Denmark-based SimCorp (OCSE:SIM, Financial) provides integrated software solutions for the buy-side industry worldwide to enhance efficiency, ensure regulatory compliance and save costs. With its system serving over 16,000 daily active users and $19 trillion in assets, the company signed up almost half of the world’s top 100 investment managers, including leading financial institutions, insurance companies, pension funds, wealth managers, sovereign wealth funds and banks. As of fiscal 2018, SimCorp Dimension, the company’s flagship product, captured 15% of the total market (i.e., 25% of the Europe, Middle East and Africa market, 6% of North America and 9% of Asia Pacific and China).
Checking the business model here, we find that a massive portion of the company’s sales is derived from existing customers, mainly through after-sales services such as software updates and support (39% of fiscal 2018 revenue) and professional services (35%). Also, more revenue was generated by selling additional licenses to current clients (14%) than first-time licenses to new clients (9%), demonstrating the stickiness of the business.
Overall, we see that new customers only contribute to approximately 10% of the business annually. The predictable nature of the model protects the company from unfavorable economic conditions. Per the chart below, SimCorp managed to increase both its revenue and operating income year-over-year throughout the financial crisis.
We also notice the cash-richness of SimCorp’s business, as the company delivered more free cash than net profit during many years over the past decade (see below).
SimCorp provides its clients with the flexibility of opting to add on more modules after the sales. This so-called "integrated front-to-end solution" can virtually handle any task relevant to an investment manager, from portfolio management to risk/reporting and accounting/clearing. Such comprehensiveness is precisely what global investment managers increasingly prefer, constituting a significant competitive advantage at SimCorp. At the same time, the switching cost of SimCorp’s mission-critical software builds the economic moat for the business. As the modules are integrated with day-to-day operations and decision-making processes, it would be a headache for asset managers to switch over to another software vendor, which incurs costs of human and financial capital as well as risks of business interruption.
As a result, SimCorp maintains a superior track record in its return of assets, which has been consistently higher than peers (see below), including State Street (STT, Financial), BlackRock (BLK, Financial) and Broadridge Financial Solutions (BR, Financial).
With the industry’s trend of technology upgrades and increasing focus on operational efficiency, SimCorp’s best-in-class product offerings may continue to gain market shares. Both North America (almost as large as EMEA in market size, per the management’s estimate) and APAC (growing the fastest) markets still appear under-penetrated to SimCorp. The company invests 20% of its annual sales in research and development, which widens the moat and fuels long-term growth thanks to its loyal customer base and strong capability of upselling.
Over the past few years, SimCorp managed to steadily grow its annual dividend payout while maintaining a decent payout ratio. The excess cash has primarily been used to buy back shares. Nonetheless, the valuation of the stock rose significantly in the meantime (see below). Therefore, the management might have a challenging time with effective capital allocation moving forward in our view.
Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market; we own shares of SimCorp.
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