Last Thursday, I looked at ways to invest in companies that provide technology and services that underpin “cloud computing” – but this week I want to look at a business model that uses the cloud, and that’s SaaS, or “software as a service.” This is a business model under which customers pay to use software hosted on a remote computer – in the “cloud” – rather than buying a software licence and installing it on their physical computers.

Companies got used to buying licences for software that went out of date quickly, inducing them into expensive upgrades; but under the SaaS model, customers subscribe to a software product that’s continually updated. The software company gets a reliable stream of recurring revenue, and the customer gains flexibility and always-up-to-date software. It is a largely win-win model in which costs to subscribe are comparatively low, customers are very “sticky” if the product meets their needs, and the software providers build up strong recurring revenue and high gross margins. SaaS is a thriving mini-sector on the ASX – here are five members of that cohort that look to offer great value at present prices.

1. Open Learning Limited (OLL, 18 cents)
Market capitalisation: $25 million
Three-year total return: n/a
Analysts’ consensus valuation: 43 cents (Thomson Reuters)

Listed in December 2019, micro-cap online education business OpenLearning is a SaaS stock that is disrupting the centuries-old model of education. The core business is the OpenLearning platform, which the company provides to institutions and educators around the world through a SaaS model: OLL has become one of the world’s largest online learning platforms, with 167 educational institutions as customers and 2.7 million students doing its courses, in more than 180 countries. Although it’s a tiny stock, not many ASX-listed companies have the global reach of OLL. Not only that, OLL is a huge beneficiary of the rapid shift to online learning that universities and educational institutions had to make when COVID-19 hit.

OpenLearning’s founder and CEO Adam Brimo realised that universities couldn’t just put their in-person courses online, they had to focus on learner engagement, connectedness, and a sense of community, to create the kind of learning experience that suited the social-media age – and was designed to supplement face-to-face teaching. More recently, the company launched its new business, OpenCreds, based on “micro-credentials,” which could be a formal qualification, recognition by a professional body, a component part of employer training, part of continuing professional development requirements, or simply, recreational learning. The target for the OpenCreds platform, which is initially being rolled-out in Australia and Malaysia, is any industry where people need to continue to upskill to stay relevant, to stay ahead of technological change and automation, or any industry where there is a high level of professional development – the market potential is huge.

FY20 (year to December) results showed that OLL is growing strongly in terms of SaaS revenue, annualised recurring revenue (ARR), client users and platform enrolments. Profitability is some way off – not before FY23 – but OpenLearning has very solid growth prospects, and the endorsement of some big partners. The one broker analyst with a target in the marketplace is looking for the stock to reach 43 cents.

2. ELMO Software (ELO, $5.29)
Market capitalisation: $478 million
Three-year total return: –0.9% a year
Analysts’ consensus valuation: $8.15 (Thomson Reuters)

ELMO is a cloud-based HR, payroll, rostering, recruitment and performance management software business that is quite typical of the SaaS business – take a set of tasks that your customers cannot escape doing, such as managing staff pay, organising timesheets, ensuring compliance with reams of government workplace regulation – for example, SuperStream and Single Touch Payroll (STP) in Australia, and Payday Filing and KiwiSaver in New Zealand – and set them up such that the processes flow seamlessly without the burden of entering and transferring data entry and transfer. Moreover, the data flow is not only automated, it can be aggregated and interrogated for insights much more quickly than ever before, and the ELMO systems are built to integrate easily with the legacy software systems that customers use. ELMO has more than 1,400 companies and organisations as clients across the Asia-Pacific region. More recently, it has expanded into the United Kingdom.

ELMO slightly disappointed the market in FY20, barely scraping into its revenue guidance range, but the company’s first-half FY21 results looked a lot more promising, with ELO reiterating its expectation for full-year revenues of between $65 million and $71 million (including the newly acquired UK platforms), compared to $50 million in FY20. In the December 2020 half-year, total revenue was up about 30%, at $30.6 million, with annualised recurring revenue up 43%, to $74.2 million. The earnings before interest, tax, depreciation and amortisation expenses (EBITDA) was close to breakeven, at an $800,000 loss. For the full FY21 year, ELO has foreshadowed an EBITDA loss of between $7.4 million and $2.4 million: investors will be closely watching this figure, as a net profit is not expected this year or in FY22.

ELO is tracking pretty well on the usual SaaS metrics – annual recurring revenue (ARR) per subscriber, customer retention rates (currently 90%) growth in the subscriber base, and gross profit margin (currently running at 88.5%). ELMO has a large addressable market opportunity around the world, with the UK expansion in particular moving it into the small-business market. Broker Morgan Stanley reckons the stock is worth $9.70.

