StatPro Group — Update 14 March 2016

StatPro’s software products are used by asset managers to measure the performance and risk profile of their funds under management. StatPro’s modular solutions, which were historically installed onsite, are now bundled and delivered as a hosted product – StatPro Seven – and priced on the basis of the number of the customer’s portfolios. StatPro Revolution, a multi-tenant cloud services (or SaaS) application, has substantially broadened the potential market by targeting front offices, smaller players and gatekeepers. The group has c 500 customers, with the largest generating less than 5% of group revenues. StatPro Revolution Performance is a highly scalable cloud-based replacement for Seven, scheduled to go live in September. The Performance module, which is a transaction-based weights and returns and data management system, is described by the company as the “production” tool, while Revolution Analytics is the “distribution” tool, focusing on multi-asset class analytics and online reporting, with controlled analysis sharing a major factor.

StatPro has always operated a rental business model, hence recurring revenues are high and contracts are typically for three years. At the end of December 2015, the group’s annualised recurring revenues stood at £28.7m, effectively c 93% of total group revenues. The group has been profitable and generated positive free cash flows in each year since 2003. In FY15, the cloud-related EBITDA loss fell slightly in constant currency terms to £5.9m, while the profit by the mature non-cloud business eased 2% to £9.9m. The group remained cash generative, with cash from operations at £4.0m, while free cash flow was steady at £0.6m, aided by falls in tax and capex.

In reaching our forecasts, we highlight three key sensitivities: market volatility (the health of the equity and bond markets will partly determine the IT investment budgets of the asset management firms); risk relating to the transition to cloud services (including ramp-up of the new products and potential for some customers to trade down to a cheaper service); and competition (we continue to believe StatPro holds a significant first-mover advantage in this cloud computing space and that its new cloud products are difficult to replicate).

Based on our forecasts, the stock trades on 28.8x our FY16 EPS, falling to 21.2x in FY17. However, these numbers are after c £6m of aggregated cloud-related EBITDA losses in FY15, which reflect the heavy investment in these new products. We expect this loss to narrow as traditional customers continue to gradually switch to the cloud products. After stripping out the cloud-related businesses to reflect the profitable traditional businesses, on our estimates the stock trades on an FCF yield of c 18% in FY16 and c 19% in FY17.

Reported revenues slipped by 1% at constant currency to £30.2m. The strong British pound turned this into a 6% absolute decline. In line with the recent trading update, the group’s annualised recurring revenue lifted by 1% at constant currency to £28.7m at 31 December, although this was c 2% lower at actual rates. Approximately 85% of new revenue came from existing clients. StatPro Revolution’s annualised recurring revenue jumped by 46% to £7.8m, to represent 27% of the total recurring revenue book, up from 18% (at constant currencies) a year earlier. Recurring revenues (ie excluding professional services) were 95% of the total compared with 91% in FY14. FY15 adjusted EBITDA was flat at constant currencies at £4.0m, having been 9% lower in H1. Normalised profit before tax eased 1% to £2.6m, while adjusted EPS slipped 4% to 2.6p. The full year dividend is maintained at 2.9p.

Last year management amended the way it presents the group’s underlying performance (see Exhibit 1). This format splits the business into the new growth units and the mature cash cow units. The new business includes the Revolution and Risk cloud services (which had been included in StatPro Seven numbers) along with data. We note the data feed is essential for the functionality of StatPro Revolution. This part of the business grew by 9% at constant currencies to £11.4m and reported an increased EBITDA loss of £6.0m. Meanwhile, the mature part of the business saw a 6% decline to £18.8m in revenues, while its EBITDA margins actually rose by 230bp to 52.8%.

The group remained cash generative, with cash from operations at £6.5m, while free cash flow was steady at £0.6m as increases in working capital and capitalised development were offset by declines in capital investment and tax. The previous year included significant investment in offices including the move to the new HQ in Wimbledon. After the dividend (£2.0m), and other minor movements, net cash slipped by £1.4m to £1.3m. There remains a c £0.7m acquisition liability relating to SiSoft, which we anticipate will be settled in FY16.

There were 275 StatPro Revolution customers at the end of the year (as shown Exhibit 3), down from 315 a year earlier. The decline reflects the introduction of the minimum $18k pa spend, up from $1,200, and the average revenue per client has jumped by 67% to £28.3k, with 44% of new sales being upsells to existing clients. The data include fund administrators resellers, rather than their end-customers, as it is not possible to break down these numbers.

In 2015, StatPro introduced a set of SaaS-based KPIs. The average cost of acquiring customers is calculated by dividing the sales and marketing spend by the number of new customers. The implied customer lifetime is one divided by the churn rate (currently c 7%). The implied customer lifetime value is the implied customer lifetime multiplied by the ARR per customer. The data show the impact of the increase in the minimum spend, which has boosted both the cost of acquiring customers and revenue per customer. Clearly, the aim is the boost the LTV:CAC ratio, which has jumped to 16.1 from 9.5 at end June 2015, as the LTV continued its strong rise.

In January, StatPro acquired IA, a US-based provider of cloud-based risk analytics solutions to hedge funds and asset managers, for up to $16m. IA’s Risk Factor and Monte Carlo models will enable StatPro to provide a broader set of risk models to its customers. The deal boosts the group’s cloud-based annualised recurring revenue run rate to 34% of the total revenue book, up from 27%, strengthens the group presence in the important North American market (IA’s HQ is in New York) and increases US dollar exposure to c36% of group revenues. It also brings significant cross-selling potential both of IAs risk products to StatPro’s client base and StatPro’s solutions to IA’s clients.

