Hyland Software Inc.

Overview Key strengths Key risks Good market share in the content services platform (CSP) space with highly vertical solutions that cater to multiple end markets, such as health care, government, education, and financial services. Increasing investments to modernize and expand its cloud solutions coupled with lower operating leverage will pressure of EBITDA margins which are well below historical mid-30% average and FOCF generation. Highly sticky client base provides good revenue and cash flow visibility. Aggressive financial policy including debt funded acquisitions and dividend recapitalizations that will result in elevated leverage. Good liquidity should help provide support during its high investment period. Significant near-term debt refinancing needs. Overall, we view the company?s increased focus on its cloud segment favorably given the

...Hyland's increasing investments to modernize its cloud platform while de-emphasizing higher margin perpetual license revenue have reduced its profitability, but we expect some of these costs to normalize over the coming year. Overall, we view the company's increased focus on its cloud segment favorably given the new onboardings should bode well for Hyland's recurring revenue growth over the longer term. However, the transition has caused volatility for Hyland's EBITDA margin profile, which declined significantly to 24% in 2022 from about 36% in 2021. The majority of these profitability headwinds stem from increasing investments to its OnBase platform as well as the deemphasis of its highly profitable perpetual license segment, which contributed to less than 5% of revenue in 2022 from approximately 15% in 2020. Hyland's decline in profitability is further exacerbated by decreasing operating leverage as the company's costs, especially those related to selling, general, and administrative...

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