Enfusion Faces Cross-Currents In Investment Management Software Market

A Quick Take On Enfusion

Enfusion (NYSE:ENFN) reported its Q2 2023 financial results on August 8, 2023, missing both revenue and EPS consensus estimates.

The firm provides investment management software-as-a-service via its cloud-based system to various types of investment managers worldwide.

I previously wrote about Enfusion with a Hold outlook.

ENFN faces a variety of cross-currents that could materially affect its financial results in the back half of 2023.

So, until we gain increased knowledge about the direction of the firm’s growth and profitability, macro conditions and client behaviors, I’m Neutral [Hold] on ENFN.

Enfusion Overview And Market

Chicago, Illinois-based Enfusion was founded to develop a suite of investment management software functions for portfolio management purposes.

Management is headed by Chief Executive Officer Oleg Movchan, who has been with the firm since 2012 and was appointed interim CEO in August 2022 and then CEO later in 2022.

The company’s primary offerings include:

• Portfolio Management

• Order Execution

• Accounting / General Ledger

• Analytics

• Technology-Powered Services

The firm pursues client relationships through its direct sales and marketing team and informally through referral partners.

Enfusion derives 98% of its revenue via its SaaS recurring subscription software platform and client contracts usually have a term of one year in length.

According to a 2021 market research report by Marketprimes, the global investment management software market was an estimated $3 billion in 2019 and is forecast to reach nearly $4.5 billion by 2025.

This represents a forecast CAGR of 10.2% from 2019 to 2025.

The main drivers for this expected growth are a desire by users to automate repetitive tasks, so they can focus on maximizing portfolio performance and creating more sophisticated approaches.

Also, assessing risks and exposures and being able to efficiently report and share the information with stakeholders will drive demand for more capable solutions.

Major competitive or other industry participants include:

• SS&C

• State Street

• SAP

• BNY Mellon (Eagle)

• Simcorp

• BlackRock

• FIS

• Northern Trust

• Others

Enfusion’s Recent Financial Trends

• Total revenue by quarter has continued to grow moderately; operating income by quarter has remained positive in each of the last four quarters:

• Gross profit margin by quarter has trended lower in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have also moved lower more recently:

• Earnings per share (Diluted) have been at breakeven or slightly positive in each of the last four quarters:

(All data in the above charts is GAAP)

In the past 12 months, ENFN’s stock price has fallen 28.26% vs. that of the iShares Expanded Technology-Software ETF’s (iShares Expanded Tech-Software Sector ETF (IGV) Stock Price Today, Quote & News) rise of 16.48%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $27.8 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash flow was $14.9 million, during which capital expenditures were $7.4 million. The company paid $6.1 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Enfusion

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ENFN’s most recent unadjusted Rule of 40 calculation was 33.9% as of Q2 2023’s results, so the firm needs some improvement in this regard, per the table below:

(Source - Seeking Alpha)

Sentiment Analysis

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited ‘Uncertain’ five times, ‘Challeng[es][ing]’ ten times, ‘Headwinds’ four times, ‘Macro’ eight times, ‘Drop’ three times and ‘Volatil[e][ity]’ once.

This frequency of negative term mentions is a fairly strong indicator of challenging or uncertain conditions for the company and its clients.

Analysts questioned company leadership about delays in conversions and implementations.

Management said that some launch delays were due to operational or funding issues with clients.

Also, analyst Dylan Becker asked how much runway asset managers have for further optimization.

CEO Movchan explained that the dynamics differ between complex hedge funds focused on seat counts vs. traditional investment managers where more usage by portfolio managers and risk managers can expand seat demand.

The firm is also focused on reviewing its pricing structure for various client types, in order to capture as much value as possible.

Commentary On Enfusion

In its last earnings call (Source - Seeking Alpha), covering Q2 2023’s results, management highlighted the sequential growth in its customer base and increasing average contract value.

Also, the company is seeing a ‘healthy bookings trajectory,’ although the back end of the book had been hurt and is now being offset by an improving front end of the book as new customer bookings rose by 44%.

Management noted that the current market environment is characterized by prospects looking for single-source solutions.

The company’s net dollar retention rate was 102%, indicating deteriorating sales & marketing efficiency as customers reduced spending or delayed their fund launches.

Total revenue for Q2 2023 rose 17% year-over-year while gross profit margin fell 3.7%.

Selling and G&A expenses as a percentage of revenue dropped 20.4%, indicating improving sales efficiency and operating income remained in positive territory.

The company's financial position is reasonably strong, with ample liquidity, no debt and positive free cash flow.

ENFN’s Rule of 40 performance has been reasonably good, although in need of additional improvement.

Looking ahead, full-year 2023 revenue is expected to rise 15.1% over 2022.

If achieved, this would represent a decline in revenue growth rate versus 2022’s growth rate of 34.56% over 2021.

On the other hand, management went to great lengths to say that it has good visibility into its near-term revenue and margin outlook.

However, the company faces a variety of cross-currents that could affect its financial results.

So, until we gain increased knowledge about the direction of the firm’s growth and profitability, macro conditions, and client behaviors, I’m Neutral [Hold] on ENFN.

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