It's still under most investors' radars, but Hansen Technologies (ASX:HSN) is a high-quality Aussie tech company that is winning big overseas. Hansen provides the mission critical customer care and billing software for service providers in a wide range of different industries in over 40 countries.
Sticky recurring revenue
Hansen's clients provide everything from Pay TV to telecommunications to electricity and water utilities, but they all have one thing in common – they are hugely dependent on Hansen's software. Hansen does all the work behind the scenes to make sure that the bills their clients send on to the end user are delivered on time and without any errors. That dependence makes for super-sticky customer relationships, which in turn means that Hansen pumps out very stable cash flows.
An effective billing system needs to deeply integrate with the client's internal systems in order to reliably provide accurate and timely invoices to the end user. It takes Hansen anywhere from 6 months to 2 years to get a new client up and running.
Changing billing software providers is a costly distraction at best, and a near-fatal error at worst. That risk makes it very rare for a customer to switch providers. The relationship is more like a marriage than a casual fling. The average Hansen customer stays with the company for ten years (that's actually a year longer than the average length of an Australian marriage!).
Those switching costs mean that Hansen is protected behind strong barriers to entry that enable it to earn high returns on invested capital. Hansen is debt free and regularly reports returns on equity of a juicy 20% or higher.
Growth
Hansen has grown sales at a compound annualised rate of 14% over the past three years, with most of that growth coming from acquisitions. Hansen's underlying organic growth is lower, at around 5-8% per year. But there are plenty of reasons to think that Hansen can keep finding suitable acquisition targets that will boost growth for many years to come.
The customer care and billing industry that Hansen operates within only really took off in the late 1990s when many utilities and telecommunications companies were privatised. These large, formerly state-owned companies had typically built their own internal billing systems, but then spun these out as separate entities soon after they were privatised. This legacy of one-off specialised systems, and the product's naturally high switching costs, means that the industry is still highly fragmented.
That fragmentation provides Hansen fertile ground for the company to acquire and consolidate the most promising of their smaller competitors. Hansen then brings its expertise and scale advantages to bear, improving the economics of these standalone businesses even further.
That is a big win for Hansen's shareholders. We calculate that for every dollar Hansen spends on acquisitions, it immediately creates over two dollars in shareholder value. That figure then rises to over three dollars in value within the first two years, once the newly acquired business has been brought up to Hansen-level economics.
The latest Telebilling acquisition is a perfect example. Hansen paid six times earnings before interest tax depreciation and amortisation (EBITDA) for the Danish company. That is some strong value-creating arbitrage considering the market values Hansen with a multiple of over thirteen times EBITDA.
