Claranova — On track for strong earnings growth

Claranova comprises three distinct businesses taking advantage of high-growth areas of internet and mobile technology: personalised e-commerce (PlanetArt), consumer software (Avanquest) and IoT (myDevices). Key investment considerations are as follows:

We forecast 20% group revenue growth for FY21 (11% organic) and 14% for FY22 (13% organic). We forecast group EBITDA (pre-IFRS 16) of €27.4m for FY21 (5.7% margin), rising to a 6.7% margin in FY22e. With limited capex requirements, this translates to normalised operating margins of 5.3% in FY21e and 6.4% in FY22e, and EPS growth (on a normalised basis) of 47% in FY21e and 50% in FY22e.

Taking into account the differing growth trajectories and profitability of each division, as well as the different levels of minority investment in each, we use a sum-of-the-parts approach to valuation and estimate a fair value of €12.12 per share.

In addition to the usual competitive pressures and the requirement to keep abreast of technology, our forecasts and the share price are sensitive to the pace and success of geographic expansion for PlanetArt, supplier dependence for PlanetArt, changes to search engine policies for the Avanquest business, integration of acquisitions, and the US dollar/euro and sterling/euro exchange rates.

Claranova is a group consisting of three businesses focused on mobile and internet technologies with high growth potential. After a long period of restructuring and refocusing the business, the group is demonstrating strong revenue growth and improving profitability.

Claranova was originally founded in 1984 as a consumer software publisher called BVRP Software. In 1996, the company changed its name to Avanquest and listed on Euronext. From 2007 to 2012, it acquired multiple businesses. By 2013, growth had slowed and the company was loss-making – the decision was taken to restructure the business. The company raised €34.5m in equity in June 2015 through the issue of 345m shares at €0.10 per share. Also in FY15, it wrote off €10.7m of debt and converted €2.6m of debt to equity. As part of the restructuring, the company sold off a number of non-core businesses and restructured the remaining businesses into three divisions:

In 2017, Claranova organised each division into its own legal entity – this has enabled the company to seek out minority investors in each of the divisions in order to accelerate growth. At the same time, it changed the company name from Avanquest to Claranova. Reflecting its growth ambitions, the company has made acquisitions in the gifting and software space over the last three years.

The company is focused on driving the growth and profitability of each business. In 2019, the company unveiled its ambitious five-year growth plan, which targets group revenues growing from €162m in FY18 to €700m by FY23 and a group EBITDA margin of 10% by FY23.

PlanetArt is building a personalised e-commerce business. It started by exploiting the popularity of photography on smartphones – its FreePrints business enables consumers to order prints of their photos directly from their smartphones in a simple and cheap fashion. It has shown rapid growth, particularly in the UK and the US, and over the last two years has expanded across Europe and into India. It has grown its product offering to include a wider range of customised products, helped by the recent acquisitions of online personalised gift providers Personal Creations and CafePress in the US. The business is focused on integrating CafePress and developing a comprehensive personalised e-commerce service that combines the photo printing and gifting businesses.

Avanquest is focused on developing proprietary software and shifting customers to subscription licensing. Once the majority of products have shifted to subscription licensing, revenue growth should accelerate and margins expand.

Finally, the myDevices IoT platform is at an early stage of commercialisation. The business is focused on broadening the distribution channels for its technology and is seeing accelerating numbers of installations by end customers. As this division is still at the early stages of revenue generation, it has not been included in the five-year growth targets for the group.

Claranova is headed up by Pierre Cesarini, Chairman & CEO. Mr Cesarini joined the company in May 2013 to effect the restructuring of the group. He is supported by the management team: Sébastien Martin (EVP), Jean-Yves Quentel (CFO), Roger S Bloxberg (CEO PlanetArt), Todd Helfstein (president PlanetArt), Daniel Assouline (CEO Avanquest) and Kevin Bromber (CEO myDevices).

