Claranova's (PA:AVQ) FY19 results confirmed strong organic revenue growth and margin expansion boosted by the inclusion of the high-growth, high-margin internet acquisitions. The recent acquisition of Personal Creations in the U.S. opens up a new addressable market for the Mobile business and has prompted the company to raise its four-year revenue target. The company is well funded to continue to invest in the business, whether internally or via acquisition.
FY19 results reflect successful Internet acquisitions
Claranova reported 62% revenue growth and 310% EBITDA growth in FY19. Excluding the high-margin businesses acquired by the Internet division at the start of FY19, organic growth was 33% for revenues and 72% for EBITDA. The strong performance of the Internet business resulted in an upward revaluation of the minority interest in that division and a one-off non-cash financial charge of €44.6m. The group generated positive cash flow from operations and reported a net cash position of €23.6m at the end of FY19.
Raising the four-year growth target
Management has revised up its four-year revenue target, aiming for revenues of €700m by FY23 (up from €600m) and maintaining its target EBITDA margin of 10% by that date. We have revised our forecasts to reflect the IoT cost base and the minority interest in the Internet business. We introduce FY21 estimates for revenue growth of 19% at an EBITDA margin of 7.4%, resulting in EPS growth of 44%.
Valuation: Sum-of-the-parts suggests upside
Reflecting the different business models and minority interests for each division, we continue to use a sum-of-the-parts approach to valuation. Based purely on peer group averages per division, we calculate a fair value of €14.08 per share. However, once multiples are adjusted to reflect our views on the growth and profitability of each division, we calculate a more realistic valuation of €13.74 per share (up from €13.41). Factors that could provide upside to our forecasts include faster-than-expected growth of the Internet business (which, in turn, is likely to lead to better profitability), returning Personal Creations to profitability, launch of the PayAware solution and distributors selling myDevices in the US and China.
Share price performance
Business description
Claranova consists of three businesses focused on mobile and internet technologies: Mobile (digital photo printing), Internet (consumer software) and IoT (internet of things). Its headquarters are in Paris, and it has operations in Europe, the US and Canada.
Investment summary
Bringing innovative products to the mass market
Claranova has been through a long period of restructuring and now comprises three distinct businesses taking advantage of high-growth areas of internet and mobile technology: digital photo printing (Mobile), consumer software (Internet) and internet of things (IoT). Key investment considerations are as follows:
The Mobile and Internet divisions are on track to show material revenue and profit growth, with further upside potential from targeted acquisitions.
The Mobile business has an asset-light business model, with all printing outsourced. This gives it significant flexibility to try out new products and new geographical markets without having to make large upfront investments.
FreePrints is a market leader in the US and the UK.
The acquisition of the group of Canadian businesses by the Internet division has given access to new methods of distributing and monetising consumer software, reflecting the shift in consumer attitude towards free or freemium products.
The IoT business has secured contracts with mobile network operators and large distributors with a presence in the US and China, which should bring its IoT platform to a wide audience.
The group is well funded with a net cash position of €23.6m at the end of FY19. Even after paying for recent acquisitions, we forecast net cash of €26m by the end of FY20 rising to €59m by the end of FY21. This should provide funds to support internal investment in growth and/or targeted acquisitions in the Mobile and Internet divisions.
Financials and valuation
We forecast 57% group revenue growth for FY20 (26% organic) and 19% for FY21. We forecast group EBITDA of €28.8m for FY20 (7.0% margin), rising to a 7.4% margin in FY21e. With limited capex requirements, this translates to normalised operating margins of 6.9% in FY20e and 7.3% in FY21e, and EPS growth (on a normalised basis) of 35% in FY20e and 44% in FY21e.
Taking into account the differing growth trajectories and profitability of each division, as well as the different levels of minority investment in each, we use a sum-of-the-parts approach to valuation and estimate a fair value of €13.74 per share.
Factors influencing growth and profitability
In addition to the usual competitive pressures and the requirement to keep abreast of technology, our forecasts and the share price are sensitive to the pace and success of geographic expansion for the Mobile business, supplier dependence for FreePrints’ printing service, changes to search engine policies for the Internet business, integration of acquisitions, and the US dollar/euro and sterling/euro exchange rates.
