SimCorp is an innovative player in a small, but quite profitable market. The Danish software developer of portfolio management systems has begun to gain serious ground with its products, landing a large portion of the investment managers switching software suppliers. In the United States, which is a vital market, there are indications that the US customers are also impressed by the Danish technology.
SimCorp is a global market leader in the attractive market for systems for portfolio managers’ monitoring of portfolios, sending up-to-date information
to optimise decision-making processes and the presentation of investment results from prior periods. The Danish software developer’s share of the global market is 15 percent.
More than 1,500 employees work at SimCorp, either developing, installing, maintaining or selling the company’s products. The company’s main product is SimCorp Dimension, which has several modules that customers can choose from and purchase according to their individual needs. Customers can also purchase the front office product Coric, which makes it easier for customers to report their achieved results.
The company’s strength lies in the fact that its modules can handle virtually any task that is relevant to an investment manager. While the first sale generally only includes a few of these modules, SimCorp can add on more modules as and when the investment manager requires them. Through considerable investments in development over many years, SimCorp can offer competitive modules in all parts
of its business. If customers use modules from several different suppliers, interaction issues may arise between the modules. One of SimCorp’s sales argument is thus that they can ensure a more stable and correct processing of data, the more of the system they deliver.
SimCorp’s management estimates that the company’s potential market is comprised of roughly 1,250 customers, of which just under 190 have already switched to SimCorp. In the long term, the annual number of orders up for grabs is expected to be around 40 to 50, but ever since the financial crisis there have been significantly fewer orders in play. In 2016 as well as 2017, there were less than 20 orders to compete for.
In 2017, SimCorp got eight new orders, making it yet another year where the software developer won more than half of the customers that were looking for a new supplier. The biggest competitor to a SimCorp sale today is the investment manager choosing to postpone their decision to a later time. The number of portfolio management system suppliers has been declining due to consolidation among other actors, most recently in 2016 with SS&C’s acquisition of Advent. We believe that fewer companies competing for the same customers is a good thing, and our assessment is that SimCorp is strongly positioned with an attractive product catalogue.
Subscription model which ensures more sales and higher profitability
The sales processes are long – generally exceeding a year – as the purchase of a new portfolio management system is a big decision. It requires considerable organisational resources on the customer’s side to implement a program like SimCorp Dimension, as it includes a review and intensive study of procedures, processes and other aspects. Furthermore, the financial aspect of buying a new system is also no small thing.
Whereas the purchase of Dimension once required large upfront payments, this has now been replaced by subscription contracts, lasting for five years in most cases. One of the ways this helps SimCorp is that the payment for acquiring the program becomes lower and can therefore typically be approved at a lower management level in the customer’s organisation. Furthermore, over time the customer’s subscription plan results in higher earnings compared to the prior payment form where the customer paid for the program over the first two to three years. The total economic value of a client is thus higher on the subscription form.
The transition to the new contract form has entailed some turmoil in the reporting of the company’s results, which in our view has been the source of uncalled-for uncertainty about and fluctuations in the stock market’s perception of SimCorp’s value. However, the effect on cash flow has been greater than both we and the management anticipated prior to the transition, and this has led to a small change in the company’s payouts in 2018.
In addition to this, several other changes to accounting standards have made it harder to compare new figures with those from prior years. However, this does not have any impact on the company’s free cash flow, which is what ultimately constitutes the long-term value in SimCorp and which creates the foundation for the assessment of the company’s potential return on investment.
On top of the continuous licence payments for its software, SimCorp also receives fees for the number of users connected to the system, which is a stable and profitable business. If the software needs to be updated or new modules/functionalities that need to be implemented, SimCorp can send consultants to help with that – for a fee, of course. Even though there was a drop in the sale of new licences from 12 in 2016 to eight in 2017, there was a healthy 35 percent growth in the number of add-on licences.
The 12 new orders in 2016 contributed to the sale of professional services growing by 30 percent in 2017. The margins on professional services are not as high as the margin on sales of new licenses but it is nevertheless an attractive income stream. The considerable increase in activity levels was due to both the integration of the record-breaking orders in 2016 as well as increased demand among SimCorp’s customers for outsourcing part of their work with SimCorp’s systems.
Gaining ground in the USA, a key market
While SimCorp holds significant market shares in Scandinavia and Northern Europe, their share of the North American market is only five percent. However, the good news is that four of the eight agreements entered into in 2017 were with American customers. Through historically sizeable and continuous investments in software development, SimCorp has created a strong product range, and this is expected to be a crucial factor in the battle for a higher market share in North America, supported by a growing understanding of the market, more references and a strengthened sales organisation.
