/E basis, Esker trades at a premium to France-listed small-cap software companies (most of which are not pure SaaS businesses) and to a group of listed global DPA software companies (most of which have a SaaS business model). Compared to US SaaS companies, the stock trades at a discount to average EV/sales and P/E multiples. We note that on average US peers are growing slightly faster than Esker, and while operating margins are expected to be lower than Esker this year, they are likely to be similar next year. Esker’s business model sits somewhere between low-growth, high-profitability on-premise software businesses and US SaaS companies’ higher-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 41% of revenue is generated in North America while only 26% of staff are based there. Economic conditions: the volume growth of transactions processed may be affected by a weaker economic environment. 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.

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 was proven to be 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, it 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). Esker has made bolt-on acquisitions: TermSync and CalvaEDI in 2015, e-integration in 2017 and Market Dojo in 2022. It has operations in 13 countries and its revenues are well spread geographically, with 53% from Europe, 41% from North America and the remainder from Australia and Asia.

Esker’s DPA SaaS software supports order-to-cash and source-to-pay business processes. The company is working to broaden its product suite, developing payments functionality within all solutions and offering supply chain finance options via partners. It is also developing technology to help customers’ ESG strategies by supporting the extraction and consolidation of non-financial data such as energy use. As well as investing 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 VP 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), Claire Valencony (deputy COO), Nicolas Mougin (global consulting and support director) and Ari Widlansky (director of global strategic alliances). The company has also created an associate executive committee to develop future management.

Esker has developed a unified cloud platform to automate order-to-cash and source-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 source-to-pay to source, order and pay for goods and services.

The software is based on a multi-tenant cloud platform, offering a single solution with common interface to access all functionality. The software has mobile capabilities, enterprise resource planning (ERP) integrations and increasing amounts of artificial intelligence (AI) functionality.

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 table below summarises the key processes supported in each cash cycle.

The software has certified integrations with the main ERP vendors, including SAP (including S/4HANA) and Microsoft Dynamics 365 Finance & Operations (F&O). It also has connectors to several other ERP vendors, including Cegid, Oracle (E-Business Suite, JD Edwards EnterpriseOne and NetSuite), Sage and Infor. 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 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 5,700 SaaS customers and c 740,000 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).

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, improving customer service and freeing up staff time for more interesting and value-added work. It has the added benefit of reducing paper and paper-related costs.

Many countries are starting to enforce e-invoicing for business-to-business (B2B) and business-to-government (B2G) transactions to improve VAT reporting. Esker’s software meets government legislation around e-invoicing. In Europe, the EU mandates 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. In Latin America, e-invoicing is government-mandated to ensure tax compliance and collection.

Some European countries are expanding e-invoicing use from B2G to B2B. For example, in France, Finance Law 2019-1479 will make e-invoicing between companies mandatory. In September, the earliest implementation deadline of 1 July 2024 was postponed with new deadlines expected to be put in place starting March 2026. Esker has applied for a plateforme de dématérialisation partenaire (PDP) and pilot programme registration with the General Directorate of Public Finances in France (DGFiP); the DGFiP will decide this by the end of 2023. A PDP will be responsible for receiving and transmitting invoices, checking them, extracting data and ensuring e-reporting of VAT data. Esker has also set up a group of volunteer companies to take part in a pilot programme organised by the DGFiP, which will start when the first version of the platform is ready (targeted for 2024) and will carry out the first exchanges with the government’s public invoicing platform.

The company’s main R&D team is based in Lyon, France (c 50 developers) with smaller teams in the US (15 engineers developing the TermSync solution) and Germany (five engineers focused on Esker EDI Services). In recent years, Esker has focused on completing both cash cycles, order-to-cash (O2C) and source-to-pay (S2P), adding functionality to ensure customer requirements for both cycles are met. The company is also using AI to improve the efficiency of its software wherever it makes sense.

On an ongoing basis, the company is employing AI to increase automation. The company uses the term Esker Synergy AI to encompass all the AI technologies (machine learning, deep learning, natural language processing (NLP)) and intelligent tools (optical character recognition, robotic process automation (RPA)) that power Esker’s software.

Esker has used machine learning for many years to improve the accuracy of its software in automating invoice processing. It also incorporates RPA into its software in selected areas, for example to automate invoice submission to a customer’s accounts payable portal or to retrieve sales orders from portals and input them into a customer’s ERP system. The table below shows how Esker has incorporated AI technologies to optimise its product suite (this is not an exhaustive list).

