Accelerating Digital Transformation And SaaS Trends Will Expand Market Opportunities

Key Takeaways

• Rapid cost synergies, management streamlining, and automation position the company to significantly exceed current margin and earnings expectations.
  
• Growing demand for SaaS, compliance, and digital services, combined with successful cross-selling, drives structural revenue and margin expansion above prior forecasts.
  
• Overdependence on major vendors, margin pressures, restructuring challenges, and sluggish transition to high-margin services limit SoftwareOne's revenue resilience and profitability growth.

Catalysts

Provides software and cloud solutions in Switzerland, Germany, Austria, rest of Europe, Mauritius, South Africa, the United States, Canada, Latin America, the Asia Pacific, Dubai, and Qatar.

• Analyst consensus expects CHF 80-100 million of cost synergies from the Crayon combination and EBITDA to double, but given the rapid and early execution of cost programs, consolidation of management layers, and automation, there is potential to significantly outperform these synergy and margin targets-yielding materially higher net margins and earnings than currently anticipated.
  
• Analyst consensus anticipates improved go-to-market execution to unlock growth, yet the strong rebound in pipeline and sales productivity already visible in previously underperforming regions (e.g., APAC, UK) and the shift to regionally accountable, empowered leadership suggest that revenue and operating leverage could inflect much more sharply, driving revenue growth and margin expansion well above expectations.
  
• With the accelerating global transition to subscription and SaaS licensing, SoftwareONE is structurally positioned for recurring, annuity-like revenues and higher revenue per client, especially as multi-year consumption-based contracts ramp and industry-wide software spend continues to outpace other IT categories.
  
• Heightened demand for compliance, cybersecurity, and cloud governance driven by new regulations is likely to rapidly expand the addressable market for SoftwareONE's consulting, FinOps, and managed services, resulting in a sustained mix shift towards higher-margin, stickier service lines over time.
  
• The company's proven ability to cross-sell and up-sell across an extensive, global client base-and monetise investments in automation and digital platforms like PyraCloud-means operating leverage and free cash flow generation could scale dramatically as client penetration and service attachment rates improve.

SoftwareOne Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on SoftwareOne Holding compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming SoftwareOne Holding's revenue will grow by 29.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.1% today to 15.5% in 3 years time.
• The bullish analysts expect earnings to reach CHF 338.6 million (and earnings per share of CHF 1.54) by about July 2028, up from CHF -1.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from -979.4x today. This future PE is lower than the current PE for the CH Electronic industry at 32.3x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.16%, as per the Simply Wall St company report.

SoftwareOne Holding Future Earnings Per Share Growth

Risks

• Overreliance on Microsoft and a select group of large vendors exposes SoftwareOne to changes in partner incentives and direct-to-customer sales by hyperscalers, as highlighted by the anticipated two to three percent revenue headwind in 2025 from Microsoft's revised incentives, putting significant pressure on topline revenue growth and gross margins.
  
• Margin compression and increased commoditization in software reselling were already evident as SoftwareOne reported a year-on-year decline in Marketplace revenue and a two-point-three percentage point fall in adjusted EBITDA margin, with ongoing risks that the channel partner's value could erode as customers increasingly use direct cloud marketplaces, reducing SoftwareOne's ability to sustain revenue and profitability.
  
• The company's efforts to adjust its go-to-market model have resulted in major organizational upheaval and restructuring costs of over one hundred million Swiss francs in 2024, combined with leadership transitions including a new CFO and the integration with Crayon, which introduce ongoing execution risk and the potential for increased SG&A expenses and margin volatility.
  
• While SoftwareOne aims for growth in services and high-margin recurring revenues, it faces slower-than-peer transitions as evidenced by only seven percent growth in Services for 2024, raising concerns that a lag in moving away from traditional reselling could limit net margin expansion and long-term earnings growth.
  
• The adoption curve for new offerings such as Microsoft Copilot is already slowing, as indicated by weaker Q4 growth and management's expectation for only gradual, not hyper growth, undermining prospects for rapid service and licensing expansion and thereby constraining future revenue and earnings potential.

Valuation

• The assumed bullish price target for SoftwareOne Holding is CHF14.9, which represents two standard deviations above the consensus price target of CHF9.41. This valuation is based on what can be assumed as the expectations of SoftwareOne Holding's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF15.0, and the most bearish reporting a price target of just CHF7.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CHF2.2 billion, earnings will come to CHF338.6 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 5.2%.
  
• Given the current share price of CHF6.92, the bullish analyst price target of CHF14.9 is 53.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.