Description

Serviceware (SJJ.GY) is an unknown German software company undergoing the usually difficult SaaS transition and is about a year away from being an all-SaaS player.  It has products in two software categories, both of which have highly valued US comps.  Enterprise Service Management is a business that comps with ServiceNow (NOW) in the US which trades at 11x 2024E revenue.  It enables an automated workflow for the IT service desk of ticket management and knowledge management.  It incorporates service request management, demand management, incident management, contract management, change enablement, release management, problem management, deployment management, knowledge management and financial management.  Currently Serviceware only competes in this space in the DACH (Germany, Austria, Switzerland) region where it has a solid win rate against ServiceNow.   It is expanding geographically through a satellite office in the UK.    

The company’s other business is Technology Business Management.  This software allows CTOs and CFOs to understand their IT costs in a highly detailed manner and optimize accordingly.  It tracks cost pools including internal labor, external labor, outside services, hardware, software, facilities and power, telecom, other, and internal services.  It then assigns these costs to towers including end user, application, delivery, security & compliance, IT management, data center, network, compute, storage, platform, and output.  It then groups these into solutions including applications, products, and services.  Finally these are applied to business units (revenue generating and non-revenue generating), business architecture, and customers and partners.   It is a new space and is being evangelized by both Serviceware and Apptio, which was a public company, then was purchased by Vista Equity Partners, and then was sold to IBM for $4.6 billion or 10x sales.  Apptio is the bigger player in the industry and dominates in the US.  Serviceware has a comparable product and so far does better in Europe.

The Serviceware growth story has two facets.  First of all, its SaaS revenue that is growing at 20% is being obscured by its maintenance revenue related to its historical license business which is slowly shrinking.  As SaaS becomes dominant over time the overall revenue growth rate will accelerate upwards.  Second, Serviceware is an internationalization story.  Similar to RIB Software which I wrote up a few years back, the company is currently concentrated in the DACH region and is just beginning to focus on the rest of the world.  As it does so, its revenue will accelerate further as it gains traction in other regions.  RIB followed this playbook and eventually was purchased by Schneider Electric for 8x sales.  Serviceware has already secured a big win with Petrobas in Brazil and this is a lighthouse deal where other large customers see Petrobas as a solid reference account for Serviceware.

Serviceware also has an AI aspect to it.  It has been partnering with a German university ( the Technical University Darmstadt) since 2019 to incorporate AI functionality into its software.  It currently has 10 AI modules that are only sold with the SaaS versions of its software.  The Enterprise Service Management Platform learns from and works with workflow and process data, service ticket data, service catalog allocations, financial planning data, and knowledge content and data.  As opposed to many companies that are jumping on the AI bandwagon now, Serviceware has been involved for the last 4 years and truly makes use of AI in its products. 

Serviceware is dirt cheap for a successful SaaS software company.  It has the lowest valuation I have ever seen for such an enterprise.  The company has a 90 million Euro market cap with 25 million Euros in net cash on the balance sheet.  This supports 100 million Euros in 2024E revenue and 50 million Euros in deferred revenue on the balance sheet which is up 50% year-over-year.  This works out to an Enterprise Value to Revenue ratio of 0.6x which is unheard of for a SaaS software company, most of which trade at 5x sales or higher.  As  ServiceNow trades at 11x sales and Apptio was sold for 10x sales this one could be a 10 bagger over time. 

Why is Serviceware so cheap?  Part of it is a deserved liquidity discount as the stock only trades 50K Euros a day on average.  There are blocks to be found, however, and it is not impossible to put on a position.  The reason that liquidity is so bad is a good one, because management owns 66% of the stock and is holding on to it.  They think the true value of the business is much higher than current levels and are striving to grow the business and make it impossible to ignore.   The company is also virtually unknown to US investors and is fairly unknown to European investors as well.  There are also few European investors who invest in technology because that sector is viewed as risky and European investors have lower risk tolerance than US investors.  That is the reason we have been able to find so many solid European tech companies with very low valuations.  This valuation gap usually begins to resolve itself when the companies begin to grow faster and become profitable, and the end game is often a takeout from a strategic or financial bidder for a fairly high multiple.  

What are the risks of an investment in Serviceware?  First is the limited liquidity of the shares.  If you change your mind there may be no easy way out.  Second, the company faces large and well-known competitors in ServiceNow and Apptio.  It is often difficult for a small company to make headway versus large competitors but I believe the markets are large enough and fast growing enough for multiple successful companies.  While Gartner does not have a Magic Quadrant for Technology Business Management it has referred many deals to Serviceware.  Serviceware is also beginning to work with consulting companies to offload the services component and start getting referrals from these players.  As SAP consulting services are slowing down these consultants are on the lookout for new business and Serviceware projects are attractive to them.

All information provided herein should not be deemed as a recommendation to buy or sell securities. The opinions expressed are my own and may differ from the opinions of my employer. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions, and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed are solely for general informational purposes. Public comments posted on this site are not selected, amended, deleted or sorted in any way. Content posted by third-parties is not attributable to myself.  

Catalyst

As SaaS becomes a larger part of the business overall revenue will accelerate and the multiple will expand.