Description

GetBusy is a small document management software company with a recurring-revenue business model. There are a few interesting items to note. First, GETB’s path to a public listing is particularly unusual -- the AIM-listed company is the result of a demerger from an Australian company and a rights offering back-stopped by insiders. Second, the valuable recurring revenue generated by two sticky products with high switching costs is obscured by investment into a new product. Third, the current market price appears to offer a significant margin of safety. I estimate the company is trading around 4-5x steady-state earnings for a company growing recurring revenue over 20% per year.

GetBusy has two revenue-generating products, Virtual Cabinet and SmartVault, and is currently developing a third product. Virtual Cabinet, a desktop-based product with a cloud component, serves medium-to-enterprise sized companies and generates a mix of consulting, license and subscription revenue. SmartVault, a cloud-based product, serves SMEs and generates subscription revenue. Given that the company grew up inside Reckon, an accounting software company, it’s not surprising the company has a strong foothold with accounting firms, serving 27 of the top 100 accountancy firms in the UK and 11 of the top 20 accountancy firms in Australia/New Zealand. The company’s products help firms capture, manage, preserve and deliver documents. The offerings include features for version control, security, compliance, etc. and integrate with leading products, including accounting packages, Salesforce, Microsoft Office and DocuSign. In May 2018, the company announced a partnership with DocuSign that will allow the company to earn reseller revenue from clients that utilize DocuSign’s Envelopes.   

The company is also developing a new product, confusingly named GetBusy, which will provide “document management + MORE” or a combination of messaging/task management/client communication.

Source: GetBusy

The company is utilizing Metalab (https://metalab.co), a “fancy” design agency, to assist with the new product’s development. Although Metalab has an exceedingly impressive client portfolio that includes Slack, Coinbase, Google (AMP) and Facebook (Messenger), and GetBusy has experience with bringing products to market, there is a very legitimate concern that the new product will fail and destroy shareholder value. I address this risk in the valuation section below.

GetBusy entered the public markets in an unorthodox manner: GETB is the result of an August 2017 demerger from Reckon (ASX: RKN). Reckon is an Australian accounting software company that was once a distributor of Intuit’s QuickBooks and is run by GetBusy’s CEO’s father. Most interestingly, insiders backstopped the rights issue, buying about 54% of the £3mm offering at 28p per share. It’s worth noting that Reckon has been quite active in the last few years; shortly after the GetBusy demerger, Reckon announced the sale of a division to MYOB Group (ASX: MYO).

In addition to the cash burn and potential value destruction related to the new product, competition is a legitimate concern. The company competes against fully-scaled and well-funded competitors, including Citrix (FileShare), DropBox, DocuSign, etc. While the competition is certainly meaningful, I believe the there are significant switching costs which reduces some of the competitive risk at the right price.

Valuation

GETB appears attractively priced using several methodologies. First, my product-based valuation arrives at a value that is double the current share price. This approach is largely illustrative as it excludes the balance sheet, overhead and software development costs. Second, I estimate GETB is trading around 4-5x steady-state operating earnings (steady-state EBITDA less CapEx).

SmartVault, the cloud-based product, has excellent user economics and high growth. In 2017, the customer base grew 28% year-over-year and the company notes (undiscounted) LTV:CAC is an impressive 6:1 as a result of a cost-effective inbound marketing model. Using a simple customer-based valuation methodology, SmartVault is worth around 30p per share.

Virtual Cabinet, the desktop product, has been growing slower but is quite valuable. Using a simple customer-based valuation methodology, Virtual Cabinet is worth around 50p per share.

I also valued the business in a more traditional manner. The current reported operating profit is burdened by elevated R&D costs related to the new product as well as customer acquisition costs to profitably grow the two existing products’ customer counts. I estimate the steady-state operating profit (steady-state EBITDA less CapEx) is around £3.8mm per year. Based on this estimate, the stock is conservatively worth around 55-60p based on 8x normalized operating earnings, excluding cash on the balance sheet which will likely be consumed by the new product under development.

As a gut check, this valuation is equivalent to around 3x sales (ex-cash). Much larger subscription companies, including Box (BOX), DropBox (DBX) and SendGrid (SEND) trade around 5-8x EV/Sales with similar revenue growth rates of around 15-20%.

While GETB is particularly hard to value, I believe the margin of safety is likely significant. In addition to the product-based and steady-state valuations noted above, there is a simpler way to demonstrate the margin of safety: the UK operations produced £2.3mmm of EBITDA before development costs and operational overhead in 2017, which is equivalent to 7.5x EV/EBITDA.

Catalyst

new product launch