I’ve been buying shares of this company all of last week and today and is now the biggest position in my portfolio at an average price of 3125/share. Disc: invested. Not investment advice.
About the Company
Oracle Financial Software Services (OFSS) provides financial software, custom application development, consulting and IT infrastructure management to the financial services industry. Some areas of the financial services industry its products addresses include Financial Crime Compliance, Retail & Corporate Banking, Risk and Finance, Revenue Management and Billing, Insurance, Cloud Infrastructure and Customer Acquisition & Experience.
Over 90% of its revenues come from its products, the remaining 10% from services. Its revenues are geographically diverse, with the Americas contributing around 30%, India 10%, Europe 17%, Asia 23% and the Middle East & Africa 20%. No single region has an oversized impact on revenues.
While the geographical revenue contribution is diverse, it’s customer contribution isn’t - a single customer accounts for over 50% of OFSSs revenues.
The crackdown on IT stock valuations is easily understood- fears of a US or global recession impacting revenues is a real possibility. But how does OFSS fit into this narrative? For one, its geographical diversification provides a natural hedge to a recession in one or more regions. Compare that to other well-capitalised IT companies where the share of America’s contribution to revenues is generally north of 50% and sometimes over 70%.
Another key point is that despite its geographical diversification, it’s focus is solely on one industry- Financial Services. So a bet on this company is a bet on the health of the global financial services industry in general and its inclination towards adopting and continued implementation of OFSSs products offerings. With 3 year average revenues growing YoY since at least 2012, that last point looks promising and likely.
Yet another point is that unlike most of its comparable, OFSS is really a products company, with products contributing 90% of revenues. Products like the kind OFSS offers tend to offer more stable and predictable revenues than services. Looking further in, we find that the majority of this product revenues comes from license fees (FY22 14%), maintenance fees (FY22 34%) and consulting fees (FY22 52%). Licenses are perpetual, so its share of revenues depends on OFSSs ability to onboard new customers. Maintenance fees are for 12 months and are generally purchased and renewed by it’s customers yearly- a very stable stream of revenue. Consulting fees are either fixed price or based on time and material. This too depends on customer needs and the number of new customers onboarded. The company signed its largest ever multi year SaaS deal with a tier-1 US Bank this past year.
The nature of the products is important too. Many of its products cater to and are central to how financial services companies operate (going digital, risk, insurance, crime compliance, etc.). Further, it is considered a leader in many of these departments. It retained the top position in Gartner’s Global Retail Core Banking Annual Survey and was recognised as the best asset-liability management solution and Risk Data Repository by Asia Risk Awards. I believe the products that OFSS offers are hard to let go of once opted into - so there’s a heavy switching cost. Switching to a different product would involve adopting a new infrastructure, chancing employee know-how (which could involve a training cost) and possibly needing customers to accustom themselves to the new layout/processes. These are changes a company won’t make on a whim.
All said, I believe OFSS revenues will be relatively stable and less exposed to any recession risk.
That One Customer
OFSS derives over 50% of its revenues from a single client.
Many might rightfully view that as a risk but I’m betting that it’s an advantage. We can deduce that the client is a large corporation simply by the amount it would need to pay yearly to account for its share of OFSSs revenues. Really, I’m betting that revenues from this one company will be stable. Moreover, given OFSSs niche in the financial services sector and their reliance on this one customer, I believe the company will do anything and more to ensure that the cash from that client keeps flowing in. One might disagree but I think such reliance might actually benefit the company over having a group of clients (possibly from different regions) that account for the same % of revenues as this one, because in the first case, focus can actually be an asset.
I won’t take up more space talking about how I derived these values, the process was similar to how I derive values in my other posts. My conservative and base estimates are 2400 and 3300 per share, which blended 60:40 gets me to 2765/share. It’s currently trading about 10% off my estimate, so it’s trading at or near fair value.
Relative to its historical averages, the company trades cheap. It currently trades within 10% of its 52w low. It trades at a P/TBV of 2.7 (5 year average was 5+). P/OCF currently at 9.5 (5 year average was 18+). P/S ratio currently at 3.4 (5 year average was 5.7). EV/EBITDA is 9.4 (5 year average was 11.5).
Relative to its peers, the company looks cheap too. It trades at an EV/EBIT of under 8.5. Other large cap peers such as LTI, MPHASIS, COFORGE and TATAELXSI trade at EV/EBITs of 20 and higher (elxsi AT 70+). It has more cash per share than any of the other comparable (20% v <5%), is the only debt free company in this group and funds its working capital through operating cash flows alone. It trades at the lowest P/OCF, less than half what the next lowest trades at.
Add to these the fact that the company has a track record of consistently paying a dividend that at current prices amounts to over 6% yearly. There were also rumours in the past of the parent company (ORACLE) delisting the stock.
The way I see it, OFSS does not face the same recession risk that other IT companies face due to its geographical diversification, industry niche and it being a products focused company. I think having one big customer contributing a big share of their revenues is a plus. the company trades at or near fair value (cheap relatively) with stable revenues and holds the possibility of a 25%+ return even if its just through repricing. Then there’s the rare chance that value is returned through the parent company delisting OFSS. I see very little chance for permanent loss of capital and the dividend is a nice sweetener while I wait for the capital appreciation, whatever shape it takes. The chance of delisting and the dividend take care of the downside, while a slight upside can be achieved through repricing and even greater returns if things turn for the better. I’m a buyer at levels below 3200.
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