Claranova — Moving closer to 10% EBITDA margin target

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 include:

We factor in a group revenue decline in FY24, reflecting the weaker dollar versus the euro and the disposal of part of Avanquest’s non-core operations. We forecast a return to growth of 6% in FY25. We forecast group EBITDA (pre IFRS 16) of €43.3m for FY24 (8.8% margin), rising to a 9.4% margin in FY25. With limited capex requirements, this translates into normalised operating margins of 8.3% in FY24e and 8.8% in FY25e, and EPS growth (on a normalised basis) of -8% in FY24e and +25% in FY25e. We forecast net debt/EBITDA of 2.2x by end-FY24 and 1.5x by end-FY25.

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 €5.4 per share, before any holding company discount.

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 ability of the company to restructure debt, supplier dependence and logistics costs for PlanetArt, changes to app store and search engine policies, 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.

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, with the plan completed in 2015. 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, which enabled it to seek out minority investors in each of the divisions in order to accelerate growth and, at the same time, it changed the company name from Avanquest to Claranova. In FY22 the company bought out the minority interests in Avanquest and has a scheme in place to buy back some of the PlanetArt minority interest. Reflecting its growth ambitions, the company has made acquisitions in the gifting and software space over the last four years.

Claranova manages and co-ordinates a portfolio of majority owned interests in digital companies with strong growth prospects. The three divisions share a common vision: empowering people through innovation by providing simple and intuitive digital solutions that facilitate everyday access to the very best of technology. The company provides autonomy for each of its activities, with experienced entrepreneurs running each business, while providing strategic guidance and managing commercial or financial partnerships at the group level. The company has an investment horizon of five to 10 years for each business, depending on its maturity, with possible exit strategies including IPO, merger and partial or entire sale to financial or trade buyers. The company is focused on driving the growth and profitability of each business, targeting a group EBITDA margin of 10% by FY24.

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 four years has expanded across Europe. It has grown its product offering to include a wider range of customised products, helped by the acquisitions of online personalised gift providers Personal Creations and CafePress in the US. The business is focused on developing a comprehensive personalised e-commerce service that combines the photo printing and gifting businesses.

Avanquest is focused on developing proprietary software. It has transitioned its licence model for most products from one-off to subscription-based and recently sold its non-core European third-party reseller business.

Finally, the myDevices IoT platform is at an earlier 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.

Claranova is headed up by CEO Pierre Cesarini. Mr Cesarini joined the company in May 2013 to effect the restructuring of the group. He is supported by the management team: Xavier Rojo (deputy CEO and group CFO), Roger S Bloxberg (CEO PlanetArt), Todd Helfstein (president PlanetArt), Eric Gareau (CEO Avanquest) and Kevin Bromber (CEO myDevices).

At the AGM/EGM on 29 November, the board was restructured and the chairman and CEO roles separated (Pierre Cesarini had previously held both roles). The board now consists of Francis Meston (chairman) and directors Marc Goldberg (vice-chairman, newly appointed), Roger Bloxberg, Craig Forman, Gabrielle Gauthey, Christine Hedouis, Michele Anderson (newly appointed) and Michael Dadoun (newly appointed). Daniel Assouline was appointed board observer. Marc Goldberg, Michael Dadoun and Daniel Assouline are all shareholders (15.9%, 2.3% and 4.7% respectively). Michele Anderson, Christine Hedois, Francis Meston, Gabrielle Gauthey and Craig Forman are deemed to be independent non-executive directors.

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 ecommerce service. The division’s strategy is to grow through a combination of geographic and product range expansion.

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 generated in the US and the UK with a growing contribution from continental Europe; PlanetArt is present in 15 countries in total. The chart below shows the various products offered by the division, which we describe in more detail below.

The FreePrints app (called FreePrints) is available for use on Apple and Android mobile devices in 15 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 per order; 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; larger prints, different-shaped prints (eg square), borders, duplicates or different finishes are available for an additional charge. Once an order is placed, customers are 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. Through the acquisition of Personal Creations (see below), PlanetArt also offers the apps created by Sincerely.com: ink cards, easytiles and postagram. More than 3.5 billion photos have been printed by PlanetArt to date.

