Topicus.com Inc. (TSXV:YOU: CA), Constellation Software (OTCPK: CNSWF) spin-off, recently released Q3 FY23 income results. Topicus is positioned as a leading provider of vertical software and platform solutions. Vertical software are special software solutions designed for it a specific industry. Vertical software is a broader term and includes specific subsets such as vertical SaaS (vertical software as a service). Vertical SaaS is the current trend and has gained popularity in recent years, and its adoption continues to SET UPespecially, among professional services firms. Specific demand for SaaS offerings is gaining traction due to its SaaS-related advantages such as faster time-to-market, scalability, and cost-effectiveness, among others. The adoption rate of vertical SaaS has driven cloud providers to start offering cloud services focused on specific industry. Microsoft introduced it NEW for Retail platform about two years ago. The platform targets the retail sector; it provides solutions to improve e-commerce personalization, supply chain optimization, analytics and insights, security and other features for cloud-based retail stores. Microsoft also launched it Cloud for healthcare platform in October 2020. Google and Amazon have developed software platforms that target specific industries. Amazon, through its AWS cloud platform, has developed new cloud-specific offerings, including AWS for retail and AWS for Industrial.
Topicus is strategically positioned in the vertical industries of finance, education and healthcare, acquiring or developing comprehensive platforms for each of these segments. Topic Pension and Wealth the platform serves wealth managers and their clients, Working condition for mortgage advisers, Today for schools and Fyndoo for corporate finance, among several other vertical software platforms targeting segments within the aforementioned industries. Topicus’ niche software offerings continue to expand through acquisitions, giving the company a sustainable competitive advantage. Topicus invests and operates mainly in Europe, which can be considered a strategic advantage.
Topicus’ recent results were good, showing the company’s favorable position in the growing vertical software and vertical SaaS market. The global vertical software market is currently valued at $328.32 billion and is expected to reach $473.39 billion by 2027, according to market data and statistics website Research and Markets.
A look at the third quarter numbers
Topicus’ growth is rapid, especially due to its series of acquisitions. Topicus’ business model involves building or acquiring and managing software companies that provide specialized software solutions. When Topicus acquires a particular software company, it typically involves taking over the acquired company’s assets, customer base and revenue streams. This leads to an inorganic increase in Topicus’ overall balance sheet and financial metrics.
Topicus primarily makes most of its money from professional services, maintenance and other recurring fees. In the third quarter, Topicus recorded €278.8 million (~$294.8 million) in sales, representing a 22% year-over-year increase. The top line grew organically by 8% in the third quarter. A summary breakdown of revenue shows that maintenance and recurring revenue currently make up about 70% of the top line, while license revenue makes up about 2.6% of the Q3 top line. Based on my analysis, I think this front line composition is a somewhat good point of view.
In my opinion, having a significant portion of revenue coming from maintenance and recurring fees can be considered a positive factor. Maintenance and recurring fees often come from existing customers who continue to use and evaluate Topicus’ products and software platforms. High levels of recurring revenue indicate a strong customer base and customer loyalty. Another reason why high recurring revenue is a good thing for Topicus is that it contributes to a more predictable cash flow, enabling the company to plan investments and other strategic moves, especially its serial M&A, with confidence Bigger. Conversely, I think the very small license income should be improved. License revenue is associated with ongoing licensing fees for purchases of new products or services. Low revenue from licenses can mean a low flow of new customers.
The figure above shows the organic growth trend of Topicus’ various revenue components since Q2 FY21. Maintenance and other recurring revenues have seen consistent organic growth for multiple quarters. This organic growth trend looks good as most of Topicus’ cash flow is used for M&A rather than being reinvested in existing businesses.
Spending for the third quarter of the theme has marked a slight improvement over the last quarter. Although revenues increased by around 2.5% between quarters (from 272.1 million euros in the second quarter to 278.8 million euros in the third quarter), expenses showed a slight decline. Second quarter expenses were 206.2 million euros, which decreased by 0.7% to 204.8 million euros in the third quarter. This shows effective cost management between quarters. If Topicus continues this trend for the next quarters, it will strengthen the result.
Third quarter net income for Topicus was 28.3 million euros, marking an annual increase of 9.9 million euros or 53.8%. This increase translates into basic and diluted EPS values of €0.22. Notably, diluted EPS maintains its underlying value due to Topicus’ simple capital structure, which lacks convertible securities, stock options or other instruments that could lead to dilution. Over the years, Topicus’ management has adopted a conservative approach to the issuance of securities, which may lead to dilution, reflected in consistent quarterly results. This stability is among the many factors that make this stock attractive.
In the third quarter, Topicus generated 25.5 million euros cash from operations (CFO). After applying non-GAAP adjustments, the adjusted figure is 12.8 million euros. This is a significant improvement in cash generation from core operations compared to the same period in FY22. Similarly, Q2 CFO, which was -€15.4 million, was an improvement of 780 basis points compared to Q2 FY22 CFO of -€32 million. Adequate cash generation from core business activities is beginning to look stable and sustainable for Topicus. It is worth noting that Topicus’ cash flow experiences some seasonality because its businesses bill their customers for annual maintenance fees in the first quarter of each year, which leads to a significant increase in cash in the first quarter of each fiscal year. . Q1 CFOs can be considered an outlier; however, an annual comparison of Q2 and Q3 CFOs paints a somewhat clearer picture.
Topicus had a good financial performance in the third quarter. Topicus is a long-term hold for patient investors who value stability. Monitoring the company’s recurring revenue trend and organic revenue growth rate, expense management trends, and its ability to sustain cash generation from core operations will be key factors for future investment decisions. .
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