Hexaware Rating | Reduce — Mobiquity buy a step in the right direction

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Published: June 24, 2019 2:29:14 AM

Deal will be EPS neutral in CY19; revenue estimates for CY20/21 raised by 9%; ‘Reduce’ retained given that valuations are full.

Hexaware offers digital solutions, mostly on the AWS cloud platform, to a quality client base which includes Amazon, AWS, Rabobank, Philips, Wawa, Backbase and Otsuka.

Hexaware announced the acquisition of the US-headquartered customer experience (CX) consulting firm, Mobiquity, for an all-cash consideration of $182 mn. CX is a core focus area of the company. The acquisition strengthens Hexaware’s front-end capabilities in CX. The transaction will be EPS neutral on a GAAP-basis. Hexaware appears to have struck a nice deal indicating the judicious use of capital. Full valuations rein in our view.

Hexaware acquires US-headquartered firm Mobiquity for CX capabilities

Hexaware announced the acquisition of the US-based digital consultancy firm Mobiquity for $182 mn at a reasonable valuation of 2.6X CY2018 revenues. The company has consulting, design and engineering capabilities in customer experience transformation, mobility and analytics. Banking, retail and pharma are the key verticals. Hexaware offers digital solutions, mostly on the AWS cloud platform, to a quality client base which includes Amazon, AWS, Rabobank, Philips, Wawa, Backbase and Otsuka. Top 20 accounts account for more than 80% of revenues. Mobiquity has strong partnerships with the AWS cloud platform and the Backbase omni-channel digital banking platform. The company has a headcount of 700 people with close to 225 employees in India. The acquisition is a step in the right direction, consistent with Hexaware’s strategy of accelerating growth in focus areas of customer experience transformation and cloud services. Hexaware has indicated that service offerings of the two companies are complementary, which can provide an opportunity to offer integrated services.

Mobiquity to retain independent structure within Hexaware

The deal is structured as an all-cash transaction with upfront payment of $131 mn and deferred consideration of $51 mn. Deferred consideration will be paid in two tranches, one in January, 2020 and the other in October,2020. Mobiquity will operate as an independent organisation within Hexaware. Mobiquity reported revenues of $70 mn in CY2018, growing at an impressive CQGR of 24% in the past three years. The acquisition has been completed and will contribute to revenues in the June quarter.

Acquisition is EPS neutral in CY2019

Hexaware has guided for 20% c/c revenue growth in CY2019e. The company has retained organic growth guidance despite the cancellation of a large net new
$100 mn+ deal won in Q4CY18. The cancellation of this contract could have potentially impacted CY2020e growth; however, Hexaware believes that strong deal pipeline and closures can help offset this impact. Hexaware reported that excluding transaction costs the acquisition will be EPS neutral on a GAAP basis. We incorporate the Mobiquity acquisition in our estimates. This results in a 9% increase in revenue estimates for CY2020 and CY2021. Revenue increase in CY2019 is lower due to the fact that acquisition revenue will flow in only for part of the year. Mobiquity’s Ebitda margin is ~14%, similar to Hexaware’s Ebitda margin. We bake in annual amortisation cost of Rs 574 mn resulting from the acquisition. Our EPS estimates are largely unchanged.

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