mVISE — Connecting the cogs

After a strong fourth quarter, mVISE reported a 52% increase in 2018 revenue to €22.5m and a 94% increase in operating profit (EBIT) before corporate acquisition/sale costs to €1.79m. Product revenues doubled from c €1m to c €2m, due principally to a €1.0m payment from Magic Software in January, invoiced in December, to secure an option to purchase the rights to market its own cloned version of elastic.io’s integration platform as a service (iPaaS) in four years’ time.

A key factor in the group’s consulting success in 2018 was the January integration of a team of 40 consultants and related consulting contracts from SHS Viveon, increasing the group’s consulting capacity by 50%. At the same time, mVISE adopted the team’s service contracts and corporate clients from SHS Viveon, including Media Saturn, Telefonica, Pro7, SAT1, HUK Coburg and Fidor Bank. The team’s expertise in high-demand areas of software integration, data insight, data warehouse, business intelligence, big data and predictive analysis led to an increased level of capacity utilisation during the year. While reporting overall pressure on day rates and margins, helped by the acquisition, mVISE’s EBIT margins excluding one-off costs of acquisitions and divestments rose 1.7pp to 7.9%, attaining the mid-point of management’s target range of 7–9%.

The August sale of loss-making workforce management and software supplier, Just Intelligence (JI), was also positive for operating profit. The decision for divestment arose principally from the lack of strategic fit with the other group’s services and products. Stripping out JI’s revenues and €0.10m in EBIT losses reveals an underlying 62% increase in group revenues to €22.1m and 69% increase in adjusted EBIT to €1.89m, revealing a strong underlying 8.6% EBIT margin (see Exhibit 2).

In March 2018 mVISE launched 2018+, a three-year strategy with targets to achieve by end 2020 including:

The group made strong progress towards these aims in 2018 with revenue growth (52%), adjusted EBIT margins up 1.7% points and a c 50% increase in consulting staff with the SHS Viveon acquisition.

A key strategic aim this year is to bring all the key segments of mVISE’s operation closer together to exploit cross-selling and synergy benefits. We believe the opportunities with the greatest potential are:

We see the potential for the group to generate a high proportion, if not multiples, of its growing product sales from product-related consulting revenues. mVISE’s white-label-partner Magic Software, which has long experience of marketing integration platforms, provides an example of the level of consulting services that can be generated via software offerings. In 2017 it generated 8% of FY17 revenues from product sales, 12% from maintenance and technical services and a total of 80% from consulting services.

We also note that mVISE’s unique knowledge of its own software product puts it in a strong position to charge higher rates than it can for standard consulting projects. In this the situation is similar to that of SAP consultants, which are able to charge substantially higher rates than consultants working on more generic software.

Despite the potential for a slight cooling in the global economy this year (the IMF forecasts a reduction in global GDP growth from 3.8% to 3.6% this year, and 3.3% in 2020), Gartner expects segments of the IT market to continue to perform strongly over the next two years driven by several key trends. These include the shift to the cloud, the growing importance of the platform at the heart of the enterprise and the increased adoption of the Internet of Things.

Within an overall group forecast for global IT spend of 2.8% in 2019, Gartner forecasts an 8.5% increase in sales of enterprise software this year and a further hike of 8.2% in 2020, driven by the shift to the cloud. Gartner also forecasts organisations to budget an increased proportion of spend on software provided using the software as a service (SaaS) model, giving rise to stronger overall growth for this segment.

mVISE’s products are well positioned in these respects. Both elastic.io and SaleSphere are cloud based and follow the SaaS model. In the case of elastic.io, its integration capabilities are a necessity for the platform model, which Gartner refers to as ‘the engine that moves the business’. The global market for the other key segment of mVISE’s business, IT services, is also forecast by Gartner to grow 4.8% this year, making it the second strongest performing industry segment.