SimCorp’s US country manager, James Corrigan, leads a division of more than 100 employees. After joining the company by the end of 2014, activity in the American business has picked up, bolstered also by the recruitment of salespeople from SimCorp’s competitor Advent following its acquisition by SS&C. These new hires have had a positive influence on the influx of orders and have without question contributed with their in-depth knowledge and understanding of the market.
Emmanuel Colson is still the head of SimCorp’s efforts to gain ground in the French market, having held the position since 2013. Over the past few years, both Corrigan and Colson have delivered good results, including a licence agreement with the insurance giant AXA’s investment management unit. We expect that they will continue to achieve positive results for the company. SimCorp has not previously had a presence in the Italian and Spanish markets, but nevertheless managed to win orders with leading investment managers in both these markets in 2016. Italy’s biggest insurance company, Generali, signed the biggest order in SimCorp’s history just prior to Christmas 2016. Management’s clear strategy is to strive for contracts with a top three player in a market that SimCorp is trying to break into.
As part of its increased focus on the Italian market, SimCorp acquired the Italian company APL Italiana in 2017 for 35 million euro, financed through a combination of shares and cash. Partly due to this acquisition, SimCorp is not expected to buy back shares in 2018, although in 2017 the company repurchased shares amounting to 190 million Danish kroner, corresponding to nearly 1.5 percent of its market value at the start of that year. In addition to this, SimCorp pays a dividend of 6.50 Danish kroner, and combined with the share repurchasing, the direct yield was three percent of the company’s market value. The fact that total payout yield will be lower in 2018 is not something we see as a negative development.
It is a good thing when our companies reinvest their capital to expand their business through value-creating investments. Our assessment is that the acquisition of APL Italiana was done at a very attractive price level of less than 7.5 times the Italian company’s operating income. APL Italiana, which had not been for sale, gives SimCorp a strong platform in Southern Europe.
Experienced and influential people occupying key positions
When customers buy a portfolio management system, it is a long-term investment. A conservative balance sheet helps assure customers that the risk of financial problems in SimCorp is low, meaning there is very little likelihood of suddenly finding themselves without a supplier in a few years’ time. SimCorp has been debt-free for many years, but after the acquisition of APL it took on a small debt, which is expected to be paid back in full after 2018.
Klaus Holse Andersen has been the CEO of SimCorp since 2012, and he comes from positions in sales from major successful US IT organisations such as Microsoft and Oracle. It is our perception that he has contributed with a strong, results-oriented approach and a long-term focus. In 2018, he was joined by Michael Rosenvold, who became the new CFO. Prior to SimCorp, Rosenvold worked at the successful project management firm Rambøll.
The chairman of the board, Jesper Brandgaard, has been in his role since 2008, and former Nordea senior executive Peter Schütze has been vice-chairman since 2012. Our assessment is that SimCorp’s board is able to contribute with strategic insight regarding the company’s long-term value creation, which Holse and Rosenvold will work together to achieve through the company’s day-to-day operations.
In 2017, SimCorp achieved revenue growth – excluding acquisitions – of more than 10 percent, and earnings from its operations amounted to 26 percent of its revenue. The company’s long-term expectation is to grow its revenue by double-digit percentages on an annual basis while also raising its margins from the current level. We believe it is realistic for margins to reach a level of more than 30 percent, which is the case for other market-leading software suppliers. The return on invested capital is more than 100 percent, which clearly demonstrates this software developer’s ability to create value.
The market-leading SimCorp Dimension is built on major investments in development. The company invests approximately 20 percent of its revenue in this area, equivalent to around 480 million Danish kroner, increasing the absolute investment by about seven percent each year for the past five years. If – as we expect – the company meets its growth targets, these investments should make up a smaller part of sales going forward. The increasing regulation of investment managers and increased complexity as a consequence of that should be a positive development in terms of opportunities to convert potential customers from earlier programs, which in many cases are self-developed solutions that can make the mandatory reporting to authorities or customers difficult due to lack of functionality, documentation of processes, etc.
While regulation and documentation requirements relating to business procedures in certain industries and companies are seen as an impediment for investment managers, who will require more resources for their operations, this helps drive growth opportunities for SimCorp. Over time, this should lead to significant increases in free cash flows and thus benefit us as co-owners through increased shareholder dividends. The future looks bright.