Clear vision on SaaS potential - InVision AG
InVision
Initiation of coverage
Clear vision on SaaS potential
Software & comp services
InVision offers a rare investment opportunity as a listed European software
6 March 2014
as a service (SaaS) company. It has seen the pain of making the move across to a SaaS platform and is well positioned to gain from the growth in the use of its injixo workforce management (WFM) software and online
Price
€39.3
Market cap
€84m
training offerings in call centres. Although valued at a premium to more traditional, smaller listed European software companies, it stands at a significant discount to other SaaS plays.
Net cash (€m) as at September 2013
Revenue (€m)
PBT* (€m)
EPS* (€)
DPS (€)
P/E (x)
Yield (%)
12/11
12.4
(3.8)
(3.4)
0.0
N/A
N/A
12/12
13.2
0.8
0.3
0.0
127.8
N/A
12/13e
13.6
1.8
0.7
0.0
52.7
N/A
12/14e
13.5
3.1
1.3
0.0
29.9
N/A
12/15e
15.5
5.4
2.3
0.0
17.4
N/A
Year end
4.9
Shares in issue
2.1m
Free float
19%
Code
IVX
Primary exchange
Frankfurt
Share price performance
Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, exceptional items and share-based payments. Our forecasts include the revenues and EBIT figures from the prelims [the only figures released].
European SaaS opportunity InVision offers a rare investment opportunity as a listed European software company that has made the transition to a SaaS business model and has leading positions in undeveloped markets. The majority of target users still use in-house solutions for WFM and traditional classroom training, but management sees a combined €600m market opportunity in the shift to cloud-based application-specific software and online training. The transition to SaaS has been painful but well executed and the recent results show gains in earnings terms are being seen.
Clear logic for increasing product adoption The business case for InVision’s WFM product is based on its low price per agent call centre WFM SaaS offer. Management estimates that the €9 cost per agent per month is more than made up for by the typical €30 per agent per month savings. It is far from clear exactly how fast the transition to professional WFM software will be in small- and medium-sized call centres but in many ways this is a situation analogous to the historical moves of SMEs to using customer relationship management (CRM) or accounting packages. With its eLearning pricing set at a fraction of the level of traditional teaching methods, this business area also has a compelling story, albeit a less developed one.
Valuation: Premium rating but not a SaaS rating InVision is forecast to see strong underlying growth and to generate cash over the coming years. This is, to an extent, reflected in its premium valuation multiples compared to the more traditional smaller European software companies and the larger call centre software vendors, but the discount to the big names of the SaaS
%
1m
3m
12m
Abs
35.4
44.1
112.4
Rel (local)
29.3
37.2
75.2
52-week high/low
€40.1
€14.8
Business description InVision provides workforce management software and online training for contact centres on a software as a service platform. It is based in Germany and is focused on European and North American opportunities as the market moves from in-house to professional solutions.
Next event Final results
31 March 2014
Analysts Ian Robertson
+44 (0)20 3681 2523
Dan Ridsdale
+44 (0)20 3077 5729
[email protected] Edison profile page
world is considerable. This discount could narrow as further evidence of the growth in SaaS revenues comes through. Furthermore, our simple DCF model also suggests that a higher share price is deserved.
InVision is a research client of Edison Investment Research Limited
Investment summary Description: Contact centre SaaS and online training InVision provides workforce management software for call centres. Its primary focus is on small and medium-sized centres (40%) expected of SaaS businesses. We estimate that the company had cash balances of €4.4m as at 31 December 2013 and even with the announced purchase of a new office building in central Dusseldorf for €6m plus approximately €1m extra for fit out and relocation costs this year, we forecast a net cash balance at the end of this year. The shift to SaaS means that there is limited requirement for capex beyond this.
Sensitivities: Market take up drives the top line The key sensitivity for InVision is whether the strong positive reaction it has seen to its SaaS products will be continued over the coming years and in particular how rapidly call centres will move away from their general use of ad hoc solutions for WFM and in-house classroom based training. There is the threat of new or increased competition in InVision’s chosen market but given InVision’s early start and focused offering we regard this is a secondary concern for now. The issues of the majority shareholding of the management and the limited share liquidity should not be ignored.
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Company description: A niche SaaS opportunity Background InVision is a leader in the provision of workforce management (WFM) software as a service and online training to call centres. Management believes there is a €600m market opportunity as these markets move from ad hoc in-house solutions, often Excel-based, and in-house classroom based training to professional systems and online education. InVision was founded in 1995 by three young computer scientists in Dusseldorf. Having started by creating enterprise-specific solutions, by 1997 they had begun to focus on solutions for call centres based around Windows client-server architectures. The company remained within the local German speaking markets for its first few years, but in due course it began serving clients in France, Italy, the UK, the Netherlands and Sweden, making its first move into the US in 2004. In 2007 the company floated on the Frankfurt Stock Exchange. Having been knocked back by the global financial crisis in 2008 and 2009, InVision launched its SaaS product in early 2011 and shortly afterwards announced the bold strategic move to adopt a pure software as a service business model over an 18-month timescale.
Call centre workforce management software The basic task of workforce management software is to work out the staffing levels required to match specific service levels and to predict ongoing staffing needs. The systems work to provide the best fit to service levels, labour costs, regulations and agents’ preferences. Historical data and predictive modelling are used to forecast demand on agents. Records are also made of actual activities, and subsequently used in the reporting of agent and call centre performance. The obvious benefit of this is that it reduces the costs of providing the required service levels, but, often more importantly, it significantly reduces the chances of understaffing, a failure that can lead to penalty payments far greater than the costs of overstaffing. The cost of staff is by far the greatest element of running a call centre, with industry studies suggesting it accounts for around 70% of costs in developed markets (source: Global Call Center Network). The task of managing this cost is typically ignored in setting up smaller call centres, and it is not until the centres are up and running that managements seek better ways of addressing the issue. InVision’s management estimates that in a typical small or medium-sized call centre, for the cost of €9 per month for its injixo WFM product, €30 per month can be saved per agent. We understand that in some cases InVision’s customers have seen savings of 25% in labour costs or 80% in administrative time.
eLearning for call centre staff In addition to the provision of software as a service, InVision also provides training for call centre agents. Having purchased The Call Center School (CCS) in 2011, management has taken this wellestablished but traditional training business and reinvented it. It has stripped out the traditional training methods and developed the online resources to create an eLearning platform based on the leading content and reputation that CCS has in the US. While this is not a major contributor to the top line at present, with revenues of €0.2m in FY13e, it should grow strongly, be cash generative and complement the software offering for call centre operators. Management has priced the offering aggressively, setting the cost at, it believes, 10% of that of equivalent classroom training. Furthermore, with less than 1% of all contact centres using online training, management believes the directly addressable market in North America alone is in the region of €300m per year.
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The call centre market According to research conducted by Pelorus Associates, there were nearly 95,000 call centres worldwide in 2010. Of these approximately two-thirds were in the US and over 20,000 were in Europe. The total number of agent positions globally was a staggering 7.6m. Looking at North America, although the largest call centres account for around 50% of agents, there are still a considerable number of agents in small and medium-sized call centres, 1.6m according to Pelorus estimates. We believe that the mix in Europe is more towards the smaller and medium-sized centres, suggesting that a total potentially addressable market in excess of 2.5m agents exists for InVision in its chosen markets of Europe and North America. Management believes WFM software penetration in the sub-150 agent market to be around 10% but expanding rapidly. While the move towards larger offshore locations was a key feature of the industry in the last decade, in recent years there has been something of a reversal following adverse customer reactions. InVision does not target these vast offshore call centres, but the move to onshoring has seen an expansion in both larger and smaller call centres. A further development in the call centre market in recent years has been the growth in virtual call centres, where many of the operators are actually working from home. Managing this type of workforce poses much the same challenges as those of a traditional call centre plus a few more besides, most notably with respect to performance tracking, accountability and productivity. InVision’s management believes that its product is well suited to address the challenges of virtual call centres.
InVision move to SaaS Seeing the opportunity in the small and medium-sized market, and understanding that the upfront cost of WFM software was its greatest challenge in the market, towards the end of the decade InVision’s management began to explore the potential of cloud technology and then began the development of its own cloud platform (injixo Platform) and the initial WFM application. Having launched and seen the reception for its SaaS product (then called iWFM.com) in early 2011, the formal announcement was made in mid-2011 that the whole company was moving across to a SaaS-based approach. Software as a service is the provision of the software and the required computing power as an allin-one service with the software being run on the software vendor’s own computers (or those of a third-party provider) and the customer accessing this via the internet. The customer typically pays for the service on a monthly or annual subscription rather than via the traditional high upfront licence fee with accompanying implementation, maintenance and service costs. Additionally, of course, the SaaS customer no longer needs to invest upfront in significant computing power of its own. The flexible model that SaaS offers is particularly attractive to smaller businesses. On a simple cost basis this compares very favourably with the cost of a traditional workforce management software solution and its accompanying service and hardware expenses.
