Cloud Giants Will Erode Intermediary Roles And Squeeze Margins

Key Takeaways

• Disintermediation by hyperscale cloud providers and increased competition threaten SoftwareOne's traditional revenue streams and market position.
  
• Margin pressure from commoditization, regulatory complexity, and execution risks on integration may curb profitability and limit earnings growth.
  
• Focus on high-margin cloud services, cost synergies from mergers, AI innovation, and improved regional performance is expected to drive revenue 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.

• As hyperscale cloud providers such as Microsoft, AWS, and Google increasingly pursue direct sales to large enterprise customers, SoftwareOne's role as an intermediary is under threat, which could result in a long-term structural decline in revenue as more clients bypass resellers for direct relationships.
  
• Ongoing price compression and commoditization in software licensing and IT services, accelerated by digital sales channels and client price transparency, are likely to squeeze net margins for SoftwareOne, eroding profitability even if topline revenues stabilize.
  
• Accelerated digital transformation and greater automation by enterprise clients may permanently reduce the need for outsourced software procurement and consulting, leading to persistent net margin contraction and long-term declines in high-margin earnings streams.
  
• Failure to fully differentiate its service offerings and execute on cross-selling higher-margin, IP-based, and managed services could result in muted profit growth, especially as the combined integration of Crayon risks internal inefficiencies and execution missteps-putting sustained downward pressure on EBITDA and net profit beyond short-term cost synergies.
  
• Intensifying competition from cloud-native and born-digital managed services providers, alongside rising regulatory complexity and compliance costs, may lead to erosion of market share and increased SG&A expenses, undermining SoftwareOne's ability to expand margins or deliver earnings growth after the current integration phase.

SoftwareOne Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SoftwareOne Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SoftwareOne Holding's revenue will grow by 23.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.0% today to 13.9% in 3 years time.
• The bearish analysts expect earnings to reach CHF 255.9 million (and earnings per share of CHF 1.17) by about September 2028, up from CHF -19.6 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 bearish analyst cohort, the company would need to trade at a PE ratio of 6.8x on those 2028 earnings, up from -79.5x today. This future PE is lower than the current PE for the CH Electronic industry at 32.5x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.04%, as per the Simply Wall St company report.

SoftwareOne Holding Future Earnings Per Share Growth

Risks

• The transition from enterprise agreements (EA) to Microsoft CSP (Cloud Solution Provider) is accelerating, and management states this provides higher margins and new cross-sell opportunities for value-added services, which could support a recovery and growth in both revenue and earnings from 2026 onwards.
  
• Cost and revenue synergies from the Crayon combination are already being realized, with CHF 11 million in run rate cost savings achieved and a plan for CHF 80 million to CHF 100 million in annual cost synergies by 2026, which would directly strengthen EBITDA margins and net profits.
  
• After a period of integration and weaker top-line results, management expects the impact from Microsoft EA incentive cuts to bottom out in 2025, providing a cleaner base for growth and margin improvement, which could lead to stronger revenue and earnings in subsequent years.
  
• The company is aggressively pushing high-margin recurring services, automation and AI solutions, as highlighted by large customer wins and productization of their AI chatbot offering, which, if successful, could drive sustained revenue growth and margin expansion.
  
• Management expects the turnaround in North America, growth in APAC, scalable channel strategies, and improved sales execution to return the company to a growth trajectory from the second half of 2025, and for revenue synergies from the combination with Crayon to exceed even the cost synergies, pointing to potential outperformance in both top-line growth and profitability.

Valuation

• The assumed bearish price target for SoftwareOne Holding is CHF7.0, which represents the lowest price target estimate amongst analysts. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF14.0, and the most bearish reporting a price target of just CHF7.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CHF1.8 billion, earnings will come to CHF255.9 million, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 5.0%.
  
• Given the current share price of CHF7.28, the bearish analyst price target of CHF7.0 is 4.1% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.