Solera Holdings: Organic Revenue Growth Expected To Tick Up
Edison | Jun 11, 2015 12:06AM ET
Building a digital platform
Solera Holdings Inc (NYSE:SLH)’s transition from a supplier of repair estimation solutions to a diversified provider of risk and asset management solutions is proving expensive. However, the impact of this investment is starting to become more apparent, as revenues diversify and with organic revenue growth expected to tick up in Q4. The conversion of Digital Garage opportunities should provide reassurance on the strategy and potentially drive further enhancement to the organic growth rate.
Continued investment in building the digital platform
Solera’s investment in building out its end-to-end digital platform has continued with the $142.5m acquisition of DMEautomotive, taking FY15 acquisition spend over $900m and likely pushing net debt to over $2.0bn. Reflecting this, the company’s revenue mix has diversified substantially with non-claims revenue contribution increasing to 46% (estimated run rate post DMEautomotive) and with the higher organic growth rate of these businesses (9.5% in Q3) expected to push group organic growth to 7.5-8% exiting this year.
Digital platform vision becoming a reality
The investment in building out a broad portfolio of assets has also enabled Solera to develop a Digital Garage solution, which brings together many of its vertical solutions into a horizontal platform, so all the information pertaining to a particular vehicle is contained in one place. The company is in negotiations with a number of insurance providers and OEMs, immediate prospects could generate c $40m in annual revenue for Solera.
Growth expected to accelerate
Q3 results were unexciting and significantly affected by FX headwinds. Organic revenue growth of 5.6% was down from 6.4% underlying in Q2 and EBITDA margins compressed to 40.0% from 40.9%. We expect margins to remain close to 40% as the company integrates DME, but management has maintained its expectation of reaching a 7.5%-8% organic growth rate exiting FY15. Our analysis suggests that with a modicum of success with Digital Garage, this growth rate should be sustainable, while stronger traction could drive an acceleration.
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