Description

We believe shares of Basware, a Finnish software provider of procure to pay and AP automation solutions, represent an attractive risk / reward at current prices with 50% upside to our base case target price of €48 with plenty of runway for further share price appreciation if the company’s turnaround is successful. Current valuation and high gross retention rates provide downside protection, as shares are trading at just 3.3x ev/sales vs public peers with multiples ranging from the mid-single digits at the low-end to double-digits and private companies with nosebleed valuations. In our view, the investment is timely, and we expect value to be realized over the next year as the management’s efforts to reaccelerate growth take shape or the company becomes an M&A target.

Background

Basware is a Procure to Pay (p2p) and AP automation software provider based in Finland and listed on the Helsinki exchange. The company offers the leading AP automation software that allows enterprise accounts payable and procurement departments to better manage spending by digitizing the purchasing process from order to payment. Additionally, Basware operates an open invoice network, providing corporations the world’s largest platform of buyers and suppliers to send and receive invoices.

Basware competes globally against US players such as Coupa, Ivalua, GEP, Jaggaer, and Tradeshift. The overall p2p market has been supported by tailwinds from digitization, automation, and data capture as well as governance and environmental benefits from reducing paper waste and maverick spending, which has enabled companies such as Coupa to receive 20x+ sales valuations in the public markets and venture backed companies to receive nosebleed valuations.

Basware had seen steady improvements over the last several years, under the leadership of CEO Klaus Andersen after the performance challenges and failed sale process in early 2019. Since then, Basware has gone through a cloud transition, migrating from a license / maintenance, on premise model to SaaS / cloud. This shift is substantially complete with a negligible level of maintenance revenue remaining. At the same time, Basware has streamlined its operations and refinanced extremely high-cost debt and now generates a mid-teens EBITDA margin and positive free cash flow after losing money in 2018.

While profitability and Basware’s capital structure has improved, Basware has struggled to reaccelerate growth in 2021. Initially, the company said that corporate uncertainty and a focus on work from home technology was preventing deals from closing, but Basware has underperformed peers such as Coupa and Esker in the rebound post-COVID. In September 2021, the market reacted sharply to continued growth challenges, causing shares to fall from €39 to €30 after the CFO indicated on a call with analysts that Q3 new business wins would be below expectations. The Q3 results ultimately came in better than feared, but Basware failed to properly communicate how a large contract under a new pricing scheme impacted reported order intake.   Another factor that has been an overhang on the shares in recent months has been the sale of shares owned by Arrowgrass, a hedge fund that is in liquidation and who at one point was a >20% shareholder of the company.  We believe their shares have been sold down in an orderly, thoughtful manner and this overhang, now very small, will be gone by year-end.

Despite Basware being in an attractive industry with a market leading product, an investment in its shares has substantially underperformed the market and peers. The current share price is below levels achieved 2014 and the company’s valuation has de-rated from 4.5x sales in 2018 to 3.1x sales despite a significant shift to cloud recurring revenue and a very strong software market. As a result, we believe Basware shares represent attractive value in the current market that are poised to benefit from operational improvements or corporate actions over the next year.

Investment Thesis

1. Attractive business model benefiting from a strong value proposition, embedded position within customers, and payment network effects

2. Investing to reaccelerate growth with lots of room for improvement and market tailwinds against low expectations

3. Active Procure to Pay M&A market with previous interest in Basware at a significant premium to current prices

4. Changes to Board and management team support shareholder value creation

Evidence

1. Attractive business model benefiting from a strong value proposition, embedded position within customers, and payment network effects

We believe there is significant, long-term profit potential in Basware’s underlying business, enabled by high gross retention and 100%+ net retention rates; high customer value, and optionality from the company’s e-invoicing network.

Basware’s has a well-rated product that creates significant value for customers. The company is represented in the Leaders area by IDC, Forrester and in the Visionaries quadrant by Gartner. It’s worth noting that Basware did shift from being a leader to a visionary by Gartner from 2019 to 2020. 

Basware’s software speeds up the procure-to-pay process over traditional scanned solutions, reducing the time from invoice to payment from 11.7 days to 3.1. Critically, Basware has 100% data capture in its AP automation platform, which enables customers to analyze and manage spend. Forrester analysis supports the high value of Basware’s solution for clients. In January 2021, Forrester calculated a 315% total economic return for Basware customers with an 11-month payback. Basware’s strong offering supports the company’s high retention rates with gross retention of 94% in the most recent year and net retention of 104%. This high value has led to Basware winning blue-chip customers such as Toyota, Exxon, Yum Brands, Siemens, and Heineken.

Over the last few years, Basware has migrated its customers to the cloud. This transformation is now complete with just €5 million in maintenance revenue expected in 2021 vs over €41mn in 2016. Completing this shift has stemmed revenue headwinds from maintenance revenue declines, de-risked customers migrating from the platform when moving from cloud to on-premise, and established a common platform for development driving efficiency in R&D and support all of which will benefit growth and profitability.

