Efecte Company report 3/10/2019 Inderes Corporate Customer Efecte company report 3/10/2019 08:30, translation published 23/12/2019 Successful internationalisation is the decisive factor Analysts We reiterate accumulate recommendation and target price of EUR 5.2 for Efecte. After the IPO, Efecte’s progress has remained weaker than expected as the acceleration of the growth of international operations has taken more time Petri Aho than estimated and the benefits from the considerable growth investments have not been at the expected level. +358 50 340 2986 However, with the new management and clarified strategy, the company’s development is stabilising, and our [email protected] opinion is that the valuation of the share is moderate considering the strong growth outlook of the SaaS business. Efecte’s software solutions are used to develop and digitalise the services of organisations Efecte’s software solutions help organisations manage, measure, develop and automate, for example, enterprise services provided by IT, finance and HR. In the 2010s, the company has successfully transformed to adopt the SaaS business model and it has commercialised and verified the functioning of its technology to good effect in the market Recommendation and target price for large and medium-sized companies in Finland, all of which is reflected in its leading market position in Finland and a 20% average growth of revenue since 2012. With the IPO that took place towards the end of 2017, the company Accumulate entered a new strategic phase, the objective of which is to increase the company’s business significantly in the (previously Accumulate) Central Europe and Scandinavian markets and to utilise the value creation potential of the scalable SaaS model. EUR 5.20 Share price (3.10.2019): EUR 4.56 SaaS revolution, digitalisation and the servicification of business models as the drivers for market growth (previously EUR 5.20) The increasing use of cloud services in business software, digitalisation and the servicification of business models have provided Efecte and other companies specialising in the SaaS model with significant growth opportunities, and the competitive landscape is being reshaped. Compared to the size of the company, Efecte’s target market is extremely large, and the SaaS transformation means that there is strong market growth. The annual total growth of the target market is expected to be more than 15%, but the market growth in Efecte’s focus area – medium-sized Key figures European organisations – is more than 20% on an annual basis. Efecte’s competitive advantages include a SaaS solution that is flexible both in terms of its features and delivery model, low total cost of ownership and the fact that it 2018 2019e 2020e 2021e is a European company, which differentiates it especially from its large US competitors. Revenue 12.2 14.0 16.3 19.2 growth % 15% 14% 16% 18% The first metres of the strategy period have been challenging, but operative trends have taken a positive turn SaaS revenue 5.8 7.0 8.5 10.6 The first metres of Efecte’s strategy, which is based on strong international growth, have been more challenging than growth % 24% 22% 22% 24% expected, as the new business in Germany did not accelerate until towards the end of 2018, the growth in EBIT adj. -2.1 -1.6 -1.1 -0.1 Scandinavia waned and the heavy, front-loaded investments reduced the company’s effectiveness. With the new EBIT % adj. -17.4% -11.6% -6.5% -0.4% management and clarified strategy, the company is now focusing more clearly on scalability and the growth of SaaS Net income -2.4 -1.6 -1.1 -0.1 revenue, which has improved the growth of international business that plays a key role in the valuation of the EPS (adj.) -0.37 -0.27 -0.17 -0.01 company and resulted in a positive turn in the profitability trend. Considering the growth outlook for the SaaS business, the share is moderately priced P/E (adj.) neg. neg. neg. neg. P/B 6.6 14.1 32.2 35.6 In the next few years, we expect the growth in SaaS to be approximately 22–24%, the total revenue to increase by Dividend yield, % 0.0% 0.0% 0.0% 0.0% approximately 15%, with profitability gradually turning positive (EBIT-% 2019e -9%, 2021e 0%). Based on our estimates, EV/EBIT (adj.) neg. neg. neg. neg. Efecte’s EV/Revenue multiple is approximately at the level of 1.7x, which is very moderate compared to Nordic EV/EBITDA neg. neg. neg. 83.4 software companies with multiples of approximately 3.4x and the valuation levels indicated by the cash flow EV/Revenue 1.5 1.7 1.6 1.4 statement (EV/S 2.6x) and the sum of parts (EV/S, 2.0x). In our opinion, the main risks related to the share are the Source: Inderes possible slowing of the ramping up of international business and slower growth of SaaS. Share price graph Revenue and