Review of Q1 2024

Group-level sales and EBITA were SEK2 409m and SEK253m relative to our SEK2 216m and SEK220m forecasts. Organic growth was 0%, better than our forecast of -3%. The deviation was primarily due to higher organic and acquired growth in DM, while PLM and PM roughly matched our expectations.

Sales in DM beat our forecast of SEK1 421m by 14% and amounted to SEK1 624m (1 212), corresponding to 34% growth y/y. The organic growth was -1% y/y, better than Q4’s -6% and our estimate of -8%. Demand remains stable within manufacturing, while the development within AEC differs between markets. The AEC market has improved from low levels in the US, while the European AEC market is weakening from higher levels. We interpret it as the overall market conditions for DM will remain roughly unchanged for the next few quarters. In addition, a rather high share of three-year deals positively impacted sales, probably because some customers wanted to secure a deal to reduce uncertainty before Autodesk changing the transaction model. The fully proprietary businesses SWG and Tribia did well during the Q1.

After suffering from integration focus in Q3, the US-based manufacturing-focused TeamD3 had a strong Q1 – partly due to seasonality. Nevertheless, once again, Addnode proves its ability to integrate larger acquisitions quickly and successfully.

Autodesk’s change to an agent model will be implemented in June for the US market and in Europe later in 2024 or 2025. As a reminder, all else being equal, the new transaction model will not affect gross profit, EBITA, or cash flow. Interestingly, Addnode points out that over 50% of today’s gross profit in Symetri is generated by Addnode’s products and services. We believe that numbers highlight Addnode’s strong value-add, with software and expertise, to Autodesk’s offering.

EBITA in DM was SEK168m (131), corresponding to an EBITA margin of 10.3% (10.8) – up from 7.9% in Q3. Our forecast was SEK125m and 8.8%. As expected, the stronger-than-expected sales resulted in a higher margin than estimated.

Design Management (DM) comprises three companies, Symetri, Tribia, and SWG. Symetri is the largest one, generating most sales in DM. Tribia and SWG have combined sales of SEKc500m.

Symetri delivers Autodesk products, related services, and add-on software to customers within architecture, engineering, and construction (AEC) and manufacturing, mainly in the US, UK and Nordics. As the bulk of the software is third-party (Autodesk), the margins in this business are lower than the division’s average. Recurring revenues generated in this business are reported as non-recurring revenues (i.e., upfront, for accounting reasons). Symetri is one of the largest Autodesk partners worldwide.

Tribia provides cloud-based collaboration software for the architecture, engineering, and construction (AEC) sector. Its main product is a proprietary software called Interaxo. Given the business's mix of proprietary software and services, its margin level is likely above the division’s average.

SWG delivers products and services for property management and maintenance, mainly in the Nordics and the UK, where it is the market leader. Like Tribia, SWG provides proprietary software and related services, so its margins are likely above the division’s average.

Sales in PLM was somewhat below our forecast of SEK460m and amounted to SEK454m (429), corresponding to 6% growth y/y. The organic growth was 2% y/y, slightly below our forecast of 4%. Overall, the market conditions within PLM are stable in most geographies. However, the rather slow organic growth of 2% – likely negative volume growth as we assume some price increases – results from customers being more cautious in investing in larger projects. While most customers do not cut their R&D spend, most might not increase it in current market conditions.

EBITA in PLM was SEK41m, corresponding to an EBITA margin of 9.0% (6.1). Our forecast was SEK44m and 9.5%. While the margin was somewhat below our expectations, the y/y improvement is substantial, and the cost-cutting initiatives initiated in 2023 are having an apparent effect.

Product Lifecycle Management (PLM) consists solely of the subsidiary Technia, which helps customers with complete product lifecycles. The offerings target various sectors, including telecom, manufacturing, automotive, construction, energy, and life science. Technia provides solutions based on Dassault Systèmes’ platform, related services, and proprietary add-on software, mainly targeting the Nordics, DACH, and the UK. Due to the division’s lack of proprietary software besides add-ons, PLM has the lowest EBITA margin in Addnode.

Sales in PM roughly matched our forecast of SEK345m and amounted to SEK342m (332), corresponding to 3% growth y/y. The organic growth was 2% y/y, somewhat below our forecast of 4%. Although many generalist IT consulting firms have experienced a tougher public sector market, PM sees stable demand. While Addnode has a somewhat different offering, it partly competes for the same budget as the generalist IT consulting firms. However, Addnode also sees a weaker demand from municipalities and authorities regarding investments in larger projects, while recurring sales and upselling to current customers remain stable. Also, there was one less working day y/y due to the easter, hurting the relatively consulting-heavy Division.