In 2021, the company launched Esker Pay, a comprehensive portfolio of integrated payment solutions that are fully integrated with its S2P and O2C suites. Esker has partnered with a number of fintechs including Boost, Corpay, Jack Henry, LSQ, Payrix, Payroc, Pytheas Capital Advisors, SisID, SlimPay, Stripe and Wind River Financial. Payment services offered include bank cards, direct debits, virtual cards, national or international bank transfers, automated supplier payments, supply chain financing, collection of discounts for early payment or negotiation of discounts in real time and verification of bank details.

Esker has been evaluating the supply chain finance market as an obvious add-on to its existing business. Rather than offering finance itself (not a core skill of the company), Esker has a partnership with LSQ in the US (it also invested $5m in an LSQ convertible bond). Esker and LSQ have integrated their platforms to allow Esker customers to implement working capital and cash management solutions seamlessly. In France, Esker is working with Pytheas Capital and Bpifrance, who together offer an invoice financing service to suppliers. Esker’s O2C and S2P suites already support dynamic discounting, where suppliers can offer discounts for accelerated payment of invoices, and this does not require the provision of financing.

Recognising the pressure on finance teams to produce data to monitor their company’s carbon emissions, Esker has started developing a new solution for CO2 reporting. The software extracts data such as kWhs of energy, litres of gasoline, volumes of gas or water consumed from a variety of sources, including utility bills, travel agent documents and expense reports. It then applies an electric mix computation, which takes into account the source of the energy used, and converts this to CO2 emissions. Automation of data collection should help companies as ESG reporting requirements become more complex and demanding.

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

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 has developed a network of channel partners. These partners offer a mix of consulting and implementation services, pure reselling and technology integration. Exhibit 5 shows partners signed up over the last four years.

In Q323, partners contributed 28% of bookings and management is targeting 30% by the end of FY23. This assumes that both direct and partner sales grow over this period, rather than partner sales replacing direct sales. The time it takes for each partner to become productive can be lengthy, once training the partner, creating 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 more than 3,500 end-customers. Neotouch is a hybrid mail solution, converting internet mail into physical form for transfer to postal services. In FY22, Esker reported a €1.5m contribution from the JV and the JV generated 8.3% 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 with which Esker competes operate in either the O2C or S2P 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 9,000 companies globally use Esker software, including Assa Abloy, Franke, Heineken, JCDecaux, Lam Research, Microsoft and Toshiba. 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), also known as procurement, a market dominated by cloud provider Coupa. Esker’s procurement offering has developed from its accounts payable solution, and the company has gradually added functionality to cover the majority of the procurement process, helped by last year’s acquisition of Market Dojo. Esker typically sells this solution to existing accounts payable customers to support the full source-to-payment cycle.

Exhibit 6 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 the 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. DeliveryWare is Esker’s oldest DPA product. Sales of DeliveryWare were discontinued in 2019; we would expect related maintenance revenues to slowly decline.

Esker has had an active approach to ESG for some time. By automating business and document processes, its 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).

The company has four overriding ESG goals:

The specific actions it is taking and the targets it has set are available on p55–57 of its 2022 Universal Registration Document.

In 2021, the company received ISO 14001 certification for its environmental management system by Lloyds’ Register Quality Assurance.

The most recent external ratings include:

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

On a quarterly basis, Esker reports revenue by business line: SaaS (subscription and transaction-based revenue), Implementation Services and Legacy Products. Maintenance revenue relating to previously sold DPA licences is included in Legacy Products, along with revenue from the fax server and host access products. Older DPA subscription sales were structured on a transaction-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. The company has gradually increased the monthly subscription fee and reduced the per-transaction fee to add more predictability to revenues. SaaS contracts are signed for a minimum of 12 months and are most commonly signed for three years. Exhibit 8 shows historical performance and our forecasts.

The company has set a target to grow SaaS revenue by 20% per annum. The company achieved this in FY19, before a dip in FY20 because of COVID-19, returning to 20%+ growth in FY21 and FY22. We forecast 16.5% growth in SaaS revenue in FY23 and 17.1% in FY24.

We expect Implementation Services revenue growth to lag behind SaaS revenue growth as it is constrained by the number of consultants and an increasing proportion of business is being undertaken by implementation partners.

For 9M23, recurring revenues (SaaS revenues) made up 82.5% of the total, versus 80.2% in FY22. 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. For 9M23, Esker won orders with an annual recurring revenue value of €14.3m (+14% y-o-y in cc); this does not include variable per-document fees, which can make up the same amount again over the life of the contract.

