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Nitro Software Into Global Top Three With Acquisition

Small Caps | Nov 22 2021

This story features NITRO SOFTWARE LIMITED. For more info SHARE ANALYSIS: NTO

Young gun electronic document provider Nitro Software is turning heads with its acquisition of Connective, making it a top global player and laying the foundation for a strong growth outlook.

-Nitro Software entered into a binding agreement for the acquisition of Connective
-The move cements the company as a global top three competitor
-Acquisitional activity and a strong FY21 make for a positive growth outlook

By Danielle Austin

A move by Nitro Software ((NTO)) to acquire Connective has been labelled a ‘game changer’ by industry analysts despite some associated risk.

The transaction is set to complete for US$81m, and Nitro Software has concurrently announced a US$105m equity raising to fund the purchase. The balance of raised equity will fund an additional US$5 in transaction costs and US$5m in integration costs, as well as providing additional working capital for the company.

Connective is the leading e-sign software as a service business in Belgium, with a growing France market share as well as customer bases in a further eleven European countries. Nitro Software highlighted that the transaction will allow it to assimilate e-signature capabilities into enterprise e-signing which it expects can increase the value of its total addressable market by US$11bn.

The deal itself, while in line with company strategy, is slightly more expensive than expected by some analysts. Further, the all cash upfront deal structure does not allow for much protection for Nitro Software if Connective does not perform to expectations.

The announced acquisition comes off the back of a year of strong organic growth for Nitro, which recently upgraded its FY22 revenue guidance to US$49-51m followed a robust third quarter that saw the company grow annual recurring revenue 50% on the year. Wilsons recently noted that given current growth, Nitro needs to only participate in, rather than dominate, business digitisation acceleration to retain its trajectory.

Adding capability to drive growth

Already guiding to strong organic growth, in recent months Nitro has faced increasing investor expectation to deliver more accelerated long-run growth, and the acquisition of Connective accelerates the company’s ability to penetrate the market at a global level. Despite this, Shaw and Partners notes that while the acquisition adds a suite of services to its offerings, failure to reach annual recurring revenue expectations and deliver on potential would likely impact on share price.

The acquisition will allow Nitro Software to introduce Connective’s enterprise e-signing capabilities to its customers, with Connective’s full suite of services including high trust e-signatures, identification verification, workflow and automation, enhanced compliance and regulatory adherence, and private cloud functionality. Evans and Partners noted that the additional capability to Nitro Software’s Contract Lifecycle Management is a step towards a holistic offering for document creation, signing and storage.

The addition of Connective also introduces an additional revenue stream for Nitro given Connective works on a volume-linked revenue model compared to Nitro’s subscription-based model.

Solidifying its global status against sector leaders

According to Bell Potter the acquisition of Connective will confirm Nitro Software’s position as the third global player in e-sign space, alongside dominant sector leaders Docusign and Adobe. With Docusign having a dominant hold on the e-signing market, and Abode holding a similar position in PDF productivity, Shaw and Partners notes that either competitor could aggressively match Nitro’s product pricing if they perceive threat from the company. Currently, Nitro competes with Adobe’s offerings at less than half the cost.

The choice of a European acquisition, as noted by Shaw and Partners, also provides confidence that Nitro is offering a world-leading platform given that it would meet stringent data regulation protection requirements in the region.

Bell Potter retains a Buy rating and target price of $4.50. Accounting for the impact of the Connective acquisition the broker upgrades revenue forecasts by 13% and 16% for 2022 and 2023 respectively, with a modest increase to underlying earnings in 2023 when the broker expects the acquisition to benefit.

Shaw retains a Buy rating and its target price reduces to $4.15 from $4.75 to reflect the dilution from the capital raising, with forecasts largely unchanged.

Evans and Partners retains a Positive rating and its valuation decreases -5% to $6.06 accounting for a higher share count. Revenue forecasts are increased by 18% and 15% for FY22 and FY23, with higher underlying losses given integration costs. The broker notes the transaction almost guarantees years of strong growth.

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