Description

** CloudCall shares are illiquid and therefore suitable only for small funds and personal accounts. **

CloudCall Group PLC

AIM: CALL | £0.98/shr | £38m MV | £25m EV | HQ: Leicester, UK

Introduction

CloudCall Group PLC is a UK-based subscription software company that integrates telephony and messaging into customer relationship management (CRM) systems. CloudCall primarily serves customers in the staffing and recruiting industry, where it is by far the leading provider.

CloudCall’s shares are dramatically undervalued. The company is growing organically at greater than 30%, generates 78% gross margins, and has 100%+ net revenue retention. Yet, because the company is small and trades in the UK where sophisticated software investors are scarce, it is valued at approximately 2.2x 2019E sales, and less than 3x gross profits. As a benchmark for private market value, Vonage acquired a closely comparable company, NewVoiceMedia, for more than 5x trailing sales in November of 2018.

Today CloudCall is a small company with run-rate sales of £11 million, but with multiple large growth opportunities ahead of it — the two most important being a move upwards into the Enterprise segment of the market, and the addition of vertical markets beyond staffing. Historically CloudCall has only served small- and medium-sized firms, mostly in the UK. However, the company has been improving its product and telephony infrastructure to the point that it is now months away from having a viable Enterprise-grade offering for the largest global staffing firms, some of whom have recently begun trials with the company.

The Enterprise opportunity is enormous: we estimate that just the ten largest staffing firms represent about 200,000 potential users, compared to CloudCall’s 37,000 current users. One firm alone, Randstad, has more FTEs (38,000) than CloudCall’s entire user base. CloudCall is making its push into the Enterprise segment of staffing in partnership with Bullhorn, the leading staffing CRM provider with ~350,000 users. Because CloudCall integrates uniquely well with Bullhorn, Bullhorn is bringing CloudCall into deals, including with some of its top ten Enterprise customers. In addition, CloudCall is set to become a ‘platinum tier’ Bullhorn partner, whereby Bullhorn’s sales force will receive financial incentives to sell CloudCall to Bullhorn users. The Bullhorn relationship gives CloudCall a significant go-to-market advantage.

We think that CloudCall’s move into the Enterprise segment, if successful, will likely double or triple the company’s user base within three to five years. Success in verticals beyond staffing and recruiting, such as real estate (where CloudCall has recently begun integrating with its first CRM partner), could drive further growth. In September, CloudCall raised £12.1M to pursue these opportunities. 

Our base assumption is that the value of CloudCall triples over the next three years. Historically the company has grown greater than 30% organically, with limited resources. The recent PIPE gives the company funds to expand its sales team and improve its infrastructure. We think the new funds and the expanded relationship with Bullhorn could accelerate CloudCall’s revenue growth over the next few years, but our base case nonetheless assumes only 25% revenue growth per year over three years, leading to a doubling in revenue. We combine this with a doubling in revenue multiple as well (from <2.5x to NewVoiceMedia’s ~5x) and arrive at an approximate tripling in the share price, after accounting for dilution.

September 2019 Capital Raise

In September of this year, CloudCall sold 12.1M shares in a PIPE at £1.00 per share. Although debt-free even before the recent capital raise, CloudCall had nonetheless spent its entire operating history growing on a shoestring budget, funding its operations with tiny one-off fundraisings.  The September capital raise should fund the company until it reaches cash breakeven, which it currently forecasts to occur sometime in 2022.

Multiple Attractive Growth Opportunities

CloudCall’s board has stated a goal of reaching £50 million in revenue (vs. £10 million LTM) in 2025. The company has a number of clear avenues for growth:

1. Move upwards into the “Enterprise” segment of the market

2. Expand presence in North America

3. Penetrate adjacent verticals, such as real estate

Move upwards into the “Enterprise” segment of the market

The numbers here are striking. CloudCall has approximately 37,000 users, while the single largest staffing firm, Randstad, has 38,000 FTEs. After Randstad, Adecco has 34,000, and Manpower has 30,000. We estimate that the 10 largest staffing firms employ perhaps 200,000 people collectively. Clearly the opportunity is enormous.

CloudCall has not pursued the Enterprise segment until now because its voice over IP (VoIP) network has needed improvement to offer redundant, global coverage, and because the company has lacked talent at the high end of the salesforce (historically CloudCall’s CEO has been responsible for all of the large customer relationships, a model which is not sustainable). The company now has the resources to address both of these needs.