3. Whispir (WSP, $3.39)
Market capitalisation: $397 million
Three-year total return: n/a
Analysts’ consensus valuation: $5.00 (Thomson Reuters)

Floated in June 2019 at $1.60, Whispir runs a communications workflow software platform that enables companies and governments to manage, automate and improve their communication processes without requiring specialised technical expertise. The software brings all of the customer’s communication channels – across mobile/email/voice/social/web – into one easily accessed space, so that staff can build customised two-way communications and actions based on certain events or “triggers.” The platform offers easy drag-and-drop templates and app-like mobile engagement so that communication can be pumped out over whatever channel the customer wants, at whatever scale is required, but be delivered to its customers and clients in a personalised and targeted way that is sensitive to individual contexts and preferences. And because it is a cloud-based platform, Whispir generates data and reporting that gives its customers insights into their own customers’ communications preferences and requirements.

Whispir has a customer base in 60 countries, with more than 707 companies as customers. The annual recurring revenue (ARR) has grown at a compound annual growth rate of 30.5% since listing, with a customer retention rate of 97%. The ARR growth rate has accelerated to 58% between the first half of FY19 and the same period in FY21. Whispir says the driver of this is that because the platform is intuitive to use, long-term customers increase their use of the platform, spending more over time – and that this virtuous cycle is driven by increased digitisation. Usage of the platform surged during COVID, as organisations looked for greater control over their business-critical communications. Whispir is right in the sweet spot of the market for digital transformation of businesses, which the company says is a US$336 billion ($442 billion) market that is growing at more than 22% a year.

In its presentation for the March capital raising (which raised $45.3 million) ELO gave the following guidance:

• Revenue: $49.0 million–$51.0 million, which would represent 25%–30% Growth on FY20;
• ARR: $53.0 million–$55.3 million, growth of 26%–31%; and
• EBITDA loss: $3.0 million–$4.5 million, which would represent improvement of 38%–59%.

Again, analysts don’t net profit here until at least FY23. But they are quite bullish on the stock: from five analyst estimates, Stock Doctor distils a consensus valuation of $5.00.

4. Class (CL1, $1.72)
Market capitalisation: $210 million
Three-year total return: –5.4% a year
Analysts’ consensus valuation: $2.40 (Thomson Reuters)

Class Limited, which listed in December 2015, develops cloud-based software solutions for the Australian superannuation, wealth accounting, and corporate compliance markets, specialising in administration solutions that automate manual workloads, driving high levels of processing efficiency and scalability. From the outset the company specialised in software for the self-managed superannuation funds (SMSFs) – Class has become the dominant player in the SMSF cloud software sector, where it claims a market share of almost 30%, and a customer retention rate of more than 99%. According to Investment Trends research in June last year, Class was the fastest-growing SMSF software provider and the most favoured platform for accountants looking to change SMSF platform provider. But Class has also moved into legal documentation and corporate compliance marketplaces.

Class has been on an acquisition strategy recently, buying trust register and corporate compliance software provider NowInfinity in January 2020, corporate compliance and documentation provider Smartcorp in August 2020, and in February, grabbing ReckonDocs, the documentation service of accounting software provider, Reckon. Class says ReckonDocs is a natural fit for its services, and its product range, including company registrations, trust deeds and SMSF deeds, will be incorporated into Class’ NowInfinity platform. Adding ReckonDocs will give Class about 14% market share (by revenue) of the corporate compliance and documentation market segment. Reckon will now focus on small business accounting and payroll and practice management for accounting and legal firms; in fact, the deal will allow Class and Reckon to work as partners, integrating their products to provide a holistic solution to accounting firms.

Class is a profitable SaaS company, earning 6.4 cents a share in FY20, and paying a 5-cent fully franked dividend. Analysts expect that to be maintained in FY21 and FY22, pricing CL1 on a grossed-up yield of 4.1%, but with a $2.40 share price target offering plenty of capital upside, too.

5. Damstra Corporation (DTC, $1.17)
Market capitalisation: $226 million
Three-year total return: n/a
Analysts’ consensus valuation: $1.68 (Thomson Reuters)

Cloud-based workforce management software company Damstra was floated in October 2019, at 90 cents a share, by its management group, which bought it from former owner Skilled Group in 2016. Damstra provides a cloud-based workplace management platform (it also supplies some hardware) which is used by businesses globally to track, manage, and protect their workers and assets. The offering is tailored to each customer: customers buy modules such as workforce management, access control, asset management, learning management and HSE (health safety environment) management. These products are integrated into one platform, allowing users of multiple modules to better track, manage, and protect their workers and assets, through access to real-time data across all modules.

During the first half of FY21, Damstra reported a 29.6% increase in revenue to $13.3 million. The company posted a 4% decline in EBITDA to $2.5 million, but explained this as caused by the acquisition of the loss-making US-based workplace technology business Vault Intelligence (a fellow ASX company) during the period. Damstra expects Vault to contribute about $8 million in revenue in FY21, with predicted annual cost synergies of $4 million.

Damstra has given guidance for FY021 of revenue expectation of $33 million to $35 million, which would represent annual growth of 60% to 70%, and includes the benefits of the Vault acquisition. To put that acquisition in context, broker Shaw & Partners says it is an important one in terms of US expansion: the broker calculates $50m in revenue by FY22 for the combined businesses.

Damstra is not yet profitable, but analysts expect that breakthrough to come in FY22.