$150m (+22.5m) sen unsec cb coming thur night from RBC/RBS, terms : 5yr 1.25-1.75% up 27.5-32.5% full pctns. UOP = gcp/hedge. Biz is growing and co. recently raised rev + eps guidance. PF Cash = $253m, PF Debt = $150m, Lev = 5.7x, LTM FCF = $32m
Co has solid liquidity from cash & +FCF. We’ll use L+500. 2yr 90d realized vol = 46. ADV = 200k. Can make argumkent for higher, but we’ll cap vol at 33. Theo = 103.5. There may be some concern over secondary liquidity but improving credit story, small deal size and pre-marketed (we hear) all signal success in mkt starving for balanced paper like this. As the captain says, “the bottom line is” you want to be involved. BUY
Cloud-based payment, invoice and document management solution for corp, fin inst, banks.
Small s/w co serving 3 markets: legal spend management, commercial banking, b to b electronic settlement. Benefits from transition to elec-based processes from paper. Has been making small acq to grow biz, recently Intuit’s comm. Bank biz for $20m & Albany software for $32m w/more acq expected. Biz growing & co recentl raised FY13 rev & eps guidance. Recurring rev makes up 71% No revolver, but cash & +FCF provide liquidity.
Our assigned apread L+500
UBS
*** EPAY New Deal Commentary ****
Announces a $150mm senior convert, with talk at 1 1/4 – 3/4 up 27.5-32.5%. Use of proceeds to fund working capital and potential acquisitions. Looks like decent edge in the pricing for credit, no borrow issues and we’re told deal was mainly pre-sounded. Not much in the way of comps out there, but we looked to TRAK at L+475 area, DLLR at ~L+800, and TIBX at L+450 as small/mid-cap convert technology comps geared toward more transactional infrastructure business. Using L+600 implies 31vol in the model and L+650/35 vol (conservative vs. what we’re hearing on guidance) models to a TV of 104.5. Both realized and option vols are in the low/mid 40s, so vol looks reasonably cheap here, too. Co. provides payment, invoice, and document automation services via “the Cloud” (what we used to call the Internet). Primary industry focus is financial services and legal billing. Fundamentally, an increasing amount of revenue being derived from subscriptions and transactions, but co. also gets a lot from service and maintenance on existing clients. Growth strategy is likely to be centered around smaller, bolt-on acquisitions going forward. Meanwhile, organic growth has been running at 8-10% recently. Profit margins are decent at a 50-55% gross margin and EBITDA margins around 15%. Company also has been generating positive FCF. Cash at fiscal 1Q13 was $107mm.
In the market with a $150mm senior convert; px talk at 1 1/4 – 3/4 up 27.5-32.5%. Use of proceeds to fund working capital and potential acquisitions. Looks like decent edge in the pricing for credit, no borrow issues and we’re told deal was mainly pre-sounded. Not much in the way of comps out there, but we looked to TRAK at L+475-500 area, DLLR at ~L+800, and TIBX at L+450 as small/mid-cap convert technology comps geared toward more transactional infrastructure business. Using L+600 implies 31vol in the model and L+650/35 vol (conservative vs. what we’re hearing on guidance) models to a TV of 103.4. Both realized and option vols are in the low/mid 40s, so vol looks reasonably cheap here, too.
The company provides payment, invoice, and document automation services via “the Cloud” (what we used to call the Internet). Primary industry focus has shifted to financial services and legal billing applications. Over the past few years, revenue has been shifting away from higher-margin licensing deals and maintenance/service revs toward subscription and transactional based revenues. For fiscal FY12, subscription revenues contributed 38% of revenues, up from 23% in 2008, while maintenance revs declined to 51% from 56% 4 yrs ago.
Growth strategy has been centered around acquisitions, which we believe the company will continue to pursue. Over the past 3 years, company has spent $133mm on acquisitions which have contributed approx. $50mm of revenues. This implies average takeover multiples of between 2.2-3.1x prior yr sales vs. EPAY’s average EV/sales multiple of 2.7x during this period.
**** Acquisition Analysis ****
USDmm 2010 2011 2012 LTM
Cash Paid for Acqs 18 60 27 56
Ann’d Revs Acquired 8 29 9 NA Note: Based on co. disclosures
Implied EV/Sales multiple 2.3x 2.1x 3.1x NA
Gross margins running at ~54-55% while EBITDA margins have slipped a bit from mid-teens to 11.2% LTM. Looking out to fiscal FY13, analysts expect EBITDA margin to be back in the 16% area on sales growth of 13% (vs. 4yr CAGR of 14%). Employee productivity looks in-line w/ other Internet software companies of similar size. EPAY’s avg rev/employee is $224k vs. a range among comps of $183k (CNQR) to $306k (ADSK).
**** Employee Productivity ****
Mkt Cap Avg Rev/Emp Gross Margin
CRM 21,989mm 365.8k 76.4%
INTU 17,680 501.4k 72.6%
TRAK 1,113 199.1k 44.0%
CNQR 3,519 183.3k 72.5%
ADSK 7,696 306.4k 89.4%
EPAY 880 224.3k 54.6%
Meanwhile, liquidity looks adequate given that company has consistently been a positive cash flow generator before acquisitions. At fiscal 1Q13, total cash/ST invs was $107mm, down net $18mm on LTM FCF of $32mm and cash paid for acquisitions of $56mm. The proposed notes will be the only debt in EPAY’s cap structure and bank does not currently have a revolving credit facility. Pro forma for the notes, debt/total capitalization will be ~13% vs. 22% for the comps.