The group is overseen by a Board made up of seven members: Pierre Cesarini, Caroline Le Bigot, Luisa Munaretto, Jean Loup Rousseau, Joanna Gordon, Francis Meston and Jérôme Bichut.

Historically PlanetArt focused on providing photo-printing services to consumers. With the acquisition of Personal Creations in August 2019, the business widened its offering into the market for mass customisation of consumer products, or what it calls ‘personalised e-commerce’. The division aims to provide easy-to-use services with a focus on value for money. The longer-term goal is to fully integrate photo printing and customised gifts to provide a comprehensive personalised e-commerce service.

Several years ago, the company identified photo printing as an area ripe for innovation. It entered the market with Web-to-print (a number of websites that offer printing services) before launching FreePrints in 2013. FreePrints is focused on printing photos using apps on mobile devices. The two businesses share the same fulfilment infrastructure and marketing teams. The majority of the division’s revenues are currently generated in the US and the UK, with a growing contribution from France, Germany, Ireland, Spain and Italy.

The FreePrints app (called ‘FreePrints’) is available for use on Apple and Android mobile devices in 12 countries. The app allows customers to print photos that are saved on the mobile device or stored on popular websites such as Facebook, Instagram, Flickr and Dropbox. The offer varies by country. For example, in Europe, customers are offered 500 free prints per year, or 45 free prints per month, for which they pay postage only. In the UK, this works out at up to £4; in Europe, it costs up to €6. In the US, the offer is for 1,000 free prints per year, or 90 per month. The free prints offer is for prints of 6” x 4”/15cm x 10cm – if a customer wants larger prints, different shaped prints (eg square), borders, duplicates or different finishes, these are available for an additional charge. Once an order is placed, customers are then offered extra printing services, such as customised mugs, fridge magnets or T-shirts. Building on the success of the FreePrints app, additional apps have since been launched:

All of the apps charge for printing on a per-job basis with no subscription required. This business is not particularly seasonal. Overall, 70–85% of monthly revenues come from returning customers; the average order value is in the range €7–8.

In FY19, the FreePrints app was launched in Belgium, India and the Netherlands, and in FY20, in Austria and Poland. In all cases, the photo-printing app is launched first, and depending on demand, photobook, tile and card apps are introduced later.

FreePrints aims to maintain its app store ratings at as close to 5/5 as possible as this is a key factor in consumers’ decision-making when downloading apps. Currently, it is rated at 4.8/5 on the Apple App Store and 4.9/5 on Google Play. This compares favourably to competitors who receive lower average review scores on significantly fewer reviews. We note that the Photobox photo printing app is not available on Android devices, only iOS. The business also aims to maintain high rankings within both app stores, as this also influences consumers’ propensity to download. For example, in the UK today on Google Play, in the free photography apps category, FreePrints is ranked No. 1, FreePrints Cards No. 6 and FreePrints Photobooks No. 16. On the App Store in the UK, FreePrints ranks as the fifth most popular app in the Photography & Video category, after Instagram, SnapChat, YouTube and PicsArt photo editing – so is in fact the top ranked photo printing app.

Web-to-print was the original photo-printing service that has been offered by the company since the acquisition of SimplytoImpress in 2010. The business operates through four dedicated websites and generates most of its business in the US.

Although called Web-to-print, the majority of orders come from mobile browsers (rather than mobile apps). The business is very seasonal, with a large volume peak in November-December covering Thanksgiving and Christmas. This business typically has a higher order value ($70–80) than the FreePrints business. Customers tend to order less frequently than for FreePrints, typically once a year.

In August 2019, Claranova acquired Personal Creations, the online gifts business of FTD Companies (FTD), for $18.1m in cash. Personal Creations operates two websites in the US (www.personalcreations.com, www.gifts.com). It differs from the existing PlanetArt services in that it does not depend on customer photos for personalisation. When acquired, Personal Creations did not have a mobile app. PlanetArt focused on integrating Personal Creations during FY20 and it now shares the PlanetArt back office.

