ENFN - Enfusion: Still Bullish Considering Q3 EBITDA Beat

2023-11-08 02:22:50 ET

Summary

• Enfusion's EBITDA expanded by +48% YoY in Q3 2023, which was +6% better than what the market had expected.
• ENFN's long-term prospects are favorable, taking into account the room for revenue growth and profit margin improvement.
• I retain a Buy rating for ENFN stock, in consideration of its good recent quarterly results and positive financial outlook.

Elevator Pitch

My investment rating for Enfusion, Inc. ( ENFN ) stock is a Buy. Previously, I identified a number of positive re-rating catalysts for ENFN in my earlier June 20, 2023 initiation article .

With this latest update, I perform a review of Enfusion's most recent quarterly financial results and assess the company's business outlook. ENFN's third quarter EBITDA beat and its favorable mid-to-long term prospects imply that the stock is worthy of a Buy. As such, I remain bullish on Enfusion as an attractive investment candidate.

Analysts' Consensus Q3 Financial Forecasts For Enfusion

ENFN revealed the company's third quarter financial performance with a press release issued on November 7, 2023 before the market opened. Prior to Enfusion's actual Q3 2023 results announcement, the market had anticipated that the company will achieve positive revenue and operating earnings growth on a year-on-year basis.

With regards to revenue, the sell side had estimated that Enfusion's top line will expand by +12% YoY to $43.9 million in the third quarter of this year. With respect to operating profit, Wall Street saw ENFN's EBITDA increase by +40% YoY to $7.6 million (source: S&P Capital IQ ) for Q3 2023.

In the subsequent section, I detail how ENFN's actual financial performance for the third quarter compared with the market's consensus financial projections.

Above-Expectations Top Line And EBITDA For Third Quarter

Enfusion did deliver top line and EBITDA expansion in YoY terms in the third quarter of the current year.

The actual Q3 2023 top line for ENFN was $44.4 million, which was equivalent to YoY and QoQ growth rates of +13% and +4%, respectively. Enfusion's third quarter revenue beat the consensus forecast of $43.9 million by +1%.

Enfusion's actual third quarter EBITDA of $8.0 million turned out to be +6% above the sell side's consensus projection as per S&P Capital IQ data. This translated into a +48% YoY jump in ENFN's EBITDA for the most recent quarter.

At its third quarter earnings call , ENFN attributed the company's top line beat to "very aggressive market share capture."

Key Factors Contributing To Enfusion's Market Share Gains

Enfusion also disclosed at the company's most recent quarterly results briefing that it registered an impressive "53% (EBITDA) pass-through rate on incremental revenues" for Q3 2023, which is consistent with its 45%-55% pass-through goal. In other words, positive operating leverage and excellent cost management have helped ENFN report higher than expected EBITDA in Q3.

The market responded favorably to Enfusion's good set of results, as ENFN's share price went up by almost +4% from $8.28 at the end of the November 6 trading day to close at $8.60 as of November 7.

Favorable Financial Outlook

Enfusion stuck to the company's existing full-year fiscal 2023 financial guidance after announcing its recent Q3 results. In specific terms, ENFN is expecting its revenue and EBITDA to expand by +15% and +57% to $172.5 million and $31.0 million, respectively as per the mid-point of its management guidance.

Looking forward, I am of the view that Enfusion has the potential to grow its revenue and EBITDA in the intermediate to long term.

There are three reasons why I believe that ENFN has yet to fully realize its top line growth potential.

Firstly, Enfusion's FY 2023 revenue guidance of $172.5 million is merely 1.5% of the $11.5 billion spent on "software & IT services" in the "investment management" industry every year as per third-party research that ENFN had cited in its Q3 results presentation slides .

Secondly, ENFN is still in the process of growing the company's presence in foreign market such as Europe. Last year, Enfusion derived 63%, 24%, and 13% of the company's revenue from the Americas, Asia Pacific, and EMEA (Europe, Middle East, and Africa) geographic regions, respectively.

Thirdly, there is a good chance of Enfusion's future revenue growth surprising on the upside, assuming that ENFN engages in inorganic growth initiatives. ENFN revealed at its Q3 2023 results call that potential acquisition targets could be those businesses that "allow us to get into areas where Enfusion is not currently represented or doesn't have capabilities to sell."

In terms of profitability, Enfusion's EBITDA margin for Q3 2023 was 18.5%, but the company is targeting EBITDA margins in the 30%-40% range for the long run as per its management commentary at the recent quarterly earnings briefing. ENFN also guided for EBITDA margin expansion in FY 2024 without offering specific quantitative numbers.

As I indicated in the previous section, operating leverage should be the most important driver of profitability improvement for ENFN. As Enfusion continues to gain share and expand its top line on a substantial fixed cost base going forward, it is reasonable to expect ENFN's profit margins to be higher over time.

Closing Thoughts

I have a positive opinion of Enfusion's better-than-expected Q3 2023 EBITDA and the company's reiteration of its full-year financial guidance. Moreover, I view ENFN's shares as undervalued, taking into account its consensus forward next twelve months' EV/EBITDA of 17.6 times and the company's consensus FY 2023-2025 EBITDA CAGR estimate of +42.8% (source: S&P Capital IQ ). Enfusion is undervalued and deserving of a Buy rating, as its EBITDA multiple is lower than its expected EBITDA growth rate.

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