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Exhibit 1: SaaS vs traditional on-premise cost comparison (€) Number of employees Old on-premise model Hardware Software Service Old Model Cost per annum over five years New SaaS model Subscription pm per agent Cost per annum Difference per annum Difference per annum per employee
25 €
50 €
100 €
1,000 €
10,000 41,000 56,000 107,000 21,400
10,000 54,000 67,500 131,500 26,300
10,000 67,000 90,000 167,000 33,400
Subject to negotiations 300,000 60,000
9 2,700
9 5,400
9 10,800
Not competitive Not competitive
18,700 748
20,900 418
22,600 226
Not competitive Not competitive
Source: InVision
Although the change in business model was painful (hits to revenues and costs of rewriting software and restructuring operations), the move makes InVision the only leading WFM software provider with a full SaaS service. The only explicit charge taken for the cost was a €0.5m provision in 2011 but there was a rise in the overall ‘other expenses’ line of €1.5m that year. The primary cost of the process has been in development spend and the service and licence type revenues foregone. The company has been focusing a significant proportion of its R&D effort on the development of its web-based product for several years and has spent over €20m in the four years leading to the transition. It is, of course, impossible to say exactly how much short-term revenues have been affected by the move, but we estimate it amounts to low double-digit millions of euros. The move to a SaaS platform should mean development spend is lower and also more effective. InVision is now working only on a single, universal WFM product for its customers, and the cost of implementing new features or revisions is now minimal because it simply has to update the software that all the SaaS users are working on. Exhibit 2: R&D spend (€000) 6,000 5,000
€000s
4,000 3,000 2,000 1,000 0
2008
2009
2010
2011
2012
2013e
Source: InVision, Edison Investment Research
Competition The call centre workforce management software industry is dominated by several large players that focus on serving the large call centre market. Approximately 80% of that market has software provided by Aspect (US, private), NICE-IEX (US, NICE.Q) or Verint (US, VRNT.Q). Behind these leaders come Teleopti (Sweden, private), InVision, Pipkins (US, private) and Calabrio (US, private), with a handful of smaller players fighting for the last few percent of the market. The large call centre market is a mature, international market with limited growth opportunities and it is not the target market of InVision. That said, InVision retains a position in this market through those of its larger
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customers that transitioned to the injixo WFM SaaS product or who remain on the legacy InVision WFM on premise product. Importantly for InVision, the growth efforts of the leaders are focused not on moving down the size range, but on expanding their product ‘suites’ into other call centre functions (such as call handling, recording or voice analytics) or across the wider enterprise/customer market (such as enterprise resource planning [ERP] or CRM). Competition for InVision in its target markets comes in the form of other solution-focused software providers, but management believes that its SaaS-focused solution is the best placed to serve this market as it transitions from ad hoc internal methods, typically Excel-based, to professional software solutions. In some ways the situation is analogous to the rise of PC-based accounting systems for small and medium-sized enterprises in the 1990s and the growth of CRM in SMEs in the last decade. Others offer products with hosted operations, notably GMT (now part of Verint), ISC (US, private) and Pipkins, but these are solutions aimed at the larger end of the market. Furthermore, they do not offer true cloud approaches and so their cost structures remain firmly within the on-premises model. Calabrio, Monet (US, private), NICE-IEX, Verint and WFMSG (US, private) have all produced products aimed at the smaller and medium-sized call centre markets, but these are typically more limited versions of pre-existing software platforms that have lacked the flexibility of implementation that InVision’s injixo WFM offers as a built for SaaS product. Of all the solutions we believe that Monet has the closest offering to that of InVision, although Monet remains tied to a more traditional sales approach, with the additional costs and complications of resellers. The Call Center School faces no significant direct competition in the eLearning space. The market for contact centre training is predominantly in-house provision or small, private providers of classroom-based education. IMCI, part of UBM (UBM.L:UK), is perhaps the most significant player. Although it has webinars, its main offering is very much in the traditional non-scaling traditional model.
Customers Although InVision has attempted to move its clients across from licence fee and maintenance contracts to SaaS, some of its larger and more conservative customers have remained on the traditional on-premise product (InVision WFM). These clients are predominantly in Germany and France, but InVision no longer actively promotes on-premise products in any market. In recent years InVision has seen a significant broadening of its customer base. In 2007 the top 10 customers accounted for over half of revenues. They now account for less than a fifth. This move has been driven in large part by the change in the product and business model. This is not to say that the larger client base has been abandoned; InVision retains Deutsche Telekom (Germany, DTE.DE) and IKEA (Sweden, private) as two of its largest customers. Furthermore, it should not be assumed that smaller call centres mean insubstantial clients as injixo WFM cloud customers include CareUK (UK, CUK.L) and Convey Health (US, private). The broadening of the client base in recent years has also been accompanied by a geographical shift in the mix with over half of new customer wins now in the US. This shift towards the US is, of course, increased by The Call Center School, which counts Coca Cola (KO:US), American Express (AXP:US) and Bank of America (BAC:US) among its customers.
Route to market By moving to a SaaS approach, InVision no longer requires the typical software company’s mix of salespeople, value-added resellers or complex ‘partnership’ arrangements to get to market. The sales and marketing process is now more focused on marketing rather than selling. The customer
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finds out about InVision through marketing (or already knows the brand), visits the website, expresses interest online, is contacted by a sales advisor and given a demonstration and basic training, runs a trial, and then subscribes to a standard product that, with a few flicks of software switches, is adapted to its requirements.
Management The management board is made up of two of the three founders of the business, Peter Bollenbeck, mainly responsible for R&D, and Armand Zohari, principally responsible for sales and support. The third founder, Matthias Schroer, who was on the management board until 2011, is a member, along with two others, of the supervisory board. All three of the founders hold significant stakes in the company. The management clearly has the skills and experience to run the business and the capability to make and execute difficult decisions, as shown by the move into SaaS. The fact that members of management continue to participate directly in areas such as product development suggests to us that they will remain ‘grounded’ in their view of the business.
Sensitivities The main driver to the value of the business (see Valuation section below) is whether call centres will move across to SaaS solutions, and more specifically to InVision’s products. However, there are other sensitivities that require consideration:
Continuing take off in SaaS revenues – although the progress to date has been impressive there are risks that the shift of small and medium-sized call centres to workforce management software takes longer than management anticipates. The low price points, rapid payback and flexible implementation suggest to us, at least, that the shift from ad hoc solutions based on applications like Excel towards workforce management software is inevitable, in a way that is similar to accounting and CRM systems before.
Competition – at present InVision appears to have a lead on both its smaller and larger competitors with regard to the small and medium-sized call centre markets. However, it is quite conceivable that a larger player could create a suitable flexible product or that a smaller or new player could provide a credible product.
Open source – it remains possible that open-source software could become available for workforce management. However, while such products exist for CRM and accounting, we do not regard it as likely that such a niche software development would attract the required support of open-source developers.
Subsuming of product – there are a number of software applications within a call centre environment (call handling, voice analytics, dialling systems), and it is noteworthy that some vendors have attempted to grow their business through adding adjoining products. Workforce management could well be one such adjoining product that non-competing vendors may have in their sights, but vendors wishing to move into this space face a choice between developing their own solution or buying one.
Taxation – as at December 2012 InVision had €12.7m taxable losses available, and it has a very advantageous tax situation (our forecast accounting tax rate is 9.5%). Should the tax situation change with regard to these losses in Germany or the low taxation of IP-related income in Switzerland, this could affect the value of InVision and its shares.
Management – the concentration of the decision-making and the shareholdings in one place is a common issue among smaller listed companies and it is very much the case with InVision.
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We note, however, that management remains committed to the business and that it appears to relish the challenge ahead.
Financials Earnings Outline We forecast an overall revenue CAGR 2013-16 of c 10%, but with the total SaaS revenues showing 20% growth. Our forecast for EBIT growth over the same period is a CAGR over 150% as the EBIT margin expands up to the levels (>40%) expected of SaaS businesses. Our forecast incudes the revenues and EBIT figures released in the summarised preliminary results statement on 18 January, but all other elements of the FY13 figures are our estimates. Final results are due for release on 31 March.
