06/04/2021
All financial figures for IVU in euros.
Enterprise Value €286.5 million
Share price €17.76
Share outstanding 17.719 million
Market Cap €314.7 million
Debt €0
Cash €28 million
Dividend Yield 1.13%
IVU is a German based software company that produces a suite of products designed to help rail and transportation companies manage the logistics of their services and run more efficiently. Over the last nine years the company has grown revenue at a ~10% CAGR, generated gross margin of 70%, grown EBIT at ~18% CAGR, is profitable, has no debt, and has generated an average ROIC of 9% annually. Unfortunately, this company does not trade at a cheap multiple. But that will be discussed at the end.
Overview
IVU was founded in 1976 and went public in 2000. Over its history, the company has developed a suite of software products to help rail, transportation, and logistics companies run their operations. Under the IVU.suite umbrella, these companies can choose different tools to solve a variety of issues, from ticketing, timetables for trains, employee management, accounting, fleet and route management, and more.
The company generates about half of its revenue from customers in Germany, the other half is generated from customers in Europe outside of Germany, and a small sliver of revenue is generated from customers in other parts of the world (South America, Asia, and North America). Most of the revenue comes from rail and transportation companies and a small percentage comes from logistics companies.
Market and Customers
IVU is focused on rail operators and transport operators. There are 500-700 rail operators in the world and all are potential customers. IVU has had the most success in signing the rail operators in Germany, Italy, and Switzerland. DB Regino, Transdev, Netinera, and Abellio own 82% of the German rail market and are all customers of IVU.
IVU’s software has been specifically designed so that the UI is compatible across companies and geographies. Customers of IVU’s software are in Montreal, Peru, Israel, Budapest Vietnam, the U.K., and other countries. Future growth is likely to come from current and prospective European rail companies, but global growth is possible. It is important to note here that none of IVU’s customers cancelled their contracts in 2020. While timing of projects was delayed and regional transportation companies suffered during the global pandemic, the governments regulating those companies all provided financial assistance to keep operations running and contracted projects alive. To put some numbers around government investment in rail, regional German governments will spend 302 million euros this year on rail transportation, €308 million next year, and €463 million in 2024. That amount will continue to increase by 1.8% annually through 2031.
The transportation industry is much more fragmented than the rail industry. While this provides a larger customer base, margins from these customers are generally smaller than rail operators because transportation companies are smaller. Since they are smaller, their software purchases tend to be smaller. The industry’s expertise around software is much lower than the rail industry, making selling more difficult as well.
Revenue
IVU breaks out its revenue into three different segments, 1) goods/services/work contracts, 2) licenses, and 3) maintenance/hosting. The first two segments make up the majority of IVU’s revenue (66%). This revenue is derived from fulfilling the projects IVU wins with customers. It includes the installation of hardware, software and training. The other segment (maintenance/hosting) is the recurring revenue portion of the business (34% in 2020). As you can see from the chart below, these segments are growing faster than overall revenue and increasing as a percentage of total revenue. The drivers of this are 1) IVU introducing a hosting service in 2014 with IVU.cloud and 2) as the company wins more contracts, maintenance services increase. IVU.cloud generates ~8% of the company’s revenue right now but is growing quickly as the rail and transportation industry becomes digitized.
The growth in recurring revenue is an important part of my IVU investment thesis. SaaS has become the adored business model of investors, and rightly so. But SaaS is simply a business model, and not a business strategy. It only works if the software is good, and customers are sticky. I am not a software developer nor am I a rail operator. So, I cannot give a definitive opinion on the software. I can only surmise from the increase in contract sales and the quality of IVU’s customers that the company has developed top tier software. I will also surmise that rail operators are not looking to rip out their software every few years. This is mission critical software and highly integrated into the day-to-day operations of these companies (if anyone reading this works at a rail operator, please correct me if I am wrong). Maintenance & support, and training will continue to grow and increase IVU’s recurring revenue.
Pricing Power
IVU can demonstrate pricing power in two ways. First, because their software is essential to the operations of trains, bus operators, and logistics companies, it is really difficult to rip out the software. IVU’s customers sign contracts with built-in price increases. These contracts have a duration of up to three years and tend to have higher maintenance costs at the backend of the contract. And since it is unlikely that the software gets ripped out, prices can be adjusted in the new contract.
The second way IVU can demonstrate pricing power is by introducing new features and tools to customers. The traditional “land and expand” strategy of many software companies is also used by IVU. IVU.cloud is a great example of this. Introduced in 2014 at the request of Train Italia, companies were at first hesitant to use the service (the cloud in 2014 was not as trusted as it is today). The service now represents 8% of IVU’s revenue and will continue to grow at a rate much faster than the rest of the company’s business segments. IVU is also introducing new features as the European economy transitions to electric bus fleets (this will be discussed more later).
Services
Understanding what IVU’s software does and the tasks it handles can seem basic at first glance, basically making sure the trains run on time. But it is so much more than that. Let us start with the problems IVU is trying to solve. Passengers need to know the timetables for the buses and trains and need to be updated in real time if there are changes. Employees need to know what route they will be running and at what time. Fare collection, ticket processing, and e-ticketing capabilities all need to be handled seamlessly and create as little friction as possible for the passenger. Weather, traffic, and construction updates need to be sent to drivers in real time, so they know how to adjust their routes. Drivers of buses need to know if these changes will result in needing to fuel up the bus earlier than expected or take a bus out of service for maintenance earlier than expected. These are difficult problems to solve that require advanced knowledge of math, logic, software development, and creativity. It is not the same level of difficulty that DoorDash is trying to execute on, but it is close (and we have not talked about the added challenges as European transportation companies are presented with as their fleets transfer over to eclectic engines). Below are the different software products that IVU offers with IVU.suite being the software product that integrates all these products.
