I was browsing some recent hedge fund letters and came accross an excerpt from Lightsail Capital Management which sounded familiar:

Late in September, we participated in a private financing deal for a small publicly-traded enterprise software company located in a developed market outside of the United States. The company is currently sub-scale, but has a large growth opportunity ahead of it that will required additional capital to pursue, hence hte capital raise.

Despite the company organically growing at 30-40%, generating gross margins above 70%, and demonstrating high customer retention, we were able to make our investment at a price that valued the company at less than 3x its trailing revenues, a multiple virtually unheard of for subscription software companies here in the United States.

This was quickly confirmed to be Cloudcall after review of recent RNS notices.

Cloudcall is a SAAS business which sells subscriptions for a telephony and communications product largely used in the recruitment industry. Cloudcall is sold as an add-on (~$30/month/user) to existing recruitment CRMs including Bullhorn CRM. The business appears to have found a good product-market fit, highlighted by accelerating revenue and user growth (30-40% p.a). A strong moat appears to be built, with a reputable product (observed by online reviews), close (revenue-sharing) relationship with key partners (i.e. Bullhorn CRM) and net revenue retention of >100% indicating very sticky customers. Churn anecdotally appears minimal and however is not disclosed in filings. Lightsail in their diligence with customers and partners confirmed the quality and competitive advantage of the product.

A capital raise was completed late last year with a mix of existing and new US based investors for a total amount of £12m. Modelling some basic growth assumptions, this should be sufficient capital for the business to reach profitability in mid FY21.

Key highlights:

  • Revenue growing at 30% + p.a. This looks very achievable for the next financial year
  • Net revenue retention at >100%
  • Cash balance of ~£13m. No requirement for additional capital raising
  • Market cap of £40m. (valuation ~equal to valuation for capital raise in Q4 2019)
  • Similar businesses (sector, growth rate) are trading in excess of 5-6x trailing revenue
  • Strong take-over/M&A potential (CRM platform, PE?)