Piteco — Update 3 May 2016

Piteco is the leading provider of cash management, liquidity management, bank transaction, and other treasury management software solutions for medium and large enterprises in Italy. Piteco began its journey over 30 years ago, and today it has more than 600 clients in Italy, operating across 2,500 subsidiaries. Customers include many high-quality Italian names such as Fiat Chrysler Automotive, Finmeccanica, Lavaza, Moncler, Prada, 3Italia and Wind. Clients also include major international groups operating in Italy, such as Carlsberg, DaimlerChrysler and Reckitt Benckiser. Piteco offers its clients a range of 20 software solutions, and continues to expand its offerings through R&D and via acquisitions. The software suite includes two solutions from the recent acquisition of Centro Data, including data-matching capability.

Piteco operates a traditional enterprise software business model, with an upfront perpetual software licence sale, professional services (consulting, implementation and configuration) along with ongoing maintenance which is paid by all active customers. The maintenance book (c €6.2m) represents nearly half of annual net sales revenues and, historically, there has been very low customer churn. Of the balance, c 35% of sales is from upselling to existing clients while c 15% is generated from sales to new clients and the company typically acquires 25-35 new clients per year.

As for the typical enterprise software vendor, there is always the risk of budget cuts in an economic downturn. However, Piteco’s typical client has a low default risk, the customer base is broadly spread across large enterprises and the bad debt charge is typically less than 0.5% of turnover. The global financial crisis did not adversely affect the group and the annual maintenance charge is a small cost for its customers. Further, exit barriers are high, as this would require a new project, and the software is embedded in its customers’ systems. There is a risk that major enterprise software vendors might take a more proactive interest in the TMS sector. There will be integration risk in the acquisition strategy and increasing currency risk as the company expands abroad.

The stock trades on c 15.0x our earnings in FY16e, which falls to c 13.9x in FY17e and to 12.6x in FY18e. In terms of EV/sales, the stock trades on c 5.0x in FY16e, which falls to c 4.6x in FY17e and to 4.3x in FY18e. Our DCF model, (which assumes a long-term margin target of 40% and terminal growth rate of 2%), values the stock at 483c, which is 23% above the current share price. In our view, Piteco’s valuation is supported by its healthy operating margins, strong cash generation, stable growth and attractive risk profile.

Piteco stands for computerised treasury planning (in Italian – Pianificazione di Tesoreria Computerizzata). The company traces its roots back to 1980. However, the modern-day business took its shape in 2008 after it was acquired by management, and a MLBO (management leveraged buyout) took place in 2012. Headquartered in Milan, the group also has offices in Padua and Rome and has c 80 employees, including 10 who joined via the acquisition of Centro Data in mid-2015. We note that historically, the group had very low staff turnover. Following the successful IPO in July 2015, the shares remain very tightly held with management interests retaining 83.3%. Chairman Marco Podini and his sister Maria Luisa Podini directly and indirectly hold nearly 75%, including via Dedagroup (52.3%), which is a large Italian-based ICT company. Additionally, the senior management (CEO, CFO and sales director), all of whom have been with the company for at least 15 years, each hold 2.86%.

Piteco raised €11.5m (gross) in new money in mid-2015, via an offering of new ordinary shares (€8.5m new money) and €5m of convertible bonds (of which €3m was new money) and listed on Aim Italia. The public listing should boost the company’s profile and help it win new customers. Piteco intends to use the funds to strengthen its leading position in the Italian TMS market for mid-and large sized enterprises and facilitate the group’s entry into new markets. Piteco has hired IDC, the market intelligence firm, to investigate international growth opportunities. Following the successful listing on AIM Italia, the plan is to fast track Piteco onto the MTA, the main Italian market, in 2017.

Treasury management systems (TMS) are software solutions used by corporate treasuries and finance departments to manage transactions and support their decision making. A TMS typically covers front, middle and back-office processes. In other words, the TMS processes a transaction, handles settlement and generates accounting entries. Further, a TMS provides analysis, risk management and reporting of the transactions and the ongoing positions. Historically, these functions were to a large degree handled by spreadsheets, but as with elsewhere in the software world, these are gradually being replaced by built-for-purpose specialist applications using modern technologies. Nearly all large enterprises will have a TMS, while, as you move down the scale to smaller companies, a much greater proportion are still using spreadsheets.

