SaaS: 5 stocks to watch
One of the big growth areas in technology in recent years has been the emergence – and expansion – of software-as-a-service (SaaS), which is the supply of software, usually on a subscription basis, over the internet. There’s no need to install and update expensive enterprise software – it’s all done for you by the supplier.
The software is hosted in the cloud, which means a network of remote servers hosted on the Internet – rather than a local server or a personal computer. Cloud computing allows companies to cut their hardware and software spending, and just use from cloud-based providers.
The subscription-based SaaS model means that businesses only pay for what they use, and are not tied to onerous and costly infrastructure upgrades: SaaS subscriptions are operating expenditure, rather than significant upfront capital expenditure. The model is flexible, scalable and allows businesses of any size to use top-level enterprise-grade tools.
The Australian Securities Exchange (ASX) hosts a growing number of SaaS providers. Here is a look at five of the most promising. (I have left out logistics software group WiseTech Global (WTC) and construction management.
Software provider Aconex (ACX): although they are definite global success stories, which have products that lead their sectors, the stocks have moved higher than their analysts’ consensus price targets for the present – WTC by a long way.)
Xero (XRO, $28.88)
Market capitalisation: $4 billion
Estimated yield FY18: n/a
Analysts’ consensus price target: $31.33
New Zealand-based cloud accounting software provider Xero has been the flagship SaaS stock on the ASX. Having floated on the New Zealand Stock Exchange in June 2007 at NZ$1 a share, Xero came to the ASX in late 2012 at $4.65, and almost became a ten-bagger within two years – the stock reached a staggering $41.85 by March 2014. But by September 2015, the stock was down to $12.19. All of this was without making a cent of profit.
Xero has rebounded strongly, to $29.11 on the ASX, as the pathway to profit started to become clear: the market grew to understand the revolution that Xero was spearheading – that instead of paying thousands of dollars upfront for desktop software, small businesses would prefer to pay a small monthly fee to use cloud-based software. As its market grew, Xero simply chose to reinvest its sales revenue back into development and marketing: in effect, it put customer growth first, in the knowledge that profit would come.
Xero now leads the New Zealand, Australian, and United Kingdom cloud accounting markets in online accounting software for small businesses, and is the largest player outside the US. The company recently expanded into Asia with partnerships with banks in Malaysia, Hong Kong, and Singapore. Earlier this year, Xero was adjudged “best SaaS Company” by the global Cloud Awards.
Xero is closing in on profitability. Xero had accumulated losses of $NZ306 million at March 31, which is the end of its financial year. But in the second half of 2017, EBITDA (earnings before interest, tax, depreciation and amortisation hit $NZ1.6 million. The company is expected to show positive EBITDA in FY18, and according to Thomson Reuters, analysts see net profit – and earnings of 12.6 cents a share – in FY19.
Until then, the analysts’ consensus price target offers enough to keep investors interested: at $31.33, analysts see the stock offering about 8% upside, as it continues to grow its market share.
Reckon (RKN, $1.52)
Market capitalisation: $141 million
Estimated yield FY18: 4.7%, unfranked
Analysts’ consensus price target: $1.50
After many years as a reseller of small business accounting products under license from US-based owner Intuit, Reckon has developed its own software portfolio, first by securing the rights to its own version of Quickbooks – now Reckon Accounting – and launching its SaaS product, Reckon One. Reckon Accounting competes against the SaaS products of MYOB and Xero, while Reckon One is the cloud-based product that being rolled out into the Australian, New Zealand and UK market.
The company’s Reckon APS is a cloud-based practice management software package for legal and accounting firms. The company says Reckon APS is used by three of the “big four” accounting firms in Australia to manage their professional accounting practices, and also 70 of the top 100 firms. Reckon’s nQueue Billback software product is used by some of the leading legal firms in the world. Its Virtual Cabinet and SmartVault online portals are used by more than 752,000 firms to store and share sensitive documents. There is also a small business lending product, Reckon Loans.
In August, the document management business was listed independently on London’s AIM exchange as GetBusy.
One-third of Reckon’s revenue now comes from cloud-based products; cloud revenue grew by 18% in the June 2017 half-year. On Thomson Reuters’ collation, analysts expect Reckon to lift earnings per share (EPS) by 3% to 9 cents a share in 2017 (Reckon uses the financial year as its calendar year) and by 9% to 9.8 cents a share in 2018. The dividend is expected to fall this year, from 4.7 cents in 2016 to 3 cents, but analysts expect a surge to 5.6 cents in 2018: at the share price of $1.18, that puts RKN on a 4.75% yield, unfranked. But analysts see healthy scope for capital gain: the consensus target price of $1.50 implies upward movement of 27%.
