Description
Azeus Systems Holdings (“Azeus”) is an enterprise SaaS business listed in Singapore. Its main product is a board management software called Convene, which allows the company to benefit from SaaS economics: rapid growth, high margins from sticky software and low capex. The company is also developing a product for the Hong Kong government called Convene Records, an electronic recordkeeping system, which is being developed under a HK$1bn contract. In addition to developing a go-to-market strategy for Convene Records outside of Hong Kong, Azeus has also recently launched another piece of software called Convene ESG to assist in ESG workflows. Azeus typically pays 100% of its net income out in dividends, resulting in a healthy dividend yield, likely to exceed 6% this year. Despite rapid growth, several new product initiatives, sticky software economics and shareholder-friendly capital allocation the business trades at just 15.1x EV / EBIT or 4.85x EV / Revenues. Given its revenue growth, this is well below other US-listed enterprise SaaS companies. This valuation is partly explained by a low free float, with the funder and Executive Chairman (Lee Wan Lik) owning 83% of the equity, as well as being listed on the small Singapore exchange in Singapore dollars while reporting in Hong Kong dollars. Additionally the high growth from Azeus products has been somewhat obscured by the stagnation of its IT services business line, which may also be a reason for the current valuation.
A brief history – first an IT services firm and now an enterprise SaaS business
Azeus started off as an IT services firm, but then in 2014 it started selling its Convene board management software because it wanted to diversify its lumpy contract-based revenues. The IT services consist of steady maintenance and support revenue (about HK$50m per year) and lumpy systems implementation and enhancement revenue, the latter having halved over the last five years to about HK$20m today. The Convene software, all funded with internal cash flow, broke even in 2019 and now makes up the majority of Azeus’s revenue. It is currently regarded as one of the best solutions for the board management market. Azeus started by focusing its Convene sales in Asia, the Middle East, Asutralia and Africa where there was less competition. They are now putting greater resources into their sales teams in the large US market as well as Europe. While IT services revenue has stagnated, Azeus’s product revenue has grown rapidly at 32% p.a. since FY20 and currently makes up 80% of total revenue.
With its background in IT services systems implementation, Azeus is well versed in managing large, complex software projects and has built a reputation as being able to work with sensitive organizational and government information. They initially developed Azeus Care as case management software for the UK social care and health services market and have won several government contracts. In 2022 Azeus was awarded the contract by the Hong Kong government to develop their Central Electronic Recordkeeping System (“CERKS”). The CERKS contract involves two phases: 1) customizing Convene Records and deploying it to Hong Kong government departments over 4.5 years to the end of FY27, after which 2) Azeus will service and maintain the software for a further 10 years to FY37. I estimate that only about HK$116m of the HK$633m phase 1 revenue has been received thusfar, leaving substantial incremental revenue to be received over the coming 2.5 years, after which Azeus will receive HK$35m per year in maintenance revenue. As a new revenue stream this is likely to accelerate revenue, albeit temporarily, in the next few years.
With regards to new products, Azeus have assembled a business development team to explore the market for Convene Records beyond the Hong Kong government. This will take time, but if successful it could result in substantial new contracts considering the size of the market. Azeus also started rolling out their new Convene ESG software in FY24. This product is in the early “investment phase” but management have said they’ve been encouraged by its initial reception. This product is designed to streamline the collection and reporting of data by companies for ESG regulatory reasons. Convene ESG is one of the early providers in this space.
Board management software from Azeus: Convene
As the flagship software product from Azeus its worth considering Convene in more detail. It likely contributes most of the product revenue which makes up about 80% of total revenue. Other products include Convene Records, Azeus Care, ConveneAGM and Convene ESG.
Convene is a platform for formal meetings (think board meetings) that require a lot of documentation. It works with online video software like Microsoft Teams and Zoom to “digitize” formal meetings. The software stores meeting documents in a central hub, allowing participants with the correct permissions to access necessary documents securely, annotate them personally or collaborate remotely with other participants. Convene also facilitates the meetings with an agenda, allowing the presenter to control the flow through documents on everyone’s behalf, minutes to be taken (and sent to participants afterwards) and action items to be assigned and monitored after the meeting. The following link provides some idea of how the software works: https://www.youtube.com/watch?v=ACjBeGJRYDw
The board management software sector is fairly fragmented, although there are a few participants that stand out. Although I’d take these numbers with a pinch of salt, the board management market is estimated to be worth about US$3bn and is anticipated to reach US$13bn by 2037 (as per Research Nester). It makes intuitive sense to me that the market would grow over time, as I’d imagine that not many boards currently use this type of software and more will adopt it due to the geographic fragmentation of board members, the move to more online meetings, the desire to become paperless and the increasing focus on online security and compliance. Since board members often sit on multiple boards, word of mouth is also likely to contribute to the growth of this sector.
