Shift To SaaS And Cloud Offerings Will Strengthen Future Market Position

Key Takeaways

• The combination of Axway and SBS into 74Software could enhance profitability and financial stability through synergy and recurring revenue growth.
  
• A focus on SaaS and cloud offerings aligns with market trends, potentially boosting earnings and margins as cloud adoption rises.
  
• The company's strategic transformation and financial stability are threatened by integration risks, revenue recognition delays, high debt, and ambitious profitability targets.

Catalysts

Operates as an infrastructure software publisher in France, rest of Europe, the Americas, and the Asia Pacific.

• The recent combination of Axway and SBS into 74Software could drive forward-looking synergies, such as leveraging their combined product portfolio and optimizing their centralized G&A to improve profitability, likely impacting net margins positively.
  
• The expansion of SBS's regulatory reporting and digital engagement platforms, particularly through growth in SaaS-first public cloud offerings, indicates potential for significant future revenue increases in regulatory-required services.
  
• Axway's consistent organic growth, driven by its market-leading API management and MFT business, particularly in North America, could support steady revenue expansion and consequently impact earnings positively.
  
• The strategic focus on increasing recurring revenue across the combined portfolio of Axway and SBS could bolster financial predictability and stability, enhancing the company's ability to generate consistent revenue growth.
  
• SBS's continuous transformation towards a product-centric model, with emphasis on SaaS and cloud offerings, aligns with long-term market trends which may lead to improved earnings and net margins as cloud adoption increases among existing clients.

74Software Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming 74Software's revenue will grow by 32.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.8% today to 8.6% in 3 years time.
• Analysts expect earnings to reach €64.3 million (and earnings per share of €2.16) by about March 2028, up from €34.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, down from 24.3x today. This future PE is lower than the current PE for the GB Software industry at 24.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

74Software Future Earnings Per Share Growth

Risks

• The recent integration of SBS with Axway is still new, and the transformation is expected to take 2-3 years, which carries the risk of potential disruption or inefficiencies that could impact revenue growth and net margins.
  
• While the transition to SaaS and subscription models is ongoing, there is a significant lead time (up to 24 months) between booking and recognizing revenue in these new models for SBS, potentially impacting short-term earnings.
  
• The financial stability depends on effective execution of the strategic plan, including significant changes like restructuring and cost control. Failure to maintain discipline could impact profitability and free cash flow.
  
• The company has a considerable debt load with leverage ratio goals contingent on future profitability improvements and cash generation; failure to meet these could affect financial stability and investor confidence.
  
• Achieving the projected 20% profit margin by 2028 requires consistent improvement in the SBS margin, meaning any delays or issues in transformation efforts could affect their operating margin projections.

Valuation

• The analysts have a consensus price target of €35.0 for 74Software based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €747.9 million, earnings will come to €64.3 million, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of €29.2, the analyst price target of €35.0 is 16.6% 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.