In July, the business launched FreePrints Gifts to provide a free customised gift each month, in the same manner as the other FreePrints apps. Users can also access a large catalogue of products that they can personalise. The business intends to launch this app in Europe.

In September 2020, PlanetArt acquired the assets of CafePress from Shutterfly for an undisclosed amount. CafePress is an online personalised product company headquartered in Kentucky, US. CafePress products are developed almost entirely by third-party content contributors and sold via CafePress websites in the US, the UK, Canada and Australia as well as via custom stores that can be set up by any user. CafePress is a licensee of hundreds of high-profile properties including Hasbro and Marvel. CafePress was acquired by Shutterfly subsidiary Snapfish in 2018 for $25m. Recent financial data are not available, but CafePress reported revenue of $86m (-16% y-o-y) and an EBITDA loss of $4m in CY17. We see scope for Claranova to create cost synergies by integrating CafePress with PlanetArt’s back-office functions and possibly using the Personal Creations manufacturing facility. PlanetArt does not currently operate in Canada or Australia so CafePress could offer an entry into those markets.

Ultimately, the division wants to offer a comprehensive personalised e-commerce service, where consumers can buy a wide variety of items that can be customised in some way. This would not be restricted to gifting, but would also include items for consumers’ own use, such as clothing or household items.

Since the advent of the smartphone more than 10 years ago, consumers have increasingly shifted from taking photos using digital cameras to using their phones for the majority of their photography. This shift is only likely to continue as smartphone manufacturers constantly improve the camera technology on phones. Mobile apps for photo printing are designed to make the process of printing out the photos taken by mobiles simple and cheap.

In 2018, Future Market Insights estimated that the market for global photo printing and merchandise was worth $16.9bn in 2018 and is likely to grow at a CAGR of 2.6% to reach $22bn by 2028. This masks the shift in distribution channels – in 2018 c 49% of the value was expected to be generated from online services, forecast to grow to 55% by 2028, which implies a CAGR of 3.9%. Within this category, we expect a continuing shift from web-based to mobile app-based printing.

The global market for personalised gifts is a much larger than the photo printing market. A ResearchandMarkets report from 2020 estimates that the market will be worth $25.8bn this year (of which $7.6bn is in the US) and will grow at a CAGR of 7.7% over the seven years to 2027. Non-photo personalised gifts (c two-thirds of the market this year) are expected to grow at a CAGR of 7.1% over the same period.

FreePrints competes against large, multinational companies such as Snapfish, Photobox and CEWE, as well as local players such as Lalalab in France and Bob Books in the UK. Web-to-print competes against services from larger online players such as Shutterfly, Photobox and Vistaprint, as well as services offered by pharmacies and retailers such as Walmart, Walgreens, Boots and Tesco, and by specialist photography companies such as Snappy Snaps and Jessops.

The division has seen a slight reduction of competition in this market, as some smaller players have been acquired or left the market, however the recent Shutterfly/Snapfish merger could alter the competitive landscape. Shutterfly consists of three businesses, only one of which, Shutterfly Consumer, competes with the FreePrints business in the US. The business offers both web-to-print and mobile printing of both photos and personalised products, with mobile-generated business making up around a third of Shutterfly-branded revenues in its last reported quarterly results. Snapfish is active in the US and the UK with a presence in France, Germany, Ireland, Italy, Australia and New Zealand. We understand that it has a higher mobile presence than Shutterfly. FreePrints has not seen increased competition from the merged entity to date, although it is possible in the longer term.

We note that the printing business has no legacy film printing services and does not own any printing or retail facilities, unlike many of its competitors. This affords it the flexibility to enter new markets at lower cost and with less risk.

In the personalisation market, Claranova competes against subsidiaries of greetings card businesses (American Greetings, Card Factory, Hallmark Cards, funkypigeon.com), photo printing companies such as Cimpress and Snapfish, specialist providers (eg Not On The High Street in the UK, society6 in the US, Minted in the US, Personalization Mall in the US, Things Remembered in the UK/US, Zazzle in the US) and e-commerce retailers such as Etsy.