Revenues Once adopted, Workforce management software is part of the day-to-day operations of a call centre and customers do not stop using it and rarely change suppliers. This means that InVision can predict with some degree of certainty its ongoing base revenues. Although the SaaS business model removes the certainty of multi-year contracts it also removes the large upfront licence fees that can prove problematic when the economy turns down, as InVision found in 2008.
SaaS transition effect on revenues mix The move to SaaS has disrupted the top line as the business has transitioned across to a subscriptions-driven model and management has actively managed down the services and licences revenues that InVision saw as a traditional software business. As noted above, the exact amount of short-term revenues foregone is impossible to measure, but we estimate that it is in the region of low double-digit millions of euros. Following the move, the long-term prospects are for higher margins, a more scalable business model and a far better position from which to attack the small and medium-sized call centre WFM software market.
€000s
Exhibit 3: Revenues transition 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
2008 Software and Subs
2009
2010
CCS/eLearning*
2011 injixo WFM*
2012
2013e
injixo ex on premise*
2014e
On premise legacy
2015e Service
Source: InVision, Edison Investment Research. Note: *SaaS-related revenues.
We forecast that the ongoing injixo WFM income from customers transitioned from InVision WFM (the on-premise product) will remain broadly flat. However, we do forecast strong growth in revenues from injixo WFM from new customers as small and medium-sized call centres transition across from internal solutions to low-cost, flexible software offerings such as InVision’s.
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Call Centre School – acquisition and refocusing The Call Centre School is a long established US business with an excellent reputation and a wide range of call centre training products but it was a constrained business. It principally undertook classroom training but was also increasingly working through webinars and e-learning. As a result of this CCS began to work with InVision. Seeing the opportunity to leverage the brand and expertise of CCS across its own and a yet wider customer base, InVision acquired CCS in June 2011 on, we estimate, a revenues multiple of little more than one. InVision’s aim is to focus purely on the scalable e-learning business and to end the traditional business. Once again this will have reduced revenues from around €1m a year to approximately a quarter of that level in 2013. In the medium to long term, the impact on actual profitability should be a marked improvement. We forecast good growth from the reduced revenue base as the e-learning business becomes established and then moves broadly in line with the growth of injixo WFM.
Core Practice – disposal Another area in which we expect to see reduced revenues is in services revenues, where the disposal of Core Practice to an MBO means that the €2.8m seen in 2013 is likely to fall to around €1.5m in 2014. Core Practice is a small consulting business giving advice on workforce management processes and optimisation. Although profitable the business does not sit with management’s strategy of building a purely scalable business.
SaaS impact on costs The restructuring and active management of costs has had a dramatic impact upon the underlying cost base at InVision, as shown in the waterfall chart below. InVision is now able to support the same level of customer service with a cost base of just under €10m, whereas a few years back it was incurring annual operating expenses of twice that rate. This chart shows the before and after shots but does not reflect the more than €1.5m increase in ‘other expenses’ that was seen in 2011. Exhibit 4: Income statement transition 2010-13e 2,000 1,500 1,000
€'000
500 0 -500 -1,000
FY13e EBIT
Other Opex
Amort. & Dep'n
Personnel
COGS
FY10 EBIT
-2,000
Revenues, Other Income
-1,500
Source: InVision, Edison Investment Research
The reworking of the software and the changes in the business model have been reflected in the workforce at InVision. The most obvious evidence of this is in the employee numbers; 119 at the end of Q313, down from 163 at the end of 2010 and 241 at the end of 2008. But there has also been a significant shift in the mix of skills required of programmers and marketers/salespeople such
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that of the 119 staff, only about half pre-date the decision to move to SaaS. Of the current employees, over half work in some form of product development role. Two-thirds of the remainder are in customer-facing positions and the rest work in corporate administration. Staffing remains the largest element of costs accounting for approximately €7.5m in 2013e, 65% of total costs (FY13e Edison estimates). InVision does not actually host the injixo WFM services itself but instead uses Amazon Web Services (AWS) to do so. The cost of piggybacking on the back of Amazon’s vast hosting resources is relatively small and significantly less than the cost that InVision would require to undertake the task in house. Additionally, AWS is immediately scalable and provides guaranteed levels of security and uptime that would require a whole technical team were InVision to attempt to do it in-house. The focus on costs has been applied across the board at InVision with almost all of the software within the business now being open source.
Taxation As seen above, the corporate and product history of InVision shows that the management is not afraid to innovate or make bold moves and this is even visible in the tax charge. In 2009 InVision took the opportunity to sell its IP to a Swiss subsidiary. As a result of this transaction InVision is exposed to a lower tax rate on its profits such that the group accounting tax rate is expected to trend towards the 9.5% rate that the company pays on its profits in Switzerland. Management believes that this will be the long-term sustainable tax rate for the group. However, with approximately €21m of taxable losses carried forward into 2014e, InVision is currently paying negligible or nil cash taxes and we do not forecast tax payments within our explicit forecast period.
Forex Most of InVision’s revenues are currently earned in euros and most of its costs are also in euros. However, the shift across to the SaaS model has meant that US revenues are growing strongly. The refocusing of the activities of The Call Centre School may temporarily reduce the US dollar exposure, but we expect the US dollar costs to also rise, albeit not as fast as the revenues. The company holds its cash balances in euros.
Cash flow Cash generation is strong. The SaaS business model ensures that payments from debtors are received on a timely basis. The main cash outflow that we anticipate in the short term is the purchase of a new building within Dusseldorf rather than in the suburb of Ratingen. The €6m cost of the building and the anticipated €1m more of renovation, moving costs and the like is to be financed by both cash, approximately €3m, and debt, approximately €4m. The rental saving of €250k a year is expected to be more than the interest income foregone and the 1.3% interest charge on the debt. Having moved to SaaS and using AWS, InVision no longer has the requirement to spend on costly servers or storage equipment of its own. The move has not, of course, reduced the requirement to spend on improving and broadening this product with a development spend of approximately €3.5m a year, none of which is capitalised. In May 2013 InVision embarked upon a share buyback programme of just over 2% of the shares outstanding, and this was extended in December 2013 and January 2014. Although at present it is on hold, we expect that this policy of buying in shares will restart in the absence of any major internal projects or M&A opportunities. We believe that any acquisitions in the short term are likely to be similar to the CCS purchase, relatively small scale, opportunistic and with a clear and
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relatively low-risk payback. Although management has released no details with regards to paying dividends, we believe that dividends could become a feature of InVision shares in the medium term.
Balance sheet InVision has a strong balance sheet with no debt other than the anticipated mortgage on the new premises in Dusseldorf. Despite the bold technological moves that the management has made, it is, we believe, inherently conservative when it comes to finance – something that we regard as a distinct virtue in technology companies.
Valuation We have considered the valuation of InVision on both a traditional multiples-based approach and a simple DCF methodology.
Multiples-based approach There are no direct listed comparators for InVision, but there are a number of companies with common features – smaller European software businesses, SaaS companies and workforce or wider HR management software plays. Exhibit 5: Comparator valuation multiples
InVision Workday Cornerstone OD Salesforce NetSuite Verint NICE Allocate GK Software IGE + XAO i:FAO Tracsis Brady Ideagen
Share price
CCY M. Cap m
39.3 109.9 58.4 62.4 115.1 46.8 58.4 1.18 47.4 63.2 16 2.33 0.68 0.33
EUR USD USD USD USD USD USD GBP EUR EUR EUR GBP GBP GBP
84 21,074 3,083 37,609 8,595 2,502 2,534 79 91 90 85 57 55 40
EV x
Y/E x
80 20,655 3,108 38,044 8,397 2,876 2,091 75 104 70 81 51 47 40
Dec-13 Jan-14 Dec-13 Jan-14 Dec-13 Jan-14 Dec-13 May-14 Dec-13 Jul-14 Dec-14 Jul-14 Dec-13 Apr-14
EV/Revenues x FY1 FY2 5.9 5.9 44.4 29.3 16.7 11.9 9.4 7.3 20.2 15.6 3.2 2.9 2.2 2.0 1.9 1.8 3.7 3.6 2.8 2.7 5.8 5.1 4.6 3.2 1.7 1.6 5.7 4.4
FY3 5.2 20.2 8.6 5.9 23.2 2.7 1.9 n/a n/a n/a n/a n/a n/a n/a
EV/EBITDA x FY1 FY2 38.0 22.5 n/a n/a 1,554.0 248.6 56.4 40.8 195.3 189.5 12.1 11.6 7.6 7.3 12.5 10.7 34.6 14.8 11.7 10.0 20.2 13.5 17.0 12.8 7.8 15.7 n/a 13.3
FY3 13.8 n/a 77.7 31.9 127.0 11.3 6.7 n/a n/a n/a n/a n/a n/a n/a
FY1 52.7 n/a n/a 183.5 442.7 16.8 22.6 17.4 n/a 21.1 16.0 n/a n/a n/a
P/E x FY2 29.9 n/a n/a 124.8 244.9 15.4 20.6 14.9 27.9 18.6 16.0 21.2 22.7 16.5
FY3 17.4 n/a 182.5 89.1 126.5 14.2 18.9 n/a 17.6 18.1 14.5 17.9 13.6 16.5
Source: Thomson, Edison Investment Research. Note: Prices as at 3 March 2014.