Piteco’s proprietary TMS software has been developed over many years and uses Microsoft languages Visual Studio and .NET. Piteco has 20 modules in total, including 17 within its flagship product suite, Piteco EVO. Two of these modules were developed in 2015 – Global Financial Reporting and Factoring. In addition to Piteco EVO, there is Corporate Banking Communication (CBC), which is a standalone solution, and two modules from the Centro Data acquisition. Piteco’s software is highly customisable with an open architecture and typically functions in conjunction with an ERP backend solution. Virtually all Piteco’s customers have an ERP, a custom ledger or similar. However, Piteco’s software can also be used stand alone. Some 61% of its clients use SAP ERP, as SAP dominates the ERP space in Europe, while others use Oracle (16%) and Microsoft (2%).

The main applications of Piteco’s software are:

Piteco has traditionally focused on large- and mid-cap companies in Italy operating in the industrial and services segments. Its client base includes 75 companies listed on the Italian Stock Exchange. Piteco does not target the banking sector, which is a very specialised market. Within its areas of focus, the customer base is diversified across many sectors, with its heaviest weightings in utilities (c 15%), mechanics and steel (c 13%), fashion (c 9%) and construction and tiles (c 8%). Piteco leads the TMS market in Italy, and does not have any significant competition in its home market. 55% of the c 600 corporations using Piteco’s software have turnover exceeding €500m, while 98% have turnover exceeding €100m. Piteco’s software is already in operation in more than 40 countries, via multinational companies, such as Finmeccanica, which is using Piteco’s software in the UK and the US. It has five dedicated sales people, and two members of senior management, (the CEO and sales director) are also involved in sales. The sales team will typically target a company’s CFO or treasurer.

Customers typically require significant customisation. This gives the group a significant advantage over competitors, for example, Piteco argues that the SAP TMS module is more challenging to customise. Customer requests drive the R&D roadmap and the resulting functionality enhancements and new modules are subsequently made available to other customers. Occasionally, Piteco will drive the process itself, as was the case with SEPA functionality. Also, Piteco plans to strengthen its financial planning solution for up-selling. Nearly all R&D is expensed. Since it relates to client requests, virtually all R&D generates revenue in the year it is incurred.

Piteco Evo is the main software suite, consisting of core base cash-management module along with 16 other modules, as outlined in Exhibit 2. The typical customer takes 6.3 modules on average and the most popular modules are Home banking (99% of customers), Financing and deposits (78%), Trade payables (71%), Portfolio effects (56%), Economic and financial planning (49%) and Centralised treasury (45%).

CBC enables efficient workflow management between companies and their domestic and international banks. It manages information flow coming from any kind of management information system, whether it is an ERP system (SAP, Oracle, Microsoft, etc) or a proprietary solution. Being separate from Evo enables CBC to achieve new market share and compete with generalist operators who do not have TMS solutions. This gives Piteco greater cross-selling opportunities with new customers. Currently, 73 customers take the CBC solution.

Piteco acquired a business unit of Centro Data in 2015 for €1.085m, which includes software, trademarks, customers, employees and business supply contracts. The acquired business had 11 employees and generated turnover of c €1.15m in FY14 and was consolidated into Piteco’s accounts from 1 July 2015. The acquisition added two modules to Piteco’s solution suite – a tool for the matching of financial data, MATCH.IT, and a securities back-office application, AT.PRO. The data-matching solution is especially useful in sectors that generate big data, such as insurance and retail. It automates processes that are typically done manually and it can handle millions of rows of data. The software is complementary to Piteco’s solution set, and Piteco will seek to cross-sell the products to its existing customer base as well as selling into the commercial pipeline. Further, many of the acquired business’ c 40 customers do not have a TMS, which therefore also provides the opportunity for reverse cross-selling.

Having successfully established itself as the major player in the Italian TMS market, Piteco is now seeking wider opportunities for growth. We note following growth drivers:

Piteco is the leading player in the Italian TMS market. There are a number of small local competitors, and Piteco has occasionally lost clients to them. Docfinance is a notable competitor, but it is focused on very small companies, with revenues below €100m. Large international vendors find it a difficult market to penetrate and our understanding is that the two major global TMS players – SunGard and Kyriba – have only won a handful of clients in Italy in recent years. We understand that SunGard has no strategy in Italy in the TMS segment. We also note that SAP, the ERP vendor, offers a TMS module, but we believe that Piteco’s module is less rigid, more cost effective and more customisable than SAP’s solution.

