April 04, 2020

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SS&C To Acquire Captricity For Machine Learning OCR Tech - Seeking Alpha

By https://seekingalpha.com/author/donovan-jones March 25, 2020 3 0

Quick Take

SS&C Technologies Holdings (SSNC) has announced the proposed acquisition of Captricity (dba Vidado) for an undisclosed amount.

Captricity has developed handwriting and machine-printed data extraction from paper technologies for enterprises.

With the deal, SSNC will add machine learning-powered OCR technologies to its business process outsourcing offerings and AWD platform.

SSNC looks fully valued at its current level, especially given Q2 2020’s likely sharp contraction ahead followed by a slow recovery for the remainder of 2020, so my bias is Neutral.

Target Company

Oakland, California-based Captricity was founded to develop machine learning software that improves extraction of data from both handwritten and machine-printed sources.

Management is headed by Chief Executive Officer Nowell Outlaw, who has been with the firm since April 2017 and was previously founder and CTObyDesign and CEO DrinkWater PBC.

Below is an overview video of transferring data from paper to IT systems:

Source: RatchetSoft

The company's system is especially relevant for these industries:

  • Insurance

  • Financial Services

  • Pharmaceutical

  • Healthcare

Investors have invested at least $51.9 million and include Social Capital, Atlas Venture and Knight Enterprise Fund.

Market & Competition

According to a 2018 market research report by ResearchandMarkets, the global market for handwriting recognition reached a value of over $1 billion in 2016.

This represents a forecast CAGR (Compound Annual Growth Rate) of 15.7% from 2017 to 2025.

The main drivers for this expected growth are an increasing desire for companies with paper-based systems to create a 'bridge' to IT systems for difficult to digitize processes and for innovations in machine learning capabilities to drive improved performance in speed and accuracy.

Major vendors that provide potentially competitive services include:

  • MyScript

  • Nuance Communications

  • SELVAS AI

  • Hanwang Technology

  • Paragon Software

  • PhatWare

  • SinoVoice

  • Sciometrics

Source: Research Report

Acquisition Terms & Financials

SS&C didn’t disclose the acquisition price or terms and didn’t file a form 8-K, so the deal was likely for a financially non-material amount.

Management also didn’t provide a change in financial guidance as a result of the proposed transaction.

A review of the firm’s most recently published financial results indicate that as of December 31,2019 SS&C had $152.8 million in cash and equivalents and $11.6 billion in total liabilities of which long-term debt accounted for $7.1 billion.

Free cash flow for the twelve months ended December 31, 2019 was $1.27 billion.

In the past 12 months, SS&C’s stock price has fallen 37.1% vs. the U.S. Software industry’s rise of 6.9% and the U.S. overall market index’ drop of 14.6%, as the SSNC chart indicates below:

Source: Simply Wall St.

Earnings surprises versus analyst consensus estimates have been positive in six of the last twelve quarters, as the chart shows below:

Source: Seeking Alpha

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Amount

Market Capitalization

$9,900,000,000

Enterprise Value

$17,310,000,000

Price / Sales

2.11

Enterprise Value / Sales

3.74

Enterprise Value / EBITDA

10.26

Free Cash Flow [TTM]

$1,130,000,000

Revenue Growth Rate

35.42%

Earnings Per Share

$1.66

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming the above generous DCF parameters, the firm’s shares would be valued at approximately $33.97 versus the current price of $38.64, indicating they are potentially currently overvalued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary

SSNC is acquiring Captricity to bolster its business process outsourcing service segment.

As Bill Stone, SSNC Chairman and CEO stated in the deal announcement,

The financial and healthcare industries are challenged by the abundance of manual paper-based transactions, often including significant amounts of handwritten data. The addition of Vidado and Captricity's team will complement SS&C's business process outsourcing [BPO] services and our AWD business process management solution.

With the handwriting recognition business a more than $1 billion annual spend industry and forecast to grow at a healthy 15.7% through 2025, the acquisition promises to give SSNC machine learning tech with which to better tackle the challenges for OCR technologies, which have been around for many years.

We don’t know how much SSNC paid for the deal, but I suspect it was valued based on a ‘team and technology’ basis and thus was probably under $50 million.

I presume integration risk into SS&C’s existing solutions will be minimal and the deal makes strategic sense.

SSNC’s stock, even after the selloff, appears fully valued according to my generous DCF valuations, which the firm will likely not meet in 2020 given the sharp economic activity drop in Q2 and possibly Q3 as a result of the Covid-19 virus outbreak.

Accordingly, my current bias on SSNC is Neutral until at least Q3 2020.

I research IPOs and technology M&A deals.

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Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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