Craneware plc (LON:CRW): A Closer Look at the Fundamentals Behind the Stock's Decline

Over the past year, the technology sector has experienced a significant rally, with many stocks reaching new highs. However, not all technology companies have benefited from this trend. Craneware plc (LON:CRW), a UK-based software company specializing in healthcare solutions, has seen its stock price decline despite the broader market's upward momentum. In this article, we will take a closer look at the fundamentals of Craneware plc to understand the reasons behind its stock price decline.

Craneware plc operates in the competitive healthcare technology sector, offering automated value cycle solutions, including 340B management, to US healthcare providers. The company combines revenue integrity, cost management, 340B performance, and decision enablement into a single, software-as-a-service (SaaS)-based platform. Despite its innovative offerings, Craneware plc's stock price has experienced a decline of -8.51% over the past month and -2.93% over the past three months. Several factors may be contributing to this decline:

1. High Earnings Multiples: Craneware plc operates with high earnings multiples, with an expected P/E ratio of 51.09 and 40.49 for the current and next fiscal years, respectively. This suggests that the company's stock price may be overvalued compared to its earnings.
2. High Enterprise Value to Sales: The company's enterprise value to sales ratio is high, at 3.59 times its current sales. This indicates that the company's valuation is relatively expensive compared to its sales.
3. High Valuation Given Balance Sheet Size: Analysts have noted that the company appears highly valued given the size of its balance sheet.
4. High Valuation Given Cash Flows: The company is also considered highly valued given the cash flows generated by its activity.
5. No Dividend or Small Dividends: Craneware plc pays small or no dividends to shareholders, which may not be appealing to investors seeking income.
6. Negative Revisions to Analyst Opinions: Over the past twelve months, analysts' opinions on the company have been revised negatively, which could indicate a decrease in confidence in the company's prospects.
7. High Debt Levels: Some analysts have raised concerns about the company's high debt levels, which could pose a risk to its financial health.

Despite these weaknesses, Craneware plc continues to trade at what some analysts consider to be an expensive valuation. At current share prices near £21.50, Craneware plc has a market cap of £752 million. After netting off the £137.39 million of cash and £1.14 billion of debt on Craneware plc's most recent balance sheet, the company's enterprise value is £8.27 billion. Versus Wall Street's £137.39 million (+14% y/y) revenue consensus for the current year, Craneware plc trades at a steep 60.0x EV/FY21 revenue multiple. Given its slower growth and lower margins compared to most software peers, Craneware plc's valuation seems unjustified.

The bottom line here: With so much uncertainty over Craneware plc's ability to defend its current territory, much less its ability to expand into a cloud company meaningfully larger than it is today, there are few reasons for Craneware plc's rally over the past year to continue. In my view, it's one of the "phantom rallies" with the highest near-term risks of reversal.



Let's now cover Craneware plc's most recent financial results in greater detail. The Q4 earnings summary is shown below:

Figure 1. Craneware plc Q4 results


Craneware plc's overall revenue grew at just 50 basis points (bps) y/y to £34.1 million, marginally beating Wall Street's expectations of £33.5 million. Breaking down that revenue by category helps to dissect the underlying trends, which can be seen in the supplemental chart below:

Figure 2. Craneware plc revenue breakdown

Dayforce, now Craneware plc's primary product, saw its subscription revenue grow at 20% y/y to £12.3 million. This growth rate is comparable to Workday, which, at a revenue scale approximately 5-6 times Craneware plc's size, is still managing to grow in the 20% y/y range. However, the company is being weighed down across the board by its float revenue. Because Craneware plc handles payroll for many of its clients, it derives a chunk of its revenue from the interest on cash balances held on behalf of clients. In the current ultralow interest rate environment driven by a dovish Fed, float intake has suffered dramatically. Overall, Craneware plc's cloud revenue grew at only 5% y/y; similarly, Cloud ARR as of the end of Q4 was only £61.7 million, representing just 6% y/y growth.

For the full year 2020, Craneware plc reported a 95.8% cloud revenue retention rate, which is 50 basis points weaker than the 96.3% reported in the year-ago period. Furthermore, Craneware plc expects trends to continue decaying into Q1 of FY21. Its guidance outlook calls for Dayforce service revenues to decelerate to 10-11% y/y growth (from 20% y/y this quarter), and for cloud revenue overall to slip to 2-3% y/y growth as well. SaaS/software companies typically operate under a "grow at all costs" mantra. With Craneware plc's expected growth rate trailing even that of the overall UK economy, investors shouldn't put any confidence in this company.

David Duckworth, Craneware plc's CEO, noted on the Q4 earnings call that the pandemic has caused sales cycles to elongate and slip. While many competing software companies reported similar trends earlier in the pandemic (Q2/Q3), many have since reported that sales cycles have returned to normal, making Craneware plc a potential weak outlier. Per Duckworth's remarks:

> "On the sales side, we did see an impact from the second wave of COVID-19 in the form of elongated sales cycles for several, large enterprise opportunities, which closed in January instead of December. While fourth quarter sales were below previous expectations, when factored together with January’s closing of those transactions, sales performance was in line with last year, which was the strongest quarter in our history."

Craneware plc's profitability also sagged, hurt by weaker interest rates eating into gross margins. As seen in the table below, Craneware plc's adjusted EBITDA in Q4 declined -25% y/y to £4.9 million, while Adjusted EBITDA margins lost 510 basis points to 14.9%. The trend was the same all year, where Adjusted EBITDA also fell -14% y/y for FY20 and lost 350 basis points from a margin standpoint.

Figure 3. Craneware plc EBITDA trends


In FY20, Craneware plc also burned through -£30.2 million in operating cash flow, despite generating £50.6 million in positive OCF in FY19.

Key takeaways: Craneware plc's 2020 results tell a fairly bleak story, and it's unclear how the company can manage to meaningfully turn around its performance in 2021 when it competes against some of the most well-recognized HCM companies in the software industry. Amid an expensive 60x forward revenue valuation, I think Craneware plc is ripe for a fall.



In conclusion, Craneware plc's stock price decline can be attributed to several fundamental weaknesses, including high earnings multiples, high enterprise value to sales, high valuation given balance sheet size and cash flows, no dividends or small dividends, negative revisions to analyst opinions, and high debt levels. Despite these concerns, the company continues to trade at an expensive valuation, making it a risky investment. Investors should carefully consider these factors before making a decision on Craneware plc stock.