A global provider of software solutions for the insurance industry, replacing the insurance legacy systems and creating a sticky, wide moat, mission critical new software company.

We’re usually drawn to single digit P/E’s but SPNS P/E ratio of 20 and EV/EBITDA of 10 (2016E) comes on the back of a very high quality company in a unique business. A breakdown of the revenue by quarter (Left chart) in the past decade demonstrates the systematic growth of ~17% in the last 5Y accompanied with an operational leverage (right chart). Growth is based on extremely long-term customer relationships, recurring revenue and operational excellency in an endless global market with a 11K insurance companies and addressable 25B$ market.

Letter to investors May 2016 Eng

The company simply has a metaphorical crosshair on its back, when it comes to private equity shooters. The balance sheet is cash rich, carrying a total net financial asset of 100M$ – 17% of market capitalization.

An important element is the fully owned subsidiary named Decision. Its enterprise software allows businesses to transform their inner logic into a centrally controlled strategic asset in the shape of Decision’s software. We can name a wide range of optimistic valuations for Decision, as it grows even faster than sapience and has clients such as JPM and Barclays. The company is still heavy on OPEX though, due to the early stage of its business life (high S&M => negative OP). Although we are patient, it is interesting to note that sales are estimated at more than 20M$ and comparable enterprises are trading for 5 times Sales. This gives us a price range between 50-150M$. Although I hate to use the sales multiple, there is no other practical way of estimating it.

Leaving the cash balance and Decision aside, Sapience trades at an EV/FCF ratio of 18.1, 13.9, 11.7 for the next three years. In this case particularly, we have a clear visibility to the future, as 85% of each year’s sales are pocketed on January 1st, due to sustainable recurring revenue.

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This post is excerpted from the Reading Capital May 2016 Letter to Investors.

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