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A Look At Nitro Software

Taking a look at PDF productivity business Nitro Software.

September 1, 2021

As many of you know, I live in Sydney, Australia. 

Some of you also know that I spent several years turning over rocks in the Australian Securities Exchange (ASX). The ASX is mainly known for banking and mining stocks, but it also hosts some promising micro-cap (by US standards) companies. 

I have a tiny allocation to ASX-listed stocks, roughly 1.5% of my investments, more or less inline with the ASX’s size relative to global equity market’s size. But I follow the tech scene closely on the ASX. After all, every now and then, Aussie entrepreneurs throw out a big one, like Afterpay (ASX: APT) and Atlassian (NYSE: TEAM). 

With that preamble out of the way, let me tell you about one exciting business called Nitro Software (ASX: NTO). 

What Does Nitro Software Do?

Nitro is a document productivity software company. Its main products include:

  • Nitro PDF Pro, a software for creating, editing, and collaborating on PDF documents. 
  • Nitro Sign, which is basically an e-signature platform
  • Nitro Analytics, which is a platform for measuring and tracking document usage. 

The company is headquartered in San Francisco. The business has 2.8 million licensed users and over 13,000 business customers (i.e., those with 10 or more licenses) in 155 countries. Interestingly, the company counts 68% of Fortune 500 among its customers. Nitro is led by co-founder Sam Chandler. 

Well, if much of what Nitro does sounds like Adobe (NASDAQ: ADBE) or DocuSign (NASDAQ: DOCU), then you aren’t off base at all. The company is competing in a space that’s dominated by those two giants. 

How Is It Going? 

Recently, the company reported first-half 2021 earnings. Let’s recap the key metrics:

  • Annual recurring revenue (ARR) finished at $33.8 million, up 56% year over year. Note that unless otherwise stated, the currency is US dollars. And yes, some companies listed on the ASX report in US dollars as their primary revenue currency.
  • EBITDA was negative $3 million.
  • Nitro had $38.6 million cash or equivalents at the end of the half-year.

Nitro’s strategy, to some extent, is centered on pricing, in addition to the expansion of product capabilities. For instance, DocuSign’s Business Pro sells for $40 per user per month; Nitro’s Sign Enterprise package sells for $29.99 per user per month. The business had some marquee customer wins this half, including Blue Origin and SVB Financial Group (NASDAQ: SIVB). It also expanded relationships with the likes of BNY Mellon, UnitedHealth Group, and Cigna. 

Fighting Big Battles?

I believe Nitro is executing nicely. But the document productivity industry is hyper-competitive. While we all know about Adobe and DocuSign, several other PDF and document productivity applications are available. Just do a Bing search! And a lot of success in this industry is based on building integrations with other applications and solving specific use cases such as contract management. And that’s where the scale starts to matter. 

So, let’s compare with DocuSign. In fiscal year 2021, DocuSign spent $278 million in Research & Development (R&D) and $866 million in Sales & Marketing. DocuSign could do that because it delivered nearly $1.5 Billion in revenue, up 49% over 2020! 

In contrast, for the first half of 2021, Nitro Sign spent $1.8 million in R&D and $5.4 million in Sales & Marketing. It’s really a difficult battle to win when one of your competitors is outspending your Sales & Marketing, and R&D by 80x and 90x, respectively!

What About Valuation? 

Let’s use the simple EV-to-Sales measure for illustrative purposes. I will use the company’s provided full year revenue guidance for these calculations. 

DocuSign’s growth at scale comes at a price. Given DocuSign’s full year revenue guidance of $2 Billion, EV/Sales (forward) is 29x.

Nitro’s guidance calls for $50 million in sales for the year. That puts the company on an EV/Sales multiple of 11.6x. In other words, the market has discounted Nitro relative to its larger competitors’ because of its smaller footprint.

So What? 

My personal investing preference is to invest in the top dog, the leaders, the ones that are leading the charge. The leaders have the balance sheet, the R&D, and Sales firepower to keep winning for the long haul. In my opinion, those tend to be the long-term compounders. Of course, it comes at the price of paying up for the stock. I‘m okay with that, and I own DocuSign shares. 

I can also see why someone might want to own shares in Nitro. It has fast growth, albeit off a small base, and the valuation is reasonable. However, people owning micro-cap stocks need to understand the typical higher risks associated with owning stocks of this kind.

The bottom line, the world of tech is ever-changing and dynamic, and we can learn much by paying attention to the landscape. 

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