For Q323, Esker reported total revenue of €43.8m, up 8% y-o-y or 13% on a cc basis. SaaS revenue grew 11% y-o-y (15% cc) to €36.1m with volumes slightly lower than expected by the company, partly due to one fewer business day in Q323 vs Q322. Implementation Services grew 5% y-o-y (10% cc) to €6.9m and the company noted that it has a backlog of work to execute. Legacy Product revenues declined 38% y-o-y (37% cc) as expected, making up only 2% of revenue. The company reported another record quarter for order intake (the previous record was in Q322): contracts with an ARR of €5.3m (+8% y-o-y, +11% cc) were signed in Q323. Despite the delay announced to the implementation of e-invoicing regulations in France, Esker saw French order intake growth of 508% y-o-y in Q323 as companies decided to move ahead with new software anyway. The company believes that the changes to regulations in France are likely to act as a driver of demand until at least mid-2024. Europe (excluding France) saw 23% growth in order intake. The Americas saw a 30% y-o-y decline to €2.4m ARR due to a strong quarter a year ago but this region is expected to see stronger orders in Q423.

Management continues to expect to deliver organic constant currency growth of 14–15% for FY23 with an operating margin of 11.5–12.5%. The company noted that if order intake in Q4 is materially ahead of the current run rate (for example, if the France e-invoicing mandate drives higher demand), there may be a higher-than-expected level of sales commissions accrued in Q423. As Esker recognises this when a contract is signed rather than over the life of the contract, this could reduce the FY23 operating margin by 1–2pp. We have not factored in an elevated level of orders and we maintain our forecasts.

The company is targeting a medium-term operating margin of 15% and believes it can achieve this by FY25. In the chart below we show the company’s operating profitability over the last five years and our forecasts for FY23 and FY24. In recent years, the company has focused on hiring sales and marketing and R&D staff to drive the growth of the business. As we discussed in our last note, various factors have combined to reduce our FY23 operating margin forecast. More recently, the company confirmed that it had slowed the pace of hiring, and in fact, has put in place a hiring freeze for all areas apart from professional services, security and platform maintenance. Combined with the gradual effect of inflation-linked price increases as customers renew their contracts, operating margins should start to expand again from FY24.

At the end of Q323, Esker had gross cash of €41.0m, a further €4.8m recorded as financial fixed assets and fixed rate debt of €11.7m, resulting in net cash of €34.1m. We forecast that net cash will increase to €38.6m by the end of FY23 and €46.1m by the end of FY24.

The stock has declined 10% over the last year, compared to a 21% decline of the Euronext Growth index, in our view reflecting earnings revisions (we have reduced our FY23 revenue forecast by 0.8%, operating profit by 9.4% and normalised EPS by 8.1% over the year). With strong growth in orders year-to-date, the opportunity presented by French e-invoicing regulations and recent moves to improve profitability, we believe there is scope for the company to return to an upgrade path.

We compare Esker’s valuation to a group of listed global DPA software companies and to France-listed small-cap software companies (Exhibit 11). We have also included aggregate data for a group of c 100 US SaaS software companies. US SaaS companies on average are growing slightly faster than Esker. In the current year, on average they are less profitable than Esker but are forecast to reach similar operating margins to Esker next year. After a multi-year phase of investing heavily in sales and marketing to gain market share as quickly as possible, many SaaS companies have switched their focus to profitability, particularly as the macroeconomic and funding environment has become more challenging. Esker’s model sits somewhere between low-growth, high-profitability, on-premise software businesses and US SaaS companies’ higher-growth operating model, aiming for a happy medium of double-digit revenue growth while achieving mid-teen operating margins.

We believe that Esker deserves a premium rating compared to its non-SaaS peers as its c 80% level of recurring revenue provides good visibility, it has the potential for multi-year profitable double-digit growth and it has a strong balance sheet that does not require additional funding to support growth. Esker’s growth has been consistent over the last five years, with a revenue CAGR of 15.9% and EPS CAGR of 18.2% from FY17–22.

We have performed a reverse DCF calculation, using a WACC of 8.3% and a long-term growth rate of 3%. Based on our forecasts for FY23 and FY24, the current share price implies revenue growth of 14% pa for FY25–32 and an average normalised EBIT margin of 14.4% over FY25–32, both of which are below the company’s targets.