Cerillion may not be a widely recognized name, but it possesses several qualities that investors highly value: a robust competitive moat, high levels of recurring revenue, consistently strong ROIC, and impressive free cash flow margins. Under the leadership of its founder, who is also the company’s largest shareholder, Cerillion has demonstrated consistent growth. The key question remains: is now the right time to invest in Cerillion? This analysis explores the answer.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Cerillion. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Cerillion either. Thus, I have no personal stake in Cerillion. If you want to purchase shares (or fractional shares) of Cerillion, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
The Business
Cerillion is a UK-based software company specializing in mission-critical solutions for billing, charging, and customer relationship management (CRM). Founded in 1999 through a management buyout from Logica, the company has established a strong reputation in the global telecoms sector while also expanding into industries such as utilities and finance. Serving customers across 45 countries, Cerillion operates offices in India, Bulgaria, Singapore, and Australia. The company’s business model is built around three primary revenue streams: software, services, and other activities. Software represents the largest revenue contributor and includes licenses, support, and managed services. Services revenue is derived from software implementation and account development, while other revenue streams encompass hosting fees and the resale of third-party hardware. Approximately 35% of Cerillion’s revenue is recurring, underlining its focus on long-term contracts and managed services. Notably, this recurring revenue has grown at a compound annual growth rate of 24% since 2019, outpacing overall revenue growth. Cerillion’s software portfolio is diverse and modular, offering clients flexibility in integrating its solutions. Customers can select specific components to enhance their existing systems or adopt the full product suite for a comprehensive end-to-end solution. This modular approach, supported by centralized development and regular updates, creates cost efficiencies, enables rapid implementation, and ensures seamless upgrades. By unifying all service types, payment methods, customer segments, and business models within a single framework, Cerillion delivers significant value to its customers. The company’ moat lies in its pre-integrated product suite, which simplifies the process for its clients. This unified platform enables faster implementation, reduces risks, and provides a smoother customer experience. Additionally, Cerillion benefits from long-standing customer relationships, with the majority of its revenue coming from clients it has served for over five years. This combination of product innovation, recurring revenue, and strong client retention positions Cerillion as a robust and growing player in its sector.
Management
Louis Hall is the CEO and founder of Cerillion, a role he has held since leading the management buyout of the business from Logica in 1999. With over 30 years of experience in the enterprise software industry, he has played a pivotal role in shaping Cerillion’s growth and strategic direction. Prior to founding Cerillion, Louis Hall gained extensive expertise through various product, sales, and management roles at Logica, giving him a deep understanding of the software and telecommunications sectors. As the largest shareholder in Cerillion, holding more than 30% of the company's shares, Louis Hall’s leadership is closely aligned with shareholder interests. His vision and operational focus have been key drivers of Cerillion’s evolution into a global provider of mission-critical software solutions for billing, charging, and customer relationship management. Under his leadership, Cerillion has built a strong reputation for its innovative software offerings and long-term customer relationships, solidifying its position in the telecoms, utilities, and subscription-based industries. I believe Louis Hall’s extensive industry experience and impressive results at Cerillion make him the right person to continue leading the company. I also appreciate that he is both the founder and the largest shareholder, as this alignment with shareholder interests ensures a focus on long-term value creation and sustainable growth.