Company description: Online technology investor
Claranova is a group consisting of three businesses focused on mobile and internet technologies with high growth potential. After a long period of restructuring and refocusing the business, the group is demonstrating strong revenue growth and improving profitability.
Background
Claranova was originally founded in 1984 as a consumer software publisher called BVRP Software. In 1996, the company changed its name to Avanquest and listed on Euronext. From 2007 to 2012, it acquired multiple businesses. By 2013, growth had slowed and the company was loss-making – the decision was taken to restructure the business. The company raised €34.5m in equity in June 2015 through the issue of 345m shares at €0.10 per share. Also in FY15, it wrote off €10.7m of debt and converted €2.6m of debt to equity. As part of the restructuring, the company sold off a number of non-core businesses and restructured the remaining businesses into three divisions:
Mobile – online and mobile photo printing (67% of FY19 revenues).
Internet – online developer and retailer of consumer-focused software; internet traffic monetisation. It is the world’s largest distributor of third-party software (32% of FY19 revenues).
Internet of things (IoT) – platform to manage connected devices in the cloud (1% of FY19 revenues).
In 2017, Claranova organised each division into its own legal entity – this has enabled the company to seek out minority investors in each of the divisions in order to accelerate growth. At the same time, it changed the company name from Avanquest to Claranova. Reflecting its growth ambitions, the company has made acquisitions in the mobile and internet space over the last 18 months.
Group strategy: Monetise internet traffic and connected devices
The company is focused on driving the growth and profitability of each business. Earlier this year, the company unveiled its ambitious five-year growth plan, which is targeting group revenues growing from €162m in FY18 to €700m by FY23 and a group EBITDA margin of 10% by FY23. The original target was to achieve €600m in revenue by FY23, but management has now increased the target to reflect the recent acquisition of Personal Creations in the US.
The Mobile business is exploiting the popularity of photography on smartphones – its FreePrints business enables consumers to order prints of their photos directly from their smartphones in a simple and cheap fashion. It has shown rapid growth, particularly in the UK and the US, and recently launched the service in India and Benelux. Future growth is expected to come from offering its customer base a wider range of products, enhanced by the recent acquisition of online personalised gifts provider Personal Creations in the US. The target for this division is to reach revenues of €500m by FY23 with an EBITDA margin of 5.0–10.0%.
The Internet consumer software business has been streamlined, with nearly all distribution shifted online and unprofitable lines withdrawn. The acquisition of a group of Canadian businesses at the beginning of FY19 has given the division access to new monetisation tools to exploit the number of visitors to its websites. The target for this division is to achieve revenues of €200m by FY23 at an EBITDA margin of 15–20%.
Finally, the myDevices IoT platform is at an early stage of commercialisation. Widespread use of the free Cayenne prototyping tool by more than half a million developers is raising awareness of the platform. Recent contracts signed with mobile network operators demonstrate the first material commercial contracts for the platform and the division is seeing accelerating numbers of installations by end customers. As this division is still at the early stages of revenue generation, it has not been included in the five-year growth targets for the group.
Management
Claranova is headed up by Pierre Cesarini, CEO. Mr Cesarini joined the company in May 2013 to effect the restructuring of the group. He is supported by the management board: Sébastien Martin (CFO), Roger S Bloxberg (CEO PlanetArt, CEO Avanquest Software (North America)), Todd Helfstein (president PlanetArt, president Avanquest Software (North America)), Kevin Bromber (head of myDevices), Olivier Thirion (e-commerce business unit director for Avanquest) and Phil Schnyder (director of online business development for Avanquest). The group is overseen by a Supervisory Board made up of three members: Caroline Le Bigot, Luisa Munaretto and Jean Loup Rousseau.
Mobile: Digital personalisation services
Historically the Mobile business (called PlanetArt) has been focused on providing photo-printing services to consumers. With the acquisition of Personal Creations in August 2019, the business has widened its offering into the market for mass customisation of consumer products. The division aims to provide easy-to-use services with a focus on value for money.
