There were opposing forces in play for Fineos Corp ((FCL)) during the December quarter, including heightened activity as existing clients generated record upgrades amid new deal deferrals as confidence in insurance carriers was eroded by the pandemic.
Ord Minnett asserts the latter was not unexpected in the current macroeconomic environment and it remains a potential overhang for the stock price over the short term. On the other hand, client upgrades demonstrate the value proposition of the platform and reflect the trend towards insurance system digitisation.
There were ten major North American carrier clients that went live during the quarter with eight new installations and seven upgrades of the platform. The broker retains an Accumulate rating with a view to buying the stock on weakness.
Cash receipts were down -6% quarter on quarter while free cash flow improved. Cash costs as a result appear well under control. UBS notes the pipeline of business remains strong albeit the timing of a recovery in insurer investment activity is uncertain.
Moelis expects software sales growth of around 28% between FY21-23, assessing the business is a high-quality vertical software provider that can provide leadership. Software purchasing activity across the industry should normalise during the second half of 2021 and, as the broker explains, the pandemic has likely accelerated the course of legacy system modernisation.
This is being driven by the increased remote location of workforces, regulatory/security requirements and efficiency gains. Global premiums are now expected to grow at 3%.
Macquarie was disappointed with the failure to provide updated FY21 guidance, although, as UBS points out, this is consistent with the company’s previous quarterly reporting. Still, commentary at the AGM suggested the outlook would become clearer in the New Year and Macquarie flags a lack of any follow-up in this release.
Subscription growth guidance of 30% in FY21 was reiterated at the AGM, although Moelis notes EUR/USD has risen nearly 10% since this was originally provided in August 2020.
Limelight Health
Also, guidance is yet to incorporate the contribution from Limelight Health. Limelight Health has now completed rebranding under the Fineos platform and the second phase of the integration plan has commenced.
Research and development costs capitalised in the second quarter amounted to EUR6.9m, up from EUR5.1m in the prior quarter. The increase is attributable largely to the inclusion of the capitalised portion of Limelight Health R&D costs.
Moelis observes this acquisition has enhanced the company’s platform and its position in the key strategic market of North America. The broker assumes around -3% contraction in underlying FY21 revenue for Limelight Health, noting a 10.5 month contribution.
As the platform integration concludes in 2021, and conditions improve, growth is expected to resume and the broker anticipates underlying compound growth of 20% across FY21-23 for Fineos Corp.
Fragmented Industry
Despite having 12 of the top 20 US insurers on its platforms, Moelis estimates Fineos has penetrated just 2% of the software market opportunity in that geography and there are unaddressed opportunities across the broader administration suites such as policy and billing.
Penetration has largely centred on claims software and Cigna is the only client in the top 20 deploying the full suite. The company’s main competitor in the claims & absence categories is ClaimVantage, recently acquired by Majestco, in turn acquired by private equity.
While this recent consolidation is likely to increase the perceived competitive threat to the company, Moelis points out, on a stand-alone basis, ClaimVantage is currently around one third the size of Fineos Corp in terms of software sales.
Moelis, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $4.77 target. The database has four Buy ratings with a consensus target of $4.82, signalling 34.6% upside to the last share price.
