Fineos Falls Short, Delays Cited

This story features FINEOS CORPORATION HOLDINGS PLC. For more info SHARE ANALYSIS: FCL

Delays in the timing of new deals and a softer outlook for services revenue has undermined short-term confidence in Fineos Corp.

-New client gains key to increased confidence
-US growth proceeding in line with targets
-Should Fineos Corp trade at a premium?
 

By Eva Brocklehurst

Insurance platform provider Fineos Corp ((FCL)) dented confidence at its AGM, failing to reiterate a top-line growth target of 20% while maintaining subscription revenue growth guidance for FY21 of 30%.

A softer outlook for services revenue was the prime reason the update fell short of expectations, although this segment is still expected to grow. Delays in the timing of new deals because of the pandemic and uncertainty surrounding the US presidential election were cited as factors.

Services revenue is also under pressure as budgets are tightened in Australasia. Macquarie cuts revenue forecasts by -13% for FY21, which implies no growth from the second half of FY20, after including the Limelight acquisition.

The broker considers services activity a leading indicator of subscription growth although retains revenue forecasts for both subscriptions and software. Around 90% of subscription growth in FY21 is expected from the ramping up of major client gains during FY19 and FY20, and Limelight.

Around 65% of subscription growth is estimated to come in FY22 from major client gains during this period. Hence, Macquarie believes new clients will be key to increased confidence in the stock and retains an Outperform rating with a $5.22 target.

The contribution from Limelight to services revenue was lower than the broker's initial expectations because of delayed decisions regarding new business projects and tighter budgets.

The loss of -$200m in market capitalisation following the AGM does not make sense to Shaw and Partners, as the market appears to have lost any understanding of how enterprise software functions.

Factors underpinning revenue pressures largely relate to services as opposed to software and reflect the timing of, not loss of, opportunities. Given the nature of services, this segment carries a significantly lower multiple.

The broker highlights the value in a stock with a software enterprise value/revenue multiple of 13.5x for FY21, attractive for a business that is growing at around 30% and has good visibility.

Shaw believes Fineos Corp should trade at a premium, given the size of the market and its superior client retention, and reiterates a Buy rating with a $5.82 target.

Ord Minnett eases back to Accumulate from Buy with a $4.50 target, prepared to wait until a clearer view of the growth opportunity in the US is obtained. The US growth strategy is in line with the company's targets and the US now represent 67% of total revenue.

The acquisition of Limelight includes additional US-based staff and completes the product suite for insurance carriers in the North American employee benefits market. This is a key catalyst for the stock over the longer term, in Ord Minnett's view, and the opportunity remains undiminished.

See also, All Systems Go For Fineos on August 28, 2020.

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