Looking solely at Germany, where the group’s non-product related consulting business is oriented, the German IT Industry association forecasts a similarly strong picture for the IT industry to grow 2.5% to €92.2bn in 2019 with software sales growth of 6.3% to €26bn helped by ongoing digitalisation demand.

In terms of market risks, it is worth noting the German auto industry has been affected by global trade disputes and difficulties with new emission standards. Brexit is also considered a risk to German growth. In terms of exposure to the auto industry, mVISE includes BMW and Bosch among its client base, but the overall share of revenue is minimal.

elastic.io is a micro-services-based hybrid iPaas platform for real-time data sync across disparate cloud-based and on-premise applications, platforms and databases. With a major focus of enterprises currently being digitalisation of their operations and the move to the cloud, the sector is growing rapidly. Market Research Future forecasts the integration platform as a service (iPaas) market to grow to approximately $2bn by 2023, with a 2017–23 CAGR of 22%.

A key strength of the elastic.io platform is its ease of use helped by more than 100 pre-built connectors to mainstream business applications. mVISE already has more than 1,000 users. Crucially, three white-label partners are due to launch the product in the coming weeks, which we expect to dramatically boost subscriber growth in coming quarters.

elastic.io has a high level of recognition in the sector, being included in the top 25 players in the iPaas market by QY Research. Its closest competitors include the US firms Informatica, Dell Boomi, MuleSoft, SnapLogic, Talend, Scribe Software and Built.io as well as SEEBURGER of Germany. Over the last year the group has undertaken more investment into and development of elastic.io, creating a white-label product and expanding the distribution network. mVISE has contracts to sell elastic.io via four major software distributors: Magic Software, Deutsche Telekom, AppDirect and Riversand. Magic Software started marketing elastic.io as its own product in January 2018 and the other three are scheduled to launch the services in coming weeks.

Magic Software is a leading global provider of integration and digitalisation software with major operations in the US and more than 50 other countries. Magic Software signed an initial agreement with mVISE in September 2017 and started selling the product in January 2018. During H218 it started selling a white-label version, called Magic XPC, and strengthened the cooperation with mVISE by agreeing to fund €2.5m for common product development until end-2022 (of which €1m was allocated in H218). The two partners have also agreed to share IP rights in the future to the software, which has given Magic Software more incentive to develop software together with mVISE.

Deutsche Telekom signed an initial deal to market elastic.io in December 2017. Nevertheless, it waited until it was able to launch a white-label version of the product on its software sales platform before launch, which was scheduled for late April, but is now expected in May. AppDirect operates an ecosystem that connects channels, developers and customers to simplify digital supply chains. AppDirect became a client of elastic.io in February 2018 but the first sales to its customers are expected to take place this month. Riversand is a specialist in master data management and product information management. The group operates a multidomain data management platform and provides applications to support further business applications. The group was listed as a strong performer (one tier below ‘leader’) in the Forrester Wave Master Data Management, Q1 2019.

SaleSphere is an integrated solution for digitalisation of sales processes that brings in data from customer relationship management (CRM), product information management (PIM) and enterprise resource planning (ERP) systems and delivers the result to a multimedia sales app. After poor early sales in 2018, mVISE redesigned the product and the interface and undertook a relaunch in July 2018. Sales in H2 did not take off as quickly as hoped, with full year 2018 sales of c €0.2m.

Nevertheless, mVISE signed a number of new partner agreements late in November and December 2018 with PIM specialist eggheads and Opus Capita a source-to-pay, cash management and PIM solutions software provider. In addition, mVISE has extended its existing platform to mSphere, a more generic no-code solution for the implementation of mobile applications.

A key positive in mVISE’s short- to medium-term outlook for its consulting business is the prospect of strong growth in higher-margin product-related consulting revenues in 2019. Sales of both elastic.io and SaleSphere are expected to increase strongly this year and, with the imminent launch of elastic.io product as a white-label solution by three more partners on three more platforms (to give four in total), is likely to lead to especially strong sales growth and a substantial increase in consulting work on the product.