Perhaps more importantly, as we’ve mentioned, Bullhorn is also making a hard push into the Enterprise segment, and will be compensating its salesforce directly for CloudCall sales to Bullhorn customers. This is a growth opportunity with a high probability of success: CloudCall has historically converted 1 in 3 leads it receives from Bullhorn (even before becoming a ‘platinum’ partner), compared to about 1 in 12 for Salesforce and Microsoft Dynamics.

Expand presence in North America

CloudCall generates about two thirds of its revenue in Europe, and the remainder in North America. For Bullhorn, these percentages are reversed. It is clear that CloudCall can add many new customers simply by increasing its penetration of Bullhorn’s North American user base, even outside of the Enterprise segment. CloudCall’s recent capital raise will enable it to improve and expand its North American sales team in order to pursue this opportunity.

We view Bullhorn’s North American customer base as very low-hanging fruit. As someone at Bullhorn told us, “there’s not a Bullhorn customer out there that doesn’t need phone infrastructure specific to recruitment. Our [Bullhorn’s and CloudCall’s] circles fully overlap.”

Penetrate adjacent verticals, such as real estate

In addition to staffing, there are other niche industries which are similarly phone-intensive, including real estate and insurance sales. Concurrent with the recent capital raise, CloudCall announced a plan to trial an integration with Propertybase, a real estate CRM with 200,000 users.

Propertybase is built on Salesforce’s Force.com platform. Since CloudCall already has an existing generic Force.com integration, the development work required to build the Propertybase integration should be undemanding. CloudCall expects this development work, along with the hiring of a few salespeople, to cost under half a million pounds. We’re not sure what kind of adoption to expect from the real estate market, but view it as a smart and cheap adjacency to pursue, one that could add significant value if it succeeds.

Product Offering

CloudCall sells a proprietary communications service that integrates deeply with various CRM systems via software, enabling the CRM to control and record all of the user’s digital communication activities. The need for this kind of functionality first emerged in the call center market. A call center representative spends his or her entire day in the communications application, and with the introduction of VoIP, these calls could be recorded, each call could be associated with the specific rep who participated, and managers could monitor calls live, or review them afterwards. 

CloudCall believed companies outside the call center market could also benefit from digitizing their communications, but that the value would come from marrying communications with other data — integrating the communications application with the key systems of record used in each market. Outside of call centers, users don’t live in their communications applications, so they need their communications to be brought into the tool they use most every day: the CRM. 

CloudCall has adopted a vertical-market-focused strategy. While it has generic integrations with industry-agnostic “horizontal” CRMs like Salesforce and Microsoft Dynamics, it generates the majority of its revenue today from staffing and recruiting, where it has 12 different CRM integrations, with the largest single integration by far being Bullhorn, the leading staffing CRM.

When evaluating CloudCall’s product, it is helpful to know two things about staffing firms: first, making phone calls is at the core of what they do; and second, the staffing industry has structurally high turnover (typically at least 30% per year), making employee training and business information continuity not only critical, but challenging.

CloudCall’s offering is designed to address these challenges. By providing deep telephony integration with the CRM, all of a staffing firm’s communications activities can automatically be initiated, recorded, annotated, and stored directly within the system of record. Using CloudCall, a recruiting agent can click to dial a candidate from within the CRM, and the CRM will automatically record the call audio, call recipient, call time, and call outcome. After the call is finished the recruiter will be prompted to leave a note about the call in the CRM. Recruiters can also leave pre-recorded voicemails to save time, transfer calls internally from within the CRM, and automatically use phone numbers that show up on caller ID as local. Beyond telephony, CloudCall is currently in the process of rolling out SMS functionality allowing users to send scheduled texts and multiple-recipient text broadcasts. Video conferencing is next on the roadmap.

In addition, in staffing, many managers essentially run their businesses through the CRM. CloudCall enables these managers to listen to recorded calls and audit ongoing calls in real-time for training purposes. It also gives them access to an array of reporting and analytics so they can better understand the productivity of their individual recruiters, as well as of their teams as a whole, and plan the best way to reach and engage with staffing candidates.

One CloudCall customer describes his firm’s relationship with CloudCall thusly:

It’s all about the unified experience for our recruiters. They live on their phones and we need to get that back into the CRM... We looked long and hard during the RFP process and nobody could offer the level of integration CloudCall has.