The table above shows that InVision’s revenues and earnings multiples generally reflect its stronger growth potential compared to other smaller European-listed software companies, although there are other smaller software companies that are awarded higher multiples despite their lower forecast growth. It also shows how InVision trades at a marked premium to Verint and NICE, which are far more substantial contact management software players. However, InVision’s shares trade at substantial multiples discounts to the leading listed SaaS companies, Salesforce, Netsuite and Workday. It is noteworthy that Workday and Cornerstone are HR-focused SaaS businesses, giving us reassurance that HR-related software and high valuation multiples are not mutually exclusive. There is no absolute conclusion that can be drawn from these comparators. However, it does appear that, even given the likely discount for smaller company size and share illiquidity, the share price is not fully reflecting the fact that over 70% of its software revenues are from SaaS (FY13e Edison estimates) and that the target market should open up significantly over the coming years.
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DCF valuation Our DCF valuation analysis is based upon a basic scenario for the growth of the business over the next 11 years. We assume that the historical InVision WFM on-premise business is maintained, that the injixo WFM product continues to grow strongly and that, once its business and products are established, The Call Centre School revenue growth will move hand in hand with that of injixo WFM for small and medium-sized call centres. Over the medium term, the revenues see strong but declining growth such that, by the end of our DCF forecast period in 2025, growth is at the rate of the wider economy at 1% with 2025e revenues from injixo WFM of €25.6m, which corresponds to 237,000 seats at €9 per month. This would be equivalent to just under a 10% share of the estimated 2.5m seats in smaller and medium-sized call centres in North America and Europe at present. Within our DCF the EBITDA margin peaks at 53%. Although this is above the longer-term guidance of the SaaS industry majors this reflects the fact that, compared to those companies, InVision does not have as great a requirement to invest in new products, marketing or physical assets. We have included the impact upon the valuation of both the historical taxable losses and the 9.5% tax rate due to the housing of the IP within the Swiss subsidiary. Exhibit 6: DCF revenues assumptions (€000) 35,000 30,000 25,000
€000s
20,000 15,000 10,000 5,000 0
2013
2014
2015
CCS/eLearning
2016 Services
2017
2018
2019
On premise legacy
2020
2021
2022
injixo ex on premise
2023
2024
2025
injixo WFM
Source: Edison Investment Research
Applying costs of capital of 10%, 11% and 12% yields share prices of €58.1, €51.5 and €46.1 respectively; this is consistent with the multiples-based analysis in suggesting significant share price potential.
Conclusion on valuation Both our multiples and DCF-based consideration of the valuation of InVision suggest that the shares are currently undervalued.
InVision | 6 March 2014
12
Exhibit 7: Financial summary €'000s PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before amort. and except.) Intangible Amortisation Exceptionals Other Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3)
2011 IFRS
2012 IFRS
2013e IFRS
2014e IFRS
2015e IFRS
2016e IFRS
12,384 (178) 12,206 (3,643) (3,860) 0 0 104 (3,756) 48 (3,813) (3,709) (3,887) (7,596) (7,596)
13,228 (340) 12,888 1,168 816 0 0 (125) 692 13 829 705 146 851 851
13,560 (325) 13,235 2,103 1,753 0 0 0 1,753 15 1,768 1,768 (168) 1,600 1,600
13,518 (270) 13,248 3,559 3,169 0 0 0 3,169 (50) 3,119 3,119 (296) 2,823 2,823
15,524 (264) 15,260 5,793 5,403 0 0 0 5,403 (50) 5,353 5,353 (509) 4,844 4,844
18,190 (309) 17,881 8,272 7,882 0 0 0 7,882 (50) 7,832 7,832 (744) 7,088 7,088
Average Number of Shares Outstanding (m) EPS - normalised (€) EPS - normalised and fully diluted (€) EPS - (IFRS) (€) Dividend per share (c)
2.2 (3.4) (3.4) (3.4) 0.0
2.2 0.3 0.3 0.3 0.0
2.1 0.7 0.7 0.7 0.0
2.1 1.3 1.3 1.3 0.0
2.1 2.3 2.3 2.3 0.0
2.1 3.3 3.3 3.3 0.0
Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%)
98.6 -29.4 -31.2
97.4 8.8 6.2
97.6 15.5 12.9
98.0 26.3 23.4
98.3 37.3 34.8
98.3 45.5 43.3
BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Stocks Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets
2,676 1,253 308 1,115 5,831 17 3,845 1,667 301 (4,933) (4,913) (20) 0 0 0 3,574
2,114 1,050 254 811 6,135 12 2,833 2,490 799 (3,853) (3,853) 0 0 0 0 4,396
1,881 1,020 219 643 7,102 12 1,858 4,433 799 (3,862) (3,862) 0 0 0 0 5,122
8,345 1,000 6,999 347 7,440 12 2,222 4,407 799 (3,841) (3,841) 0 (4,000) (4,000) 0 7,944
7,941 990 6,914 38 12,686 12 2,552 9,322 799 (3,838) (3,838) 0 (4,000) (4,000) 0 12,789
7,846 980 6,829 38 19,871 12 2,990 16,069 799 (3,841) (3,841) 0 (4,000) (4,000) 0 19,876
CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash)
(2,102) 0 0 (1,028) 0 (653) 0 (3,784) (5,431) 0 0 (1,647)
1,294 0 0 (374) (148) 71 0 843 (1,647) 0 0 (2,490)
3,103 0 0 (285) 0 (875) 0 1,943 (2,490) 0 0 (4,433)
3,124 0 0 (7,150) 0 0 0 (4,026) (4,433) 0 0 (407)
5,210 0 0 (295) 0 0 0 4,915 (407) 0 0 (5,322)
7,042 0 0 (295) 0 0 0 6,747 (5,322) 0 0 (12,069)
Source: InVision accounts, Edison Investment Research
InVision | 6 March 2014
13
InVision | 6 March 2014
14
InVision | 6 March 2014
15
Contact details
Revenue by geography
InVision AG Halkestrasse 38 40880 Ratingen Germany +49 (0) 2102 7280 www.invisionfm.com
%
Germany, Austria, Switzerland
CAGR metrics EPS 2011-15e EPS 2013e-15e EBITDA 2011-15e EBITDA 2013e-15e Sales 2011-15e Sales 2013-15e
50%
Profitability metrics N/A 74.0% N/A 66.0% 5.8% 7.0%
Balance sheet metrics
ROCE 14e Avg ROCE 2011-15e ROE 14e Gross margin 14e Operating margin 14e Gr mgn / Op mgn 14e
69.7% 23.2% 35.5% 98.0% 23.4% 4.2x
Gearing 14e Interest cover 14e CA/CL 14e Stock days 14e Debtor days 14e Creditor days 14e
Rest of world
Sensitivities evaluation N/A N/A 1.9 N/A 60.0 34.4
Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices
Management team CEO: Peter Bollenbeck
VP: Armand Zohari
Peter is one of the three founders of InVision and is responsible for product development.
Armand is one of the three founders of InVision and is responsible for marketing and customer relationships.
Chair of Supervisory Board: Dr Thomas Hermes
Head of Finance: Marc Aurel Voges
Thomas is an experienced corporate lawyer and is a partner of HolthoffPfoertner, based in Essen and Berlin.
Marc is leads the finance team and is responsible for the financial management and reporting at InVision.
Principal shareholders (as at 1 March 2014)
(%)
InVision Holding GmbH (Management)
24.2
Peter Bollenbeck (Founder, CEO)
17.0
Armand Zohari (Founder, VP)
17.0
Matthias Schroer (Founder, supervisory board)
11.3
Companies named in this report NICE-IEX (NICE.Q),Verint (VRNT.Q),Deutsche Telekom (DTE.DE), CareUK (CUK.L) , UBM (UBM.L), American Express (AXP), Bank of America (BAC), Coca Cola (KO)
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Frankfurt +49 (0)69 78 8076 960 Schumannstrasse InVision | 634bMarch 2014 60325 Frankfurt Germany
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom
New York +1 646 653 7026 245 Park Avenue, 39th Floor 10167, New York US
Sydney +61 (0)2 9258 1161 Level 25, Aurora Place 88 Phillip St, Sydney NSW 2000, Australia
Wellington +64 (0)48 948 555 Level 15, 171 Featherston St Wellington 6011 New Zealand
16
Initiation of coverage
Clear vision on SaaS potential
Software & comp services
InVision offers a rare investment opportunity as a listed European software
6 March 2014
as a service (SaaS) company. It has seen the pain of making the move across to a SaaS platform and is well positioned to gain from the growth in the use of its injixo workforce management (WFM) software and online
Price
€39.3
Market cap
€84m
training offerings in call centres. Although valued at a premium to more traditional, smaller listed European software companies, it stands at a significant discount to other SaaS plays.