When new customers sign up, Piteco’s software typically replaces one of the following:

The main competitors in the US are SunGard, the software giant, which sells to large corporates and banks, and Kyriba, which is a mid-sized multi-tenant SaaS company. Another competitor, GTreasury, is smaller than Piteco. In our view, Oracle, the leading supplier of ERP systems in the US, does not have as strong a treasury management solution as SAP, which Piteco competes with in Italy. Also, Wall Street Systems is not seen as a direct competitor, as its focus is more on corporate finance and risk management rather than cash management. According to Kyriba, in 2013 c 75-80% of US mid-market companies’ (revenues of $100-800m) treasurers and CFOs used excel spreadsheets for cash forecasting, cash allocation and risk management. However, according the Kyriba/Association of Corporate Treasurers 2015 Treasury Survey, spreadsheets are in rapid decline, with 31% of companies overall using spreadsheets as their primary treasury management tool in 2015, compared to 42% in 2014.

Piteco has a highly experienced and stable management team, and its senior management team have all been with the company for at least 15 years. These senior directors own all the shares.

Chairman: Marco Podini, who is a successful technology entrepreneur. He founded Dedagroup in 2001 and remains its president. He is CEO of Sequenza (logistic outsourcing) and, with his sister Maria Luisa Podini, is the majority shareholder in Lillo. He is chairman of ICT companies Dexit, Derga Consulting, DDWay and Sinergis.

Chief executive officer: Paolo Virenti has been CEO of Piteco since 2012. He was general manager of Piteco from January 2004 and chairman of the board and its legal representative from 2006.

Chief financial officer: Riccardo Veneziani has been chief financial officer and customer account executive of Piteco since January 2004.

Sales director: Andrea Guillermaz is sales and marketing manager and adviser to Piteco. He is responsible for the acquiring of new customers, sales strategies and marketing.

The three other members of the board of directors are:

Gianni Camisa (director) is an experienced IT professional with over 12 years' experience at IBM in various high-level positions. He has been CEO of Dedagroup (Piteco’s parent company) since 2008. Prior to joining Dedagroup, he was CEO at AlmavivA.

Maria Luisa Podini (director) is the sister of Marco Podini. Ms Podini plays key roles in the various parent companies of Dedagroup. She is president of Sequenza’s board and vice-president of Elma’s board. She is a major shareholder in Lillo.

Anna Maria Di Ruscio is the independent member of the board. Ms Di Ruscio spent four years at Gartner Research and before that worked with Nomos. She co-founded NetConsulting (an ICT consulting business) when she was 32 years old.

Piteco operates a traditional enterprise software business model, with an upfront perpetual software licence sale, professional services (consulting, implementation and configuration) along with ongoing support and maintenance.

A typical implementation is €65k (€35k licence paid upfront and €30k services). However, an implementation can range from €20k to €500k, with pricing related to the modules taken, services required and the number of users.

The annual maintenance charge is 15-20% of the initial software licence, and is billed on 1 January each year. The average new maintenance contract is currently €13k, and this number has been trending higher as licence sizes increase. The ongoing maintenance charge is also increasing as new modules and extra users are added, and the contract is inflation adjusted. A maintenance contract usually has a one-year term, though some have three-year terms. Churn on the maintenance book is very low and hence customers have a long duration.

Cost are predictable with c 81 employees and an average cost of €67k, for c €5.4m in total staff costs representing c 43% of sales. Administration, general and other overheads total €2.2m (c 17% sales) and the normal depreciation charge is small. Cash flows are also predictable, with minor capital investment and there are typically inflows from working capital, reflecting the cash-generative business model.

Piteco has reported steady growth since 2008. Total turnover has risen from €8.1m in FY08 (Italian GAAP) to €13.4m in FY15. This reflects a 7.4% CAGR, and c 65% total growth, despite the financial crisis of 2008/2009. FY15 turnover includes net sales revenues of €12.8m, changes in work in progress of €12k, and other revenues of €534k. The group began capitalising development costs in FY14, and €201k of capitalised development costs are included in FY15’s other revenues. The €333k balance of other revenues mainly represent expenses that have been charged back to customers. We note that contracts can either be inclusive or exclusive of expenses (mainly travel and subsistence); when they are excluded, they are charged back to the customer. Piteco gained 30 new customers in FY15, which, along with c 45 inherited with Centro Data, took the total to 598.

The group has modest fixed costs, and its only significant cost is its people. EBITDA rose from €2.4m in FY08 to €5.7m in FY15, for a 43% EBITDA margin (based on the total turnover). Capital investment (apart from software development) is typically very small. R&D is typically driven by client requests rather than the company launching new products. Operating cash flow was €5.1m in FY15. While cash conversion (in relation to EBITDA) typically exceeds 100%, it dipped to 88% in FY15 due to an extraordinary loss of €342k and a small working capital outflow. The group ended 2015 with cash of €10.2m, bank debt of €6.1m and convertible bonds of €4.5m, leaving net debt of €0.3m. There is a pension deficit of €1.1m that takes the adjusted net debt to €1.4m. There are 1,189 convertible bonds with a nominal value of €4,200 (debt book value €3,771). Each bond pays 4.5% annual interest and can convert into 1000 new ordinary shares at 420c up until 24 July 2020.