In addition to the core platform, Basware has a unique e-invoicing network with an open architecture that manages €1 trillion from 150mn invoices in 175 countries worldwide. Over 2 million organizations are connected to the network. We believe there is significant untapped value in the data and payments opportunity within the network that could be unlocked by Basware long-term or viewed by an acquirer as a strategic asset.

2. Market tailwinds support investment to reaccelerate growth where there is lots of room for improvement against low expectations created by a misunderstanding of Q3 order intake

The purchase to pay market is set to accelerate after a slowdown over the last couple of years due to COVID. PWC forecasts an acceleration to an HSD CAGR from 2021 to 2025 after the market slowed to 2% due to COVID from 2019 to 2021. The reacceleration is driven by pent-up demand as enterprises reprioritize digitization as well as mandates from various countries, primarily in Europe, to use digital invoices. Digital invoicing has a clear ESG benefit, reducing both paper waste and spending, and supports attainment of net-zero goals.

In September 2021, Basware brought on a new Chief Revenue Officer, Alwin Schauer, who joined from Software AG where he had a brief stint as head of the DACH region. He previously served as VP of EMEA Sales for Salesforce. Basware’s previous CRO stepped down in March 2021, leaving the company without sales leadership for 6 months. Alwin recently presented some initial perspectives on Basware’s sales organization, where he felt there was potential for quick wins from shortening time to value for customers, investing in pipeline generation, and increasing the amount of selling time per rep by off-loading non-selling activities to other teams. Over time, management indicated the goal to reduce its CAC ratio from 2.2 years to 1.6 which would drive a 37% increase in new business and enable 20% growth. We think Alwin starting as CRO will benefit Basware’s sales and marketing organization.

Basware’s share price fell recently after Basware reported its Q3 order intake, which didn’t include a large contract signed with US QSR. This contract would have increased order intake to one of Basware’s best Q3s, but with the deal excluded, Basware reported its worst. This agreement will flow into revenue over time, assisting the growth acceleration, but due to accounting conventions, will not be recognized in Cloud Order Intake because the contract size scales as it is implemented. We believe Cloud Order Intake would have been at least €4.5mn if this contract were appropriately calculated.

3. Active Procure to Pay M&A market with previous interest in Basware at a significant premium to current prices

The M&A and private market has been active in the procure to pay and AP automation industry over the last several years. Corporate and financial buyers have been active consolidators and we’d expect both groups would be interested in Basware’s leadership position in AP Automation and large invoicing network. While the market has become somewhat crowded in recent years, Basware peers have all recently raised financing rounds at much higher valuations, making Basware the most digestible target.

Basware became a target in early 2019 after its share price collapsed to €21 per share. Tradeshift announced an intention to launch a tender offer at €48 per share. Ultimately the deal fell through with Basware stating that Tradeshift cited conditions in the capital markets. Since the acquisition announcement, Basware’s cloud revenue has increased over 30% and the company has completed its cloud transition.

4. Changes to Board and management team support shareholder value creation

Basware added two new Board members in 2021 both of whom appear to have strong backgrounds to support the turnaround of the company. Developing a global partner network is critical for Basware to accelerate growth, and Jonathan Meister served as the Global SVP of Business Develop at SAP Concur, where according to his LinkedIn profile he “oversaw partner operations, partner innovation and development, partner sales and services revenue, and channel personnel across all geographies served by SAP Concur.” Carl Farrell, the other member, previously served as President of Altus Group and Chief Revenue Officer of SAS institute, giving him the experience to assist Basware in improving the Sales and Marketing function.

The company’s structure allows for the top three shareholders to serve on the company’s nominating committee. We’d note specialist software investor, Longpath Partners, joined the top 3 shareholders and Nominating Board last year, and we believe they will advocate for Shareholder interests. Beyond board and shareholder changes, there is likely an opportunity to improve the value of the company by improving shareholder communication and re-listing the company at a larger exchange. Basware is an international business and the limited volume on the Helsinki exchange limits the company’s corporate branding, pool of eligible investors, and ability to compensate employees. Challenges of limited liquidity have been exacerbated due to the previously mentioned liquidation of Arrowgrass, the company’s former largest shareholder. We believe Arrowgrass will fully exit Basware by year-end and is no longer a major holder. While we expect the completed sell down will improve Basware's trading even on the Helsinki exchange, London or continental Europe appear much more logical choices for Basware’s listing.

Financials

We believe Basware will accelerate SaaS growth from LSD to LDD by 2025 and bring SaaS growth from MSD to 20%+ while increasing EBITDA margins from the mid-teens to the high-teens. Key drivers in the model are sales efficiency, where management is focused. We believe the company will re-rate to 7x+ cloud sales providing a 30%+ IRR through the end of 2024.

Valuation

Basware trades at a significant discount to its peer group; particularly the closest publicly traded companies, Coupa and Esker. The discount has been warranted by Basware’s closer growth rate, which we believe indicates Basware will re-rate if the company can accelerate growth. Basware’s discount to peers with similar or slower growth supports the company’s undervaluation in an M&A context.

Key Risks

• Increase in competitive intensity limits private equity and strategic interest in Basware

• Cyber security breach

Catalyst

• Q4 results and 2022 guidance
• Continued dislocation of the share price