And another user:

What would we do without CloudCall? I don’t know.

As far as the necessity of the integration, you can function without it, but it just makes everyone’s life much easier, and makes you much more efficient... You can function without CRM integration but you’ll be much slower. But five years down the road, everyone will have deep CRM integration with voice unless they are a small, small company. It just doesn't make sense not to have it. It even helps you recruit recruiters because it makes their lives easier. 

Competitive Position

CloudCall faces two different types of competitors: telephony providers, and software companies. It has distinct advantages against each group. 

The most common competitors are traditional IP telephony providers such as Cisco, RingCentral, 8x8, and Vonage. Their offerings are effectively just VoIP with a generic software front-end. When staffing companies decide they want full communications integration with their CRM, and all the features described in the previous section, CloudCall stands far ahead of the VoIP players. While some VoIP companies claim to offer vertical-specific CRM integrations, our work has shown these claims to be empty. One former 8x8 (and current CloudCall) customer told us that 8x8 has been promising to offer Bullhorn CRM integration for years (it even touts it here), but that it has yet to actually do so. This same customer also indicated extreme skepticism about 8x8’s ability to build a software integration that would be anywhere near as functional and user-friendly as CloudCall’s.

We share this user’s skepticism. Despite many claims to the contrary, we are not aware of a single VoIP provider that offers a homegrown, full-featured software integration with a CRM. The “integrated” VoIP offerings we have seen might allow a user to click to call a contact from within a CRM, for example, or see a caller ID for an incoming call, but that is where the integration ends. Otherwise, telephony functions are managed from a separate application outside the CRM. And when VoIP providers do try to push data into CRMs, they generally fail. As one former 8x8 customer told us:

8x8 couldn’t do that [provide a unified experience]. Notes didn’t end up in the CRM because there was no integration. We really need the integration… 

We heard similar things from a former Vonage customer: 

We knew about CloudCall but went with Vonage instead because it was cheaper. That was a mistake. They said their system linked up with our CRM, but it didn’t really, and to get the integration we had to install a middleman integration app that always broke. The phone system would cut out all the time. The majority of our business is run through our phones, so we need phones, but we had so much phone trouble. The app was a mess, it would create incorrect CRM entries, it never got fixed, our people gave up on it and just stopped using it.

VoIP providers manage large telephony networks. They are not software companies. Thus far they’ve failed to build quality CRM software integrations internally, and we see no reason why this will change. Vonage’s decision to acquire NewVoiceMedia rather than keep trying to build this functionality internally only reinforces our view.

Over the long term, we expect CloudCall’s true competitors to be other software companies. Branded as “cloud contact center” or “unified communications” providers, these companies (such as NewVoiceMedia, Five9, Fuze, Tenfold, and TextUs) offer more functionality than traditional voice, but in staffing they have multiple competitive weaknesses relative to CloudCall. Some of these weaknesses stem from choices they have made in terms of route to market or workflow design, and others stem from a lack of expertise in telephony. 

For example, NewVoiceMedia has chosen a horizontal rather than vertical route to market. NewVoice’s integration with the Salesforce CRM is not tailored to staffing and recruitment, nor is NewVoiceMedia likely to develop tailored offerings in markets where CloudCall may head next, such as real estate. For companies with generic integration needs who are running Salesforce, NewVoiceMedia’s solution is valuable. But since NewVoice does not connect with Bullhorn, it is of little use to customers in the staffing market. NewVoice and CloudCall rarely compete for the same customer.

Fuze and Tenfold have a different issue: they’ve chosen to put their own systems, rather than a customer’s CRM, at the center of a user’s workflow, pushing themselves as the “single pane of glass” through which a user views all of their important information. The functionality lives inside their applications, not inside CRMs. Integrations with CRMs, while they exist, are rudimentary. As one CloudCall customer told us:

We also looked at Fuze ... But they backed out during the scoping process, because they said they couldn’t compete with CloudCall…. Their phone service works well, videoconferencing works well. But the data on the calls wasn’t moving back into the CRM.