The division targets revenue growth from a combination of growing the customer base and encouraging the existing customer base to order more frequently and buy a wider range of products. The recent acquisitions of Personal Creations and CafePress bring a whole new range of products that could be sold into FreePrints, and vice versa.

Advertising costs are almost completely variable, with spend being dialled up or down depending on the cost of advertising at any given time, and the availability of cash. The division’s experience is that this has a direct relationship with the number of new users acquired.

To win new customers, the division focuses its advertising on Facebook, where it can use micro-targeting, as well as on Twitter and Pandora (internet radio). Occasionally, the company buys TV advertising, and during the pandemic has taken advantage of much cheaper TV ad rates. To retain and encourage existing customers to spend, the business sends app notifications and emails with special offers and runs a loyalty programme. It also has a ‘refer a friend’ scheme. The business makes use of the FreePrints customer base to sell the Photobooks, Photo Tiles, Cards and Gifts services.

The division outsources all photo printing to one printer in the US, one in the UK and one in the Czech Republic. In India, it has set up a network of several printers to ensure national coverage. As the mobile app service is less seasonal, it can provide good volumes through the year, not just at Christmas time. During the Christmas peak, it can push delivery out from five to 10 days to ensure stable pricing. The company has built the IT systems to manage high volumes and if a new country is added, the system can manage localisation.

Personal Creations has a facility in Illinois, US where items are customised. This had to close for a short period of time in Q420 due to lockdown regulations, but has since reopened and is operating at normal capacity. CafePress does not have any manufacturing facilities, outsourcing product manufacturing and customisation. As the business launches personalised e-commerce outside of the US, the intention is to work with manufacturing partners rather than vertically integrating.

In September 2017, a group of investors including Cap Investissement, the family office of Groupe Riccobono (a French industrial printer), invested €11.4m in PlanetArt in return for a 7.1% stake. An additional €0.8m was invested in April 2018, for a total minority investment of 7.7%.

When this business was launched, the aim was to reach critical mass without burning significant amounts of cash. It has grown rapidly since launch and moved into EBITDA profitability in FY18. Sales growth has been driven by geographic and product expansion and more recently by the acquisition of Personal Creations.

Cost of sales consists of printing costs, the cost of items such as mugs or T-shirts, shipping costs and payment processing fees. FreePrints earns an estimated gross margin in the region of 35%, with the photo printing service earning an estimated 33–34% (we estimate 23–25% for basic photo printing, 60–65% for add-ons), and photobooks an estimated 40–45%. We estimate that web-to-print generates gross margins of c 60–65%.

Operating costs include variable costs such as marketing spend, and others that are more fixed in nature: support, marketing staff (staff in the US as well as several people in Paris to manage European marketing), developers, general admin and share of corporate costs (based on revenues). We note that the business hires temps to cover increased support demands during the seasonal peak of the web-to-print business in November and December, which results in higher staff costs in H1.

In FY20, divisional revenues grew 78% y-o-y, or 29% on an organic basis, with a contribution of €87.5m from Personal Creations. Revenues in Q420 were significantly higher than is normal for the time of year, boosted by strong demand during lockdown. The division achieved an EBITDA margin of 4.5% in FY20, down from 6.2% in FY19, due to the integration of loss-making Personal Creations from the beginning of August 2019. Management commented that Personal Creations did not contribute to EBITDA. If at best the Personal Creations business broke even in FY20, this implies that the remaining business generated an EBITDA of 6.3%, in line with the prior year.

We forecast a moderation of growth in the photo printing business in FY21e and FY22e and incorporate CafePress from September 2020. We assume that in FY21 Personal Creations moves to profitability while CafePress is slightly loss-making, before moving to profitability in FY22.

Avanquest is a consumer-focused online software business focused on three key verticals (photo editing, pdf, security/privacy). As well as selling software online, Avanquest monetises the traffic that visits its online properties via advertising, commission and transaction-based fees.