Depreciation and amortisation has exceeded investment in recent years, because in 2008 €3.5m of the group’s proprietary software was capitalised, and this was fully amortised in FY15.fdgdfhfdg

We forecast 11% y-o-y growth in net sales revenues in FY16 to €14.3m, which includes organic growth of c 6% along with a full period contribution from the acquired Centro Data assets. We note Piteco has already signed eight new clients in FY16 so far. We forecast net sales revenues to rise by 8% in each of FY17 and FY18 to €15.4m and €16.6m respectively. Our forecasts are based on the group’s traditional markets and do not include any assumption for new growth opportunities.

We have conservatively assumed a customer churn of 2% per year.

Sales to new clients: we assume there are 35 new clients in FY16, rising to 39 in FY17 and to 43 in FY18. We assume a stable licence size of €35k and projects of €30k. In all, we forecast revenues from new clients rise to €2.3m in FY16 and to €2.5m in FY17 and to €2.8m in FY18.

Upselling to existing clients: we assume that 95% of clients are upsold new modules and licences in FY16, rising to 100% in FY17 and to 105% in FY18, which reflects the increase in modules from 16 to 20, with some clients taking more than one additional module. We assume clients on average spend €9k, of which 40% is spent on licences and 60% on spent projects. In all, we forecast upselling revenues from existing clients to rise to €5.1m in FY16, to €5.6m in FY17 and to €6.1m in FY18.

Maintenance revenues: we conservatively assume average revenues per customer of €11.5k in FY16, rising 2% per year. In all, maintenance revenues rise by 11% to €6.9m in FY16, partly reflecting the acquired Centro Data client base, and by 6% in each of FY17 and FY18 to €7.3m and €7.7m respectively.

Other revenues: We have included capitalised development costs (see R&D below) and other revenues (essentially expenses that have been charged back to customers) calculated at 3.5% of net sales revenue.

Operating costs: opex largely relates to headcount. We forecast total opex to rise 11% in FY16 to €8.5m, by 7% in FY17 to €9.1m and by 5% in FY18 to €9.5m.

R&D: €201k of development costs were capitalised in FY15, representing 1.6% of net sales revenues. We forecast that 2.0% of net sales revenues are capitalised each year, and these are amortised over the subsequent five years.

Interest: €7m debt was successful refinancing in late 2014 at a significantly reduced interest rate (Euribor +2%) which resulting in net interest expense tumbling in FY15 to €600k. The convertible bonds pay annual interest of €225k and the group also has a large, and rising, cash position. Hence we forecast net interest to continue to decline, falling to €300k in FY16, to €200k in FY17 and to €100k in FY18.

Taxation: we assume a 22% tax rate in FY16, rising to 24% in FY17 and to 26% in FY18. The rate reflects the Italian corporate tax rate of 31.4% and the benefits from new “patent box” tax rules in Italy.

As for the typical enterprise software vendor, there is always the risk of budget cuts in an economic downturn. However, Piteco’s typical client has a low default risk, the customer base is broadly spread across large enterprises and the bad debts charge is typically less than 0.5% of turnover. We also note the global financial crisis did not adversely affect the group. In fact the financial crisis has highlighted the importance that enterprises need to have an effective TMS in place to ensure strong internal controls and risk management capabilities. Further, exit barriers are high, as switching systems would require a new project. The software is embedded in its customers’ systems and the annual maintenance charge is a relatively small cost for its customers. We highlight the following sensitivities:

Piteco has built up an excellent track record of delivering steady revenue growth, healthy margins and strong cash generation, despite having had to cope with a very challenging economic backdrop. The group’s turnover growth has outpaced Italian GDP in each of the seven years to 2015, and its turnover has expanded in aggregate by more than 65% over the period when Italian GDP has fallen by 8%. Piteco has a strong pipeline and growing brand awareness and is now seeking to accelerate growth through acquisition and international expansion. The investment profile is attractive, with a resilient maintenance book ensuring 50% recurring revenues, and with healthy growth prospects from the pipeline, cross-selling, a broadening end market (geographically and into smaller businesses) and via acquisitions.