How long have you held Rhipe Limited?
Naos initially invested in Rhipe in June 2014. At that stage the company had only been listed on the ASX for about six months.
What do you like about it?
Rhipe is poised to benefit from the growing trend of software as a service, part of the wider cloud-computing trend. Being a ‘managed services’ business, Rhipe acts as a partner to large software vendors such as Microsoft, Citrix & VMWare and is an important cog in these vendors ‘go to market’ cloud based strategies.
A recent round-up by Forbes on the evolution of software as a service indicates revenues from this sector are forecasted to reach US$106 billion in 2016, increasing 21% over the projected 2015 spending levels. The research stated spending on cloud infrastructure and platform spending would grow at 30% compound annual growth rate from 2013 to 2018 (compared to just 5% growth in spending for overall enterprise IT).
Further research from International Data Corporation (IDC), predicts by 2020 cloud computing will ultimately stop being called clouds – it will simply become the new way business is done and IT is provisioned. IDC research indicates the global cloud infrastructure is super-scaling and becoming the launch pad for infrastructure innovation. As a result, hardware vendors’ innovations are shifting to ‘cloud first’. Microsoft is a leader in the roll-out of cloud-based services with Microsoft 365 being the primary vehicle for many businesses looking to build their service offering. It is said that over the next 12 months it will be virtually impossible to buy Microsoft software ‘off the shelf’ in a CD format. The only option for software download will be via the 365 interface, which is where a company such as Rhipe comes in.
How is Rhipe better than its competitors?
Rhipe is unique as it operates solely in ‘cloud only’ technology. The provision of services utilising traditional technology platforms does not form part of its service offering.
The focus of the company’s offering is threefold;
- Selling and implementing cloud based solutions to enterprises
- Providing professional services & support to enterprises with regards to cloud-based technology; and
- Providing billing, software asset management and license optimisation for end users as well as lead generation for Channel partners (vendors) such as Microsoft, Citrix, VMWare.
Rhipe’s positioning is dominant in the Australian marketplace and is growing significantly throughout Asia as a result of software vendors, such as Microsoft, developing out their regional cloud endeavours.
From a vendor perspective Rhipe has expanded its relationships with these software vendors whilst more and more vendors are wanting to use Rhipe. From a customer perspective, Rhipe’s customer loss rate is minimal and growth rates are consistently strong. Both of these perspectives provide evidence to suggest Rhipe is doing its job well and has been doing its job well for many years.
What do you like about its management?
A new CEO has been brought into the business within the last 12 months who has significant and relevant experience in all forms of businesses within the technology sector. This includes running, growing and selling his own businesses to working with Larry Ellison at Oracle, to working with prominent private equity backed businesses such as MYOB. The CEO does a good job of explaining the Rhipe business in a manner which the investment community can understand and quantify. His experience, contracts, enthusiasm, clear thought process, and approach to risk mitigation are all qualities we like.
The board is headed by Chairman Mike Hill who is part of Ironbridge Capital. Ironbridge were responsible to the listing of the company and did significant due diligence on Rhipe prior to listing which helps to provide comfort around the business.
What is your target price on Rhipe Technologies?
It is difficult to provide a defined target price Rhipe at this point on time given there are significant tender opportunities with Microsoft for which Rhipe is awaiting outcomes in the short term. A scenario analysis on the growth opportunities therefore produces different target prices. In saying this, we see no reason why the underlying business of Rhipe for which they have been operating for many years won’t continue to grow in line with historical rates at around 40% p.a. Given a relatively scaleable cost base this would see substantially higher growth rates at an earnings level.
At what point would you sell it?
This will be linked to the above mentioned outcomes so hard to provide you with a clear point in time. We will continue to assess our view of ‘fair value’ over time and manage our position according to where that sits relative to its share price.
How much has it added to your overall portfolio over the last 12 months?
Bought in June, added in December when the company raised money for purchase of a strategic acquisition.
Is it a liquid stock?
For a company that is capitalised at around $167m, its liquidity on the ASX is currently quite good – turning over about 200,000 shares a day.
Where do you see its value?
Fundamental to our investment thesis for Rhipe is that the company offers a differentiated service offering to others within the technology sector. Rhipe presents similar characteristics to a utility provider; a key part of the business performs as a usage aggregator, billing patrons for services used, as well as providing essential value added services to customers. Therefore presenting Rhipe with recurring revenue streams (which are consistently growing at 40% p.a.) which must be said is quite rare amongst comparable small cap tech stocks. Further, Rhipe’s customer base is incredibly sticky as the usage of the customer base increases so does their dependence on Rhipe’s business offering. By investing in Rhipe we are not trying to pick the ‘next big thing’ in the technology sector. Rather, in its simplest form, we view our investment as a ‘no frills’ approach to the adoption of cloud software by businesses and customers.
Disclosure
NAOS funds are shareholders in Rhipe, owning approximately 1% of the company.
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