Following recent posts on powercloud, I realised that I did not have a sufficiently robust understanding of HSN’s software solutions, how it has evolved and how each integration is integrated into HSN’s overall solution suite.
I went through the ASX announcements for each of the HSN acquisitions since 2018, using this FY2024 AGM slide as a reference. I then grouped and summarised the various solutions acquired based on industry group/functionality/offering which has enabled me to get a clearer view of how these solutions overlap/differentiate - see below for detail.
I found the exercise very worthwhile in increasing my understanding of HSN's solution offerings, extrapolating how they might go to market, the level of disclosures that can be expected post acquisition etc.
If there is one clear finding, it is that HSN's approach to acquisitions from start to end have been highly consistent.
This does not change my overall view of HSN, the sustainability of its revenue and how I am thinking of the powercloud acquisition outlined in my earlier posts, but I suspect having this greater baseline understanding will enable me to make better sense of HSN announcements going forward.
Discl: Held IRL and in SM
SUMMARY
HSN does not appear to offer a SAP/Oracle-like single, all encompassing billing & customer care software solution and I cannot quite find evidence to suggest it will go into that scenario as a long-term goal.
HSN instead has acquired and offers, “best-of-breed” solutions to new customers which appear to be based on previously acquired solutions - factors like industry, type of customer, geography will likely be the drivers to select the most appropriate solution to deploy to a new customer. Coming from my integrated ERP background, this does take a bit of effort to wrap my head around, but if I look at it from a pure financial and investment perspective, makes good sense given the completely prohibitive cost and effort to (1) develop a single platform and then (2) migrate all of HSN’s customers from their current platform to a single suite.
From the announcements, sometime around 2020, HSN appears to have done a rebranding exercise and has progressively referred to the acquired solutions in terms of “Hansen [Module]” or “Hansen CIS Suite” or similar - this has caused almost total blurring of the acquired solutions eg. Sigma System Order Management is now “Hansen Order Management”. It is now not entirely clear which solution is actually being implemented in a new customer contract as they all seemed to now be branded as “Hansen CIS Suite”.
HSN management has been very consistent in how it has approached and disclosed each of its acquisitions since 2018, including powercloud - it has used acquisitions to add a combination of scale, geography, customers and software solution capability rather than from a pure software solution capability perspective.
Management has not provided running commentary on how each of the acquired solutions perform post acquisition. The disclosures around powercloud progress has in fact, been an anomaly in terms of the greater level of detail that has been provided.
At A$49m, the powercloud acquisition is only the 3rd largest HSN acquisition in the 4 acquisitions where the cost was disclosed, and is roughly only 1/3 the cost of the largest acquisition, Sigma Systems, which was acquired at A$166.2m in 2019 - relative to the Sigma acquisition, powercloud appears to only be a medium-sized acquisition and thus, a medium financial and operational risk to HSN overall. This was an important data point to put the powercloud acquisition in proper context relative to ALL prior HSN acquisitions.
With this perspective, it is now clear to me that (1) HSN is a multi-solution best-of-breed provider of billing and customer care solutions (2) is is unlikely that there will any further detail on powercloud’s specific performance from hereon, similar to the approach taken by HSN in all of its 10 acquisitions prior to powercloud and (3) instead of focusing on the performance of each individual acquisition like powercloud, which will be challenging to do with the lack of detailed information, the approach will be to focus on HSN’s broader/overall revenue sustainability, growth trajectory, churn rate etc across all the billing solutions it offers.
OVERVIEW OF HSN’s SOLUTION OFFERINGS - MORE DETAIL
HSN’s baseline customer care and utilities billing solution used to be known as “HUB” - this appears to be for Telco, Electricity, Gas and Water industries.
HSN’s acquisition approach since 2008, has been highly consistent, meeting the following acquisition criteria:
- Are within and adjacent to its core business of billing and customer care
- Increases revenue base
- Expands suite of global products
- Expands existing geographic footprint, market presence
- Expands customer base
- Is immediately EPS/EBITDA accretive on acquisition
Each acquisition appears to directly add to HSN’s overall product suite despite what appears to be direct functionality overlaps to previously acquired solutions.