All four elastic.io distributors have contracts with mVISE (via elastic.io) to provide their clients with installation, hosting and operations services for elastic.io during runtime, as well as support and professional services to build out the software to their requirements. To date there have been no purchasers of elastic.io software that mVISE has not been required to provide further consulting services to, so the relationship between growth in new clients and that of consulting revenues should be very strong.

Further impetus should come from an H218 contract with Magic Software that agrees Magic Software will subsidise €2.5m in mVISE development efforts to continue improving the common product until 2022. In addition to boosting consulting work at mVISE, this should also increase demand for the software.

Despite the expected increase in demand management does not foresee any significant staff shortages over the next year. The group has good experience of outsourcing work to programmers in Kiev and for 2019 it is looking to only moderately increase consulting staff numbers overall.

Another important and positive development is presented by the increasing customer awareness of the issue of ‘false’ self-employment, which is now discouraging companies from using freelance staff based in their premises. The changes mean that freelance staff based in a company’s office are now seen to be more likely to be deemed employees by tax authorities, which increases the tax burden of the company/employer.

As a result, mVISE has been approached by a number of firms to take over-run of work contracts previously undertaken by freelancers for execution in mVISE premises. This gives us further confidence in the ability of the group to fill its order book and to avoid staff availability becoming a pinch-point for the division this year, with more freelance employees likely to be released into the employment market.

mVISE management forecasts an increase in 2019 turnover from €22.5m to €26–29m and an increase in EBIT margin before one-off acquisition costs from 7.9% in 2018 to 10–12%. We believe these forecasts are based on reasonable expectations of growth and margins in the product and services division.

In particular, management’s goal of doubling its software sales in 2019 to €4–5m is supported by:

If sales of products do not disappoint, reaching the mid-point of the targeted increase in group revenue will require only a 10–15% increase in consulting revenues from c €20m in 2018 (excluding c €2m product sales and revenues from JI), to c €22–23m. Despite the potential negative impact of a slowing domestic economy, we believe this rate of growth should be supported by the prospects for increased product-related work and the improved competitive position of the company versus freelancers.

Management’s current-year forecast of the expansion in the EBIT margin before one-off acquisition costs from the underlying 8.6% (and reported figure of 7.9%) in 2018 to 10–12% looks consistent with the expected growth in high-margin product sales (margins on products are typically in the region of 40% versus approximately 10–20% for consulting activities, depending on the level of product or other specialisation) and the expected increase in proportion of revenues from high margin product-related consulting activities.

In 2018 the group achieved a 48.8% increase in operating cashflow before working capital to €2.90m. Nevertheless, one-off impacts on working capital from the integration of SHS Viveon staff during the year (arising from its focus on year-end managed service contracts and the resulting build-up in debtors) contributed to a €3.4m increase in year-end trade receivables balances and an additional increase in current tax liabilities during the year. This led to a €0.63 cash outflow from operating activities. This increase in working capital was funded with a €5.8m increase in net debt, resulting in net debt to equity rising sharply from 21% to 160% over the year. We note that payments of the invoices during the first quarter should result in a reduction in net debt and gearing levels by mid-2019.

At present the international software product sector is rated on significantly higher earnings multiples than the consulting sector, reflecting the fast-growing market for digitalisation products and the highly scalable business model of software providers.

In our view, with its mix of product and consulting revenues, there is a good case for mVISE being valued on a multiple between the norms of the two groups, at a premium to the consultants and discount to the product groups. At present, however, after recent share price weakness the stock trades on an FY1 P/E multiple discount to both the consultants and product sectors of 32% and 81%, respectively.

Based on mVISE management’s guidance for group revenues and its expectation of a doubling in product sales in each of the next two years, we calculate that mVISE could see consulting revenues fall to c 81% of total revenues in 2019 and 70% in 2020, giving the company a potentially greater exposure to products than Magic Software and providing a strong basis for a re-rating given the significant difference in prospective FY2 multiples.

We see the potential likely catalysts for an mVISE re-rating as:

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