The main competitors to Convene appear to be:
1. Diligent Boards and BoardEffect (specifically for NPOs), both owned by Diligent Corporation from New York who itself is private equity owned,
2. OnBoard which is privately owned, based in Indianapolis, and run by CEO Paroon Chadha, and
3. Nasdaq Boardvantage bought by Nasdaq in 2007.
Convene’s sales focus has initially been in Asia, Australia, the Middle East and Africa whereas I’d imagine the other major competitors are focused on the US given that’s where they’re located.
The following graphs give a summary of the board management landscape based on reviews from two different research companies - Convene is well-regarding towards the top-right in both graphs:
In terms of both vendor capability and features, Convene ranks highly (based on July 2024 research by SoftwareReviews) relative to its 8 peers in the left graph above:
So in summary, Convene is one of the leading board management software products available in a market that is likely to grow. Its features and Azeus’s capabilities compare well with its competitors, although competition is admittedly quite robust. Convene’s early start in Asia as opposed to the US has also likely given it a less competitive environment in which to grow, although given the size of the US market for board management software, Azeus has increased its sales focus in the Americas more recently. Azeus does not publish churn rates but I’d imagine this software is very sticky – once a board has learnt how to use it they’re unlikely to switch to another product unless the experience is very poor.
A financial history of rapid growth, SaaS economics and substantial dividends
The following table shows a snapshot of the financial history of Azeus over the last 10 years with CAGRs since FY20:
Total revenue growth, although good, has been somewhat obscured by the decline in IT services revenue which used to be the only revenue contributor to the group. Product (SaaS) revenue has grown strongly at more than 30% p.a. since FY20. The decline in IT services has come from (lumpy) systems implementation & enhancement work while the maintenance and support revenue has held very steady at HK$45m to HK$50m p.a. since FY14 (currently HK$52.7m LTM). Given this I’d suggest that a large decline in IT services revenue from here is less likely.
The CERKS project started delivering revenue in FY23 which has boosted recent revenue growth. Its not explicitly split out, but Azeus does provide the split in the table below for its product revenue. I’ve highlighted the revenue that I think largely belongs to the CERKS project since it starts or ramps up meaningfully from FY23 when management said CERKS work started. As mentioned, I estimate this project has so far yielded about HK$116m in revenue (sum of the highlighted items), so there is much still to come in the next few years as the product is deployed. Management estimates that the phase 1 revenue (customization and deployment) will be HK$633m by end FY27, so that leaves another HK$517m revenue for CERKS by FY27. And since Azeus is probably fully staffed for this project and the customization work is complete, I suspect much of this additional CERKS revenue will drop to the bottom line. Note that the deployment license revenue is dependent on the number of users in each government department and the HK$633m is management’s estimate.
Convene ESG had its first full year of sales in FY24. The contribution to total revenue is still very small but this could further boost growth in the coming years, in addition to any success from the sale of Convene Records outside of Hong Kong.
Gross margins have steadily improved as product revenue has become a larger portion of total revenue. This has meant that gross profit has grown faster than revenue at 23.9% p.a. since FY20. There was a change in the accounting treatment of research & development from FY20 onwards, where it was taken out of cost of sales and treated as an operating expense. This resulted in a boost to the gross margin between FY19 and FY20.
Most of “Other gains / (losses)” stems from currency exchange with the exception of a bad debt allowance in FY24 of HK$2.7m and HK$3.9m provision for impairment of VAT receivables in FY22.
Research & development expenses are substantial, but its growth has not quite kept pace with the growth in revenue. This R&D spend has borne fruit resulting in several new products over the last 10 years, namely Convene, ConveneAGM, Convene ESG, Convene Records and Azeus Care. Azeus has an advantage over their Western-based competitors since they source development and engineering employees from cheaper markets in the Philippines, Malaysia and India. This likely allows them to earn higher margins and / or offer a more competitively price product.
Azeus understands the need to invest in selling & marketing ("S&M"). They have recently increased their investment in the US, South American and German markets. Given the size of these markets and the competiveness of the Convene product, this should hopefully bear fruit in the form of additional sales. Here is their latest geographical sales split for H1 of FY25 – note that this includes IT services as well as the CERKS project:
Net income has grown strongly, especially since FY20. This recent strong growth is a combination of the revenue growth and the improved net income margin which has gone from 7% in FY20 to 29.2% in H1 of FY25. Revenue growth from Azeus products (as opposed to IT services) has driven this margin expansion.
Free cash flow has kept pace with net income, showing the quality of earnings. All R&D and S&M spend is expensed leaving almost nothing in the form of capex spend. This accounting treatment arguably understates the company’s true earnings since capitalization and amortization of this R&D and S&M spend would likely be a more accurate view of the company’s earnings given that this spend is almost exclusively for growth purposes.
The company aims to pay out between 50% and 100% of net income from the prior year in dividends, depending on their need for cash internally. In some years it exceeds the 100% level. This has meant that the dividend growth has kept pace with the growth in net income (given that the share count has remained unchanged at 30m for the last 10 years). FY25 should see the business posting more than HK$110m in net income so a dividend payout at 100% would result in a yield of over 6% at current prices. This 100% payout seems feasible considering the healthy cash position of the business at present.