There does not appear to any focus to merge/integrate/collapse/rationalise newly acquired overlapping solutions into a single all-encompassing HSN billing and customer care solution suite - each solution continues to operate as is, and is offered to new customers, “as-is” eg. PeacePlus was the solution for Ergon Energy (Dec 2014), eRex Corporation (Sep 2015) and the ICC Solution was the solution for Hinduja Group (Jul 2015), DishHome (Feb 2016).
However, it does appear that a rebranding of acquired solutions into “Hansen XX” occurred around 2020 as contract announcements stopped using the names of the acquired solutions - Jan 2020 Simple Energy announcement referred to “Sigma Catalog” and “Sigma CPQ” but in the Jun 2020 announcement on Hansen Provision Release 7.0, there was reference to Hansen Catalog, Hansen Order Management etc - these were Sigma products.
The employee base of each solution acquisition is likely to be resource base to implement, support, enhance each of the acquired solutions.
This approach may be required as each acquired solution is likely to be mission critical to the customer base of that solution and is hence, highly “sticky”, meaning that migrating customers from each acquired solution to a single, all-encompassing HSN solution suite may simply not be possible without significant effort and cost.
This then means that HSN’s solution offering approach is one “best-of-breed” - new customers will be matched with the best fit solution based on industry, scope, geographic location etc.
This also means that “Hasenisation” is really around optimising business processes, resourcing, software development methodologies and tools etc, and not technical integration/rationalisation/merging of acquire software solutions into a single suite.
Disclosures around each acquisition has also been highly consistent:
- Single announcement of the acquisition - cost, impact on HSN revenues, strategic rationale, funding, employee additions, customer additions etc.
- Follow-up commentary post an acquisition is usually included in HSN’s half-year and full-year results, mostly focused on impact on earnings, completion of integration etc
1HFY18 results announcement following large Enoro acquisition,
FY19 Results Announcement following the largest acquisition to date, Sigma Systems
Post acquisition, there has been no detailed commentary on how each acquisition has progressed from an operational, competitive position/progress of each solution. The only reference to previous acquisitions appear to be when an acquired solution is used as the basis of a new customer contract eg. Use of ICC Solution for the Nepal DishHome contract (Feb 2016) or if there is a major upgrade to an acquired solution eg. Solution Upgrade for Banner CIS to v5 (Apr 2015).
HSN SOLUTIONS, GROUPED BY INDUSTRY/SCOPE
Utilities - Billing, Customer Care, Customer Information System (CIS)
Utilities - Integration/Add-On Solutions
Utilities - Water Billing
Utilities - Business Process Outsourcing, IT Services
Media, Entertainment, Telecommunications
Some positive news amidst the bloodbath today - new $50m-ish deal and reaffirming of FY25 guidance.
Market clearly liked it, as did I!
Discl: Held IRL and in SM
Virgin Media Limited Deal
- License HSN’s cloud-native Suite for Communications,Technology & Media to VMO2 for an initial 5-year term
- VMO2 is joint owned by Liberty Global and Telefonica, with 45.6m connections in the UK across broadband, TV and home phone
- Hansen Suite will deliver 3 platforms for VMO2 expanding wholesale and retail markets as part of VMO2’s digital transformation
- “With associated revenue of approximately A$50m” - unclear if this is THE total deal size or over and above the subscription as A$15m of VMO2 license revenue will be recognised upfront in 2HFY2025
FY2025 Guidance
I am starting to fully appreciate the benefit of spending a few minutes working through AGM material of the companies I own. 90% of the material is a repeat from the results announcement, but there are just these few additional insights and/or reinforcement of previous points that seem to make things that much clearer for me. I also look out for new or updated slides. And so it is with the HSN AGM material.
Very pleased with how HSN has been travelling.