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 on Google Play. This compares favourably with competitors, which receive lower average review scores on significantly fewer reviews. The business also aims to maintain high rankings within both app stores, as this also influences consumers’ propensity to download.

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 it is 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 to 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.

Claranova has built capability for personalised gifting through a series of acquisitions:

In CY20, the business launched the FreePrints Gifts app 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 app is currently only available in the United States, but the business intends to launch this app in Europe in due course. In CY23 PlanetArt launched PhotoCalendars in all 15 countries – the app enables users to personalise a calendar with their own photos, as well as allowing them to add significant dates and start the calendar in any chosen month.

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 15 years ago, consumers have increasingly shifted from taking photos using digital cameras to using their phones for the majority of their photography. Mobile apps for photo printing are designed to make the process of printing out the photos taken by mobiles simple and cheap. Moving into the personalised gifts market expands the addressable market. According to Statista, the global market for personalised gifts was worth $23.5bn in 2019 and is forecast to grow at a CAGR of 5.6% to $34.3bn by 2026.

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.

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 greetings card businesses (American Greetings, Card Factory, Hallmark Cards, funkypigeon.com, Moonpig.com), photo printing companies such as Cimpress and Snapfish, specialist providers (eg Not On The High Street (UK), society6 (US), Minted (US), Personalization Mall (US), Things Remembered (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.

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 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.

To win new customers, the division has typically focused its advertising on Facebook, Google Ads, TikTok, X and other channels. Occasionally, the company buys TV advertising. As we have previously written (Post-lockdown hangover), the introduction of Apple’s App Tracking Transparency (ATT) policy in April 2021 made new customer acquisition much more difficult. The division has rebuilt its customer acquisition strategy with channels now including TikTok, Instagram and YouTube, and marketing spend on Facebook is now at less than a 10th of previous levels.

The division outsources all photo printing to one printer in the US, one in the UK and one in the Czech Republic. 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. 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%. In January 2022, Claranova announced that it would buy back some of the minority interests (see Increasing stake in PlanetArt). As at the end of FY23, the minority interest stood at 5.41%.

Cost of sales consists of printing costs, the cost of items such as mugs or T-shirts, shipping costs and payment processing fees. 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 France 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.

Revenues saw very strong organic growth in FY20 and FY21 boosted by COVID-19 lockdowns, however Apple’s ATT policy described above resulted in a revenue decline in FY22 (12% organic cc decline). FY23 revenue increased 4% y-o-y (flat cc) as the company made progress with new customer acquisition methods. Year-on-year, EBITDA declined 7% in FY23 despite the 4% increase in revenue, resulting in a 0.5pp decline in margin to 3.9%. The company noted that offsetting the €16m increase in revenue, inflation added €10m to cost of goods sold, €3m to employee costs and €4m to transport costs. Despite the decline in profitability, the business has managed to reduce customer acquisition cost back to the level it was at prior to Apple’s ATT policy and is now focused on the scalability of its new customer acquisition methods. In Q423 it started to restructure the business to improve profitability and is also considering changes to its pricing policy.

Revenue in Q124 declined 11% y-o-y or 7% cc as the business continued to focus on profitability over revenue growth. We forecast a return to cc growth from Q324 as the company scales its new customer acquisition channels and forecast 6% reported growth in FY25. We assume the restructuring in the division started at the end of FY23 will support EBITDA margin growth in FY24 and FY25.

Avanquest is a consumer-focused online software business operating in three key verticals: photo editing, pdf and 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 historically sold a mixture of third-party software and own-IP software. Up to the end of FY18, the company sold products that broadly fell within one of the following four categories: operating tools, office tools (eg PDF-based software), interior/exterior design and photo-related. Software was typically from less well-known brands and did not include household names such as Adobe, Microsoft or Norton. In 2018, Avanquest acquired 50.1% of a group made up of three Canadian businesses – Adaware, Lulu Software and Upclick – all with proprietary software. In FY22, Avanquest acquired the minority interests and now owns 100%. The acquired businesses have kept their existing business models and brands.

