Esker — Working to balance investment and profitability

Esker (PAR: ALESK)

Last close As at 26/04/2024

EUR177.80

−5.10 (−2.79%)

Market capitalisation

EUR1,075m

More on this equity

Research: TMT

Esker — Working to balance investment and profitability

In H123 Esker reported strong growth in revenue (+16% y-o-y in constant currency (cc)) and bookings (+18% y-o-y cc) but this was outweighed by increases in costs, resulting in an operating margin decline. The company is taking measures to counter this, both in its contract pricing and by slowing the pace of hiring. While FY23 revenue outlook is unchanged, management reduced the mid-point of operating margin guidance by 1% to 12%. We have conservatively reduced our operating profit forecasts, which for FY23 were at the upper end of the new guidance range.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Esker

Working to balance investment and profitability

H123 results

Software and comp services

18 September 2023

Price

€133.40

Market cap

€786m

US$1.07/€

Net cash (€m) at end H123

33.5

Shares in issue

5.9m

Free float

78%

Code

ALESK

Primary exchange

Euronext Growth Paris

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

(13.5)

(11.7)

1.9

Rel (local)

(14.7)

(12.5)

(13.8)

52-week high/low

€168.10

€108.60

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

Q323 revenue update

17 October

Analyst

Katherine Thompson

+44 (0)20 3077 5700

Esker is a research client of Edison Investment Research Limited

In H123 Esker reported strong growth in revenue (+16% y-o-y in constant currency (cc)) and bookings (+18% y-o-y cc) but this was outweighed by increases in costs, resulting in an operating margin decline. The company is taking measures to counter this, both in its contract pricing and by slowing the pace of hiring. While FY23 revenue outlook is unchanged, management reduced the mid-point of operating margin guidance by 1% to 12%. We have conservatively reduced our operating profit forecasts, which for FY23 were at the upper end of the new guidance range.

Year

end

Revenue
(€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/21

133.6

18.0

2.37

0.60

56.4

0.4

12/22

159.0

23.4

3.04

0.75

43.8

0.6

12/23e

180.1

22.8

2.85

0.80

46.8

0.6

12/24e

205.4

28.0

3.44

0.85

38.8

0.6

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

Cost growth outweighed revenue growth in H123

Esker reported 15% y-o-y revenue growth for H123 (+16% cc) while total costs increased 23% over the same period through a combination of inflation, headcount increases, the acquisition of loss-making Market Dojo in June 2022 and the reversal of an accrual in H122. This resulted in an operating profit of €9.8m and an operating margin of 11.2%, down 5.7pp from H122. Adjusting for the acquisition and tax accrual, underlying operating profit was 1% higher y-o-y and the underlying margin 1.8pp lower at 12.3%. Net cash increased marginally h-o-h to €33.5m.

Margin guidance reduced slightly for FY23

To counter the pressure on profitability, the company is putting inflation-linked price increases through its contracts, which will take effect as contracts are renewed, and since the end of 2022 has slowed the pace of hiring. The company maintains its revenue guidance for FY23 for organic constant currency growth of 14–15%. Reflecting the higher-than-expected impact of inflation, the company has reduced its operating margin guidance from 12–14% to 11.5–12.5%. Our revenue forecasts are unchanged and we have reduced our operating margin forecasts by 0.6pp and 0.2pp, respectively, to 11.7% in FY23 and 12.8% in FY24.

Valuation: Profitable growth key to upside

Based on EV/sales and P/E ratios, the stock continues to trade at a premium to French software peers (CY P/E c 41x), 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 73x). With net cash of €33.5m at the end of H123, the company is well-funded to take advantage of opportunities to make bolt-on acquisitions, which in the current environment may become more affordable. The stock is down 16% from a recent high of €159 in August – in our view, evidence of stabilisation of the cost base would be a key trigger for upside from this point.

Review of H123 results

Exhibit 1: H123 results highlights

€m

H123

H122

y-o-y

Revenues

87.9

76.3

15.2%

EBITDA

15.7

18.2

-13.3%

EBITDA margin

17.9%

23.8%

-5.9pp

Reported operating profit

9.8

12.9

-23.8%

Operating margin

11.2%

16.9%

-5.7pp

Reported net income

7.5

10.1

-26.4%

Basic EPS (€)

1.26*

1.75

-27.7%

Diluted EPS (€)

1.22*

1.72

-28.9%

Net cash

33.5

27.7

20.9%

Source: Esker. Note: *Estimate based on FY23e average basic and diluted share count.