My shit-hits-fan top-up zone remains between ~$4.21 and ~$4.42. There is Long-Term resistance ahead at $6.03 which will cap prices during FY25, but a good FY25 result with realised powerCloud post-restructure EBITDA , looking to be better than initially flagged, should see an assault through this in early FY2026. I much prefer these sorts of paced earnings-driven price moves rather than straight line hot stock-like moves, as they are much more sustainable.
Discl: Held IRL and in SM
Overview of Industry Verticals
We support two industry sectors – Energy & Utilities and Communications & Media and each of our verticals has a strong presence. Both verticals are well diversified across the globe
Both of these sectors are incredibly dynamic and in exciting transition phases. As a Group we are uniquely positioned to help accelerate our customers’ transition and transformation.
These dynamic changes are helping to drive solid growth prospects for Hansen and it was very pleasing to note the Energy & Utilities vertical delivered nearly 15% organic growth in FY24. Energy & Utilities growth is driven by their need to manage regulatory compliance and the transition to Distributed Energy Resources.
The Communications & Media segment is a little different to the Energy & Utilities segment. The Communications & Media operators are essentially technologists. During Covid and the years immediately following, the sector has been cautious to invest in large scale transformational technology programs. This is changing and we anticipate a stronger performance in FY25 with several late-stage new logo discussions in the communications space across the main regions we operate in.
Re-Iteration of Strong M&A Track Record
Since 2008 we have acquired and successfully integrated 11 businesses and have achieved a 14.7% Operating revenue CAGR and a 14.3% EBITDA CAGR since then.
We take a very careful approach to M&A and have a defined playbook to both acquire and integrate business.
Ultimately, we are a business that spends the money like it’s our own and we don’t do a deal unless it makes complete commercial sense.
powercloud Update
Turnaround of powercloud is on track, nearing completion, and will be EBITDA positive during 2H25.
Since acquiring and updating the powercloud strategy we have rationalised the structure from approximately 390 staff to 140 staff - thats an impressive 64% reduction in headcount.
We have been carefully listening to the powercloud customers to deliver mutually beneficial outcomes - we have refocused our R&D efforts on the core system, RCS which is what our clients have been wanting.
We have reviewed and adjusted the fixed cost base and there are more potential medium-term savings available. Since acquiring, we have reduced the cost base by approximately $27m AUD on an annualised basis - this was flagged as $13m during the August results announcement, so annualised savings appears to have now doubled
The strategic rationale for acquiring powercloud remains, with significant potential upside as the German energy market transforms over the medium term.
FY25 Guidance
The Group’s guidance for revenue remains unchanged.
We are experiencing current FX headwinds but the global FX rates in November are moderating and it's still early in the year. Due to the natural currency hedge Hansen has by region, driven by the localised cost base, we don’t see the current FX headwinds materially impacting bottom line.
Most importantly, we expect that the industry tailwinds the business is experiencing should persist beyond FY25.
SUMMARY
No surprises on Core Hansen business, German PowerCloud acquisition short-term financial drag was flagged and thus expected.
Pleased with progress on Hansenisation of powercloud in the short time since acquisition - it will be a good launch pad into the DACH region, once completely integrated into HSN.
powercloud expected to be Underlying EBITDA positive in Q4FY25, with Underlying EBITDA loss capped at (A$5m) and capitalised R&D capped at $A5m - expect this to be achievable given current progress and HSN’s strong record of integrating acquired businesses.
Thesis of steady, dependable growth very much intact. HSN provides my portfolio with a stable growth ballast and dividends.
Discl: Held IRL and in SM
Core Hansen, Excluding powercloud
Chugging along nicely (1) $334.7m revenue, 7.3% increase (2) Underlying EBITDA flat at $99.7m (3) Underlying EBITDA margin 26%
11 Tier 1 & 2 wins in FY24
No one customer contributes >8% revenue, customer church remains extremely low at ~1%
No surprises, both Energy & Utilities and Communications & Media verticals are travelling nicely
German powercloud Acquisition
The German powercloud acquisition has, as expected, dragged the FY24 results down (1) Revenue $18.4m (2) Underlying EBITDA ($7.4m) (3) Underlying NPAT ($10.4m) - this was previously flagged, so no surprises.
