Fineos (ASX: FCL) is a core software vendor to the global life, accident, and health, or LA&H, insurance industry.

Its customers are primarily large multinationals and midmarket insurers, and the firm generates revenue mainly from subscriptions and product implementation services.

Promising showing in first quarter of 2025

Fineos’ cash balance rose to EUR 35 million at March 31, up from EUR 20 million at the end of 2024. The firm attributes this growth to seasonal cash collections and underlying business expansion.

This cash generation reinforces our view of Fineos’ potential for strong revenue growth and margin expansion. For the year to March 2025, the firm had strong customer receipts growth, reduced operating cash outflows, and a first year of free cash flow.

Revenue prospects are supported by successful implementations with large clients and endorsements from project implementation partners—major global consulting firms—which validate Fineos’ product utility to potential new customers. Fineos is also close to more new wins.

We believe free cash flow growth reflects both increased products per customer through cross-sells and a shift to higher-margin subscription revenue. Cash outflows have declined in absolute terms, consistent with Fineos’ prior statements that products have sufficiently scaled.

Shares cheap in our view

We retain our AUD 3.10 per share fair value estimate, with shares cheap in our view. While margin expansion potential is evident, we believe the market is concerned about Fineos’ ability to win new business and increase customers’ spending.

However, we are more positive in the longer term, and we think recent history supports this view. Fineos alluded that it is well-placed to win six small new deals. AdminSuite, its most comprehensive offering, was adopted by two large insurers, providing a blueprint for further cross-sells.

An externally-sponsored marketing event is set for early June 2025, funded by system integration partners such as global consulting firms PwC, Ernst & Young, and CapGemini. We like the strategy to outsource services work to those firms to allow Fineos to focus on product development.

The impact of US-induced tariffs on the global economy, and the response from governments and central banks, is uncertain. But we believe Fineos’ wide switching cost-based moat helps defend against some of the macroeconomic risks, given the significant operating efficiencies and new business capabilities its products can deliver compared with the in-house legacy systems of many insurers.

Additionally, we expect Fineos to grow alongside insurers, who we think can counter short-term tariff impacts, such as higher inflation, through reasonable premium price increases. We believe there is upside potential for investors now despite execution risks, such as potentially higher costs or slower product adoption.

Ambitious management targets

We project revenue growth of 6% per year for the next decade, driven by close to 10% growth in subscription revenue per year, and flat services revenue. Specifically, we expect subscription revenue growth to come from mid-single-digit price increases, higher product uptake among existing client from upsells and crosssells, as well as new client wins.

Importantly, subscription revenue is much higher-margin than services revenue, and the improving revenue mix should benefit margins. By 2027, we forecast EBITDA margins of 22%; and by 2029, we expect EBITDA margins of 27%, versus margins of 15% in fiscal 2024.

Fineos is more optimistic though, and guides to EBITDA margins of 25% by 2027 and 40% by 2029. There is roughly further 40% upside to our valuation should Fineos’ more optimistic view prevail. Here, we think investors should look for subscription revenue growth in the mid-teens, alongside strong expansion in the gross profit and EBITDA margins as evidence management’s view is becoming the likely case.

Wide Moat rating intact

Fineos has a wide economic moat built on switching costs.

FINEOS’ insurance customers are stickier than ordinary enterprise customers like in retail or manufacturing as replacing core systems is a lengthy, costly, and risky ordeal for insurers.

Customers are averse to changing core systems, as failed attempts at implementation carry high sunk costs. Switching costs include direct time and expense of implementing a new software, lost productivity, loss of data during changeover, and business disruption.

A hypothetical competitor who comes out with a better (presumably faster and more seamless) product than Fineos only wins half the battle. Another half is to get the insurer to disconnect Fineos across a complex web of processes and reconnect new ones, which is daunting as the perceived benefits from switching are often uncertain.

To Fineos, this means revenue is more predictable as customers would mostly rather stick with the group than risk a years-long disruption with another competitor.

Customers who use Fineos may become a reference point, boosting Fineos’ credibility to win new business—especially from larger prospects, who typically require multiple reference accounts. As Fineos establishes itself across geographies, we also think it will be an obvious choice for prospective customers looking for external LA&H software.

Fineos (FCL)

  • Moat rating: Wide
  • Fair Value estimate: $3.10 per share
  • Share price April 30: $2.18
  • Star rating: ★★★★
  • Uncertainty rating: Very High

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.