The Numbers
The first metric to examine is the return on invested capital (ROIC). Ideally, I look for a ten-year history of ROIC consistently exceeding 10% annually. Cerillion made its IPO in March 2016, and as its fiscal year ends in September, the available data begins from 2017. Cerillion has consistently delivered impressive results, with only one year - 2018 - registering a ROIC below 10%. Since 2021, Cerillion has achieved a ROIC above 20%, and this figure has exceeded 30% since 2022, which is very encouraging. While ROIC decreased slightly in 2024, this has been a challenging year for many companies. Despite the slight decline, Cerillion managed to achieve its second-highest ROIC ever in 2024. With ROIC remaining above 30%, there is no cause for concern. If Cerillion can sustain ROIC levels above 30% annually, it has strong potential to establish itself as a quality compounder, delivering long-term value to shareholders.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. As mentioned earlier, we only have data from 2017 onwards, as Cerillion made its IPO in 2016. Since then, Cerillion has managed to increase its equity in most years, which is an encouraging sign. Even more impressive is that Cerillion has grown its equity by more than 20% annually since 2021, and by over 30% year-over-year for the past three years. This consistent and accelerated growth highlights the company's strong financial performance.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Cerillion has consistently delivered positive free cash flow every year since its IPO, which is an encouraging indicator of the company’s financial stability. Free cash flow reached its second-highest level ever in fiscal year 2024, further highlighting Cerillion’s ability to generate strong cash flow despite a challenging market environment in 2023 and 2024. While the levered free cash flow margin has not returned to its previous highs above 30% since 2022, it is worth noting that Cerillion managed to increase its margin from 2023 to 2024, which is an encouraging trend. This improvement suggests that the company is navigating market challenges effectively, and there is potential for the margin to return to previous levels as global economic conditions improve. However, the free cash flow yield is currently at its lowest level since the IPO, indicating that the shares are trading at a premium valuation. This is a point to consider, and we will revisit it later in the analysis to determine whether the current valuation offers an attractive investment opportunity.
Debt
Another important aspect to consider is debt. It is crucial to evaluate whether a business has a manageable debt level that can be repaid within three years, which is typically assessed by dividing total long-term debt by earnings. Analyzing Cerillion’s financials reveals that the company has no debt. In fact, Cerillion has been entirely debt-free since 2019, which is a highly encouraging sign of financial health and stability. This debt-free status significantly reduces financial risk and indicates that debt is unlikely to be a concern for the company moving forward.
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Risks
Changes in the demands of the telecoms industry pose a significant risk to Cerillion, given its heavy reliance on this sector as the primary source of revenue. The telecoms market faces sustained pressure from declining product and service prices, driven by regulatory intervention and intense competition. This downward pricing trend is expected to persist, potentially eroding the profitability of Cerillion’s customers. If their financial health deteriorates, their capacity to invest in Cerillion’s software and services could weaken, directly impacting the company’s revenue and growth prospects. This risk is further amplified during global economic downturns. In such periods, telecom operators may reduce spending on infrastructure, software, and services as a response to declining consumer demand. A prolonged reduction in telecom expenditure would adversely affect Cerillion, given its dependence on the willingness and ability of telecom customers to continue investing in its solutions. Additionally, the industry faces broader challenges such as declining call volumes in both fixed-line and mobile telephony. This trend reflects the increasing adoption of internet-based communication tools like messaging apps and VoIP services, which provide low-cost or free alternatives to traditional telecom products. Cerillion has historically relied on fixed-line, mobile, broadband, and TV volumes and revenues - areas that may shrink further as consumer preferences evolve. These changes could reduce the revenue streams of Cerillion’s customers, further undermining their ability to invest in Cerillion’s products and services.
The rapid technological changes and evolving industry standards in the telecommunications sector present a significant risk to Cerillion, as they challenge the company’s ability to remain competitive and relevant. In an industry where products can quickly become obsolete, Cerillion must consistently innovate and adapt to meet shifting customer demands. Failing to do so could lead to a loss of customers to competitors offering more advanced or cost-effective solutions, ultimately reducing market share and revenue. Cerillion’s success hinges on its ability to enhance existing products while developing new features and services that address the evolving needs of its customers. This requires significant investment in research and development to ensure its software remains functional, reliable, and market-responsive. However, this process is inherently risky. Delays, unexpected costs, and technical challenges could hinder the timely launch of new products or updates. Moreover, there is no guarantee that Cerillion’s innovations will be well-received by customers or provide a meaningful competitive advantage. If these challenges are not effectively managed, the consequences could be severe. Cerillion risks losing its competitive position, making it difficult to retain existing customers and attract new ones. This inability to innovate could lead to declining financial performance, increased operational costs, and potential reputational damage. In a sector defined by constant technological advancement, staying ahead of trends is not just an advantage - it is a critical requirement for long-term survival and success.
