ENFN - Enfusion Expands Offerings As Revenue Growth Decelerates

Summary

• Enfusion went public in 2021, raising approximately $319 million in an IPO.
• The firm provides investment management software via a SaaS model to institutional investors.
• ENFN has produced growth and is near operating breakeven, but its revenue growth is slowing, macro conditions are worsening, and the stock may be fully valued.
• I'm on Hold for ENFN in the near term.

A Quick Take On Enfusion

Enfusion ( ENFN ) went public in October 2021, raising approximately $319 million in gross proceeds from an IPO that was priced at $17.00 per share.

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

I'm on Hold for ENFN given its apparent full valuation and slowing revenue growth in the face of worsening macroeconomic conditions.

Enfusion Overview

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, Thomas Kim, who has been with the firm since March 2020 and was previously in management at Bridgewater Associates.

The company's primary offerings include:

• Portfolio Management

• Order Execution

• Accounting/General Ledger

• Analytics

• Technology-Powered Services

• Enfusion Express

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

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

Enfusion's Market & Competition

According to a 2021 market research report by Market Primes, 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 Performance

• Total revenue by quarter has risen according to the following chart:

• Gross profit by quarter has followed the same trajectory as Total Revenue:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended higher, as revenue has increased (the high amount in Q4 2021 was due to stock-based compensation related to the IPO):

• Operating income by quarter has generally been close to breakeven for most of the last 9 quarters:

(All data in above charts is GAAP)

Since its IPO, ENFN's stock price has dropped 32.1% vs. the U.S. S&P 500 Index's drop of around 15.7%, as the chart below indicates:

Valuation And Other Metrics For Enfusion

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

(Source - Seeking Alpha)

Commentary On Enfusion

In its last earnings call ( Source - Seeking Alpha), covering Q2 2022's results, management highlighted growing new customer signings from institutional asset managers and diversification of its client base.

The firm has also launched Enfusion Express, a lightweight version of its flagship system that is aimed at smaller fund managers with under $100 million in assets under management ((AUM)).

Management intends to leverage its partner channel to help distribute this system to a wider market and enable smaller managers that grow to eventually 'seamlessly (transition) to the comprehensive Enfusion end-to-end solution.'

As to its financial results, total revenue rose 38% year-over-year while adjusted EBITDA (which typically excluded stock-based compensation and one-time items) was $5.4 million.

The company's net dollar retention rate was 121.9% (when excluding involuntary churn), indicating strong product/market fit and good sales and marketing efficiency.

GAAP operating losses were $3.9 million for the quarter as the company has generally produced close to operating breakeven in most of the last 9 quarters.

For the balance sheet, the firm finished the quarter with $56.6 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash used was $18.2 million.

Looking ahead, management expects full year 2022 revenue growth to be 35% at the midpoint of the range and adjusted EBITDA margin to be 12.7% at the midpoint.

Regarding valuation, the market is valuing ENFN at an EV/Sales multiple of around 6.8x.

The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.9x at September 30, 2022, as the chart shows here:

So, by comparison, ENFN is currently valued by the market at about equal to the broader SaaS Capital Index, at least as of September 30, 2022.

A primary risk to the company's outlook is lengthening sales cycles in the hedge fund area of its market, which is typically driven by changes in macroeconomic conditions.

A potential upside catalyst to the stock could include a tapering of interest rate hikes by the U.S. Federal Reserve, which may result in improved financial market conditions for its customers and prospects.

Going forward, it appears that revenue growth is expected to drop slightly, so I wonder if ENFN's fastest growth days are behind it.

While the company is near to operating breakeven, its stock appears fully valued when compared to a wider basket of SaaS companies.

I'm not optimistic about overall economic trends over the coming year, so I'm on Hold for ENFN given its apparent full valuation and slowing revenue growth.

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