EBIT-% EPS and dividends 7,0 10% 0,06 6,5 0,00 0,010,00 0,00 0,00 0,00 0,00 19,2 5% 6,0 16,3 -0,01 5,5 14,0 0% 12,2 5,0 10,6 -5% 4,5 8,3 -0,17 -10% 4,0 3,5 -15% -0,27 3,0 -20% 12/17 6/18 12/18 6/19 -0,37 2016 2017 2018 2019e 2020e 2021e 2016 2017 2018 2019e 2020e 2021e Efecte OMXHCAP Revenue EBIT-% (adj.) EPS (adjusted) Dividend / share Source: Thomson Reuters Source: Inderes Source: Inderes Value drivers Risk factors Valuation • Growth investments and • Slower than expected growth MCAP EV • Efecte has a technologically international expansion might has lead to decreasing 27 24 mature and commercially fail estimates (estimate risks high) proven solution • Changes in competition or • EV/S-based valuation is MEUR MEUR • Highly scalable business model market position sensitive to the changes in • Strong value proposal in SMB • Technological and IT-security expected growth or growth segment risks company valuations in general • Huge and growing addressable • Growth investments push cash • From a longer term perspective market flows negative in coming years, company’s valuation looks EV/S EV/S • International expansion and which means if turnaround in attrative (etc. DCF) growth in existing customer profitability fails companies cash 1,7 1,6 base position will be low at the end of 2019e 2020e strategy period Table of Contents Efecte’s business model 5-12 Strategy 13-16 Markets and competition 17-21 Financial position 22-23 Estimates 24-27 Investment Profile 28-29 Valuation 30-33 Tables 34-38 Disclaimer and recommendation history 39 4 Efecte in short Efecte offers cloud-based (Software as a Service, SaaS) 2012-2014 2015-2017 2018- service and identity management solutions, supported ▪ Transformation of business ▪ Transformation of ▪ Strong expansion by professional services. They streamline and simplify model from license-based to maintenance customers to investments to German management of services, IT systems and infrastructure SaaS begins SaaS, strong new sales and market expansion within existing in organizations. The company has ofiices in Finland, ▪ Building own sales and customers accelarates SaaS- ▪ CEO change at the end of Sweden, and Germany. service organisation revenue growth 2018 1998 ▪ Bolt-on acquisition to ▪ International operations and ▪ Strategy updated with enhance technical capabilities organisation strenghtened stronger focus on SaaS Established in identity and access significantly at the end of the growth managements period ▪ Clearly negative operating 2017 ▪ IPO at the end of 2017 results due to the growth IPO investments 14,0 MEUR (+14 % vs. 2018) Revenue 2019e 18 % 2013-2019e Average annual revenue growth 10 % 14,0 -1,3 MEUR (-9 % lv:sta) 5 % 12,2 EBITDA, 2019e 10,6 7,0 0 % 7,0 MEUR 8,3 6,5 SaaS ARR 6/2019 -5 % 6,9 6,0 5,4 4,9 59 % 4,8 -10 % 4,4 Recurring revenue of total revenues, 4,3 rolling 12m, 6/2019 3,9 7,0 4,2 5,8 -15 % 4,3 4,6 2,6 3,4 1,5 0,1 0,6 -20 % 2012 2013 2014 2015 2016 2017 2018 2019e Source: Inderes, Efecte SaaS Other revenues Adj. EBITDA-% 5 Efecte’s business model 1/5 Efecte’s business model, 2018 Efecte Plc Revenue EUR 12.2 million, operating income EUR SaaS software for service management SaaS revenue and the supporting services are the -2.4 million core of the business Efecte is a Finnish software company offering SaaS (Software-as-a-Service) and it specialises in cloud- Efecte’s transition to cloud-based SaaS business Countries of based software solutions for the service model with continuous invoicing, which started in management of companies and to identity and 2013, has been implemented in practice. Over 80% operation access management. In addition, the company of the company’s revenue is generated by SaaS and (number of employees) provides services supporting the deployment, the related services, whereas revenue based on the integration and development of its software. diminishing single licence model has decreased and Finland (85 employees) is now less than 20%. Sweden (9 employees) Efecte, which was established in 1998, listed in the First North marketplace in 2017 with the objective of Efecte’s revenue stream is divided into four parts: 1) Denmark (- employees) implementing a strategy involving growth and SaaS, 2) Services, 3) Licences and 4) Support and Germany (13 internationalisation especially in the German market. maintenance. Of these, there is strong growth in employees) SaaS and Services, both of which belong to the core With Efecte’s software solutions, organisations can business in the company’s strategy, whereas manage all internal and external services, such as IT revenues from Licences and Support and (ITSM), HR and financial services, other enterprise maintenance are waning as existing and new Revenue per area, 2018 services (ESM) and access rights (IAM).