EBITA in PM was SEK65m (64), corresponding to an EBITA margin of 19.0% (19.3). Our forecast was SEK66m and 19.0%. Overall, once again, it was a solid quarter for PM.

Process Management (PM) comprises +15 companies, mainly serving the Swedish public sector. The solutions target a variety of the public sector’s needs, including document and case management and digitalised public services. The +15 units target most public sector-specific needs, and PM’s combined offering is broader than its competitors. Unlike DM and PLM, this division relies solely on proprietary software, meaning it has the highest EBITA margins in the group. However, these are dampened by about 50% of sales from services.

EBITA was SEK253m, corresponding to an EBITA margin of 10.5% (10.2). Our forecast was SEK220m and 9.9%, and the beat was mainly due to a stronger-than-anticipated rebound in DM. EBITDA – CAPEX, which we typically prefer in software companies where EBITDA and EBITA are boosted by capitalised R&D, was SEK237m (189), corresponding to an EBITDA – CAPEX margin of 9.8% (9.6).

Addnode’s net debt was SEK816m at the end of Q1, corresponding to 0.8x EBITDA 2024e, leaving financial room for further larger acquisitions.

As for any SaaS business capitalizing R&D, EBITDA and EBITDA margin are unsuitable metrics for Addnode. This, as EBITDA discards a large portion of the company’s R&D costs totally. R&D is typically a high cost for most SaaS businesses. The same holds for EBITA in Addnode's case. Instead, EBIT (where the capitalized R&D is amortized over time) or EBITDA – capitalized R&D/EBITDA – capex are better measures of the underlying profitability as it concerns the company’s full R&D spend. However, as Addnode has amortizations related to M&A, the underlying profit generation is somewhere between EBIT and EBITDA. We believe EBITDA - CAPEX (excluding M&A and including leasing payments) is the most suitable earnings metric for Addnode.

Since our last update, Addnode has acquired Canadian Optimec. The company has sales of about SEK40m and will join the PLM division. Although a small acquisition, it can pave the way for further expansion of PLM in North America.

Notably, management seems rather positive regarding the prospects for M&A in 2024. The pipeline with potential targets is solid.

Addnode’s R12m acquisition activity is currently high, as the large acquisition of Team D3. As usual, we expect additional acquisitions and assume that Addnode will add SEK800m in sales from M&A during 2024 on a full-year basis (from Q3 2024 and onwards in current forecasts). As the larger acquisitions in Addnode tend to occur sporadically, the R12m contribution to sales from acquisitions tends to differ significantly.

Addnode has a strong track record of value-adding acquisition. In addition to significant valuation-multiple arbitrage, Addnode has a track record of extracting value from acquisitions by using its expertise and selling add-on software to the acquired companies’ customers, and cross-selling acquired software to the customer base. The substantial margin improvements in larger low-margin acquisitions such as Transcat, Excitech and Microdesk are evidence of Addnode’s ability to extract value from M&A

We leave our overall sales growth and EBITA assumptions roughly flat, increasing sales by 0-1% and EBITA by 1-2% in 2024 and 2025. We believe the overall market environment will remain unchanged for the next few quarters and then gradually rebound, driven partly by lowered interest rates.

On the Divisional level, we increase our forecasts for DM following the relatively strong momentum in the Autodesk-related businesses. For now, we stick to forecasting sales in DM, despite Autodesk’s new transaction model somewhat impacting the number in Q2, to align our discussions about historical data and forecasts. We will change our focus to gross profit in the Q2 Preview. On the other hand, we lower PLM and PM somewhat due to slightly lower organic growth forecasts.

Note that the underlying increase of our forecasts is slightly higher as we remove future M&A from Q2 2024.

Based on the raised forecasts, we increased our Base Case to SEK 117 (110).

Addnode’s valuation of 22x EBIT for 2025e is below the average but above the median SaaS business in our peer list. Addnode has a relatively low share of SaaS revenues compared to its peers. On the other hand, the group does have a very successful acquisition record. EV/EBITDA - CAPEX, which we believe is a more relevant multiple for Addnode, considering its high M&A-related D&A, is trading at 19x for 2025e. Also, we believe the uncertainty in the estimates is lower in Addnode compared to many other companies in the list, where analysts expect significant margin improvement. Addnode is trading at a discount to Vitec, another successful software-focused M&A compounder. However, Vitec has solely proprietary software, indicating the potential in Addnode as its proprietary solutions grow. Note the forecasts for Addnode are Redeye’s and include future M&A.