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Summary of "Americas Emerging Software" Document

Core Content

This document provides an analysis of the performance and outlook for SMID-cap software companies in the Americas, focusing on Q1 results and their implications for the rest of the year. It outlines key themes and evaluates specific companies (OS, VERX, WAY) that are highlighted as top tactical ideas. The report emphasizes that while the median stock in the coverage has declined by ~15% YTD, the S&P 500 has only dropped ~1%. The analysis suggests that multiple expansion, driven by modest estimate revisions, will be the key factor influencing stock performance in the coming months.

Main Views

• Q1 Performance:

  • Q1 results and guidance were better than feared.
  • Companies did not lower the high-end of FY revenue guidance, indicating confidence in future performance.
  • Some companies (e.g., WK, VERX, SMWB) experienced share price declines despite strong fundamentals, highlighting the importance of management messaging.

• Investor Sentiment:

  • Investors are focused on estimate revisions and forward-looking guidance.
  • Companies that provided clear and optimistic messaging saw positive share reactions, while those that were perceived as cautious or unclear faced negative performance.

• AI Adoption:

  • AI is becoming a central theme in product development and strategy.
  • Companies are investing in AI in three main ways: enhancing internal efficiency, embedding AI into platforms, and launching dedicated AI solutions.
  • While AI is not yet a major revenue driver, it is expected to influence customer adoption and retention in the future.

• Sub-Sector Insights:

  • Vertical Software:
    • Down ~10% YTD, but up ~5% since Q1 results.
    • Healthcare RCM, P&C Insurance, and Bank Technology are seen as areas with durable demand.
  • Back Office Software:
    • Down ~10% YTD, but up ~16% since Q1 results.
    • Q1 results were better-than-feared, with median revenue and profitability ahead of expectations.
    • Companies maintained FY+1 revenue guidance, indicating a conservative outlook for the buying environment.

Key Companies

OneStream (OS)

• Near-term:
  • Experiencing a slowdown in growth, with guidance pointing to stronger 2H25 performance.
  • CPM Express product reduced implementation time, driving a >50% YoY increase in commercial bookings.
• Long-term:
  • Agentic AI and no-code platform differentiate it in the CFO space.
  • Likely to benefit from ERP cloud transitions and has a significant opportunity to expand its customer base.

Vertex (VERX)

• Near-term:
  • Share price dislocation reflects a slowdown in subscription revenue growth (~14% YoY).
  • Improved visibility into its pipeline and e-Invoicing options support convergence with peers.
• Long-term:
  • Strong position in Enterprise indirect tax with compelling win rates against Thomson Reuters.
  • Well-positioned to maintain leadership in this space with continued innovation and AI investment.

Waystar (WAY)

• Near-term:
  • Implied growth for FY25 is ~5% YoY, a significant deceleration from TTM growth (~18%).
  • The "air pocket" in implementations is attributed to the impact of the Change Healthcare cyberattack.
• Long-term:
  • Platform extensibility and innovation help stem outsourcing dynamics.
  • Likely to benefit from replacing legacy systems and has a $15bn TAM.

Key Themes

1. Revenue was better-than-feared against a relatively low bar, guidance largely unchanged:

   • Median stock revenue was ~1% ahead of consensus.
   • Guidance for FY25 remained largely unchanged, reflecting confidence in future performance.

2. Profitability comes in ahead of consensus though FY outlooks largely unchanged:

   • 1Q25 profitability margins were ~1.3% above consensus.
   • Full-year profitability outlooks were largely unchanged, with some companies showing margin expansion or compression.

3. Management messaging was paramount to share performance, in some cases more-so than formal guidance:

   • Clear and optimistic messaging led to positive share reactions, while cautious or unclear commentary led to declines.
   • Companies that adjusted guidance to reflect macro uncertainty were rewarded by investors.

4. Buyer behavior remained largely unchanged in 1Q despite elevated macro uncertainty:

   • Companies are emphasizing faster time-to-value to meet increased budget scrutiny.
   • This focus on time-to-value is becoming a key differentiator in an uncertain environment.

5. AI strategies coming into focus:

   • AI is being integrated into products and platforms to improve efficiency, customer value, and retention.
   • While AI is not yet a major revenue driver, it is expected to influence future performance and adoption rates.

Valuation & Key Risks

• Valuation Drivers:
  • Multiple expansion is expected to be the key driver for stock performance through the rest of the year.
  • Companies with clear visibility into 2H25 estimates (e.g., VERX, GWRE) are preferred.
• Key Risks:
  • Continued macro uncertainty and budget scrutiny.
  • Execution against Q2 expectations will be critical to inform 2025 estimates.
  • Companies that fail to deliver on guidance may face further share price declines.

Sub-Sector Takeaways

• Vertical Software:
  • Down ~10% YTD, but up ~5% since Q1 results.
  • Healthcare RCM, P&C Insurance, and Bank Technology are areas with durable demand.
• Back Office Software:
  • Down ~10% YTD, but up ~16% since Q1 results.
  • Q1 results were better-than-feared, with median revenue and profitability ahead of expectations.
  • Companies maintained FY+1 revenue guidance, indicating a cautious outlook for the buying environment.

Conclusion

The report highlights the importance of estimate revisions, management messaging, and AI integration in driving stock performance for SMID-cap software companies. While macro uncertainty persists, companies that are clear in their guidance and focus on time-to-value are more likely to outperform. The long-term outlook for AI and vertical software remains positive, with opportunities for growth and share gain.