Elevator Pitch
I have a Buy rating assigned to Enfusion, Inc. (NYSE:ENFN) shares.
My prior write-up published on November 8, 2023 highlighted Enfusion’s above-expectations financial performance for the third quarter of last year. In the current article, I have found good reasons to be optimistic about ENFN’s prospects pertaining to revenue growth acceleration and margin improvement. As such, I stick to my existing Buy rating for ENFN.
Optimizing Customer Mix
ENFN aims to have its revenue growth accelerate from +16% in fiscal 2023 to a yearly top line expansion of between +20% and +22% for the FY 2025-2027 time frame, as indicated in its investor presentation slides.
The targeting of higher ACV (Annual Contract Value) customers is expected to be a key top line growth acceleration driver for ENFN.
As of end-2023, ENFN boasted 51 customers who contributed ARR (Annual Recurring Revenue) of over half a million dollars. 43 of these 51 clients were hedge funds, and the remaining eight of them (around 15%) were traditional asset managers. In contrast, traditional asset managers represented 61% of Enfusion’s estimated TAM or Total Addressable Market amounting to $25 billion. These numbers sourced from Enfusion’s investor presentation imply that winning a greater number of new traditional asset manager customers will play a key role in ENFN’s client mix optimization efforts.
At the recent Morgan Stanley (MS) US Financials, Payments & CRE Conference on June 12, 2024, Enfusion emphasized that its growth strategy entails “expansion around our core market, which is hedge funds” and “going after traditional asset management (my emphasis).”
Enfusion also disclosed at the June 12 MS conference that the company has “a pipeline of at least another 15 clients” with “between $4 million and $5 million of ACV” which translates into an average ACV per customer in the $266,000-333,000 range. As a comparison, ENFN’s mean 2023 ACV per customer in its “client book” was a much lower $219,000 as revealed in its investor presentation slides.
In a nutshell, I have confidence in Enfusion’s ability to register a faster pace of revenue growth in the years ahead. ENFN’s pipeline appears to be strong in terms of the ACV numbers, and the company has the potential to win over a larger number of new traditional asset manager clients.
Capitalizing On Positive Operating Leverage And Becoming Leaner
As highlighted in the company’s investor presentation slides, Enfusion’s goal is to deliver a +2-4 percentage points improvement in its normalized EBITDA margin on an annual basis in the FY 2025-2027 time period.
ENFN’s most recent quarterly or Q1 2024 non-GAAP adjusted EBITDA margin was 19.1% which beat the Wall Street analysts’ consensus estimate of 16.7% (source: S&P Capital IQ) by +240 basis points. This also represented a +5.2 percentage points YoY improvement as compared to the company’s Q1 2023 normalized EBITDA margin of 13.9%.
There is justification for having positive expectations of a further expansion of Enfusion’s operating profit margins for the future.
One key profitability improvement driver is positive operating leverage.
Enfusion mentioned at its earlier Q1 2024 analyst briefing in May this year that its operating profitability for the most recent quarter benefited from “increased scale (my emphasis) from our SG&A (Selling, General & Administrative) functions.” In its investor presentation slides, ENFN also cited “scale against existing cost structure” as a critical profit margin expansion lever.
As highlighted in the previous section, I am optimistic that ENFN can register a faster rate of revenue expansion going forward, which will most likely translate into positive operating leverage.
The other key margin expansion driver is that the company will continue to become leaner.
ENFN stressed at the latest Morgan Stanley investment conference on June 12, 2024 that “we’re one of the best in our vertical SaaS category” in terms of “efficiency” based on “the ratio of net new IRR (Internal Rate of Return) divided by S&M (Selling & Marketing) spend” metric. Separately, the sell-side analyst from MS also referred to Enfusion as one of a few “fintech businesses” that is achieving “real GAAP profits” at the recent Morgan Stanley investor event. As a reference, ENFN reported positive GAAP net income for six consecutive quarters for the time period between Q3 2022 and Q4 2023.
At the company’s first quarter earnings call, Enfusion indicated that “lower spend on third-party service providers” was one of the factors contributing to its normalized EBITDA margin improvement.
Judging by the company’s comments and actual bottom line performance, it is realistic to think that ENFN will continue to find ways to become more efficient and more cost-effective in the quarters and years ahead.
To sum things up, ENFN’s target of realizing a +200-400 basis points yearly expansion in the company’s non-GAAP adjusted EBITDA margins appears realistic, considering profitability enhancement drivers like operating leverage and efficiency improvement.
Variant View
Enfusion’s shares could perform badly, assuming that the company fails to meet its intermediate term financial targets.
One risk factor is that ENFN doesn’t gain sufficient headway in securing new traditional asset manager clients that translates into a lower-than-expected mix of high ACV customers.
Another risk factor is that the company’s growth investments are more substantial than what was expected and offset the improvement in operating efficiency.
Concluding Thoughts
I stay bullish on ENFN, as I am confident that the company can achieve its medium term financial goals pertaining to top line expansion and profitability improvement. Enfusion’s current consensus next twelve months’ Enterprise Value-to-Sales or EV/S multiple is 3.7 times, which is undemanding on an absolute basis (low-single digit) and below its all-time historical mean EV/S of 5.0 times. As ENFN continues to make good progress towards realizing its mid-term targets, the stock’s EV/S multiple is likely to gradually expand and approach the mid-single digit level in my opinion.