Photo printing: From standard prints to customised products
Photo printing is offered via two businesses: FreePrints, which is focused on printing photos using apps on mobile devices, and Web-to-print, which hosts a number of websites that offer printing services. The two businesses share the same fulfilment infrastructure and marketing teams. The majority of the division’s revenues are currently generated in the US and the UK, with a growing contribution from France, Germany, Ireland, Spain and Italy. The business launched the service in India, the Netherlands and Belgium during FY19.
FreePrints: Exploiting the shift in photography to phones
The first FreePrints app was launched in 2013 (called ‘FreePrints’) and is available for use on Apple (NASDAQ:AAPL) and Android mobile devices. This app allows customers to print photos that are saved on the mobile device or stored on popular websites such as Facebook (NASDAQ:FB), Instagram, Flickr and Dropbox. The offer varies by country. For example, in Europe, customers are offered 500 free prints per year, or 45 free prints per month, for which they pay postage only. In the UK, this works out at up to £4; in Europe, it costs up to €6. In the US, the offer is for 1,000 free prints per year, or 90 per month. The free prints offer is for prints of 6” × 4”/15cm × 10cm – if a customer wants larger prints, different shaped prints (eg square), borders, duplicates or different finishes, these are available for an additional charge. Once an order is placed, customers are then offered extra printing services, such as customised mugs, fridge magnets or T-shirts. Building on the success of the FreePrints app, additional apps have since been launched:
In early 2016, the business launched the FreePrints Photobooks app, which offers a free 20-page softcover photobook every month, again for the cost of postage only (UK c £6, Europe €8). Upgrades are available for larger formats, more pages and for hardback covers.
In FY19, PlanetArt launched the FreePrints Photo Tiles app. This enables customers to order one free PhotoTile (an 8”x8” canvas picture suitable to stick on the wall) per month, again for the cost of postage (£5.99 in the UK). This has so far been launched in the US, the UK, France, Germany, Italy, Ireland and Spain.
This summer, the FreePrints Cards app was launched in the US and the UK. Customers can order one free greetings-style postcard per month and pay just 70p to cover delivery. They can upgrade to a standard card format with envelope for £1.99.
In total, FreePrints-branded apps have been downloaded more than 45m times to date. All of the apps charge for printing on a per-job basis with no subscription required. This business is not particularly seasonal. Overall, 70–85% of monthly revenues come from returning customers; the average order value is in the range €7–8.
First step into Asia with India launch
FreePrints launched in India in September 2018, initially just for photo prints but more recently also for photobooks. Some mobile photo printing apps already exist in India but have struggled with the delivery aspect of the service so have not received good reviews. Claranova is aiming to offer a better delivery service by contracting with a courier company for all deliveries (at a fixed cost), rather than using India Post, as well as using a network of printing companies to reduce the distance that prints have to be shipped. The business has taken a flexible approach to advertising the service, trying different methods to ascertain the most effective, and keeping the cost at modest levels while assessing the economics of the service.
Web-to-print: Most orders originate from mobile browsers
Web-to-print was the original photo-printing service that has been offered by the company since the acquisition of SimplytoImpress in 2010. The business operates through four dedicated websites and generates most of its business in the US.
SimplytoImpress: high style cards and stationery products with text and photos
PhotoAffections: wide variety of personalised photo products
CanvasWorld: turns photos into canvas wall art
MyCustomCase: personalised cases for mobile phones, tablets and other devices
Although called Web-to-print, the majority of orders come from mobile browsers (rather than mobile apps). The business is very seasonal, with a large volume peak in November-December covering Thanksgiving and Christmas. This business typically has a higher order value ($70–80) than the FreePrints business. Customers tend to order less frequently than for FreePrints, typically once a year.
Personal Creations opens up a new addressable market
At the end of June 2019, the company announced that it had made a bid to buy Personal Creations, the online gifts business of FTD Companies, Inc (FTD), for $18.1m in cash. FTD was trading under Chapter 11 at the time. The deal was approved on 31 July and the acquisition completed on 2 August. Personal Creations (PC) operates two websites in the US (www.personalcreations.com, www.gifts.com). It differs from the existing PlanetArt services in that it does not depend on customer photos for personalisation.
