Rising Compliance Costs And Free Software Will Erode Value

Key Takeaways

• Greater regulatory scrutiny and expanded security investments will increase operating complexity and pressure future margins as global expansion continues.
  
• Over-reliance on a legacy product and rising competition from open-source software threaten revenue growth, pricing power, and long-term profitability.
  
• Integrated product suite rollout, cloud migration, AI features, and international expansion all enhance revenue stability, competitive positioning, and long-term growth while reducing risk.

Catalysts

Develops and distributes online text communication software for businesses worldwide.

• The long-term trend towards greater regulatory scrutiny on technology and data privacy is expected to drive higher compliance costs for Text, as evidenced by extended SOC2 certification processes and new security-related investments, significantly weighing on future net margins and raising operational complexity as the business expands internationally.
  
• The ongoing global rise of open-source and free software alternatives threatens to erode Text's pricing power and brand loyalty over the coming years, undermining competitive differentiation and downwardly pressuring revenue growth and profitability as large customers reassess their software expenditures.
  
• Persistent over-reliance on the legacy LiveChat product-still accounting for nearly 89% of total group revenue despite efforts to roll out new products-leaves Text exposed to customer churn and risks a sharp deceleration in total sales if the core offering loses further relevance or market share.
  
• Margin compression is likely to persist due to sustained requirements for elevated investment into R&D, sales and marketing, and technical staff recruitment in response to increasingly intense competition and the accelerated pace of industry change, having already driven EBIT margin down from 62% to about 50% over five years and showing no sign of stabilization.
  
• The software sector's shift toward strict customer ROI scrutiny and elongated enterprise sales cycles, combined with lower-than-expected growth in monthly recurring revenue and payments collected, will limit Text's revenue visibility and make achieving ambitious recurring revenue targets significantly more challenging, resulting in elevated risk to top-line growth and earnings consistency.

Text Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Text compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Text's revenue will grow by 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 35.4% today to 31.6% in 3 years time.
• The bearish analysts expect earnings to reach PLN 114.7 million (and earnings per share of PLN 4.4) by about August 2029, down from PLN 116.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as PLN151.4 million.
• 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 12.3x on those 2029 earnings, up from 11.9x today. This future PE is lower than the current PE for the GB Software industry at 17.9x.
• The bearish 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 11.19%, as per the Simply Wall St company report.

Risks

• The launch of Text App as a fully integrated product suite, already in use by over 350 clients and set to be offered to new customers soon, presents a major opportunity to drive higher-value sales, increase user stickiness, and open up cross-selling across the base, supporting future revenue growth and improved customer retention.
  
• Migration to a new cloud infrastructure, which is expected to lower operating costs, enhance service quality, and unlock additional functionality for enterprise customers, can boost gross margins and enable scalability over the long term.
  
• The growing proportion of large clients and expanding average revenue per license (ARPL), together with a shift toward multiproduct adoption, provides a structural pathway to more predictable recurring revenues and higher net earnings, even if total customer numbers fluctuate.
  
• Text's rapid incorporation of artificial intelligence features into both legacy products and the new Text App positions the company well to benefit from secular trends in automation and AI-driven enterprise software adoption, supporting both competitive differentiation and long-term top-line expansion.
  
• Strong cash reserves, EBITDA growth, and a record dividend payout signal financial discipline and continued shareholder value creation, while international expansion efforts (such as the new Miami office) diversify revenue streams and reduce concentration risks, enhancing long-term earnings potential.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Text is PLN40.0, which represents up to two standard deviations below the consensus price target of PLN60.6. This valuation is based on what can be assumed as the expectations of Text'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 PLN85.1, and the most bearish reporting a price target of just PLN40.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be PLN362.8 million, earnings will come to PLN114.7 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 11.2%.
• Given the current share price of PLN53.8, the analyst price target of PLN40.0 is 34.5% lower.
• 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.