Esker reported H123 revenue in line with its July trading update. EBITDA and operating profit declined year-on-year for several reasons, which we explain below. The company generated €0.1m in net financial income and reported a €0.6m contribution from its joint venture with Quadient (-29% y-o-y). The tax rate was 29% compared to 24% in H122 and 21% in FY22.

Net cash at the end of H123 stood at €33.5m, including €4.8m cash held in long-term assets. This was slightly up on net cash of €32.7m at the end of FY22. Cash inflow from operating activities of €13.5m more than offset capex of €8.7m, dividends paid of €4.5m and other cash inflows of €0.8m.

Normalising operating profit for underlying performance

The table below shows the breakdown of costs/other income in H123 and H122.

Exhibit 2: Cost breakdown

€m

H123

H122

y-o-y

Purchase & external costs

23.676

19.667

20%

Personnel & related taxes

54.641

43.536

26%

Local & misc. taxes

0.762

0.835

(9%)

Depreciation and amortisation

5.668

4.94

15%

Reserves

0.259

0.343

(24%)

Other income

(0.764)

(0.737)

4%

Capitalised development costs

(6.191)

(5.17)

20%

Total costs

78.051

63.414

23%

Source: Esker

In H122, Esker reversed an accrual for tax on stock-based compensation totalling €2.247m. The company acquired Market Dojo in H122 and consolidated it from 1 June 2022. Excluding the reversal of the tax on stock-based compensation and the loss relating to Market Dojo, underlying operating profit would have been €10.739m in H122. In H123, adjusting out a tax accrual of €0.374m and the Market Dojo loss of €0.632m, underlying operating profit would have been €10.807m, marginally higher than in H122. Underlying operating margin declined 1.8pp y-o-y to 12.3% (see Exhibit 3).

Exhibit 3: Reported to underlying operating profit reconciliation

€m

H123

H122

YoY

Total reported operating costs

78.051

63.414

23%

Tax on stock-based compensation

(0.374)

2.247

N/A

Market Dojo costs

(0.632)

(0.116)

N/A

Underlying costs

77.045

65.545

18%

Reported operating profit

9.801

12.87

(24%)

Reported operating margin

11.2%

16.9%

(5.7%)

Underlying operating profit

10.807

10.739

1%

Underlying operating margin

12.3%

14.1%

(1.8%)

Source: Esker

With staff costs the largest cost category, the company provided an analysis of the €11.1m increase year-on-year (see Exhibit 4). The largest increase was from the higher number of employees – average headcount increased 13% y-o-y. Since the end of 2022, the company has moderated the pace of hiring. Total full time equivalent headcount was 972 at the end of FY22, rising to 1,010 by the end of H123, and the company only expects this to increase to 1,030 by the end of FY23. This equates to an increase of 6% for FY23e compared to 16% for FY22. The company also noted that to ensure staff retention, it awarded staff pay rises in line with inflation. Annual employee turnover was 8% in Q123 and Q223 compared to c 15% in Q222 and Q322 and 13% in Q422 so this policy appears to be paying off. The company noted purchases and external expenses saw a c €1m increase due to inflation.

Exhibit 4: Breakdown of increase in staff costs year-on-year (€m)

Source: Esker

Bookings intake remains strong

The annual recurring value (ARR) of contracts signed in H123 was €9m, 18% higher y-o-y on a constant currency basis. Orders were 6% higher in the Americas (c 45% of orders), reflecting a strong H122. Orders in Europe ex-France (c 22% of total orders) were up 135% y-o-y, reflecting contract wins in the UK and Germany. Orders in France (c 23% of orders) declined 9% while companies assessed how to prepare for new e-invoicing legislation in France. APAC orders were 10% higher y-o-y (c 10% of orders). Management highlighted that in the Americas, Q3 would have a challenging base but Q4 should see strong growth. Despite the French government postponing the implementation of its e-invoicing legislation, management expects a stronger order intake in France in H223 as companies decide to prepare for the change anyway.