In CY17, PC generated revenues of $116m and in CY18 it was reported to have grown revenues by 9% to $126m. In CY18, EBITDA was slightly negative, after several profitable years. Claranova expects Personal Creations to generate positive EBITDA in the first year of ownership, albeit on potentially lower revenues, and sees synergies in terms of marketing and administrative costs. We would expect the management team to focus on integrating Personal Creations into PlanetArt and returning it to profitability before considering expansion beyond the US and would expect the company to consider developing a mobile app for Personal Creations.
Mobile printing market growing faster than web-based
Since the advent of the smartphone more than 10 years ago, consumers have increasingly shifted from taking photos using digital cameras to using their phones for the majority of their photography. This shift is only likely to continue as smartphone manufacturers constantly improve the camera technology on phones – the recently launched iPhone 11 Pro has three camera lenses to provide nearly equivalent functionality to a DSLR camera.
As people tend to have their phones on or close to them at all times, the number of photos taken has increased exponentially. InfoTrends estimates that 1.2 trillion photos were taken in 2017, up 9% compared to 2016, with c 90% taken with mobile devices (85% phones, 5% tablets). The majority of these sit on phones or photo-sharing services such as Instagram and Flickr and are never printed; in 2017 InfoTrends estimates that c 38bn photos were printed (only 3% of photos taken). Mobile apps for photo printing are designed to make the process simple and cheap. Alternatives include buying a home printer, which once specialist paper and ink is factored in, becomes an expensive option, using printing kiosks or uploading photos to web-based printing services.
In 2018, Future Market Insights estimated that the market for global photo printing and merchandise would be worth $16.9bn in 2018 and is likely to grow at a CAGR of 2.6% to reach $22bn by 2028. This masks the shift in distribution channels – in 2018 c 49% of the value is expected to be generated from online services, forecast to grow to 55% by 2028, which implies a CAGR of 3.9%. Within this category, we expect a continuing shift from web-based to mobile app-based printing.
The market for personalised gifts is a much larger than the photo printing market – according to data presented by the company, the personalised gift market is worth c $26bn and is growing at c 10% per annum.
A competitive market with a shifting landscape
FreePrints competes against large, multinational companies such as Snapfish, Photobox and CEWE, as well as local players such as Lalalab in France and Bob Books in the UK. Web-to-print competes against services from larger online players such as Shutterfly, Photobox and Vistaprint, as well as services offered by pharmacies and retailers such as Walmart (NYSE:WMT), Walgreens, Boots and Tesco (LON:TSCO) and by specialist photography companies such as Snappy Snaps and Jessops. The division has seen a slight reduction of competition in this market, as some smaller players have been acquired or left the market, however the recently announced Shutterfly/Snapfish merger is likely to alter the competitive landscape.
Exhibit 3 summarises the main competitors. We note that the Mobile business has no legacy film printing services and does not own any printing or retail facilities. This affords it the flexibility to enter new markets at lower cost and with less risk.
In June, private equity firm Apollo Global Management announced that it planned to acquire Shutterfly for an EV of $2.7bn. Shutterfly had been undergoing a strategic review so news that it was being acquired was not totally unexpected. Linked to this deal, Apollo announced it was also acquiring Snapfish and that it plans to merge the two businesses (the Snapfish acquisition is contingent on the completion of the Shutterfly acquisition) once the deals complete (target Q4). Snapfish is currently owned by District Photo, a large printing company that prints photos for its own brands (Snapfish and Truprint) as well as businesses such as Walgreens, Amazon (NASDAQ:AMZN) and Tesco (LON:TSCO) in the US and Europe. The price for this deal has not been disclosed, although press articles suggest a figure of $300m.
Shutterfly consists of three businesses, only one of which, Shutterfly Consumer, competes with Claranova’s Mobile business in the US. The business offers both web-to-print and mobile printing of both photos and personalised products, with mobile-generated business making up 32% of Shutterfly-branded revenues in its last quarterly results. Snapfish is active in the US and the UK with a presence in France, Germany, Ireland, Italy, Australia and New Zealand. We understand that it has a higher mobile presence than Shutterfly. We would expect that the initial focus for the combined business will be to merge the two businesses operationally while servicing the debt put in place to make the acquisitions. In the short term, we do not expect Claranova’s Mobile business to suffer from increased competition from the merged entity, although it is possible in the longer term.
