Description

AXW.PA is an enterprise software company growing cloud revenues 35-50% per year that trades for 2x EV/revenue and 9x EV/EBITDA. AXW.PA has been transitioning from an on-premise vendor to a cloud model, which has depressed total revenue growth in the last few years. AXW.PA is now seeing inflecting total revenue growth as cloud revenues (40% of total revenues) are about to overtake on-prem maintenance revenues. We believe that AXW.PA is also inflecting on EBITDA margins and will continue to pay a modest dividend given its unlevered balance sheet.

The core of the thesis is that AXW.PA is an attractive asset with two core product offerings (MFT and API) that will be growing total revenues ~10% with high FCF generation (~10% on the EV today) and is now a cloud first business. Due to the sticky nature of MFT and API management software, gross retention rates are 94%+ typically. If this company were acquired, the valuation would be potentially three times the current level (6x EV/revenue), or over €80/share. Globalscape (formerly trading as GSB), a director competitor to AXW.PA, was acquired for over 5x revenues in July 2020, and it was an 100% on-premise MFT business (no cloud revenues) that is 1/10th the size of AXW.PA. The founder/exec Chairman/controlling shareholder of AXW.PA, Pierre Pasquier, is now 85 years old. Now might be a decent time to evaluate alternatives. We have no insight into this, but we think the set up is decent. Even if nothing happens in the next few years, shareholders are earning a close to 10% FCF yield and growth inflecting towards high single digits, and margins should be double current levels as the transition to the cloud advances.

We do not know of any $350M USD enterprise software vendor that is growing cloud revenues 35-50% per year and is profitable that trades for 2x revenues. The closest comparable situation we could find is with QADA, where it was trading for ~2x revenues for the majority of its life in the public markets and was growing cloud revenues 20-30% (albeit with inconsistent profitability), and was eventually acquired by Thoma Bravo for ~5.5x revenues in June 2021. So we believe the current valuation is the downside and the upside approximates 3x the current stock price. We have AXW.PA doing ~€60M of EBITDA (note that GSB EBITDA margins were 45%+ when it was sold, so AXW.PA’s 15-20% target is not ambitious) in FY22, which surpasses its peak of €56M in FY16, as operating leverage finally takes hold as the cloud business scales. Capital allocation seems balanced: a solid dividend and some tuck-in’s on the API side.

What has changed since this was last written up on VIC in November 2016?

-          In 2016, AXW.PA had no SaaS or cloud business—today cloud is 40% of total revenues and growing rapidly (35-50%), yet the market cap has not changed since the write up and the enterprise value has shrunk due to the cash build. Cloud revenues have grown from ~€19M in 2016 to ~€125M today, and recurring revenue (maintenance + cloud) has grown from €162M to €241M.

-          Total revenues are now growing organically, they were flat/declining in 2015, 2016 and 2017

o   1Q21 organic rev growth +7.5%, 2Q21 + 3.2% organic rev growth

o   Organic growth in ’15, ’16 and ’17 was flat

-          The business is more diversified with a rapidly growing API management offering (“Amplify”) that is in the leader quadrant in the latest Gartner reports and a leader in the Forrester reports.

o   Axway is rated in the leader’s quadrant close to MuleSoft in API which was acquired by CRM for 13x EV/rev

-          MFT remains the core, but is mature with a sticky customer base, the company is forecasting that this business, which is 70% of the overall is flattish

-          API / Amplify is growing rapidly , with the company forecasting Amplify at a 20%+ CAGR over the mid-term

-          Forecasting margins returning to mid-teens level by 2023; we think the business could easily earn a 35% margin if / when management decides to focus on profitability

Shareholder dynamics, management

-          Patrick Donovan, who we have met in Phoenix, was the former CFO was brought in to accelerate  the cloud transition and maintain profitability; not a product visionary but a solid operator and has grown the cloud business significantly

-          He has largely transitioned the business to the cloud, and is now focused on growing API/Amplify and using the cash flows from the mature MFT business to grow API 20%+

-          Pasquier spun AXW.PA out of Sopra in 2011, but Sopra remains the largest shareholder, so Pasquier controls both entities

-          At some point Pasquier might want liquidity for Axway, timeline is not clear, although he is now 85 years old

Risks

-          Capital allocation: could do bad acquisitions

-          Elevated churn on the MFT/legacy side of the business

-          Slowdown in growth at API/Amplify

Conclusion

AXW.PA has undergone the cloud transition that will drive top-line revenue growth and margin expansion long-term, yet this has yet to be recognized by the market as the business today is trading for 2x 2022E revenues and 9x 2022E EBITDA. Given the risk-reward skew, we believe this to be a highly attractive investment opportunity.

Catalyst

-Investor awareness

-FCF generation and growth

-Being acquired