Review of Q1 2024

The total ARR (S&M and SaaS) was SEK426m (383m), up from SEK405m in the last quarter. While the total q/q growth was strong, note that FX positively affected SEK14m q/q. The total FX-adjusted ACV was SEK6.4, below our forecast of SEK11.0m. While Private improved its ACV y/y, we expect higher levels in Private for Formpipe to reach SEK11m on the group level, as our forecast for Public is more defensive. Regarding Private ACV, the contribution from the banking sector was solid, with six new customers (although not very large ones). However, growth within Microsoft Dynamics was more dampened with 13 new customers (compared to 23 in Q4). Also, Private ACV was hurt by churn in some older non-core life science products. Our impression is that management is unsatisfied with the growth within Dynamics, and we believe a higher level is needed to reach the company’s 10% overall growth target. However, in conjunction with the Q1 report, management presented new initiatives to improve growth within the Dynamics ecosystem.

So far, Lasernet has mainly targeted larger enterprise customers with substantial needs. While Lasernet has done well within that category, management believes that strategy has left a lot of potential sales on the table – which we find reasonable. By segmenting Lasernet into three tiers, Stater (free), Professional, and Enterprise, Formpipe aims to capture a larger share of the overall market. Formpipe believes that companies – outside of the current core enterprise market – implementing Dynamics will opt for the free and cheaper tiers rather than using a custom-built or simpler solution. Then, when the customers realize the benefits of Lasernet, Formpipe hopes they will gradually implement the professional or enterprise tier. While there is a risk of cannibalizing (the current offering is basically the Enterprise tier), our impression is that Lasernet is a very capable product and that market awareness limits growth. Thus, we believe adding product-led growth elements to the offering makes sense. The potential market is substantial, highlighted by the wide range of current customers such as baking company Pågen and machinery company Caterpillar.

We look forward to seeing the impact of the new tiered offering, which, if successful, could occur in late 2024.

Formpipe recently acquired the French company Dictymatec to accelerate growth in southern Europe. It is a long-term distributor and implementation partner for Lasernet in southern Europe, with sales of about SEK4m. Thus, it is a minor acquisition that could strengthen the interest in Lasernet in those markets.

The ARR, both S&M and SaaS, and its growth rate (ACV) is the most important metric to follow in Formpipe. The ARR is a leading indicator of recurring revenue growth, the major driver of profit growth in Formpipe and essential to the investment case.

Total sales came in below our forecast of SEK133m and amounted to SEK125m (128), corresponding to -2% growth y/y. Recurring revenue, S&M and SaaS grew by 15% y/y, largely matching our expectations. Deliveries in Public came in significantly lower than we expected due to the new deal with Landburgsstyrelsen – which impact we likely underestimated – and temporary peaks in product development in TAS.

Total Deliveries declined y/y by 40%. Deliveries in the private sector are coming down as Formpipe wants partners to take care of the delivery in the private segment, and, thus, that is nothing we are worried about. The decline in Private of 15% was lower than we had anticipated.

For Public, Deliveries was down by 44% y/y while we forecasted a decrease of 18%. As far as we understand, Sweden did rather well, and management believes the organization is in good shape and is pleased with the improvements in structure and efficiency. While we do not expect any substantial sales growth in the next few quarters, we believe Deliveries Sweden has solid growth potential in the future – as Formpipe takes its consulting in-house.

As mentioned, Denmark was the driver behind the weak development. Public DK suffered from less revenue from Landburgsstyrelsen to a greater extent than we expected. However, we believe the deliveries from Landburgsstyrelsen will increase gradually between 2024 and 2025. In addition, Public DK was hurt by temporary peaks in product development, using the same resources that otherwise would have generated Deliveries revenue. However, as the demand is healthy, we expect a rebound in the next quarter.

Formpipe has four kinds of sales: Support & Maintenance (S&M), SaaS, Licenses and Deliveries. Support & Maintenance relates to service agreements for software sold as an on-premises license and SaaS add-on modules where the platform was initially sold as an on-premises license. The Support & Maintenance revenue is 100% recurring and largely resembles SaaS revenue with high gross margins. SaaS revenue is 100% recurring software revenue from software sold as a subscription with high gross margins. Licenses constitute on-premises licenses, and their share of total sales is low and declining. Deliveries is revenue from consulting or professional service with lower gross margins, where Formpipe integrates and sometimes customizes the software.

Overall, OPEX came in above our forecast of SEK98m and was SEK104m (101), as both Other external costs and Personnel expenses per employee was higher than we expected. The number of employees was flat q/q while we expect an increase of one. However, management mentions that it recruited a few people after the end of the quarter, mostly for the Swedish Deliveries organization, which we find promising considering its growth prospects. The quarter’s personnel expenses was somewhat elevated from normal levels. Thus, despite the higher outcome than expected, we left our OPEX forecasts roughly unchanged.

Sales expenses relate mainly to partner kickbacks and sub-consultants. In addition to the typical Other costs, like rent, software and travel, the line includes Formpipe’s Ukrainian-based offshore resources.

EBIT was SEK4.0m (7.1), corresponding to an EBIT margin of 3.2% (5.5). Our forecast was SEK16.4m and 12.3%. EBITDA - CAPEX was SEK6.7m (10.2), corresponding to an EBITDA - CAPEX margin of 5.4% (8.0), below our forecast of SEK16.0m. Despite the soft EBIT, free cash flow was relatively strong at SEK15.1m, thanks to a solid contribution from working capital.

By the end of the quarter, Formpipe’s net debt was SEK-18m.

As for any SaaS business capitalizing R&D, EBITDA and EBITDA margin are unsuitable metrics for Formpipe. 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. 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.

We lowered our sales forecasts by 4% for 2024-2025, which, combined with roughly flat OPEX, resulted in a 15-27% reduction of our EBIT forecasts for 2024-2025. Note that the weak EBIT in Q1 significantly impacts 2024 numbers.

Notable changes:

Despite making a rather substantial cut to our 2024 and 2025 EBIT forecasts, we only lower our Base Case slightly to SEK32 (33). We believe the issues in Public Deliveries are temporary. While the lower ACV within Dynamics is somewhat worrying, we believe the repackaged Lasernet has a good chance of accelerating growth in late 2024 and beyond. Although it will take longer than we previously thought, we believe strong growth in recurring revenue fueled by strong ACV and margin expansion will provide solid profit growth over the next few years.

While Formpipe does not look very attractive on EV/EBIT multiples in 2024, we believe the combination of a rather low EV/sales, decent sales growth potential, and solid margin expansion potential make Formpipe interesting. The 2025 EV/EBIT of 10x hints at where the expected margin improvement and decent sales growth do to the EV/EBIT valuation. Also, considering that we believe Formpipe can reach an EBIT margin of almost 20% in 2026, the 2024e EV/S of 2.8x is arguably attractive given the company reaches our forecasts or its 20% EBIT margin target (which is for 2025, and we believe it will be nearly reached in 2026)