Class (CL1, $2.35)
Market capitalisation: $332 million
Estimated yield FY18: 2.1%, fully franked
Analysts’ consensus price target: $3.56
Class Limited has benefited from two huge trends: the attractiveness of the SaaS offering, and the huge growth in self-managed superannuation funds (SMSFs). Class develops cloud-based software solutions for the Australian wealth accounting market, specialising in administration solutions that automate manual workloads, driving high levels of processing efficiency and scalability. Class has become the dominant player in the SMSF cloud software sector, with about 68% market share: its biggest competitor is BGL which has a product called Simple Fund 360.
As at the end of the third quarter of 2017, Class had a total of 150,553 “billable portfolios,” up more than two-thirds from its numbers just two years ago. About $195 billion of assets are administered on Class Super, across 146,922 SMSFs. There is still considerable scope for growth as more of the administration and reporting for SMSFs moves from the desktop to the cloud.
Analysts see solid growth in EPS, from 6.7 cents in FY17 to 7.9 cents in FY18 and 10.2 cents in FY19. From that, the dividend is expected to be boosted from 4 cents in FY17 to 5.8 cents in FY17 and 7 cents in FY19. That means the fully franked yield will rise: Class still shows a below-average dividend yield – its projected gross yield of 2.9% in FY18 is well below the market average of 5% – but the trajectory is very positive. For investors looking for a good growth stock candidate, Class really lives up to its name – and the stock is still trading at a discount of more than 20% to where analysts see its fair value.
Wellcom (WLL, $4.09)
Market capitalisation: $175 million
Estimated yield FY18: 5.4%, fully franked
Analysts’ consensus price target: $5.00
Wellcom Group is a global advertising and marketing creative production agency specialising in content creation and design. The company designs and produces advertising and marketing material for a wide range of customers who own brands, including household-name consumer goods and services businesses.
One of the big attractions of Wellcom is its content management platform and workflow tool, Knowledgewell, which it built for itself, to run its own production workflow. In 2016, the company launched Knowledgewell as a global marketing SaaS product, which can effectively run the marketing operations for any retailer, distributor or manufacturer.
In FY17 Wellcom secured international companies Tesco PLC and Southeastern Grocers as Knowledgewell customers, which it described as “breakthrough” deals in the respective UK and US markets. The software is also used by clients such as Treasury Wines Estates, the Victoria Racing Club (VRC), Sigma Pharmaceuticals, food company Riviana and Pharmacy Choice.
Knowledgewell is an integral part of the company’s “hub” strategy, which generates more than 70% of Wellcom’s revenue: there are more than 60 hubs worldwide, which act as a complete in-house marketing production studio. The hub business model consists of personnel, state-of-the-art hardware, communications and software. External licensing of Knowledgewell will a major growth business of Wellcom going forward. For now, the company is a high-quality Australian services stock with an international business, with a very attractive fully franked yield, and share price upside – if the analysts’ consensus price target is achieved – of about 12%.
Vista Group International (VGL, $2.50)
Market capitalisation: $391 million
Estimated yield FY18: n/a
Analysts’ consensus price target: NZ$2.90 (Yahoo Finance)
Kiwi stock Vista Group International is the global leader in its business, of cinema management software. The company’s biggest product, Vista Cinema, provides cinema management software to the world’s leading cinemas: it supplies 38% of the global ‘large-circuit’ cinema market. If China is excluded, Vista Cinema has 44.5% of the global market.
Vista Cinema, is not wholly a SaaS product – it is installed enterprise software – but one of the company’s main growth strategies is to move Vista Cinema to the cloud. In the meantime, VGL has several big SaaS sellers in other areas of the cinema business. Its Veezi cloud-based cinema management solution was built specifically for cinema exhibitors in the ‘small circuit’ (or independent) cinema market, categorised as those with fewer than 20 screens. Veezi has customers in more than 20 countries with the total market opportunity estimated to exceed 20,000 cinema sites.
Movio is Vista’s cloud-based marketing data analytics and campaign management software for cinema exhibitors, film distributors, and studios. Numero is the group’s SaaS product for film distributors and exhibitors: it tracks daily results at cinema level. MovieTeam is its SaaS cinema staff management and scheduling product. MovieXchange is its SaaS application to help exhibitors and distributors manage their digital marketing content. Flicks is a SaaS-based movie and cinema online guide product for small cinemas.
Vista’s net profit rose to NZ$3.6 million in the six months ended June 30, from NZ$2.7 million a year earlier and it is expecting 20 per cent plus growth in annual earnings. There is no dividend on the horizon yet, but Vista is a very good example of a company that grew to dominate a niche market through its products; has grown organically and through product extension into cloud solutions and marketing data services and an event ticketing business; and has expanded into China, where China’s burgeoning consumer class are big cinema goers.
The company’s business now covers Oceania, the Asia-Pacific region, the Americas, Europe, the Middle East, and Africa: it is well-placed to grow further, and that should flow through into the share price. Vista Group has recently completed a two-for-one share split, which took effect on 24 November.
Vista Group International