Net cash (€m) as at September 2013
Revenue (€m)
PBT* (€m)
EPS* (€)
DPS (€)
P/E (x)
Yield (%)
12/11
12.4
(3.8)
(3.4)
0.0
N/A
N/A
12/12
13.2
0.8
0.3
0.0
127.8
N/A
12/13e
13.6
1.8
0.7
0.0
52.7
N/A
12/14e
13.5
3.1
1.3
0.0
29.9
N/A
12/15e
15.5
5.4
2.3
0.0
17.4
N/A
Year end
4.9
Shares in issue
2.1m
Free float
19%
Code
IVX
Primary exchange
Frankfurt
Share price performance
Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, exceptional items and share-based payments. Our forecasts include the revenues and EBIT figures from the prelims [the only figures released].
European SaaS opportunity InVision offers a rare investment opportunity as a listed European software company that has made the transition to a SaaS business model and has leading positions in undeveloped markets. The majority of target users still use in-house solutions for WFM and traditional classroom training, but management sees a combined €600m market opportunity in the shift to cloud-based application-specific software and online training. The transition to SaaS has been painful but well executed and the recent results show gains in earnings terms are being seen.
Clear logic for increasing product adoption The business case for InVision’s WFM product is based on its low price per agent call centre WFM SaaS offer. Management estimates that the €9 cost per agent per month is more than made up for by the typical €30 per agent per month savings. It is far from clear exactly how fast the transition to professional WFM software will be in small- and medium-sized call centres but in many ways this is a situation analogous to the historical moves of SMEs to using customer relationship management (CRM) or accounting packages. With its eLearning pricing set at a fraction of the level of traditional teaching methods, this business area also has a compelling story, albeit a less developed one.
Valuation: Premium rating but not a SaaS rating InVision is forecast to see strong underlying growth and to generate cash over the coming years. This is, to an extent, reflected in its premium valuation multiples compared to the more traditional smaller European software companies and the larger call centre software vendors, but the discount to the big names of the SaaS
%
1m
3m
12m
Abs
35.4
44.1
112.4
Rel (local)
29.3
37.2
75.2
52-week high/low
€40.1
€14.8
Business description InVision provides workforce management software and online training for contact centres on a software as a service platform. It is based in Germany and is focused on European and North American opportunities as the market moves from in-house to professional solutions.
Next event Final results
31 March 2014
Analysts Ian Robertson
+44 (0)20 3681 2523
Dan Ridsdale
+44 (0)20 3077 5729
[email protected] Edison profile page
world is considerable. This discount could narrow as further evidence of the growth in SaaS revenues comes through. Furthermore, our simple DCF model also suggests that a higher share price is deserved.
InVision is a research client of Edison Investment Research Limited
Investment summary Description: Contact centre SaaS and online training InVision provides workforce management software for call centres. Its primary focus is on small and medium-sized centres (40%) expected of SaaS businesses. We estimate that the company had cash balances of €4.4m as at 31 December 2013 and even with the announced purchase of a new office building in central Dusseldorf for €6m plus approximately €1m extra for fit out and relocation costs this year, we forecast a net cash balance at the end of this year. The shift to SaaS means that there is limited requirement for capex beyond this.
Sensitivities: Market take up drives the top line The key sensitivity for InVision is whether the strong positive reaction it has seen to its SaaS products will be continued over the coming years and in particular how rapidly call centres will move away from their general use of ad hoc solutions for WFM and in-house classroom based training. There is the threat of new or increased competition in InVision’s chosen market but given InVision’s early start and focused offering we regard this is a secondary concern for now. The issues of the majority shareholding of the management and the limited share liquidity should not be ignored.
InVision | 6 March 2014
2
Company description: A niche SaaS opportunity Background InVision is a leader in the provision of workforce management (WFM) software as a service and online training to call centres. Management believes there is a €600m market opportunity as these markets move from ad hoc in-house solutions, often Excel-based, and in-house classroom based training to professional systems and online education. InVision was founded in 1995 by three young computer scientists in Dusseldorf. Having started by creating enterprise-specific solutions, by 1997 they had begun to focus on solutions for call centres based around Windows client-server architectures. The company remained within the local German speaking markets for its first few years, but in due course it began serving clients in France, Italy, the UK, the Netherlands and Sweden, making its first move into the US in 2004. In 2007 the company floated on the Frankfurt Stock Exchange. Having been knocked back by the global financial crisis in 2008 and 2009, InVision launched its SaaS product in early 2011 and shortly afterwards announced the bold strategic move to adopt a pure software as a service business model over an 18-month timescale.
Call centre workforce management software The basic task of workforce management software is to work out the staffing levels required to match specific service levels and to predict ongoing staffing needs. The systems work to provide the best fit to service levels, labour costs, regulations and agents’ preferences. Historical data and predictive modelling are used to forecast demand on agents. Records are also made of actual activities, and subsequently used in the reporting of agent and call centre performance. The obvious benefit of this is that it reduces the costs of providing the required service levels, but, often more importantly, it significantly reduces the chances of understaffing, a failure that can lead to penalty payments far greater than the costs of overstaffing. The cost of staff is by far the greatest element of running a call centre, with industry studies suggesting it accounts for around 70% of costs in developed markets (source: Global Call Center Network). The task of managing this cost is typically ignored in setting up smaller call centres, and it is not until the centres are up and running that managements seek better ways of addressing the issue. InVision’s management estimates that in a typical small or medium-sized call centre, for the cost of €9 per month for its injixo WFM product, €30 per month can be saved per agent. We understand that in some cases InVision’s customers have seen savings of 25% in labour costs or 80% in administrative time.
eLearning for call centre staff In addition to the provision of software as a service, InVision also provides training for call centre agents. Having purchased The Call Center School (CCS) in 2011, management has taken this wellestablished but traditional training business and reinvented it. It has stripped out the traditional training methods and developed the online resources to create an eLearning platform based on the leading content and reputation that CCS has in the US. While this is not a major contributor to the top line at present, with revenues of €0.2m in FY13e, it should grow strongly, be cash generative and complement the software offering for call centre operators. Management has priced the offering aggressively, setting the cost at, it believes, 10% of that of equivalent classroom training. Furthermore, with less than 1% of all contact centres using online training, management believes the directly addressable market in North America alone is in the region of €300m per year.
InVision | 6 March 2014
3
The call centre market According to research conducted by Pelorus Associates, there were nearly 95,000 call centres worldwide in 2010. Of these approximately two-thirds were in the US and over 20,000 were in Europe. The total number of agent positions globally was a staggering 7.6m. Looking at North America, although the largest call centres account for around 50% of agents, there are still a considerable number of agents in small and medium-sized call centres, 1.6m according to Pelorus estimates. We believe that the mix in Europe is more towards the smaller and medium-sized centres, suggesting that a total potentially addressable market in excess of 2.5m agents exists for InVision in its chosen markets of Europe and North America. Management believes WFM software penetration in the sub-150 agent market to be around 10% but expanding rapidly. While the move towards larger offshore locations was a key feature of the industry in the last decade, in recent years there has been something of a reversal following adverse customer reactions. InVision does not target these vast offshore call centres, but the move to onshoring has seen an expansion in both larger and smaller call centres. A further development in the call centre market in recent years has been the growth in virtual call centres, where many of the operators are actually working from home. Managing this type of workforce poses much the same challenges as those of a traditional call centre plus a few more besides, most notably with respect to performance tracking, accountability and productivity. InVision’s management believes that its product is well suited to address the challenges of virtual call centres.