“Hansenisation” of powercloud have gone well, powercloud financials have been better than originally anticipated.
Re-signed EWE, a major powercloud customer, for another 5 years.
Initial restructuring completed with estimated annualised savings of ~$13m.
powercloud has offered a cheaper, faster more effective way to enter the German market vs the alternative option of building HSN’s billing software from scratch.
Balance Sheet
- $59.1m Operating Cash flow, down 25%
- Free Cash flow ($5.7m) to $46.7m
- $70.2m debt, net debt position $23.5m
- Already paid down $12.0m of initial borrowing of $55.3m to acquire powercloud
- No change to dividend payments - $51.1% of NPATA
M&A
Continue to be on the lookout for M&A opportunities with the usual HSN M&A diligence
FY25 Guidance
Back to “normal” HSN trajectory
Pleased to see some “precision” in powercloud financials - EBITDA positive Q4FY25, subsiding of Underlying EBITDA losses and capped to ~A$5m, capitalised R&D capped at ~A$5m
Finally got round to reviewing the position with HSN and determining what action to take.
Discl: Held IRL and in SM
1HFY24 Summary
- Robust 1HFY24 results with growth in revenue, underlying EBITDA margin, strong cash generation, debt repayment and returning of cash to shareholders, underpinned by stable and predictable revenue, very low customer churn
- Net cash positive for the first time since 2017, $8m, pre-powercloud acquisition where cash reserves of ~$45.1m exceed debt of $36.9m
powercloud Acquisition Feb 2024
Market has been spooked by the powercloud acquisition in Feb 2024
The strategic rationale for the acquisition makes sense (1) buying a robust, modern and entrenched suite of complementary billing software (2) opens access to the broader DACH region markets (3) at a stage in powercloud’s maturity that will benefit from the more robust Hansen discipline and processes to become more efficient and hence more profitable
Downside:
- Requires ~$20m more investment over and above the upfront acquisition price of EUR30m
- Will adversely dilute short term FY24 underlying EBITDA by ~$7-8m, bringing FY24 underlying EBITDA margin to +26% from the normal pre-acquisition underlying EBITDA margin of ~+30%
HSN has a strong proven record of successfully integrating acquisitions into the broader HSN business - this acquisition should be no different. Must however, sit through the risk of margin dilution in the next 12-18M before powercloud can be fully earnings accretive.
Current Position and Action
- Price has been drifting towards a ~3-years old well-supported zone between ~$4.21 and ~$4.42
- this zone was a strong resistance zone for a good 18M prior to mid-Mar 2021 when the resistance was penetrated
- Since Mar 2021, this has been a strong support zone, successfully defended in Oct 2023, then April 2023
- If price falls into, or in the vicinity of the top up zone, increase position from current ~1.8% to 2.5%
Discl: Held IRL
THE GOOD
Revenue
- 5.2% increase in operating revenue, 2.1% in NPAT, 1.0% increase in EPS - organic growth, highest ever operating revenue result vs FY2023 guidance was 3-5% increase in revenue
- Services, Support & Maintenance revenue grew organically 7.3% YoY, well above historical average of the business
- No customer makes up more than 7% of revenue - diverse across geography, currency, product, and industry
- Continued generating significant cash-flows and the paying down of debt - effectively net debt zero outcome
- Several new logos and renewals won during FY23, no material loss of customers in FY23
Cash Flow and Debt
- $78.8m of operating cashflows in FY23, used to (1) retire $33.6m of debt (2) pay dividends of $18.4m (3) fund the capitalised portion of ongoing product development program of $21.1m.