Valuation
As mentioned, the business is attractively valued relative to other SaaS businesses listed in the US. Arguably there are some good reasons for this, most notably its listing in Singapore and small free float, but I don’t think that justifies its current valuation. The following graph (credit to Fairlight Capital for this way to illustrate valuation from their Azeus pitch in 2021 – worth a read) shows this relative valuation, with those companies meeting the Rule of 40 criteria (revenue growth + EBITDA margin > 40%) in green:
Note Azeus (“BBW”) is at the bottom-right of the graph with it 4.85x EV / Sales and 35.7% LTM revenue growth. It comfortably meets the Rule of 40 criteria at 67%. On a purely relative basis, one could argue that Azeus should be valued between 10x and 20x sales which is 2x to 4x its current valuation. I’m not saying I expect a multiple rerate since BBW has hovered between 4x and 6x EV / Sales since October 2021, but what I am saying is that you’re getting the business at a reasonable price given its growth, margin and cash flow dynamics.
Another way to look at this is on an earnings basis. Of the 67 companies in the graph above, if I only consider the 28 with positive earnings then Azeus has the second lowest EV / EBIT multiple at 15.1x with the 28 companies averaging 91x EV / EBIT. Perhaps a sign of where we are in the cycle. But a 6.6% pre-tax yield for a fast-growing enterprise SaaS business with growth ahead of it seems underpriced. And since all of the R&D and S&M expenses are expensed, you get this yield (after tax) back in your pocket in the form of dividends, in addition to the future growth.
Risks
The main risk I can see is that the Convene revenue growth slows down dramatically (there is significant competition) and that Azeus has no success with its Convene ESG sales or any Convene Records sales outside of Hong Kong. In this case the multiple may come down (despite not being very expensive now) but one would assume that management would reduce spending on R&D and S&M. This would boost earnings. If management cut these R&D and S&M expenses by 50% then the share price could remain unchanged despite the EBIT multiple falling to 10.7x. However, I think this is unlikely because the market for Convene is likely to continue growing and Convene is one of the best offerings available. Azeus is also committing increasing resources to their sales efforts. I also think Convene Records has a solid use case given that the Hong Kong government has adopted the software. The market for this type of software is likely very large. Lastly the Azeus team is constantly on the lookout for additional software to maintain their growth, and they’ve proven that they are able to execute once they identify a need. Their IT services business will also provide them with insights into the problems that companies need solving.
A question that is often raised is why Microsoft or Zoom wouldn’t add board management solutions to their online meetings products. Although the Convene product embeds video meetings into its software (often integrating with Teams or Zoom, but also offering their own video solution) its core offering is focused on pre- and post-meeting communications, documentation storage and handling, page synchronization, security, collaboration, minutes, audit trails, signatures and voting (this page does a good job of explaining the differences: https://www.azeusconvene.com/articles/board-portals-and-video-conferencing-in-board-meetings). Teams and Zoom are focused on informal meetings as opposed to this formal meeting niche. I don’t think the size of the prize is worth either of these organizations pursuing this niche, especially given that they’re late entrants into the space. The switching costs (of learning a new application) also make it difficult for one of these companies to take the portion of the market they’d need to make it worth their while to pursue an offering.
Lastly, any mention of Hong Kong raises the eyebrows of most investors due to the political risk of companies listed in or doing business in China. I think the fact that Azeus is listed in Singapore protects it against direct government interference at a company or stock level. And although a substantial portion of Azeus revenue comes from Hong Kong, I think pulling the plug on a project like CERKS part-way through implementation (due to political interference) is likely as damaging to the Hong Kong government who rely on Azeus to maintain CERKS. Then there are the Convene licenses sold to companies in China which should probably continue to be used as long as those companies have become reliant on the software. Also, in the case of geopolitical tensions the Chinese government is likely to view a Singaporean company differently to a US company when deciding on potential retaliation. So although there may be some risk, I don’t think its at nearly the same level as investing in a company like Alibaba.
Conclusion
Azeus is a leading enterprise SaaS business trading at a fair (even cheap) price that is growing fast and paying all of its net income out to shareholders. The board management market is growing and Convene is a key competitor in that market. Azeus also has extensive experience dealing with large organizations and governments which positions them well to produce software products for these entities. CERKS is one such product that will drive revenue in the coming years, after which Azeus will manage the software for the foreseeable future. By leveraging its cheaper labor from the Philipines, Malaysia and India, Azeus is also developing other products for the enterprise market to continue its growth trajectory, like their Convene ESG product that is going into its second year of sales. Although I’d prefer the shareholding to be spread around more, especially for the CEO to own some equity, the 83% shareholding by the 62-year-old executive chairman and founder does create alignment with shareholders. The benefits of investing in Azeus seem to far outweigh the risks.