Claranova has been developing and selling consumer-focused software since the company was founded in the 1980s. It currently sells a mixture of third-party software and own-IP software, with a focus on building up its proprietary software business. Up to the end of FY18, the company sold products that broadly fell within one of the following four categories:

Software was typically from less well-known brands and does not include household names such as Adobe, Microsoft or Norton. In July 2018, Avanquest acquired 50.1% of a group made up of three Canadian businesses: Adaware, Lulu Software and Upclick. All software IP is proprietary. We detail below the products offered by each business:

Prior to acquisition, Avanquest already had a good working relationship with the group; it used to sell Soda PDF as Expert PDF and was using Upclick to process around half of its e-commerce transactions. The division has since phased out the use of its proprietary e-commerce platform and shifted all e-commerce onto Upclick’s platform. The acquired businesses have kept their existing business models and brands.

The legacy business saw declining revenues in FY16–18, partly due to a process of weeding out unprofitable product lines. However, this was reversed in FY19 when it reported growth of 16% (14% constant currency). Claranova no longer splits out revenue between legacy and acquired.

While Avanquest continues to sell third-party software, the focus now is very much on building the proprietary software side of the business.

The legacy business used to have more in-house developers but refocused many of them on PlanetArt to develop the photo-printing services. The division therefore has a number of legacy products and uses freelancers to keep them up to date. It also has a number of niche products where it has looked at the most commonly used functionality of popular software such as Photoshop, and developed a simplified version so that a consumer can use the software without being an expert eg InPixio. As noted earlier, the acquired businesses own their software IP.

Product development is now focused around three core areas based on the main proprietary solutions:

The company has recently launched several new releases: SodaPDF 12, InPixio Studio 10, Adaware antivirus and Adaware Protect.

It has also developed a new service which was originally known as PayAware but has been rebranded as LastCard. This is designed to provide a secure and private way to make purchases online. The user registers with LastCard and provides details of a debit or credit card. Using the LastCard browser, when a user wants to pay for an item online, they press the LastCard button. This provides a one-time use card number that auto-fills in the payment page. By providing the one-time use number, even if it is intercepted it cannot be used again for another transaction. The transaction will show up on the user’s credit card statement as a LastCard transaction. Via a separate dashboard, the user can log in and view all transactions made in this way. Avanquest is aiming to sell this service on a white-label basis.

The division generates revenues in four different ways:

The business sells across Europe and North America through the main channels below:

The business only has limited retail activity in Germany and a larger presence in the US (combined making up 10% of divisional revenues and decreasing). As retailers in the US have shorter payment terms, this does not consume so much working capital for the business and also helps when signing up some third-party software suppliers.

The market for consumer software is made up of:

Avanquest falls into this last category, along with companies such as Avast, Kape and IronSource. Avast (LSE-listed, market cap £5.4bn) and Kape (AIM-listed, market cap £268m) both sell cyber-security and PC hygiene tools and have been actively buying software providers in the space. IronSource is a private Israeli company selling monetisation and distribution tools for software and app developers. Its InstallCore software download tool is one of the most widely used and operates a similar model to Adaware’s H2O tool. As a private company financial data are hard to come by, but recent investor CVC has commented that Ironsource was on track to finish 2019 with revenue of approximately $1bn.

The company views one of the division’s key skills as marketing, with unique expertise in acquiring customers online that was bolstered by the Canadian acquisitions. Using the acquired businesses’ expertise in generating and monetising web traffic, the division has already managed to return to organic growth. The acquisitions also marked a shift in the division’s strategy towards developing proprietary software which offers higher margin potential.

The business is keen to increase the level of recurring revenue, mainly through offering software on a subscription basis, and is already seeing the benefits of this shift: recurring revenues made up 46% of divisional revenues in FY20 compared to 35% in FY19.