InVision move to SaaS Seeing the opportunity in the small and medium-sized market, and understanding that the upfront cost of WFM software was its greatest challenge in the market, towards the end of the decade InVision’s management began to explore the potential of cloud technology and then began the development of its own cloud platform (injixo Platform) and the initial WFM application. Having launched and seen the reception for its SaaS product (then called iWFM.com) in early 2011, the formal announcement was made in mid-2011 that the whole company was moving across to a SaaS-based approach. Software as a service is the provision of the software and the required computing power as an allin-one service with the software being run on the software vendor’s own computers (or those of a third-party provider) and the customer accessing this via the internet. The customer typically pays for the service on a monthly or annual subscription rather than via the traditional high upfront licence fee with accompanying implementation, maintenance and service costs. Additionally, of course, the SaaS customer no longer needs to invest upfront in significant computing power of its own. The flexible model that SaaS offers is particularly attractive to smaller businesses. On a simple cost basis this compares very favourably with the cost of a traditional workforce management software solution and its accompanying service and hardware expenses.
InVision | 6 March 2014
4
Exhibit 1: SaaS vs traditional on-premise cost comparison (€) Number of employees Old on-premise model Hardware Software Service Old Model Cost per annum over five years New SaaS model Subscription pm per agent Cost per annum Difference per annum Difference per annum per employee
25 €
50 €
100 €
1,000 €
10,000 41,000 56,000 107,000 21,400
10,000 54,000 67,500 131,500 26,300
10,000 67,000 90,000 167,000 33,400
Subject to negotiations 300,000 60,000
9 2,700
9 5,400
9 10,800
Not competitive Not competitive
18,700 748
20,900 418
22,600 226
Not competitive Not competitive
Source: InVision
Although the change in business model was painful (hits to revenues and costs of rewriting software and restructuring operations), the move makes InVision the only leading WFM software provider with a full SaaS service. The only explicit charge taken for the cost was a €0.5m provision in 2011 but there was a rise in the overall ‘other expenses’ line of €1.5m that year. The primary cost of the process has been in development spend and the service and licence type revenues foregone. The company has been focusing a significant proportion of its R&D effort on the development of its web-based product for several years and has spent over €20m in the four years leading to the transition. It is, of course, impossible to say exactly how much short-term revenues have been affected by the move, but we estimate it amounts to low double-digit millions of euros. The move to a SaaS platform should mean development spend is lower and also more effective. InVision is now working only on a single, universal WFM product for its customers, and the cost of implementing new features or revisions is now minimal because it simply has to update the software that all the SaaS users are working on. Exhibit 2: R&D spend (€000) 6,000 5,000
€000s
4,000 3,000 2,000 1,000 0
2008
2009
2010
2011
2012
2013e
Source: InVision, Edison Investment Research
Competition The call centre workforce management software industry is dominated by several large players that focus on serving the large call centre market. Approximately 80% of that market has software provided by Aspect (US, private), NICE-IEX (US, NICE.Q) or Verint (US, VRNT.Q). Behind these leaders come Teleopti (Sweden, private), InVision, Pipkins (US, private) and Calabrio (US, private), with a handful of smaller players fighting for the last few percent of the market. The large call centre market is a mature, international market with limited growth opportunities and it is not the target market of InVision. That said, InVision retains a position in this market through those of its larger
InVision | 6 March 2014
5
customers that transitioned to the injixo WFM SaaS product or who remain on the legacy InVision WFM on premise product. Importantly for InVision, the growth efforts of the leaders are focused not on moving down the size range, but on expanding their product ‘suites’ into other call centre functions (such as call handling, recording or voice analytics) or across the wider enterprise/customer market (such as enterprise resource planning [ERP] or CRM). Competition for InVision in its target markets comes in the form of other solution-focused software providers, but management believes that its SaaS-focused solution is the best placed to serve this market as it transitions from ad hoc internal methods, typically Excel-based, to professional software solutions. In some ways the situation is analogous to the rise of PC-based accounting systems for small and medium-sized enterprises in the 1990s and the growth of CRM in SMEs in the last decade. Others offer products with hosted operations, notably GMT (now part of Verint), ISC (US, private) and Pipkins, but these are solutions aimed at the larger end of the market. Furthermore, they do not offer true cloud approaches and so their cost structures remain firmly within the on-premises model. Calabrio, Monet (US, private), NICE-IEX, Verint and WFMSG (US, private) have all produced products aimed at the smaller and medium-sized call centre markets, but these are typically more limited versions of pre-existing software platforms that have lacked the flexibility of implementation that InVision’s injixo WFM offers as a built for SaaS product. Of all the solutions we believe that Monet has the closest offering to that of InVision, although Monet remains tied to a more traditional sales approach, with the additional costs and complications of resellers. The Call Center School faces no significant direct competition in the eLearning space. The market for contact centre training is predominantly in-house provision or small, private providers of classroom-based education. IMCI, part of UBM (UBM.L:UK), is perhaps the most significant player. Although it has webinars, its main offering is very much in the traditional non-scaling traditional model.
Customers Although InVision has attempted to move its clients across from licence fee and maintenance contracts to SaaS, some of its larger and more conservative customers have remained on the traditional on-premise product (InVision WFM). These clients are predominantly in Germany and France, but InVision no longer actively promotes on-premise products in any market. In recent years InVision has seen a significant broadening of its customer base. In 2007 the top 10 customers accounted for over half of revenues. They now account for less than a fifth. This move has been driven in large part by the change in the product and business model. This is not to say that the larger client base has been abandoned; InVision retains Deutsche Telekom (Germany, DTE.DE) and IKEA (Sweden, private) as two of its largest customers. Furthermore, it should not be assumed that smaller call centres mean insubstantial clients as injixo WFM cloud customers include CareUK (UK, CUK.L) and Convey Health (US, private). The broadening of the client base in recent years has also been accompanied by a geographical shift in the mix with over half of new customer wins now in the US. This shift towards the US is, of course, increased by The Call Center School, which counts Coca Cola (KO:US), American Express (AXP:US) and Bank of America (BAC:US) among its customers.
Route to market By moving to a SaaS approach, InVision no longer requires the typical software company’s mix of salespeople, value-added resellers or complex ‘partnership’ arrangements to get to market. The sales and marketing process is now more focused on marketing rather than selling. The customer
InVision | 6 March 2014
6
finds out about InVision through marketing (or already knows the brand), visits the website, expresses interest online, is contacted by a sales advisor and given a demonstration and basic training, runs a trial, and then subscribes to a standard product that, with a few flicks of software switches, is adapted to its requirements.
Management The management board is made up of two of the three founders of the business, Peter Bollenbeck, mainly responsible for R&D, and Armand Zohari, principally responsible for sales and support. The third founder, Matthias Schroer, who was on the management board until 2011, is a member, along with two others, of the supervisory board. All three of the founders hold significant stakes in the company. The management clearly has the skills and experience to run the business and the capability to make and execute difficult decisions, as shown by the move into SaaS. The fact that members of management continue to participate directly in areas such as product development suggests to us that they will remain ‘grounded’ in their view of the business.
Sensitivities The main driver to the value of the business (see Valuation section below) is whether call centres will move across to SaaS solutions, and more specifically to InVision’s products. However, there are other sensitivities that require consideration:
Continuing take off in SaaS revenues – although the progress to date has been impressive there are risks that the shift of small and medium-sized call centres to workforce management software takes longer than management anticipates. The low price points, rapid payback and flexible implementation suggest to us, at least, that the shift from ad hoc solutions based on applications like Excel towards workforce management software is inevitable, in a way that is similar to accounting and CRM systems before.
Competition – at present InVision appears to have a lead on both its smaller and larger competitors with regard to the small and medium-sized call centre markets. However, it is quite conceivable that a larger player could create a suitable flexible product or that a smaller or new player could provide a credible product.
Open source – it remains possible that open-source software could become available for workforce management. However, while such products exist for CRM and accounting, we do not regard it as likely that such a niche software development would attract the required support of open-source developers.
Subsuming of product – there are a number of software applications within a call centre environment (call handling, voice analytics, dialling systems), and it is noteworthy that some vendors have attempted to grow their business through adding adjoining products. Workforce management could well be one such adjoining product that non-competing vendors may have in their sights, but vendors wishing to move into this space face a choice between developing their own solution or buying one.
Taxation – as at December 2012 InVision had €12.7m taxable losses available, and it has a very advantageous tax situation (our forecast accounting tax rate is 9.5%). Should the tax situation change with regard to these losses in Germany or the low taxation of IP-related income in Switzerland, this could affect the value of InVision and its shares.
Management – the concentration of the decision-making and the shareholdings in one place is a common issue among smaller listed companies and it is very much the case with InVision.
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We note, however, that management remains committed to the business and that it appears to relish the challenge ahead.
Financials Earnings Outline We forecast an overall revenue CAGR 2013-16 of c 10%, but with the total SaaS revenues showing 20% growth. Our forecast for EBIT growth over the same period is a CAGR over 150% as the EBIT margin expands up to the levels (>40%) expected of SaaS businesses. Our forecast incudes the revenues and EBIT figures released in the summarised preliminary results statement on 18 January, but all other elements of the FY13 figures are our estimates. Final results are due for release on 31 March.