Avanquest is now focused on selling proprietary software, having recently sold most of its non-core third-party reseller business. Product development is now focused around three core areas based on the main proprietary solutions:

Avanquest has made several acquisitions to strengthen the PDF business. In FY21, Avanquest acquired PDFescape. PDFescape has integrated Soda PDF technology into its desktop solution since 2016 and has more than a million visitors to its site each month. In FY23 Avanquest made two further PDF-related acquisitions: PDFforge (see Stable performance year to date) and Scanner App, a US company specialising in the development of mobile apps, licensed on a subscription basis.

The division generates revenues in four different ways:

Costs of sale include the cost of products (ie royalties paid to third-party software providers), bank fees, distribution costs for physical goods and server hosting. Operating costs include advertising, marketing, administration and R&D. The division operates with single IT, marketing and finance teams.

The market for consumer software is made up of:

Avanquest falls into this last category, along with companies such as Avast, Kape, Foxit Software and Nitro Software. Avast and Kape both sell cybersecurity and PC hygiene tools and have been actively buying software providers in the space. Foxit and Nitro both sell pdf software.

The business has shifted the majority of its product sales to a recurring revenue model, mainly through offering software on a subscription basis. Recurring revenues made up 67% of FY23 revenue, up from 46% in FY20. The division would also consider more acquisitions, targeting profitable companies with high levels of web traffic.

Exhibit 6 shows the quarterly revenue progression over the past three years; this business sees a seasonal peak in Q2 (ie calendar Q4).

In FY23, the division grew revenue 14% y-o-y (6% organic cc) and EBITDA 48% y-o-y, expanding the EBITDA margin by 3.5pp to 14.9%. The company provided a breakdown of revenue by core and non-core businesses and gave further detail on the four product lines within the core business (see Exhibit 7). Security (Adaware) is the largest product line within the division, making up 53% of core revenue and 44% of divisional revenue. This saw revenue growth of 13% y-o-y although EBITDA was flat year-on-year due to higher customer acquisition costs. PDF (Soda PDF) is the next largest product line at 35% of core revenue and 29% of divisional revenue. Revenue grew 31% y-o-y, helped by the inclusion of PDF Forge from Q123, and EBITDA increased 91% y-o-y. The Photo (InPixio) product line makes up 10% of core revenue and 9% of divisional revenue. Revenue grew 25% y-o-y while the EBITDA loss was flat as the company invested to seek to reach critical mass. The Mobile product is based on ScannerApp technology, acquired in Q223. The information provided by the company was not detailed enough to calculate the Mobile EBITDA margin.

Non-core revenue declined 13% y-o-y generating a larger EBITDA loss. The company had previously announced plans to sell its non-core business, which mainly involves the resale of third-party software. In July, it announced that it was in negotiations with Encore Software to sell its European Home Design products (including Architect 3D) and on 19 October, it completed this transaction. The paper distribution business, marketed under the Micro Application brand, has separately been sold to a new company created by two former employees.

In Q124, Avanquest grew revenue 6% y-o-y (15% cc, 14% cc organic). Proprietary SaaS software made up 87% of the quarter’s revenue. We have revised our forecasts to reflect the disposal of non-core activities, which results in better profitability.

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

myDevices monetises 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 comprises a gateway (the link to the cellular/LoRa network or ethernet), sensors (positioned as required on the customer’s premises, send data back to the gateway on a regular basis using the LoRa wide area network (LoRaWAN) protocol) and apps (mobile or web-based to control the network, to monitor the network and to provide alerts as required). Exhibit 9 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 required. 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 that 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 Aramark, BASF, Engie, Hilton, Honeywell and Sodexo. The business has developed 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 (WAN) 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. Claranova and Semtech together made further investments in myDevices in 2020 and 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.

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.

Customers pay to use myDevices on a per-device subscription basis. 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.