The last group of software competitors are those with a heritage in digital communications (texting, app-based messaging, etc.) but little experience in voice. One example is TextUs, which began as an SMS integration provider and has only recently begun to offer voice as well. TextUs and companies of its ilk have all built the messaging portion of their applications internally, but they’ve outsourced the voice infrastructure — the much harder part to build — to third party providers, resulting in a weak voice product. No one we spoke to in the industry viewed TextUs’ VoIP offering favorably, including TextUs’ own salespeople. Critical voice features (such as global failover redundancy) aren’t even on the product roadmap. Weak voice capabilities make these offerings unappealing as unified VoIP for virtually any staffing firms, and a complete non-starter for the large global firms.

The Bullhorn Partnership 

CloudCall’s premier CRM partner is Bullhorn. Headquartered in Boston, Bullhorn is the leading CRM provider in the staffing vertical, with 350,000 users across a base of 10,000 customers. 

The staffing CRM industry is fragmented. Historically Bullhorn has held a strong presence in the middle market, but there has been no clear leader in the Enterprise segment. Bullhorn’s recent strategy has been to move up market aggressively through acquisitions, and through the expansion of its Enterprise salesforce (from 6 to 40 people, out of 160 salespeople total).  Some of Bullhorn’s large recent acquisitions include Connexys, Peoplenet, Talent Rover, and Erecruit, which collectively count Randstand, Manpower, Adecco, and others as customers. Bullhorn’s acquisition spree has given it a strong foothold in the Enterprise segment, and provided a natural entree for CloudCall.

Bullhorn has also chosen to make a strategic change to how it partners with key vendors such as CloudCall. Historically, Bullhorn has charged vendors a small fee to list their products on the Bullhorn marketplace, and taken no role in the ensuing sales relationships between the vendor and customer. Now, Bullhorn is creating a ‘platinum’ provider tier for the top partner in each functionality area, and will compensate its own salesforce for selling products from ‘platinum’ tier partners, in exchange for an ongoing 15-25% commission from the partner. Bullhorn’s rationale for this change is twofold. First, Bullhorn has found that increased customer usage of marketplace partner applications correlates with increased Bullhorn CRM user retention. Second, the ongoing vendor commissions help Bullhorn grow its own recurring revenue.

CloudCall will be Bullhorn’s ‘platinum’ partner in telephony. This is a significant initiative for Bullhorn. We spoke to multiple senior leaders there, all of whom are excited about the partnership, and Bullhorn has already begun bringing CloudCall into large Enterprise deals. This will be a boon to CloudCall. The company has always lacked the funds to go to market aggressively. It has not had an established salesforce (especially in Enterprise), but now it will be able to leverage Bullhorn’s.

Valuation

CloudCall operates in a unique niche in a new market that has the potential to be large. If it can capture just the opportunity immediately before it, the company could be worth many multiples of its current value. Although subscription software businesses like CloudCall with high gross margins and net retention can be extremely profitable at scale, the company is currently too small to focus on profitability. As such, we focus on revenue and gross profit.

Our base case is simple: CloudCall doubles its revenue over the next three years, and is valued at nearly twice the multiple it trades for currently. This would result in an approximate tripling in the share price after accounting for dilution. We have based our valuation on precedent private market transactions. As mentioned, Vonage acquired NewVoiceMedia in 2018 for 5x sales and 7x gross profits. Before that, in 2016, NICE Systems bought inContact, which was bigger than NewVoiceMedia or CloudCall but also growing more slowly, for approximately 3.5x revenue and 7x gross profit.

We think the biggest risk to this scenario is that CloudCall ends up struggling to sell into the large global staffing firms given its tiny size. However, because the company is already growing 30% without a single global enterprise customer, we feel comfortable that even if the enterprise pursuit is unsuccessful, the shares are undervalued at current levels.

Disclaimer

This document is for informational purposes only. All content in this report represents the author's opinion. The author obtained all information herein from sources believed to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind — whether express or implied. All expressions of opinion are subject to change without notice, and the author does not undertake to update or supplement this report or any information contained herein. As of the publication date of this report, the author and/or their affiliates have a long position in the stock of CloudCall Group PLC (“CloudCall”). Following publication of the report, we may transact in the securities of CloudCall without notice. This report is not a recommendation to purchase the shares of any company, including CloudCall. The information included in this document reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity. Any or all forward-looking statements, assumptions, expectations, projections, intentions or beliefs about future events included in this document may turn out to be wrong. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment prior to making any investment decision.

Catalyst

Continued high growth, driven by:

1. Enterprise customer wins

2. Further penetration of Bullhorn's US customer base

3. Success with CRMs in verticals beyond staffing (such as Propertybase in real estate)