Customers have the option to choose their products either a-la-carte or purchase everything with IVU.suite. Rail operators will get a basic package of software products through IVU.rail and they can then add further products in the future. This is how IVU executes its land and expand strategy.
Electric Mobility
A major opportunity for IVU is providing the software for the electrification of Europe’s bus fleet. One of the key factors for Europe to reach its GHG emissions goal is to transfer the continent’s bus fleet from fossil fuels to “clean” fuels (electric and fuel cell). In 2019, Europe had deployed 3,900 municipal e-buses. By 2030, 30% of Europe’s bus fleet must be running on “clean” fuels. Today, there are approximately 900,000 buses working in Europe. EY believes that 42% of Europe’s bus fleet will be electrified by 2030, which equates to ~400,000 buses.
Unfortunately, changing the composition of Europe’s bus fleet is a lot more complicated than simply buying electric buses. First, electric buses have about half the range of diesel buses. Diesel buses can run all day without needing to refuel. Eclectic buses’ range is also much more sensitive to the weather than diesel buses. Also, entire bus fleets cannot be charged overnight because that will wreak havoc on Europe’s grid. For Europe to continue to rely on buses for transportation (55% of commuters rely on buses everyday), these buses will have to be run very efficiently and charged in a coordinated fashion. This is where IVU comes in.
The factors needed to be taken into consideration when running a fleet of electric buses are, but not limited to power supply requirements, planning, and building charging stations, adjusting vehicle workings to suite ranges, integrating charging times, monitoring the state of charge (SoC) and infrastructure, planning charging processes, and dispatching in real-time and learning from data. IVU’s suite of products can be used to address all these factors. IVU.run can adjust routes for weather and construction to optimize range. IVU.vehicle communicates the charging status between bus and headquarters and optimizes charging for cost and future routes. And it is not just eclectic vehicles that can run the IVU.suite software. It also works for diesel and fuel cell powered buses as well. This is not software that is being dreamed up ready for its big day, it is already being deployed successfully in the field.
Another advantage IVU has is its partnership with Daimler. In 2018, the two companies formed a partnership to help each other succeed in the eclectic bus market. As part of the deal, Daimler purchased a little over 5% of IVU’s shares. While Daimler’s market share of the eclectic bus fleet in Europe is very small, it is expected to grow, and the two companies should benefit from each other.
Company Ownership
As of 12/31/2020
Free float: 72.7%
Founders: 22.1%
Daimler Buses: 5.2%
Competition
IVU’s main competitor is the German software company init (ticker: IXX). The company is very similar to IVU in that it focuses on the same types of problems as IVU and addresses them through hardware and software products. Both companies are very focused on participating in the growth of electric bus fleets and building solutions for the problems electric mobility presents. IXX has a larger international presence than IVU with offices across the globe and a larger employee base. The main difference that I can find is that IXX looks to grow its revenue through more projects while IVU is focused on growing revenue through recurring revenue services but still focused on winning projects. This difference is likely why IVU trades at a slightly higher multiple than IXX. The industry IXX and IVU compete in is not a winner take most industry. The pie is growing, and each should be able to succeed.
Valuation
IVU is a wonderful business. In my research I found nothing that made me question the quality of the company or think it has a small probability of continuing to grow in the future. But investing is about more than just finding wonderful companies, it is also important to buy them at a fair price. But figuring out the fair price for a company is difficult. Part of why it is so difficult is because I want the valuation decision to be as easy as liking the company. Unfortunately, that is not the case. Below are current trading metrics for IVU (All based on 2020-year end numbers and stock price of €17.76).
EV/EBITDA: 18.7x
P/S: 3.4x
P/S (recurring revenue only): 9.9x
FCF Yield (2019): 3.6%
P/E: 31.2x
FCF Growth 5yr CAGR: 30%
Again, this stock is not cheap but not overly expensive either. A 5yr reverse DCF shows what assumptions are backed into the stock price right now.
I am comfortable with the margin assumptions because 1) when IVU sold off its IVU.elect product in 2019, it allowed the company to generate 75% gross margins in 2020 and second, increasing revenue from IVU.cloud should continue to help the company generate margins above the historical average. Current revenue guidance for 2021 assumes revenue growth of 9% over 2020 but the company has beaten its revenue guidance in eight of the last nine years and beaten its gross margin guidance every year for the last nine years. The company also targets an EBIT/GP ratio of 12.5%. That target has been exceeded in the last two years (16.9% in 2019 and 18.2% in 2020). But if using an EBIT/GP ratio of 12.5% IVU would have to grow revenue at 21% annually for five years to meet market expectations. In the last nine years, IVU has grown annual revenue above 20% once, which was in 2015. I think IVU can continue to generate an EBIT/GP ratio significantly above 12.5% for the reasons stated above.
To me, the market is properly pricing IVU’s growth prospects and maybe pricing in a slight increase in growth due to growing cloud business. But the market seems to be giving almost no credit to IVU’s electric bus business. That is what makes me comfortable with this company as an attractive investment. I think there is little downside and attractive potential upside if the electric bus business is successful.