Inflation-linked price increases to gradually boost revenue

The company noted that H123 revenue growth includes a c 2% benefit from price increases in contracts. This is significantly lower than the inflationary increases affecting personnel and other costs. This was partly due to the French Syntec index (which is the index used in French contracts) reflecting much lower inflation rates than other sources, and some contracts having delayed index application. Customer prices are now increased automatically at contract anniversary date based on local CPI (consumer price index), so as contracts are renewed, the benefit should start to flow through.

Outlook and changes to forecasts

The company maintained its guidance for organic constant currency revenue growth of 14–15% for FY23. It has reduced its FY23 operating margin guidance, from 12–14% to 11.5–12.5% (midpoint reduces from 13% to 12%). Our forecast was for a margin of 12.3%, at the lower end of the previous range but now at the upper end of the new range. We maintain our revenue forecasts for FY23 and FY24. We have revised our cost forecasts to reflect H123 outturn – while personnel and other costs increase, we have also assumed a higher level of capitalised development costs. Overall, we reduce our operating profit forecast by 5% to €21.2m, which equates to an operating margin of 11.7%. For FY24, we reduce our operating margin forecast from 13.0% to 12.8%. We assume that the slowdown in hiring will dampen the rate of increase of staff costs and inflation is likely to moderate.

Exhibit 5: Changes to forecasts

€m

FY23e old

FY23e new

change

y-o-y

FY24e old

FY24e new

change

y-o-y

Revenues

180.1

180.1

(0.0%)

13.3%

205.4

205.4

(0.0%)

14.0%

EBITDA

33.9

32.9

(3.2%)

3.3%

39.7

39.2

(1.2%)

19.4%

EBITDA margin

18.8%

18.2%

(0.6%)

(1.8%)

19.3%

19.1%

(0.2%)

0.9%

Normalised EBIT

22.5

21.4

(4.8%)

(1.2%)

27.0

26.5

(1.8%)

23.7%

Normalised EBIT margin

12.5%

11.9%

(0.6%)

(1.7%)

13.1%

12.9%

(0.2%)

1.0%

Reported EBIT

22.2

21.2

(4.9%)

(1.2%)

26.7

26.2

(1.8%)

24.0%

Reported EBIT margin

12.3%

11.7%

(0.6%)

(1.7%)

13.0%

12.8%

(0.2%)

1.0%

Normalised PBT

24.2

22.8

(5.5%)

(2.6%)

28.7

28.0

(2.3%)

22.6%

Normalised net income

18.4

17.4

(5.5%)

(5.2%)

21.8

21.3

(2.3%)

22.6%

Reported net income

18.2

17.2

(5.6%)

(3.9%)

21.6

21.1

(2.4%)

22.9%

Normalised dil. EPS (€)

3.01

2.85

(5.5%)

(6.4%)

3.52

3.44

(2.3%)

20.7%

Reported basic EPS (€)

3.08

2.91

(5.6%)

(4.2%)

3.60

3.52

(2.4%)

20.9%

Reported diluted EPS (€)

2.98

2.82

(5.6%)

(5.2%)

3.49

3.40

(2.4%)

20.9%

Net cash

40.9

38.6

(5.8%)

18.2%

50.3

46.1

(8.3%)

19.5%

DPS (€)

0.80

0.80

0.0%

6.7%

0.85

0.85

0.0%

6.3%

Source: Edison Investment Research

Exhibit 6: Financial summary

€'m

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

 

 

86.9

104.2

112.3

133.6

159.0

180.1

205.4

EBITDA

 

 

18.3

20.1

21.9

25.7

31.8

32.9

39.2

Normalised Operating Profit

 

 

12.0

12.8

14.0

16.8

21.7

21.4

26.5

Amortisation of acquired intangibles

(0.3)

(0.4)

(0.4)

(0.3)

(0.3)

(0.3)

(0.3)

Exceptionals and other income

(0.1)

(0.1)

0.0

0.0

0.0

0.0

0.0

Operating Profit

11.5

12.4

13.6

16.6

21.4

21.2

26.2

Net Interest

(0.1)

0.3

(0.1)

0.2

0.3

0.1

0.1

Associates & joint ventures

0.3

0.5

0.5

1.0

1.5

1.3

1.4

Exceptionals

0.0

0.0

0.5

0.4

(0.3)