Focus on customer service to maintain high ratings and rankings
PlanetArt aims to maintain its app store ratings at as close to 5/5 as possible as this is a key factor in consumers’ decision-making when downloading apps. Currently, it is rated at 4.8/5 on both the Apple (NASDAQ:AAPL) App Store and Google (NASDAQ:GOOGL) Play. This compares favourably to competitors who receive lower average review scores on significantly fewer reviews. We note that the Photobox app is not available on Android devices, only iOS. The business also aims to maintain high rankings within both app stores, as this also influences consumers’ propensity to download. For example, in the UK today on Google Play, in the free photography apps category, FreePrints is ranked No. 1, FreePrints Cards No. 5 and FreePrints Photobooks No. 9. On the App Store in the UK, FreePrints ranks as the fourth most popular app in the Photography & Video category, after Instagram, YouTube and Snapchat, – so is in fact the top ranked photo printing app.
Business model
Sales strategy and customer retention
The division targets revenue growth from a combination of growing the customer base and encouraging the existing customer base to order more frequently and buy a wider range of products. The recent acquisition of Personal Creations brings a whole new range of products that could be sold into FreePrints, and vice versa.
Advertising costs are almost completely variable, with spend being dialled up or down depending on the cost of advertising at any given time, and the availability of cash. The division’s experience is that this has a direct relationship with the number of new users acquired.
To win new customers, the division focuses its advertising on Facebook (NASDAQ:FB), where it can use micro-targeting, as well as on Twitter and Pandora (internet radio). Occasionally, the company buys TV advertising. To retain and encourage existing customers to spend, the business sends app notifications and emails with special offers and runs a loyalty programme. It also has a ‘refer a friend’ scheme. The business makes use of the FreePrints customer base to sell the Photobooks, Photo Tiles and Cards services.
The cost to acquire a FreePrints customer is low- to mid-single-digit euros, which, with a typical order value of €7–8, is covered in roughly nine months. Web-to-print undertakes limited advertising, focusing more on encouraging its existing customer base to place orders. The cost to acquire a new Web-to-print customer is around 10 times that of a FreePrints customer, but due to the higher average order value and higher gross margin, the payback is almost immediate.
Logistics: Outsourced printing
The division outsources all printing to one printer in the US and one in the UK. In India, it has set up a network of several printers to ensure national coverage. As the mobile app service is less seasonal, it is able to provide good volumes through the year, not just at Christmas time. During the Christmas peak, it can push delivery out from five to 10 days to ensure stable pricing. The business typically prints on average 50m photos per month. The company has built the IT systems to manage high volumes and if a new country is added, the system can manage localisation.
Minority investment to fund growth
In September 2017, a group of investors including Cap Investissement, the family office of Groupe Riccobono (a French industrial printer), invested €11.4m in PlanetArt in return for a 7.1% stake. An additional €0.8m was invested in April 2018, for a total minority investment of 7.7%.
Mobile Financials: Marketing drives strong growth
When this business was launched, the aim was to reach critical mass without burning significant amounts of cash. It has grown rapidly since launch and moved into EBITDA profitability in FY18. The target now is to generate revenues of €500m by FY23 at an EBITDA margin of 5.0–10.0%. This implies a CAGR for revenues of 29.8% from FY19 to FY23. Once the addition of Personal Creations is taken into account from FY20, we estimate a CAGR of 17.2% will be required to hit the target.
Cost of sales consists of printing costs (including the cost of items such as mugs or T-shirts), shipping costs and payment processing fees. FreePrints earns an estimated gross margin in the region of 35%, with the photo printing service earning an estimated 33–34% (we estimate 23–25% for basic photo printing, 60–65% for add-ons), and photobooks an estimated 40–45%. We estimate that Web-to-print generates gross margins of c 60–65%.
Operating costs include variable costs such as marketing spend, and others that are more fixed in nature: support, marketing staff (staff in the US as well as several people in Paris to manage European marketing), developers, general admin and share of corporate costs (based on revenues). We note that the business hires temps to cover increased support demands during the seasonal peak of the web-to-print business in November and December, which results in higher staff costs in H1.