- At the end of FY23, total borrowing's is $54.3m, net debt is effectively zero
- Strong balance sheet with headroom for future borrowing capacity when the right acquisition opportunity is secured
- Final Dividend of 5.0c, partially franked to 1.5c
FY24 Outlook
- Organic revenue growth rate in FY24 is 5-7%, higher than FY23 5.2% growth
- EBITDA expected to remain above 30%, and above pre-pandemic historical run rate of 25-30%
- FY24 capitalised R&D spend of 5-7% of revenue
Acquisition Pipeline
- Macro-economic factors increasingly favourable for acquisitions
- Having effectively zero debt, HSN has significant financial resources for acquisitions
NOT SO GOOD
- Underlying EBITDA FY23 was $99.5m, Labour costs and staff churn has stabilised
- EBITDA margin at 31.9% reflects careful cost control - 2HFY23 EBITDA margin was 33.5%, indicating HoH margin improvements
- Licencing revenue bounces around from half-to-half - driven by revenue recognition standards, does not appear to be a concern
WATCH & RISKS
FY24 seems set up to be a year of acquisition as (1) opportunities increase with the current macro challenges globally and in EMEA where HSN has a big footprint (2) decks have been cleared from a debt perspective to build the war chest to fund acquisitions - need to watch that the acquisitions make sense - excellent track record in this respect, so risks are very low
SUMMARY
- Good solid results, exceeding FY23 guidance, steady as she goes - as “defensive” as technology companies can go
- FY24 guidance is bullish
- Expecting M&A activity in FY24
Positives
- Stable, steady-as-she-goes result - boring really
- No loss of customers, significant project go-lives, stable margin - signs of continued operational excellence amidst staff, wage and inflationary pressures and a highly sticky customer base
- Guidance for FY2023 maintained - 2HFY23 should see a better result than 1HFY23 due to (1) license renewal revenue - a timing difference in 1HFY23 (2) benefits flowing through stabilisation of workforce churn (seen in higher costs, reducing EPS)
- Continue to be robustly cash generating, enabling rapid payment of debt (net debt $28.7m, 0.32x leverage ratio, but no debt actually paid this half), war chest in in place to take advantage of M&A opportunities as businesses globally face increasing pressures to shed cost as interest rate rises and other business inflationary pressures kick in - IT is always a good candidate for cost shedding, HSN is well placed to pounce
- HSN is well placed with operational excellence/improvement and cash generation continuing in one stream, which then directly feeds its ability to find and execute M&A opportunities
- Recent history has suggested that patience in M&A opportunities will likely be well rewarded as financial screws tighten further globally in CY23 and CY24 - next 12-18M could be very interesting
Minuses
- Growth is significantly more “steady-to-flat” and boring - out performance will occur in distinct steps, tagged to M&A activities
- Flat pcp revenue
Things to Watch Out for for 2HFY23
- No improvement in license revenue in 2HFY23 - this would be a cause for concern
- Costs continue to rise rather than flatten
- Progress on any M&A opportunities
- Continued traction on deployment implementation
Other Observations
- The lack of M&A in recent periods has probably allowed for a period of technical stability to enable digesting/integrating/embedding of the acquired technology into the broader solution suite and customer - a good thing
- Recent announcements appear to be contract extensions or new deployments of the HSN Solution Suite
Red Flag Risks
- Loss of customers - a big red flag given historical trend of retention
- Hint of challenges in technology deployment
Portfolio Positioning
- Current portfolio has too much cash from forced divestments of high growth/high gain companies in the portfolio due to being acquired
- HSN provides (1) a better position to deploy that scarce cash while looking for new opportunities to invest in (2) a ballast to a tech and growth-skewed portfolio (3) a steady dividend stream
- Is not the best place to deploy scarce capital as there are more exciting opportunities for growth, but it is prudent to inject a bit of strong stability and strong cash flow generation into the portfolio, with the potential for decent price upside
- Added 0.5% today at $4.71 to the existing 0.62% position, bought at $4.47
- Ultimate position size could be 2.5-3.0% over time.
- Has not tested 52-week lows of $4.32 for some time and is nowhere near the 52-week highs of $6.10 - have funds availability to top up if the market tanks and 52 week lows are re-tested
Discl: Hold 1.1% IRL