Exhibit 11 shows the quarterly revenue progression over the past three years. Customers pay to use myDevices on a per-device subscription basis, and as customers become familiar with the platform, the expectation is that they will want to use the service for more devices in more locations. FY23 revenue grew 57% (46% cc) and Q124 revenue grew 50% y-o-y (61% cc). myDevices reported FY23 EBITDA of €0.1m, well ahead of our forecast €1.4m loss. The H223 cost base of €3.5m declined from €4.5m in H123, mainly as the costs of developing the platform are largely complete. This resulted in a step up in EBITDA from -€1.6m in H123 to €1.7m in H223. The company noted that annualised recurring revenue (ARR) reached €4m by the end of FY23, up 34% y-o-y cc.

We model strong revenue growth in FY24 and FY25, reflecting customer wins and expanding usage by existing customers.

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:

Exhibit 13 summarises FY23 results (the company reported Q423/FY23 revenue in August). Revenue was substantially in line with our forecasts following the August trading update. Pre IFRS 16 EBITDA came in slightly above our forecast (the company had expected growth of 25–30% versus FY22, actual growth was 27.5%) resulting in a margin of 6.4%, 1pp higher than in FY22. Normalised operating profit was marginally below our forecast. Adjustments to arrive at reported operating profit were higher than we forecast in total; exceptional costs of €5.3m included litigation costs relating to the capital raise and restructuring costs, including the costs of moving people out of Ukraine. Net finance costs of €28m were higher than our €21m forecast, mainly due to foreign exchange losses of €6m (mostly unrealised). Claranova closed FY23 with a net debt position of €112m, higher than our €93m forecast. The difference was mainly due to working capital consumption of €15m compared to our forecast for a €3m inflow. As a reminder, the company raised net proceeds of €17.3m from the issue of 11.2m shares at €1.65 per share in July (post year-end). €15m of this was effectively a debt/equity swap of the promissory notes owed to Lafayette Investment Holdings (LIH).

The company is targeting a 10% EBITDA margin in FY24. It believes it is possible to reach this without making additional acquisitions, depending on the success of the restructuring of PlanetArt. It confirmed that its €700m revenue target will depend on M&A.

Total debt at the end of FY23 stood at €178.8m, offset by cash of €66.8m. Debt included:

The company is currently investigating the refinancing of the OCEANEs and ideally would seek to replace them with longer-dated debt and additional capacity for M&A.

We have revised our FY24 forecasts to reflect lower than previously expected profitability in PlanetArt and better profitability in myDevices and Avanquest (partly due to the disposal of non-core activities). The reduction in our FY24 revenue forecast is due the disposal of the Avanquest non-core activities. We introduce FY25 forecasts, including 6.4% revenue growth and an EBITDA margin of 9.4%.

In Exhibit 15, 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 minority investors in two of the businesses, we use a sum-of-the-parts approach to fully capture the value of the group.

We use average peer multiples for reference, adjusting them to reflect our views on the growth and profitability prospects for each division. In Exhibit 16, our sum-of-the-parts valuation is based on adjusted FY24e EV/sales multiples by division (rolled forward by one year since our last valuation). The EV/sales multiple for FY25e and the EV/EBITDA multiples for FY24e and FY25e are implied based on the EV/sales multiple used for FY24e. For PlanetArt, we use an FY24e multiple of 0.7x, with the 40% discount to peers reflecting its lower profitability. For Avanquest, we use the value implied by the minority interest buyout, which equates to an FY24e EV/sales multiple of 1.4x. We use a multiple of 2.0x for myDevices. This results in a new valuation of €5.4 per share, down from €6.1 when we last wrote, reflecting reduced revenue forecasts and higher net debt. If the full value of the OCEANE debt is included, this brings the valuation down to €4.7. Clearly, this valuation implies material upside to the current share price. However, investor confidence has been affected by PlanetArt’s struggle with new customer acquisition and concerns around the ability of the company to fund the repayment of the OCEANE debt in 2024. We also assume that investors factor in a holding company discount. Factors that could restore confidence and start to close this valuation gap include: