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In the “tech” sector – specifically, the IT and Software sector on the ASX – one of the most interesting themes is SaaS, or “software as a service.” This is a business model under which customers pay to use software hosted on a remote computer – in the “cloud” – rather than buying a software licence and installing it on their physical computers. Companies got used to buying licences for software that went out of date quickly, inducing them into expensive upgrades.
But under the SaaS model, customers subscribe to a software product that’s continually updated. The software company gets a reliable stream of recurring revenue, and the customer gains flexibility and always-up-to-date software. It is a largely win-win model in which costs to subscribe are comparatively low, customers are very “sticky” if the product meets their needs, and the software providers build up strong recurring revenue and high gross margins.
Adobe, Microsoft, Oracle – even Google in its G Suite services – are all big SaaS companies these days. The standard-bearer for SaaS stocks in Australia is the amazing Xero, but there is a growing contingent of SaaS stocks – here are 4 of the best.
Market capitalisation: $722 million
Three-year total return: 38.5% a year
Analysts’ consensus valuation: $2.00 (Thomson Reuters), $2.35 (FN Arena)
Infomedia provides SaaS technology solutions to global auto manufacturers and dealers, specialising in the after-sales parts and service sector: it is one of few global software providers operating in this field, and has become a true export leader, with more than 80% of its revenue generated outside Australia – the company’s parts and service solutions are used in 186 countries, by more than 180,000 users. More than 95% of the company’s revenue is recurring and its ten-year average operating margin is 43%.
Infomedia’s products include the Microcat electronic parts catalogue (EPC), designed to precisely and quickly identify replacement parts, drive parts sales, improve productivity and give better-quality customer experience; the Superservice platform, an automotive manufacturer data-driven service-selling solution designed to optimise pricing transparency, increase customer trust and improve dealer service productivity; and Nidasu, its critical automotive data analytics and forecasting tool, that promises to help reduce automakers’ and dealerships’ operational costs, grow their sales and improve customer retention. Both Microcat and Superservice are precise to the level of the VIN (vehicle identification number, linking parts and service needs to individual vehicles – it doesn’t matter how obscure the part.
In FY20, Infomedia lifted revenue by 12%, to $94.6 million, and boosted net profit by 15%, to $18.5 million. Unusually in the SaaS world, IFM pays a dividend, which was increased by 10% in FY20, from 3.9 cents a share to 4.3 cents (70% franked). The company says the COVID pandemic has significantly impacted new car sales, making parts and service a key area of profit growth for manufacturers and dealers – positioning IFM well for further growth. However, COVID-19 restrictions will delay sales converting to revenue in the first half of FY21 – subject to restrictions easing, IFM expects growth in calendar 2021 to “re-emerge at a faster pace.”
For several years now Infomedia has been developing the next generation (Next Gen) of its Microcat electronic parts catalogue (EPC), and that work received a big fillip last month when it won a $14 million strategic pan-European contract with Ford Europe to roll out Next Gen.
Analysts do expect COVID to push the dividend lower in FY21 (to 4.2 cents on Thomson Reuters’ analyst collation and 4.1 cents on FN Arena’s), before recovering in FY22 (FN Arena says 5.2 cents, Thomson Reuters expects 4.7 cents). That could be considered a handy boost, because Infomedia looks to be getting close to fair value right now – as you’d expect from a company kicking big goals. UBS, the most recent company to update its research on IFM, has a price target of $2.20.
Market capitalisation: $333 million
Three-year total return: n/a (listed June 2019)
Analysts’ consensus valuation: $4.56 (Thomson Reuters), $4.40 (FN Arena)
Floated in June 2019 at $1.60, Whispir runs a communications workflow software platform that enables companies and governments to manage, automate and improve their communication processes without requiring specialised technical expertise. The software brings all of the customer’s communication channels – across mobile/email/voice/social/web – into one easily accessed space, so that staff can build customised two-way communications and actions based on certain events or “triggers.” The platform offers easy drag-and-drop templates and app-like mobile engagement so that communication can be pumped out over whatever channel the customer wants, at whatever scale is required, but be delivered to its customers and clients in a personalised and targeted way that is sensitive to individual contexts and preferences. And because it is a cloud-based platform, Whispir generates data and reporting that gives its customers insights into their own customers’ communications preferences and requirements.
Whispir has a customer base in 60 countries, with more than 665 “blue-chip” customers and as of November 2020, the platform handles 1.5 billion interactions a year, with more than 55 million individuals. Usage of the platform surged during COVID, as organisations looked for greater control over their business-critical communications: Whispir was quick to develop standardised templates to help its clients meet their communications obligations with staff and customers.
In FY20 annualised recurring revenue grew by 34%, to $42.2 million (in the first quarter of FY21 that figure rose to $43.7 million), to represent 95.6% of revenue, while the lifetime value of the customer cohort grew by 115%, to $379 million (it had 630 customers at 30 June). The gross revenue churn – the percentage of revenue that is lost during a period due to customers cancelling or downgrading – is running at just 3%, and has more than halved since the company listed. Whispir customers don’t tend to leave the platform. The gross margin is over 62%.
As global information and communications technology investment pours into digital, Whispir is poised to benefit strongly. The company has guidance in the market for revenue growth of 21%–30%, to $47.5 million–$51 million, annual recurring revenue to reach $51.1 million–$55.3 million, and the EBITDA (earnings before interest, tax, depreciation and amortisation) loss to be in the range of $6.2 million–$4.8 million, compared to the $5.6 million loss in FY20. Clearly WSP is not profitable at the net level, but its numbers look increasingly attractive. This stock looks to be very attractive buying.
Market capitalisation: $256 million
Three-year total return: n/a (listed October 2019)
Analysts’ consensus valuation: $2.26 (Thomson Reuters), $2.00 (FN Arena)
Cloud-based workforce management software company Damstra was floated in October 2019, at 90 cents a share, by its management group, which bought it from former owner Skilled Group in 2016. Damstra provides a cloud-based workplace management platform (it also supplies some hardware) which is used by businesses globally to track, manage, and protect their workers and assets. Customers buy modules such as workforce management, access control, asset management, learning management and HSE (health safety environment) management. These products are integrated into one platform, allowing users of multiple modules to better track, manage and protect their workplaces through access to real-time data across all modules.
Damstra has benefited from COVID, as companies want to both look after their staff and check who is coming on to their worksites. Its newest product, Damstra Solo, tracks individual remote and lone worker safety in the field through an array of mobile devices. The Solo wearable, fever detection and satellite tracking safety solution has been used in several roles during COVID: in one instance the system identified and tracked a COVID outbreak through contact tracing, allowing the client to minimise its shutdown to 20% of the workforce for two days, versus a complete workforce 14-day shutdown. The system has also been used to screen event spectators for COVID symptoms: Damstra’s transportable, container-housed fever detection solution allows large crowds to be quickly assessed, and will help an eventual return to attended events.
In FY20, Damstra delivered a 47% increase in revenue, to $23.5 million, underpinned by strong demand from existing customers, and an increase in customer numbers from 129 to 279, with 404,000 users compared to 320,000 in FY19. Damstra’s products are used in 11 countries. Recurring revenue now stands at 90.7% of revenue, up from 90.4% in FY19, and the client revenue churn level halved in FY20, to be under 0.5% – one could almost say that Damstra has no churn. Excluding transaction costs from acquisitions, operating cash flow surged from $300,000 to $5.2 million in FY20, while at EBITDA level, underlying EBITDA came in at $4.8 million, up from $1.8 million in FY19. Damstra’s gross margin is close to 48%. The company described the year as “a fundamental step change in the business compared to FY19,” and it’s hard to disagree with that.
In July Damstra took over Vault Intelligence, which provides cloud-based and mobile-friendly health and safety risk software. Although North America is the growth focus, Damstra is also ideally positioned for growth in South-east Asia. Damstra is not yet profitable, although analysts expect breakthrough to net profit in FY22. But the stock is kicking a lot of goals, and I reckon it’s worth buying at these levels.
Damstra Holdings (DTC)
Market capitalisation: $426 million
Three-year total return: 65.8% a year
Analysts’ consensus valuation: $1.85 (Thomson Reuters), $1.17 (FN Arena)
Dubber is a global provider of cloud-based, call recording software, with a scalable unified call recording service and voice intelligence cloud starting to be adopted as core network infrastructure by multiple global telecommunications carriers, in North America, Europe and Asia Pacific. Dubber allows the service providers to offer call recording for compliance, business intelligence, sentiment analysis, AI and more, on any phone. The company describes itself as a disruptive innovator in the multi-billion-dollar call recording industry.
The call recording software helps companies manage and analyse large volumes of calls as well as meet compliance targets. The software offers advanced search capabilities and allows business users to easily categorise and sort calls. Although it is particularly useful for call centres, Dubber’s software has a range of more sophisticated applications, for instance, its ability to use artificial intelligence (AI) technology to measure customer sentiment.
In the second half of this year, Dubber has struck some impressive deals. In October, it launched its unified recording and voice AI solution for Microsoft’s Microsoft Teams platform. In November, IBM chose Dubber to provide recording and data capture technology to support its newly launched service IBM Cloud for Telecommunication Services platform. Dubber’s Unified Call Recording (UCR) solution will be used to integrate with the IBM Cloud for Telecommunications platform, and will enable IBM to offer improved ability for its customers to meet compliance mandates, improve sales, and unlock the critical information contained within voice data. Dubber’s UCR enables voice data to be generated from every conversation and delivered to Dubber’s scaleable voice intelligence cloud where its AI creates insights, intelligence, transcriptions and more. It is this facility – AI-powered and connected intelligence, and the insights that come from it – that is at the true heart of Dubber’s ability to create more value for customers, by monetising the data, tangible and intangible, that comes from their voice connections.
In FY20, Dubber almost doubled subscriber numbers, to 230,000, lifting revenue by 51%, to $3.25 million – more importantly, annualised recurring revenue jumped by 95%, to $16.1 million (as of the September 2020 quarter, that had lifted to $18.1 million). The products are used by more than 140 networks and solution partners around the world. The gross margin is running at about 44%. As Dubber increases the value of customers and voice data as a service, every user creates more value and connections – and Bingo!, you have a multiplying network effect. DUB looks to be a great growth story emerging, if investors can accept the fact that net profit does not likely until at least FY23.
Dubber Corporation (DUB)