Revenues Once adopted, Workforce management software is part of the day-to-day operations of a call centre and customers do not stop using it and rarely change suppliers. This means that InVision can predict with some degree of certainty its ongoing base revenues. Although the SaaS business model removes the certainty of multi-year contracts it also removes the large upfront licence fees that can prove problematic when the economy turns down, as InVision found in 2008.
SaaS transition effect on revenues mix The move to SaaS has disrupted the top line as the business has transitioned across to a subscriptions-driven model and management has actively managed down the services and licences revenues that InVision saw as a traditional software business. As noted above, the exact amount of short-term revenues foregone is impossible to measure, but we estimate that it is in the region of low double-digit millions of euros. Following the move, the long-term prospects are for higher margins, a more scalable business model and a far better position from which to attack the small and medium-sized call centre WFM software market.
€000s
Exhibit 3: Revenues transition 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
2008 Software and Subs
2009
2010
CCS/eLearning*
2011 injixo WFM*
2012
2013e
injixo ex on premise*
2014e
On premise legacy
2015e Service
Source: InVision, Edison Investment Research. Note: *SaaS-related revenues.
We forecast that the ongoing injixo WFM income from customers transitioned from InVision WFM (the on-premise product) will remain broadly flat. However, we do forecast strong growth in revenues from injixo WFM from new customers as small and medium-sized call centres transition across from internal solutions to low-cost, flexible software offerings such as InVision’s.
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Call Centre School – acquisition and refocusing The Call Centre School is a long established US business with an excellent reputation and a wide range of call centre training products but it was a constrained business. It principally undertook classroom training but was also increasingly working through webinars and e-learning. As a result of this CCS began to work with InVision. Seeing the opportunity to leverage the brand and expertise of CCS across its own and a yet wider customer base, InVision acquired CCS in June 2011 on, we estimate, a revenues multiple of little more than one. InVision’s aim is to focus purely on the scalable e-learning business and to end the traditional business. Once again this will have reduced revenues from around €1m a year to approximately a quarter of that level in 2013. In the medium to long term, the impact on actual profitability should be a marked improvement. We forecast good growth from the reduced revenue base as the e-learning business becomes established and then moves broadly in line with the growth of injixo WFM.
Core Practice – disposal Another area in which we expect to see reduced revenues is in services revenues, where the disposal of Core Practice to an MBO means that the €2.8m seen in 2013 is likely to fall to around €1.5m in 2014. Core Practice is a small consulting business giving advice on workforce management processes and optimisation. Although profitable the business does not sit with management’s strategy of building a purely scalable business.
SaaS impact on costs The restructuring and active management of costs has had a dramatic impact upon the underlying cost base at InVision, as shown in the waterfall chart below. InVision is now able to support the same level of customer service with a cost base of just under €10m, whereas a few years back it was incurring annual operating expenses of twice that rate. This chart shows the before and after shots but does not reflect the more than €1.5m increase in ‘other expenses’ that was seen in 2011. Exhibit 4: Income statement transition 2010-13e 2,000 1,500 1,000
€'000
500 0 -500 -1,000
FY13e EBIT
Other Opex
Amort. & Dep'n
Personnel
COGS
FY10 EBIT
-2,000
Revenues, Other Income
-1,500
Source: InVision, Edison Investment Research
The reworking of the software and the changes in the business model have been reflected in the workforce at InVision. The most obvious evidence of this is in the employee numbers; 119 at the end of Q313, down from 163 at the end of 2010 and 241 at the end of 2008. But there has also been a significant shift in the mix of skills required of programmers and marketers/salespeople such
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that of the 119 staff, only about half pre-date the decision to move to SaaS. Of the current employees, over half work in some form of product development role. Two-thirds of the remainder are in customer-facing positions and the rest work in corporate administration. Staffing remains the largest element of costs accounting for approximately €7.5m in 2013e, 65% of total costs (FY13e Edison estimates). InVision does not actually host the injixo WFM services itself but instead uses Amazon Web Services (AWS) to do so. The cost of piggybacking on the back of Amazon’s vast hosting resources is relatively small and significantly less than the cost that InVision would require to undertake the task in house. Additionally, AWS is immediately scalable and provides guaranteed levels of security and uptime that would require a whole technical team were InVision to attempt to do it in-house. The focus on costs has been applied across the board at InVision with almost all of the software within the business now being open source.
Taxation As seen above, the corporate and product history of InVision shows that the management is not afraid to innovate or make bold moves and this is even visible in the tax charge. In 2009 InVision took the opportunity to sell its IP to a Swiss subsidiary. As a result of this transaction InVision is exposed to a lower tax rate on its profits such that the group accounting tax rate is expected to trend towards the 9.5% rate that the company pays on its profits in Switzerland. Management believes that this will be the long-term sustainable tax rate for the group. However, with approximately €21m of taxable losses carried forward into 2014e, InVision is currently paying negligible or nil cash taxes and we do not forecast tax payments within our explicit forecast period.
Forex Most of InVision’s revenues are currently earned in euros and most of its costs are also in euros. However, the shift across to the SaaS model has meant that US revenues are growing strongly. The refocusing of the activities of The Call Centre School may temporarily reduce the US dollar exposure, but we expect the US dollar costs to also rise, albeit not as fast as the revenues. The company holds its cash balances in euros.
Cash flow Cash generation is strong. The SaaS business model ensures that payments from debtors are received on a timely basis. The main cash outflow that we anticipate in the short term is the purchase of a new building within Dusseldorf rather than in the suburb of Ratingen. The €6m cost of the building and the anticipated €1m more of renovation, moving costs and the like is to be financed by both cash, approximately €3m, and debt, approximately €4m. The rental saving of €250k a year is expected to be more than the interest income foregone and the 1.3% interest charge on the debt. Having moved to SaaS and using AWS, InVision no longer has the requirement to spend on costly servers or storage equipment of its own. The move has not, of course, reduced the requirement to spend on improving and broadening this product with a development spend of approximately €3.5m a year, none of which is capitalised. In May 2013 InVision embarked upon a share buyback programme of just over 2% of the shares outstanding, and this was extended in December 2013 and January 2014. Although at present it is on hold, we expect that this policy of buying in shares will restart in the absence of any major internal projects or M&A opportunities. We believe that any acquisitions in the short term are likely to be similar to the CCS purchase, relatively small scale, opportunistic and with a clear and
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relatively low-risk payback. Although management has released no details with regards to paying dividends, we believe that dividends could become a feature of InVision shares in the medium term.
Balance sheet InVision has a strong balance sheet with no debt other than the anticipated mortgage on the new premises in Dusseldorf. Despite the bold technological moves that the management has made, it is, we believe, inherently conservative when it comes to finance – something that we regard as a distinct virtue in technology companies.
Valuation We have considered the valuation of InVision on both a traditional multiples-based approach and a simple DCF methodology.
Multiples-based approach There are no direct listed comparators for InVision, but there are a number of companies with common features – smaller European software businesses, SaaS companies and workforce or wider HR management software plays. Exhibit 5: Comparator valuation multiples
InVision Workday Cornerstone OD Salesforce NetSuite Verint NICE Allocate GK Software IGE + XAO i:FAO Tracsis Brady Ideagen
Share price
CCY M. Cap m
39.3 109.9 58.4 62.4 115.1 46.8 58.4 1.18 47.4 63.2 16 2.33 0.68 0.33
EUR USD USD USD USD USD USD GBP EUR EUR EUR GBP GBP GBP
84 21,074 3,083 37,609 8,595 2,502 2,534 79 91 90 85 57 55 40
EV x
Y/E x
80 20,655 3,108 38,044 8,397 2,876 2,091 75 104 70 81 51 47 40
Dec-13 Jan-14 Dec-13 Jan-14 Dec-13 Jan-14 Dec-13 May-14 Dec-13 Jul-14 Dec-14 Jul-14 Dec-13 Apr-14
EV/Revenues x FY1 FY2 5.9 5.9 44.4 29.3 16.7 11.9 9.4 7.3 20.2 15.6 3.2 2.9 2.2 2.0 1.9 1.8 3.7 3.6 2.8 2.7 5.8 5.1 4.6 3.2 1.7 1.6 5.7 4.4
FY3 5.2 20.2 8.6 5.9 23.2 2.7 1.9 n/a n/a n/a n/a n/a n/a n/a
EV/EBITDA x FY1 FY2 38.0 22.5 n/a n/a 1,554.0 248.6 56.4 40.8 195.3 189.5 12.1 11.6 7.6 7.3 12.5 10.7 34.6 14.8 11.7 10.0 20.2 13.5 17.0 12.8 7.8 15.7 n/a 13.3
FY3 13.8 n/a 77.7 31.9 127.0 11.3 6.7 n/a n/a n/a n/a n/a n/a n/a
FY1 52.7 n/a n/a 183.5 442.7 16.8 22.6 17.4 n/a 21.1 16.0 n/a n/a n/a
P/E x FY2 29.9 n/a n/a 124.8 244.9 15.4 20.6 14.9 27.9 18.6 16.0 21.2 22.7 16.5
FY3 17.4 n/a 182.5 89.1 126.5 14.2 18.9 n/a 17.6 18.1 14.5 17.9 13.6 16.5
Source: Thomson, Edison Investment Research. Note: Prices as at 3 March 2014.