0.0

0.0

Profit Before Tax (norm)

 

 

12.2

13.6

14.5

18.0

23.4

22.8

28.0

Profit Before Tax (FRS 3)

 

 

11.8

13.1

14.5

18.2

22.9

22.6

27.8

Tax

(2.9)

(3.4)

(3.0)

(3.9)

(5.0)

(5.4)

(6.7)

Profit After Tax (norm)

9.2

10.1

11.5

14.2

18.3

17.4

21.3

Profit After Tax (FRS 3)

8.8

9.7

11.6

14.3

17.9

17.2

21.1

Ave. No. of Shares Outstanding (m)

5.4

5.4

5.7

5.8

5.9

5.9

6.0

EPS - normalised (€)

 

 

1.70

1.86

2.03

2.42

3.11

2.94

3.55

EPS - normalised fully diluted (€)

 

 

1.65

1.79

1.99

2.37

3.04

2.85

3.44

EPS - (GAAP) (€)

 

 

1.64

1.80

2.04

2.44

3.04

2.91

3.52

Dividend per share (€)

0.41

0.33

0.50

0.60

0.75

0.80

0.85

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

18.2

19.1

Normalised Operating Margin (%)

13.8

12.3

12.5

12.6

13.6

11.9

12.9

BALANCE SHEET

Fixed Assets

 

 

39.6

47.2

49.0

57.2

71.7

76.9

81.8

Intangible Assets

28.1

29.3

30.8

33.6

47.7

51.7

55.2

Tangible Assets

7.1

10.4

10.0

9.9

9.0

8.9

8.9

Other

4.5

7.4

8.2

13.7

15.0

16.3

17.7

Current Assets

 

 

49.0

52.0

72.9

71.5

90.7

98.8

113.4

Stocks

0.1

0.2

0.3

0.3

0.5

0.5

0.5

Debtors

25.6

30.0

31.4

35.5

46.2

50.3

57.4

Cash

22.8

21.4

40.4

35.0

42.9

46.8

54.4

Other

0.5

0.5

0.8

0.7

1.1

1.1

1.1

Current Liabilities

 

 

(30.1)

(34.3)

(50.2)

(45.9)

(45.5)

(48.4)

(51.8)

Creditors

(30.1)

(34.3)

(38.7)

(44.7)

(45.5)

(48.4)

(51.8)

Short term borrowings

0.0

0.0

(11.5)

(1.2)

0.0

0.0

0.0

Long Term Liabilities

 

 

(10.8)

(8.3)

(6.3)

(2.5)

(18.1)

(16.1)

(16.1)

Long term borrowings

(9.3)

(6.5)

(3.6)

0.0

(15.0)

(13.0)

(13.0)

Other long term liabilities

(1.5)

(1.8)

(2.7)

(2.5)

(3.1)

(3.1)

(3.1)

Net Assets

 

 

47.8

56.6

65.4

80.4

98.6

111.1

127.2

CASH FLOW

Operating Cash Flow

 

 

18.4

20.3

24.4

28.8

22.4

31.5

35.6

Net Interest

0.1

0.4

(0.0)

0.3

0.9

0.1

0.1

Tax

(2.8)

(3.3)

(0.9)

(3.4)

(5.1)

(5.4)

(6.7)

Capex

(7.8)

(11.0)

(10.2)

(11.1)

(12.6)

(15.6)

(16.5)

Acquisitions/disposals

(0.2)

(0.5)

(0.5)

(5.5)

(8.9)

0.0

0.0

Financing

0.8

1.4

0.0

2.8

0.8

0.0

0.0

Dividends

(1.8)

(2.2)

(1.9)

(2.9)

(3.6)

(4.6)

(5.0)

Net Cash Flow

6.6

5.0

11.0

8.9

(6.1)

6.0

7.5

Opening net debt/(cash)

 

 

(10.0)

(16.6)

(21.0)

(30.3)

(38.6)

(32.5)

(38.6)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

(0.1)

(0.6)

(1.7)

(0.6)

(0.0)

(0.0)

(0.0)

Closing net debt/(cash)

 

 

(16.6)

(21.0)

(30.3)

(38.6)

(32.5)

(38.6)

(46.1)

Source: Esker, Edison Investment Research


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United Kingdom

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