Management has suggested that it would like to move more in the direction of the type of business operated by IAC, a US-listed media and internet company that owns 150 brands, including Ask.com, Dotdash, Investopedia and Vimeo. IAC revenues arise from the traffic generated on its websites – either through subscription services (eg Vimeo video services) or advertising. IAC’s Applications division is most similar to Adaware’s business – it provides browser extensions that enable users to run search queries directly from their browser tab, as well as mobile applications and device cleaner and security tools. In 2019, IAC generated $520m of revenues from its Applications division. In our view, consumers have become used to receiving online services for free (for example, Facebook or free anti-virus tools) and it is harder to persuade them to pay for software upfront. Monetising consumer software sales via advertising or by offering freemium services is the direction in which the industry is moving and the acquisition of the Canadian companies has helped the business address this market shift.

The division would also consider additional acquisitions, targeting profitable companies with high levels of web traffic.

Exhibit 8 shows the quarterly revenue progression over the past three years; this business sees a seasonal peak in Q2 (ie calendar Q4). The cost of products (ie royalties paid to third-party software providers) ranges from 10–30% of sales. Other costs of sales include bank fees, distribution costs for physical goods and server hosting (c 15%), resulting in a gross margin of 60–65%. Operating costs include advertising, marketing, administrative and R&D. The division operates with single IT, marketing and finance teams.

In FY20, the Software business reported revenue growth of 9% (all organic). The FY20 EBITDA margin of 7.9% declined from the 12.4% achieved in FY19 due to the push to shift customers to a subscription licensing model. SodaPDF is now at c 90% subscription licensing, with InPixio the next highest and Adaware with the furthest to go. The annual price of a subscription licence tends to be lower than the price of a one-off licence and is spread over the year rather than being recognised on the date of sale. For the same number of product sales, this reduces the absolute level of revenue during the transition years. However, once the majority of the business is on a subscription model (which is the intention), the higher level of recurring revenue should provide better visibility and growth should accelerate. Management has suggested that 20% per annum growth rates for products such as pdf should be achievable (in fact SodaPDF grew 34% in FY20) and ultimately EBITDA margins in the region of 30% should be attainable.

We note that as a result of the acquisitions in 2018, there are significant minority interests in the division. Part of the deal consideration included the issue of preference shares to the vendors for the remaining 49.99% of the businesses. The preference shares were convertible into shares of Avanquest Software SAS (the parent company of this division) and resulted in the vendors holding 64.09% of Avanquest shares. Although this would technically mean that this division is an equity investment, because Claranova retains control over the business, it is fully consolidated and the 64.09% stake is treated as a minority interest in the accounts. The vendors remain with the business and are therefore motivated to drive the performance of the division.

Our forecasts reflect slightly stronger revenue growth in FY21 and FY22 reflecting the growing proportion of subscription revenues. We assume that this growth translates to EBITDA margin expansion over the forecast period.

Claranova has developed a management platform for IoT applications. Its IoT in a Box turnkey solution is designed to enable businesses and consumers to remotely monitor assets.

After developing the platform in 2015, the business decided to encourage use of the technology by launching a developer tool, Cayenne. Developers use the drag-and-drop IoT project builder to develop prototypes. Cayenne can be used on Raspberry Pi and Arduino boards and is designed to work on LoRaWAN.1 There are more than 800,000 registered developers on the platform. myDevices also runs a manufacturer programme called Cayenne IoT Ready, which provides a way for hardware manufacturers to integrate their products into the Cayenne platform.

myDevices plans to monetise the platform by selling its IoT in a Box solutions on a B2B basis through telecom operators, system integrators and other resellers. The standard IoT in a Box solution contains the following:

The diagram below shows how a typical IoT network is structured.

The solution is designed to be plug-and-play. The user first downloads the myDevices app, then plugs in the gateway and scans a QR code on the gateway, which registers it on to the network. Then all sensors are scanned via QR code to add them to the network and positioned where necessary. Within the app, the user then edits operating ranges for each sensor, so that SMS and/or email alerts can be sent if any sensor operates outside of the target range. The user can schedule regular reports and can access detailed sensor history via the app. The app also provides the ability to visualise the location of every sensor.

