Investment case: Esker

WHAT MAKES THE COMPANY DIFFERENT

Esker was one of the first companies to offer a cloud-based offering already in 2007. We are seeing increased demand for modern cloud-based software solutions versus more traditional on-premise offerings. Modern cloud-based solutions are simpler for the company as the IT infrastructure is all housed offsite and is monitored and managed by someone else. The fact that Esker was a first-mover to cloud-based software acts as a competitive advantage as Esker often uses reference clients to help it to win new business.

Another key factor is that Esker offers software across multiple processes whereas competitors offer only one-point solutions. Esker’s software covers accounts receivable, payable and sales order processing. This means that customers that choose Esker can simplify their implementation process and reduce the number of suppliers they deal with.

RESILIENCE

At SilverCross we aim to invest in businesses that have a proven resilience and can prosper in both good times and bad. Esker’s business can be regarded as resilient for two key reasons. Firstly, Esker has a very sticky customer base demonstrated by a very low customer churn rate of 1-3%. This is due to high switching costs. Once a customer goes through the effort of integrating Esker with its Enterprise Resource planning (ERP) software system, it is cumbersome and costly to switch supplier.

The second reason that Esker’s business is resilient is due to the fact that 74% of its revenues are recurring in nature. Esker is not completely insulated from the macro environment given that 45% of its recurring revenues are in fact a variable per document fee. Yet, the past has shown that Esker performs well during economic downturns even if variable fees decline.

ESG

Esker’s products are, in nature, improving sustainability and the environment. Esker’s cloud platform has helped businesses around the world automate processes and eliminate the need for almost 2.6 billion sheets of paper. This has resulted in a staggering estimated saving of 4.9 Gigagrams CO₂ equivalent. Additionally, 100% of Esker’s new customer environments are hosted in the Microsoft Azure public cloud which runs on 60% renewable energy. While Esker is not currently subject to the Greenhouse Gas Emissions (GHGs) accounting regulations, it discloses on all three emission scopes. This exemplifies some of the main attributes we seek out in a company – transparency, the ability to look ahead and proactivity to limit risks. 

Also, Esker is a member of the UN Global Compact and has a strong social strategy, including an in-depth human rights policy. It recently introduced a Supplier Code of Conduct. Esker has also introduced material corporate actions to benefit society. For example, through its partnership with Reforest'Action, Esker has committed to planting six trees per reel of paper used in its Décines mail production facility. Finally, Esker’s Supervisory Board composition is strong and performs well against its peers. Its Board is made up entirely of independent members and has an equal gender split which is above its peer average of less than 20% women.

MANAGEMENT + INSIDER OWNERSHIP

At SilverCross we aim to invest in those companies that have a high insider ownership as we believe those companies tend to have a corporate culture that is aligned with our long-term investment approach. Approximately 22% of Esker’s shares are controlled by insiders. Esker’s founder and CEO, Jean-Michel Bérard is the largest insider shareholder with 6.9% of the company. Emmanuel Olivier, the COO owns 1.1% which makes up a significant share of his total net worth and equates to about 34 times his total 2019 compensation.  These insiders are aligned with us as minority shareholders and incentivised to continue to innovate and build Esker into a leader in its field. On 19th November 2020 we were delighted to have had Emmanuel Olivier join us for our sixth SilverCross Annual Investor Event to share the Esker story. Emmanuel has been at Esker for 21 years, initially as Chief Financial Officer and for the last 18 years as the Chief Operating Officer. For those of you that were unable to attend the live event, please click on the link to view the fireside chat with Esker’s COO.

GROWTH PROSPECTS

The document process automation market is growing at about 10-12% a year. About two thirds of new customers are replacing paper based or home-made solutions and about one third are replacing existing software such as on-premise solutions. Esker launched its cloud offering many years ago whereas some peers only recently commenced the process. This has acted as a platform for Esker to win market share from competitors, driving its historic sales growth to about two times the market rate. We believe there could be a catalyst to drive a further acceleration in this growth rate. Historically, Esker sold primarily via its own direct sales force. This has acted as a bottleneck for growth where demand has outstripped Esker’s implementation capacity. For this reason, it has decided to expand its sales effort with channel partners such as KPMG in the Netherlands and Fuji Xerox in Japan. This, we believe, will act as a catalyst for accelerated sales growth to over 20% per annum versus the 15% compound annual growth rate that we are currently modelling for the next five years.

INNOVATION & VISION

Esker’s CEO has proven to be a visionary in the document process automation market. He foresaw the transition to cloud years ahead of competitors which is partially responsible for the recent success they have experienced. While some of its peers are busy catching up to be able to offer a modern cloud equivalent solution, Esker’s CEO is moving ahead, focussing on executing his vision for the next 5-10 years. Currently Esker is known as a leader in back-office automation solutions such as the processing of receivables and payables. Customers that want best in class solutions often purchase back-office automation software from Esker but the front office software for procurement and purchasing, for example, from one of Esker’s peers. Esker’s CEO is now focussed on developing its front office automation solutions so that it can provide customers with a one stop shop solution. It is investing 11% of annual sales in research and development. The new front office solutions will significantly expand Esker’s already large total addressable market. Its management team doesn’t lack ambition and believes that if it can successfully execute its vision, the opportunity would be to grow Esker into a €1bn revenue business from €112m in 2020.

INVESTMENT CASE / WHY WE INVESTED

In early 2020 the corona crisis led to a significant decline in stock prices. Esker was no exception and by 17 March 2020, its share price had declined by 29%. This created an attractive entry point. Assuming the global pandemic could get worse and lockdowns could continue for months, it was essential we gained clarity on two key points. First to ensure we were investing in a company that would be able to survive a prolonged crisis and second to invest only if we believed the business had the best potential to emerge from the crisis in a stronger position.

With regards to its ability to survive a prolonged crisis, we were comforted by the fact that Esker has a rock-solid balance sheet with a net cash position. In addition, Esker’s software carries out a critical function and is deeply embedded in its customers’ business processes making it very difficult for companies to stop paying Esker the contracted fixed fees unless they were to go bankrupt.

When we added Esker to the fund in April, Esker was under the radar for many investors. Only one small local French broker wrote research on the company. This could partially explain why it was trading at ‘only’ 4.8x its forecast sales versus 22x for US listed peer Coupa Software. Several months after we invested in Esker, a well-known broker initiated research on the company. This, combined with solid execution from Esker during a tough 2020, have helped to raise awareness of the strong outlook for the company. We believe the Esker growth story is in the early innings and we expect it to compound earnings growth at a double-digit rate for many years into the future. We anticipate being long-term owners.