StatPro is paying an initial $7m in cash, with a further $3m in deferred payments – $2m after one year and $1m after two years. This represents 2.0x FY15e revenues, which in our view looks attractive in relation to both the asset management software sector and SaaS business model valuations. In the 12 months to December 2015 IA generated $5m of revenues, of which 94% were recurring in nature. A further $6m is payable after one year, dependent on securing a number of new contract wins.

We understand that IA’s small size was limiting its ability to expand the business and becoming part of StatPro should resolve this issue. We note that, as indicated by its name, IA always wanted to expand its product solutions to performance and attribution, but lacked the resources to do so on its own. IA is being integrated into the StatPro Revolution platform, and StatPro anticipates that its existing equity focused asset management clients will wish to subscribe for the additional functionality. Further, we believe that IA’s existing 53 clients, which are all new clients for StatPro, could be interested in Revolution’s Performance and Attribution features. IA generated an EBITDA loss of c $0.3m in FY15. However, StatPro believes it can achieve annualised cost synergies (including data feeds and administration services) of c £0.7m, and is therefore targeting EBITDA of £0.35-0.5m in the first 12 months after the acquisition. Exceptional cash charges of £0.7-1.0m are expected to be made, covering transaction fees and other one-off costs. StatPro has a small net cash position and so the transaction is being financed through its debt facility with Wells Fargo, which has been increased to c £24.5m, £17.0m of which is committed.

In February, StatPro announced it was exchanging its existing StatPro Seven compliance module (SPC) licence contracts for a 51% stake in InfoVest Consulting. StatPro Seven is StatPro’s legacy traditional software platform. While most of StatPro Seven’s modules are migrating to the Revolution cloud platform, StatPro had no plans to upgrade StatPro Portfolio Control (SPC) functionality to the cloud. Nevertheless, the SPC module has a distinct market niche, and given InfoVest's specialist skillset, it makes sense for StatPro to transfer the development, support and sale of the product to InfoVest. Further, InfoVest has access to StatPro's global client base to help grow SPC's sales. Additionally, InfoVest brings to StatPro standardised data solutions that will be particularly useful for streamlining customer data in the implementation of cloud transition contracts. StatPro believes InfoVest’s data warehouse solutions could be of value to mid-size asset management companies.

InfoVest is a South Africa-based software provider, specialising in data warehouse, ETL (Extract, Transform and Load) and reporting software for the asset management industry. InfoVest’s managing director is an ex-StatPro employee, who took on his executive role at InfoVest in 2012, and InfoVest has partnered with StatPro for more than two years, providing support for all StatPro’s outstanding SPC contracts. SPC, which is StatPro’s compliance solution, ensures that customer’s portfolios are within predetermined parameters, such as the percentage that can be invested in specified asset classes. These parameters can relate to regulatory or in-house criteria and the solution is separate to StatPro’s risk solution. While SPC could transition to the cloud, this has not been on StatPro’s R&D roadmap. InfoVest generated revenues of c ZAR18m (c £0.76m) in the year to 28 February 2015, including £0.13m revenue from supporting SPC. The business is profitable, so we would expect it to modestly boost StatPro’s EPS.

StatPro is fast approaching the end of the first phase of its transformation to a pure cloud business model, which began with the commercial launch of StatPro Revolution in late 2011.

for StatPro Revolution which is up 52% at £14.7m, representing 40% of the total. The next major driver will be the launch of the StatPro Revolution Performance module, which is scheduled for commercial launch in September. The group suffered from the strong British pound in FY15, as it has a higher proportion of costs in sterling. However, following its recent declines, sterling is now c7% below average 2015 levels, and if it remains there it will support upgrades later in the year.

We have amended our forecasts for the InfoVest transaction. We have conservatively eased our StatPro Revolution forecasts by £0.5m, on the view that the Performance Module will not generate meaningful revenues until FY17. We have increased traditional software by the same amount. Our normalised PBT forecast for FY16 has also been affected by a £0.2m reduction in our assumption for the net capitalisation in development costs. The group spent £4.9m, or 16% of sales, on R&D in FY15, of which 82% was capitalised. We continue to forecast 15% of sales is spent on R&D, of which 72.5% is capitalised and amortised over the subsequent three years. We have made adjustments for the share buyback announced on 14 March – 2.87m shares at 72p – which represents 4.25% of the share capital. We estimate this buyback will increase FY17 EPS by c 2%.

We have noted before that the transition of a traditional software vendor to a cloud model is a painful process. However, we believe there are a number of reasons why the group could shortly move into an upgrade cycle:

Having expanded its product suite and geographic position through a series of acquisitions over its 22-year history, StatPro has evolved its product suite to a cloud computing environment. It has exploited the group’s domain knowledge, technical skills and access to data to develop an entirely new software application from scratch. We note that one of StatPro’s key competitors recently abandoned a cloud project, apparently due to the challenges of switching to the cloud. Also, we understand that only other supplier with an equivalent level of Risk functionality is MSCI (Barra, Riskmetrics) but its products sit on two separate platforms, while StatPro’s are integrated on a single platform. We highlight the following points on the group’s valuation.