Cerillion’s reliance on a small number of customers presents a significant risk, as this concentration makes the company highly vulnerable to the financial health, decisions, and actions of a limited number of key clients. In 2024, the top five customers accounted for 51,5% of the company’s revenue, while the top ten contributed over 75%. This heavy dependence means that the loss of even one major customer, a deterioration in relationships, or non-payment could have a substantial negative impact on Cerillion’s financial performance, operational stability, and growth trajectory. A particular concern is the risk of financial difficulties or insolvency among Cerillion’s key customers. If one or more of these customers goes out of business, delays payments, or opts not to renew their contracts, Cerillion could lose a significant revenue stream. This would be especially disruptive if the customer is tied to ongoing projects or long-term support agreements. Cerillion’s revenue and cash flow often depend on achieving project milestones, so delays or payment issues from key customers could strain the company’s financial health and operational efficiency. This reliance is projected to increase in the short to medium term, further amplifying the risks associated with customer concentration. The lack of diversification in the customer base leaves Cerillion less protected against financial challenges or spending reductions by individual clients. Should a major customer scale back its investments, delay payments, or encounter financial trouble, the ripple effects could undermine Cerillion’s revenue, profitability, and overall business stability.
Reasons to invest
New orders are a compelling reason to consider investing in Cerillion, as they underscore the company’s expanding market presence, growing customer demand, and potential for sustained growth. In fiscal year 2024, new orders grew by 21%, reflecting Cerillion's ability to secure business in diverse regions, including the Republic of Ireland and South Africa. This geographic diversification not only reduces regional risks but also demonstrates the scalability and adaptability of Cerillion’s software solutions to address a wide array of market needs. High-profile contracts further validate Cerillion’s strong position in the market. For instance, the €12,4 million agreement with Virgin Media Ireland, announced in November 2023, highlights Cerillion's capability to deliver mission-critical solutions to Tier 1 operators. This contract encompasses a broad range of Cerillion’s core software offerings, representing a significant opportunity for deeper collaboration and future project expansions. Similarly, the $11,1 million deal with a leading connectivity provider in Southern Africa underscores Cerillion’s ability to support cutting-edge initiatives, such as 5G rollouts and service expansions. Both agreements not only contribute to immediate revenue growth but also open doors for additional opportunities with these clients. Cerillion’s growing sales pipeline and strong customer relationships further enhance its investment appeal. The company’s long-term contracts, which often span over a decade, provide a reliable foundation of recurring revenue. High-profile wins with Tier 1 operators like Virgin Media bolster Cerillion’s credibility, positioning the company as a trusted partner for other prominent telecom brands. Each successful deal reinforces Cerillion’s reputation, creating a snowball effect that drives new opportunities and strengthens its foothold in the global telecom software market.
Outsourcing presents a significant growth opportunity for Cerillion, as telecom companies increasingly focus on their core operations while delegating complex back-end software services to specialized third-party providers. While global telecom capital expenditures have slowed, operators are shifting their priorities toward monetizing existing infrastructure and improving efficiency through enterprise software solutions. This shift has created strong demand for advanced billing, charging, and customer relationship management platforms - key areas where Cerillion’s SaaS offerings excel. Cerillion’s modular SaaS platform is tailored to address the evolving needs of telecom operators in a cost-effective and efficient manner. Unlike traditional, heavily customized systems that are expensive and cumbersome to maintain, Cerillion’s platform simplifies operations, reduces costs, and accelerates implementation timelines. This enables telecom companies to quickly launch new products and services, keeping pace with rapidly changing market demands. As telecom providers transition away from legacy systems and seek integrated, modern solutions, Cerillion’s unified platform, which supports all telecom services under one framework, offers a compelling alternative for streamlining operations. Outsourcing these functions also allows telecom companies to reduce internal IT expenses and eliminate the need for large, in-house teams to manage complex software systems. Cerillion’s SaaS model provides an added advantage by offering regular, automated updates that include new features and enhancements. This eliminates the need for costly, one-off system upgrades or full overhauls, ensuring telecom operators can remain technologically up-to-date without disrupting operations. By enabling telecom providers to optimize operations, reduce costs, and stay ahead of industry trends, Cerillion’s SaaS platform positions the company as a trusted partner in improving operational efficiency and competitiveness.