Customers can ask for the IoT in a Box solution to be customised, using the gateway and sensors of choice. myDevices works with a number of hardware suppliers to ensure a wide range of gateways and sensors are available to suit every requirement.

myDevices has already developed white-label solutions for applications such as temperature and humidity monitoring, property monitoring, air quality monitoring, rodent control and personal safety with multiple versions available for a variety of different users, eg restaurants, supermarkets, commercial buildings, holiday rentals, perishable food manufacturing and healthcare. Customers include Sodexo, Engie, Chevron, P&G, Rio Tinto, Hilton and Kaiser Permanente. Recently, the business launched seven vertical specific websites to help market the solutions.

The LoRa radio frequency protocol was designed by chip-maker Semtech, which then founded the LoRa alliance in 2015. The LoRa alliance is dedicated to the standardisation of low-power, wide area networks and the global promotion of the LoRaWAN open standard. myDevices is a member of the LoRa alliance, alongside 500 other members including chip manufacturers, gateway and sensor manufacturers, software companies, system integrators and telecom companies. In 2017, Semtech invested $3m in myDevices in return for a 13% stake and invested a further $3m in 2019. In July 2020, both the company and Semtech invested further in myDevices for an undisclosed amount.

The IoT market is in a strong growth phase – IDC estimates that total spending on IoT hardware, software, services and connectivity was $646bn in 2018 and is likely to grow at a double-digit rate to exceed $1tn by 2022. A large proportion of the IoT market is dominated by enterprises spending on applications in the manufacturing, automotive, logistics, utilities and smart cities sectors. The consumer IoT market includes applications such as wearables (eg Fitbit, Apple Watch) and domestic automation (eg Nest temperature controls, Ring home security). myDevices is positioned somewhere between the two markets, with a focus on simplifying the use of IoT for SMEs.

Research from BCG forecasts incremental spending by companies on IoT of €250bn by 2020, over and above normal technology spending. Of this, it expects €15bn to be spent on IoT platforms. BCG’s view is that a complete IoT platform should offer three capabilities:

Unlike in some other markets, no one platform provider is dominant. In 2017, BCG counted more than 400 different IoT platform providers, of which c 50 offered all three capabilities. Providers of IoT platforms include large hardware and/or software vendors such as Bosch, Cisco, GE, IBM, Microsoft, PTC, SAP, Siemens and Software AG, as well as smaller IoT platform-focused companies such as Ayla Networks, EVRYTHNG, relayr, Telit Communications and thethings.iO. By focusing on the SME niche, where ease of use is the key selling point, myDevices should avoid competing against the larger platform providers that focus on supporting enterprises with complex IoT networks.

As this is effectively a start-up business, myDevices is taking a flexible approach to monetising its technology. It is working with mobile network operators (MNOs), distributors, resellers, system integrators and other partners.

By the end of FY20, myDevices was being used by 500 customers at more than 5,000 sites.

Exhibit 11 shows the quarterly revenue progression over the past three years. As customers pay to use myDevices on a per device subscription basis, revenues are building up slowly, but as customers become familiar with the platform, the expectation is that they will want to use the service for more devices in more locations.

Headcount includes support engineers as well as staff to manage the relationships with MNOs and distributors. The company does not anticipate growing headcount materially unless there is a significant uplift in demand. The division uses Amazon Web Services for storage of all data uploaded to the platform. We model a small increase in the cost base over the forecast period, with rising revenues as the Sprint relationship progresses, distributor partners win more customers and existing customers expand their usage.

