Summary of a broker research note issued this morning. Dropsuite...

Summary of a broker research note issued this morning.

Dropsuite Limited (DSE.ASX)
Annual Recurring Growth
1. DSE is a global business that operates in a large and growing market.
2. DSE’s technology is user friendly, robust and scalable.
3.  Exceeded 300,000 users as at 14 June 2018, representing 20% growth month over month.
4. Strong gross margins of 75%+, with significant operating leverage
5. Management team with impeccable credentials, with CEO, Charif el Ansari, ex Dell and formerly the Head of Google APAC
6. On track to cross over to profitability by the end of CY 18, and finish the year with an annualised recurring revenue run rate (ARR) of $7.5m.

Investment Thesis

DSE is a high growth SaaS business boasting over 300,000 users globally of its Website and Email Backup products.  The product is scalable and affords DSE gross margins > 75%.  The uniqueness and value proposition of DSE’s product is exhibited by the calibre of its key partners (eg. UOL, Ingram Micro, GoDaddy, Hostpapa etc) who have selected and integrated with DSE to offer their backup products.

Revenue grew by 94% in CY17, and is forecast to continue to grow by over 90% in CY18 and CY19.  DSE has declining cash burn and is moving rapidly towards break even. We forecast DSE to reach profitability by the end of CY18, and should generate over $3.0m of annualised EBIT by December 2019.

We expect DSE to sign new and significant partnerships in the coming months, with a number of prospective opportunities in Europe and North America nearing a point of execution. This news flow will validate the growing demand for DSE’s product suite, adding to an already strong growth profile.

DSE offers the attractive growth profile of a SaaS business, that is trading on an CY18 ARR multiple of 7.1x

DSE has a highly competitive product offering. They have achieved a strong success rate from numerous competitive tender processes. Feedback from users has been glowing.  The system is robust, scalable and has a user friendly front end.

The uniqueness and value proposition of DSE’s product is exhibited by the calibre of the key partners (eg. UOL, Ingram Micro, GoDaddy, Hostpapa etc) who have selected and integrated with DSE to offer their backup products.

DSE should continue to see strong operating leverage over the coming years, with costs largely fixed. We anticipate costs should grow in the single digit percentages over the next few years, in contrast to revenue which should grow at a CAGR of 90%. This should result in breakeven being achieved by the end of this calendar year.

User growth is accelerating with the launch of DSE’s Email Backup product.  Management have indicated that by the end of CY 2018, the Email Backup product should takeover Website Backup as a larger proportion of DSE’s subscriber base.  Importantly, Email Backup has an addressable market that is exponentially larger than Website Backup and offers the opportunity for an improvement in ARPU.

Given DSE’s growth profile, competitive product offering, global distribution, large addressable market and moderate valuation, we believe that DSE represents an attractive investment opportunity.