The potential for acquisitions represents a compelling reason to invest in Cerillion, as it demonstrates the company’s commitment to strategic growth while maintaining disciplined financial management. With a strong cash balance, Cerillion is well-positioned to execute acquisitions that could expand its market reach, enhance its product offerings, and drive sustainable earnings growth. This strategy aligns with the company’s stated goal of making "strategic acquisitions of operating businesses to improve and enhance the scope and scale of earnings," underscoring its focus on long-term value creation. Acquisitions provide Cerillion with opportunities to enter new markets, strengthen its competitive positioning, and add complementary capabilities to its portfolio. By targeting businesses aligned with its core expertise in billing, charging, and customer relationship management software, Cerillion could further solidify its leadership in the telecom and enterprise software sectors. Expanding through acquisitions would also enable Cerillion to diversify its customer base, broaden its geographic footprint, and enhance its recurring revenue streams. Notably, Cerillion has not pursued an acquisition since acquiring netSolutions in 2015, highlighting the company’s prudent and methodical approach to mergers and acquisitions. This cautious strategy minimizes common acquisition risks, such as overpaying, cultural mismatches, or challenges in integrating acquired businesses. Cerillion’s demonstrated discipline suggests that management will only pursue acquisitions that align with the company’s strategic objectives and deliver clear, accretive value to shareholders.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first metric is the Margin of Safety price, calculated using earnings per share (EPS), estimated future EPS growth, and an estimated future price-to-earnings (P/E) ratio. The minimum acceptable rate of return for this calculation is 15%. I have used an EPS of 0,51, based on Cerillion's fiscal year 2024 results. For the projected future EPS growth rate, I selected 15%. While Cerillion has achieved an impressive average EPS growth of 52% per year over the past five years, I chose 15% as it is the highest growth rate I use. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on the Cerillion's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be £15,30. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Cerillion at a price of £7,65 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 11,2, and capital expenditures were 0,2. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 0,1 in our calculations. The tax provision was 4,4. We have 29,536 outstanding shares. Hence, the calculation will be as follows: (11,2 – 0,1 + 4,4) / 29,536 x 10 = £5,25 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Cerillion's Free Cash Flow Per Share at £0,37 and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is £5,84.
Conclusion
I believe that Cerillion is an intriguing company, led by its founder and largest shareholder, which combines strong management with a clear moat. Its pre-integrated product suite simplifies complex systems for customers, offering a distinct advantage in the telecom software space. The company has consistently delivered high ROIC and positive free cash flow since its IPO, demonstrating both financial strength and operational efficiency. However, Cerillion faces certain risks due to its heavy reliance on the telecom sector, which is under pressure from declining prices, evolving consumer habits, and potential reductions in spending by operators. These challenges could affect the financial health of its customers, thereby impacting their ability to invest in Cerillion’s software. Moreover, the rapid pace of technological change and shifting industry standards require continuous innovation. Failure to adapt could result in product obsolescence, a loss of market share, and reputational damage. Additionally, Cerillion’s reliance on a small number of key customers is a notable risk, as the loss or reduced spending of even one major client could significantly impact revenue and profitability. Despite these risks, Cerillion’s strengths make it a compelling investment. The company’s growing market presence is reflected in high-profile contracts, such as its deals with Virgin Media Ireland and a leading Southern African connectivity provider. These agreements highlight Cerillion’s ability to secure long-term partnerships, diversify geographically, and drive sustained growth. Furthermore, the ongoing trend of outsourcing in the telecom sector aligns with Cerillion’s capabilities. Its cost-effective SaaS platform allows telecom operators to streamline operations, reduce IT costs, and improve efficiency, reinforcing its position as a valuable partner. The potential for strategic acquisitions further enhances Cerillion’s growth prospects. With a strong cash position and disciplined management, the company is well-equipped to pursue value-accretive acquisitions that align with its core competencies and expand its scope and scale. Overall, I believe Cerillion offers strong investment potential. Acquiring shares at £11,50 - approximately a 25% discount to intrinsic value on the Margin of Safety price - would present a promising long-term opportunity for investors.
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