In addition to the usual competitive pressures and the requirement to keep abreast of technology, our forecasts and the share price are sensitive to the following factors:

The group reported revenue growth of 56% for the year, of which 20% was organic. We discuss divisional performance in each of the relevant sections of this report. Group EBITDA (pre-IFRS16) was 9% ahead of our forecast: PlanetArt was slightly lower than forecast and Avanquest and myDevices reported better EBITDA than expected. EBITDA under IFRS 16 increased 29% y-o-y, benefiting from the exclusion of €3.1m in lease payments, and was 7% higher than our forecast. The group (pre-IFRS 16) EBITDA margin declined y-o-y due to the consolidation of loss-making Personal Creations in PlanetArt and the shift to subscription licensing in Avanquest. The company noted that it spent €86m/21% of revenues on marketing (+68% y-o-y) and €21m/5% of revenues on R&D (+42% y-o-y).

Normalised operating profit, net income and EPS were marginally ahead of our forecasts. Net cash at the year end was €14m; the group generated €29m cash from operations (helped by negative working capital requirements) and paid €33m for acquisitions during the year.

In terms of COVID-19 government support, the group took advantage of a €4m French government-backed loan (PGE) with a 0.5% interest rate. It also took out $5.7m/€5m of PPP loans in the US. These have a two-year term and a 1% interest rate. They will be forgiven if Claranova meets certain criteria. Currently, these criteria have been met for €0.5m of the loan which has been treated as a grant. The remainder is accounted for as a loan, rather than a reduction in staff costs, until the conditions relating to forgiveness are clarified.

We have incorporated CafePress for the first time and have made minor changes to our divisional forecasts. We introduce FY22 forecasts.

In Exhibit 13, we show Claranova’s valuation and operating metrics versus four peer groups: personalised e-commerce companies, online software publishers, IoT companies and French software companies. As Claranova is a combination of the first three groups and there are material minority investors in each business, we use a sum-of-the-parts approach to fully capture the value of the group.

Based solely on average peer group EV/sales multiples for FY21e (1.1x for PlanetArt, 5.8x for Avanquest (excluding Foxit) and 1.0x for myDevices), we arrive at a sum-of-the-parts valuation for Claranova of €15.33 per share. However, we believe that these multiples are not reflective of the growth and profitability prospects for each division. In Exhibit 14, our sum-of-the-parts valuation is based on adjusted FY21e EV/sales multiples by division, as discussed in more detail below. The EV/sales multiple for FY22e and the EV/EBITDA multiples for FY21e and FY22e are implied based on the EV/sales multiple used for FY21e.

We have used an EV/sales multiple for PlanetArt in line with its peer group. While the division is forecast to grow faster than peers, this includes the contribution from CafePress, which is likely to be loss-making in the year. We therefore believe it is appropriate to use a lower multiple to reflect the impact on profitability. This results in an implied EV/EBITDA multiple at a premium to peers, reflecting PlanetArt’s lower EBITDA margins. As the photo printing business has a fully outsourced production model, it has minimal depreciation and amortisation, and we would expect its EBIT margin to be very close to its EBITDA margin. On this basis, we estimate that the division’s profitability is much closer to that of its peers.

We have used a multiple for Avanquest that is at a large discount to its peers. Looking at revenue growth in FY21, the business is likely to grow at a slightly slower rate than its peers. In addition, it is generating substantially lower profitability than its peers on an EBITDA and EBIT margin basis. We note that the Canadian group of businesses was acquired at a trailing price/sales multiple of c 1.8x.

For myDevices, we have used an EV/sales multiple for FY21 that is at a premium to its listed peer group. We note that the number of pure-play listed peers for this market is low, and their forecast growth is substantially lower than for myDevices. We therefore think it is more appropriate to apply a multiple based on recent transactions which show that IoT platforms command price/sales multiples anywhere between 4.2–8.9x sales. On this basis, we arrive at a valuation of €12.12 per share, up from €11.52 when we wrote in August. Since then we have rolled forward the valuation by a year and our forecasts now include CafePress.

Clearly, if the company does not achieve our forecasts, there could be downside to the share price. Factors that could provide upside to the valuation include sustained high demand for photo printing, successful adoption of the FreePrints Gift app in the US and returning recent acquisitions to profitability.