The table above shows that InVision’s revenues and earnings multiples generally reflect its stronger growth potential compared to other smaller European-listed software companies, although there are other smaller software companies that are awarded higher multiples despite their lower forecast growth. It also shows how InVision trades at a marked premium to Verint and NICE, which are far more substantial contact management software players. However, InVision’s shares trade at substantial multiples discounts to the leading listed SaaS companies, Salesforce, Netsuite and Workday. It is noteworthy that Workday and Cornerstone are HR-focused SaaS businesses, giving us reassurance that HR-related software and high valuation multiples are not mutually exclusive. There is no absolute conclusion that can be drawn from these comparators. However, it does appear that, even given the likely discount for smaller company size and share illiquidity, the share price is not fully reflecting the fact that over 70% of its software revenues are from SaaS (FY13e Edison estimates) and that the target market should open up significantly over the coming years.
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DCF valuation Our DCF valuation analysis is based upon a basic scenario for the growth of the business over the next 11 years. We assume that the historical InVision WFM on-premise business is maintained, that the injixo WFM product continues to grow strongly and that, once its business and products are established, The Call Centre School revenue growth will move hand in hand with that of injixo WFM for small and medium-sized call centres. Over the medium term, the revenues see strong but declining growth such that, by the end of our DCF forecast period in 2025, growth is at the rate of the wider economy at 1% with 2025e revenues from injixo WFM of €25.6m, which corresponds to 237,000 seats at €9 per month. This would be equivalent to just under a 10% share of the estimated 2.5m seats in smaller and medium-sized call centres in North America and Europe at present. Within our DCF the EBITDA margin peaks at 53%. Although this is above the longer-term guidance of the SaaS industry majors this reflects the fact that, compared to those companies, InVision does not have as great a requirement to invest in new products, marketing or physical assets. We have included the impact upon the valuation of both the historical taxable losses and the 9.5% tax rate due to the housing of the IP within the Swiss subsidiary. Exhibit 6: DCF revenues assumptions (€000) 35,000 30,000 25,000
€000s
20,000 15,000 10,000 5,000 0
2013
2014
2015
CCS/eLearning
2016 Services
2017
2018
2019
On premise legacy
2020
2021
2022
injixo ex on premise
2023
2024
2025
injixo WFM
Source: Edison Investment Research
Applying costs of capital of 10%, 11% and 12% yields share prices of €58.1, €51.5 and €46.1 respectively; this is consistent with the multiples-based analysis in suggesting significant share price potential.
Conclusion on valuation Both our multiples and DCF-based consideration of the valuation of InVision suggest that the shares are currently undervalued.
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Exhibit 7: Financial summary €'000s PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before amort. and except.) Intangible Amortisation Exceptionals Other Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3)
2011 IFRS
2012 IFRS
2013e IFRS
2014e IFRS
2015e IFRS
2016e IFRS
12,384 (178) 12,206 (3,643) (3,860) 0 0 104 (3,756) 48 (3,813) (3,709) (3,887) (7,596) (7,596)
13,228 (340) 12,888 1,168 816 0 0 (125) 692 13 829 705 146 851 851
13,560 (325) 13,235 2,103 1,753 0 0 0 1,753 15 1,768 1,768 (168) 1,600 1,600
13,518 (270) 13,248 3,559 3,169 0 0 0 3,169 (50) 3,119 3,119 (296) 2,823 2,823
15,524 (264) 15,260 5,793 5,403 0 0 0 5,403 (50) 5,353 5,353 (509) 4,844 4,844
18,190 (309) 17,881 8,272 7,882 0 0 0 7,882 (50) 7,832 7,832 (744) 7,088 7,088
Average Number of Shares Outstanding (m) EPS - normalised (€) EPS - normalised and fully diluted (€) EPS - (IFRS) (€) Dividend per share (c)
2.2 (3.4) (3.4) (3.4) 0.0
2.2 0.3 0.3 0.3 0.0
2.1 0.7 0.7 0.7 0.0
2.1 1.3 1.3 1.3 0.0
2.1 2.3 2.3 2.3 0.0
2.1 3.3 3.3 3.3 0.0
Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%)
98.6 -29.4 -31.2
97.4 8.8 6.2
97.6 15.5 12.9
98.0 26.3 23.4
98.3 37.3 34.8
98.3 45.5 43.3
BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Stocks Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets
2,676 1,253 308 1,115 5,831 17 3,845 1,667 301 (4,933) (4,913) (20) 0 0 0 3,574
2,114 1,050 254 811 6,135 12 2,833 2,490 799 (3,853) (3,853) 0 0 0 0 4,396
1,881 1,020 219 643 7,102 12 1,858 4,433 799 (3,862) (3,862) 0 0 0 0 5,122
8,345 1,000 6,999 347 7,440 12 2,222 4,407 799 (3,841) (3,841) 0 (4,000) (4,000) 0 7,944
7,941 990 6,914 38 12,686 12 2,552 9,322 799 (3,838) (3,838) 0 (4,000) (4,000) 0 12,789
7,846 980 6,829 38 19,871 12 2,990 16,069 799 (3,841) (3,841) 0 (4,000) (4,000) 0 19,876
CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash)
(2,102) 0 0 (1,028) 0 (653) 0 (3,784) (5,431) 0 0 (1,647)
1,294 0 0 (374) (148) 71 0 843 (1,647) 0 0 (2,490)
3,103 0 0 (285) 0 (875) 0 1,943 (2,490) 0 0 (4,433)
3,124 0 0 (7,150) 0 0 0 (4,026) (4,433) 0 0 (407)
5,210 0 0 (295) 0 0 0 4,915 (407) 0 0 (5,322)
7,042 0 0 (295) 0 0 0 6,747 (5,322) 0 0 (12,069)
Source: InVision accounts, Edison Investment Research
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Contact details
Revenue by geography
InVision AG Halkestrasse 38 40880 Ratingen Germany +49 (0) 2102 7280 www.invisionfm.com
%
Germany, Austria, Switzerland
CAGR metrics EPS 2011-15e EPS 2013e-15e EBITDA 2011-15e EBITDA 2013e-15e Sales 2011-15e Sales 2013-15e
50%
Profitability metrics N/A 74.0% N/A 66.0% 5.8% 7.0%
Balance sheet metrics
ROCE 14e Avg ROCE 2011-15e ROE 14e Gross margin 14e Operating margin 14e Gr mgn / Op mgn 14e
69.7% 23.2% 35.5% 98.0% 23.4% 4.2x
Gearing 14e Interest cover 14e CA/CL 14e Stock days 14e Debtor days 14e Creditor days 14e
Rest of world
Sensitivities evaluation N/A N/A 1.9 N/A 60.0 34.4
Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices
Management team CEO: Peter Bollenbeck
VP: Armand Zohari
Peter is one of the three founders of InVision and is responsible for product development.
Armand is one of the three founders of InVision and is responsible for marketing and customer relationships.
Chair of Supervisory Board: Dr Thomas Hermes
Head of Finance: Marc Aurel Voges
Thomas is an experienced corporate lawyer and is a partner of HolthoffPfoertner, based in Essen and Berlin.
Marc is leads the finance team and is responsible for the financial management and reporting at InVision.
Principal shareholders (as at 1 March 2014)
(%)
InVision Holding GmbH (Management)
24.2
Peter Bollenbeck (Founder, CEO)
17.0
Armand Zohari (Founder, VP)
17.0
Matthias Schroer (Founder, supervisory board)
11.3
Companies named in this report NICE-IEX (NICE.Q),Verint (VRNT.Q),Deutsche Telekom (DTE.DE), CareUK (CUK.L) , UBM (UBM.L), American Express (AXP), Bank of America (BAC), Coca Cola (KO)
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16
