Smart Employee Benefits expects watershed year as benefits processing platform starts to scale
Smart Employee Benefits Inc. (TSXV: SEB) (“SEB”) has gone through many of the growing pains of a start-up and is now well positioned for growth.
Millions were spent on proprietary Service as a Software (“SaaS”) “game changing” benefits processing solutions. Additionally, the company has successfully completed and integrated more than 12 acquisitions since its inception in January, 2011. Today the company has over $100.0M of revenue and over $500.0M of client contracts, including both benefit processing contracts and non benefits processing contracts. The non benefit processing business has funded the investment in the benefit processing business as well as providing the technology and infrastructure to drive a higher margin SaaS/BPO business model in benefits processing. The company is now entering a phase of strong growth in cash flow and earnings.
After seven years in business, SEB’s client portfolio looks like a who’s who of corporate Canada, with top companies and government (federal, provincial, municipal) entrusting the outsourcing of mission critical systems and infrastructures, including employee benefits processing. States John McKimm, President/CEO, “The company has reached the inflection point where fixed costs are covered by an existing customer base. Our business is very scalable and once fixed costs are covered, margins grow exponentially, typical of margins realized by SaaS software companies. This year, SEB is expecting significant growth in cash-flow.”
“It takes time to build a company,” McKimm told InvestorIntel. “I am confident 2018 will be a watershed year where we will come into our own with respect to earnings and cashflow.”
McKimm set up SEB as a technology driven benefits processing environment designed to take advantage of outdated healthcare and benefits platforms at both the corporate and government level. This is a market that has over CAD$80 billion of premium and over $5.0B of processing revenue in Canada and much more than that in the United States, he said. SEB’s growth trajectory in 2018 appears to be massive, particularly so given that the company has visibility on over 90% of its current run rate revenue for the next 5 years.
“The Canadian benefits market is growing between 4% and 8% a year even in times of recession and provides plenty of growth potential for SEB,” McKimm said. The company describes its primary focus as consolidating its position in Canada, however, SEB is also working on joint venture agreements to expand overseas and in USA; including most recently with Virginia-based NeST Technology Corp. McKimm states, “SEB has over 20 joint venture white label partner opportunities in Canada and abroad, representing several million plan members. Our technology solutions are applicable globally, however, outside Canada our growth opportunities are exclusively technology partner opportunities with minimal capital expenditure by SEB.”
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With a critical mass of customers reached, gross margins are expected to reach C$36 million in 2018, compared with C$27.3 million in 2017 and C$17.2 million in 2016. Cash flow could reach C$9 million this year, compared with approximately C$3 million in both 2016 and 2017.
Another key metric for McKimm is the company’s very high customer retention rate. Companies usually sign multi-year deals with SEB. Recurring revenue accounted for over 90% of its revenues of approximately C$105 million in 2017. Revenue is expected to increase to over C$123 million in 2018, with a strong increase in organic growth; but underpinned by more than C$100 million in recurring revenue. SEB’s technology solutions are very sticky. It is both difficult and costly for clients to change technology platforms and environments. States John McKimm, “ SEB’s strategy is to provide clients with game changing highly automated SaaS solutions and services that are user friendly, cost effective, easily customizable with the most comprehensive choices in the industry”.
McKimm has a track record of building start-up companies to achieve sizeable revenues. In a 35-year career mainly focused on IT, McKimm has reorganized, operationally and financially dozens of companies. His successes have allowed McKimm to be an active investor in his new venture. Besides owning 16.6% of SEB. McKimm and other key senior executives have a track record of both buybacks and insider share purchases in SEB shares, with insiders and existing shareholders acquiring the majority of the $11.0M equity raised in the past year. SEB Management, Directors, employees and strategic investors, control approximately 53% of the issued and outstanding shares.
While over 85% of the company’s core business is related to the non-benefits processing business, McKimm sees massive potential for SEB’s benefits processing solutions. States John McKimm, “Benefits Processing is a huge market opportunity for SEB. The investment in technology has been made, our solutions are in the marketplace and we have over 50 of Canada’s corporate elite using one or more of our benefits processing modules. We manage over $1.0B of premium for over 330,000 plan members. In addition, we are targeting multiple government contracts and have over 20 white label joint venture opportunities in process. SEB has closed a number of joint venture transactions in the past 12 months.”
The company describes its “single sign on connectivity in one processing environment” as a critical competitive advantage. This capability integrates all stakeholders – employers/government, employees/plan members, insurance brokers, benefit consultants, third part administrators, adjudicators, master general agents, insurers, pension administrators/consultants, financial planners, payroll/HRIS providers, other technology providers – on its platform. This is a unique solution in the marketplace. SEB is a company to watch in the coming months. There are very few companies with over $100.0M in sales, with contracts over $500.0M who have the steadily improving cashflow profile and balance sheet as SEB; who’s common shares are today trading in the $0.25 range with a market capitalization less than $40.0M.
Matt Craze has covered commodity markets for more than 20 years, working as a researcher at CRU International, and for over 10 years as a ... <Read more about Matt Craze>