OTRS (DB:TR9)
German ITSM software + service provider. ROIC 40%. 91% recurring revs. Founder (70%) led. 30m market cap. 11x EV/EBIT or 2x sales. Value with a catalyst.
I’ve decided to only post the ‘elevator pitch’ section of my writeup to substack to lower the workload of transposing a document to Substack (I write the first cut in google docs, hence the PDF). Takes time and I really CBF. The full writeup along with my views on the Company’s key ratios, products, competitive landscape, moat, risks, and comparative analysis to peers can be obtained here as a PDF. In the meantime, to give you a flavour of this month’s company, read on.
OTRS (TR9.DB) is an IT software and managed service business based in Germany, operating globally. It has three software products, but the primary one is an Information Technology Service Management software package called OTRS. It is a service desk system which manages email inboxes and telephone inquiries in companies with high volumes of electronic or telephone inquiries. In addition to the sale of software, it has a tiered service offering, increasing in cost for each tier which has more storage size and responsiveness from the OTRS team. OTRS AG is the owner of the source code to OTRS and the world’s largest service provider for the OTRS service management suite. With that said, its not a straight software company: 49% of revenues are generated from managed services.
As a microcap at ~30m EUR, it trades at 11.4x EV/EBIT or 1.8x EV/Sales. It has a return on invested capital of 41.3% and a return on common equity of 36.2% both of which have grown steadily over the last 4 years. It has gross margins of 30% which is lower than other direct ITSM software companies, but higher operating margins - suggesting strong cost control (which is echoed by management in the annual reports). The Company has been around since 2001 but listed in 2007. Interestingly it used to have an open source product but recently announced going forward they would only be supporting/developing a paid product which has boosted revenues, income and returns on capital. This suggests to me that the 1) Company has strong pricing power, as clients are prepared to pay for OTRS software + service when there are free alternatives available and 2) management is capable of making drastic pivots in strategy to enhance profitability. The company has no debt and the founders hold 70% of the company. The founders remain involved - one is the CEO and the other is the COO.
The product sits as a small player in a market dominated by 5 larger ITSM software companies (Servicenow, Atlassian, LogMeIn, BMC and Ivanti). While the company is small, its clients are not. They include BSI (German Federal Office for Security in Information Technology), the Max Planck Institute, Toyota, TUI Cruises, Lufthansa, Airbus, IBM, Porsche and others. In 2016, OTRS was in use at more than 40% of the DAX 30 companies.
I like to think of this as a value investment, with a catalyst. Rare we get one in software. The catalyst is that the free/open source version of the software has been discontinued in late 2020, and the upside potential is that users migrate to the paid version. To an extent this has already played out, but I believe the catalyst is still unfolding and the market has not yet recognised this. The company is small and misunderstood, with no analyst coverage. It doesn’t have a cash flow statement / accounting standards are different. Many will assume that the business offers open-source software and is primarily a services business with low margins. While this was a once correct view, now the company is transitioning into a priced software company with a high percentage of recurring revenues (more on this later) and high returns on invested capital. Profit has been boosted. Revenue is growing steadily in the low teens (in line with management objectives to grow slowly but steadily). Costs are under control. Admittedly, this has partly been recognised by the market, which has produced a 300% return since the priced software was released. Maybe I’m a little late, but I don’t think I’m too late! Great stocks rarely come without friends, and the company is still optically (and historically) cheap. I initiated a position at 13 EUR and averaged up on recent weakness in price. My average cost basis is now 15 EUR which is slightly below the current market price.
Read the full write-up here (skip the summary / pitch - you’ve just read that part!)