SLI Systems is a fast-growing SaaS company operating in the hot field of e-commerce, but seemingly priced at EV/Sales multiples closer to those of mature industrials. It is currently in the investment phase and therefore pre-profit, but its revenue base is sustainable, high-margin and recurring, and should therefore generate substantial returns provided it can reach profitable scale. The company has recruited a new CEO, Silicon Valley executive Chris Brennan, who brings a consistent track record of growing early-stage companies. Founding CEO Dr Shaun Ryan will move to the new role of chief innovation officer and remains an executive director with his interests aligned with the company.
The subscription nature of SLI’s revenue, combined with the initial customer acquisition and set-up costs, means that a high retention rate is required to generate positive returns. It typically takes two years of subscription fees to pay back the initial costs, but the annual retention rate has historically been 90%, resulting in a current undiscounted net lifetime value (assumed to be 10 years) per client of approximately NZ$320k. In FY15 retention fell to 87% but management has put in place measures to return this to the historic average. We estimate the 586 clients as at 30 June 2015 will make a collective lifetime contribution of c NZ$188m (assuming a 90% retention rate and 75% gross margins).
SLI announced on 30 September that it had recruited Silicon Valley executive Chris Brennan as CEO. Founding CEO Dr Shaun Ryan will take on the new role of chief innovation officer and remain as executive director. The change readies SLI for its next stage of development and is likely to raise its profile in the US capital markets.
SLI’s share price has drifted lower over the last few months despite a solid performance. The weakness may be due to increased concerns over competition, but we view the extent of the decline (35% over the last 12 months) as unjustified and the current share level could therefore be viewed as a buying opportunity. A reverse DCF implies revenue growth of 11.4% to 2020 is required to justify the current share price, which compares favourably to the 21% growth seen over the last five years and 27% y-o-y growth in FY15. Assuming a revenue CAGR of 21% to 2020, the DCF produces a valuation of NZ$2.21.