Review of Q2 2024

Net customer intake was 16,000 (15,000), somewhat higher than our expectation of 15,000 and the highest level seen in a Q2 so far. Thus, as seen in earlier quarters, softer macroeconomics do not have any meaningful impact on the net customer intake. As mentioned in earlier Updates, according to management, the solid number is mostly a result of long-term initiatives focusing on making it easier for accounting bureaus to transfer all their customers from other systems to Fortnox. Also, the increased focus on micro-businesses has boosted the net customer intake to some extent. The y/y increase in the number of customers was 12.2%, and the total number was 572,000 at the end of the quarter.

The net intake of customers is, together with the ARPC, the most important metrics in Fortnox. A strong net customer intake implies a continuing low churn and that Fortnox continued to gain market share. However, in a few years, probably around 2025, the market will mature, likely resulting in a lower net customer intake. The net intake of customers has a seasonal pattern, where Q1 is strong, and Q3 is weak.

Fortnox has a target of reaching at least 700 000 customers in 2025, which we find rather ambitious, and that would require an uptick in the absolute customer intake relative to current levels.

The ARPC increased to SEK304 per month, above our forecast of SEK297. Interestingly, in terms of quarterly numbers, Fortnox has already reached its 2025 target of SEK300 in ARPC. However, Fortnox uses the R12m figure, which will most likely reach SEK300 in a few quarters. The ARPC increased by 14% y/y and grew by 7% sequentially, partly driven by price increases. While most ARPC lines roughly matched our forecasts, ARPC from Core Transactions was 8% better than expected. It seems like higher usage and new products and services have been able to offset an assumed negative impact from soft macroeconomics. However, price increases and Fortnox moving some revenue related to payrolls from subscriptions to transactions (in November 2023) also have a positive impact. ARPC from Core Transactions grew by a solid 23% y/y in Q2.

The average revenue per customer (ARPC) is, together with the net intake of customers, the most important metrics in Fortnox. Strong ARPC growth implies that the average customer uses additional modules, integrations and transaction- and lending services. In addition to increasing sales, higher usage typically raises customers switching costs, which, all else equal, should reduce churn. Also, our ARPC concerns a single quarter, while the company typically talks about the 12 months rolling average.

Fortnox has a target of at least SEK300 per month in ARPC in 2025. Fortnox is well on track to reach that target, and we believe the company will reach it.

Total sales beat our forecast of SEK502m and amounted to SEK515m (404), corresponding to 27% growth y/y – 26% organic growth. As has been the case for several years, Fortnox remains one of the fastest-growing and profitable SaaS companies in the Nordics despite its large size. Although partly driven by price increases, sales growth is also driven by positive net customer intake and strong momentum in Transactions and Lending thanks to continuous product development – despite soft macroeconomics.

The underlying drivers of Fortnox sales growth are the net customer intake and the ARPC, discussed earlier. We sort Fortnox’s sales into five categories, Core Subscriptions, Core Transactions,  Pengar Transactions/Lending, Pengar Other, and Marknadsplatsen. Core Subscriptions includes the subscription revenue from Företagande, Byrån, and Entreprenären – mostly subscriptions of Fortnox software modules. Core Transactions includes transaction revenue from the same business areas – mostly incoming invoices and pay slips. Pengar Transactions/Lending includes transaction- and lending revenue from Pengar – mostly factoring and corporate loans. Pengar Other includes the remaining revenue from Pengar. Marknadsplatsen includes all reveue from Marknadsplatsen – Offerta, Fortnox App Market, and the integration module.

ARR was SEK1478m (1237), up from SEK1448m in the last quarter, corresponding to an annualized q/q growth of 9%. As seen in the last years, the q/q ARR growth is typically concentrated in a quarter where price increases are implemented. Also, most new products and services are monetized by transaction revenues rather than subscriptions, hurting ARR growth. However, substantial parts of Fortnox transaction revenue are more or less recurring. It is important to note that Fortnox, unlike many SaaS companies, does not include recurring-like transaction revenue in its ARR. That is why we believe investors should focus on sales rather than ARR in Fortnox (However, ARR is the most relevant metric in most SaaS businesses).

The ARR and its growth rate is an important metric to follow in Fortnox. The ARR is a leading indicator of Core subcription revenue growth. However, unlike most SaaS companies, where ARR often is more important than sales (as ARR typically is a leading indicator for overall sales growth), Fortnox has a notable share of transaction and lending-based revenue, making the ARR somewhat less important.

OPEX roughly matched our forecast of SEK265m and amounted to SEK266m (219). The net recruitment of 38 people exceeded our expectations and marked the second consecutive quarter with higher recruitment than we anticipated. Most will work within R&D. As mentioned in our last update; we believe it makes sense to increase the headcount substantially after a rather long period of small increases, particularly considering the softer employee market. We expect lower net recruitment for the next few quarters, roughly in line with the 2023 average.

As for any SaaS business, the short-term connection between OPEX expansion and sales growth is limited. If Fortnox has low net recruitment for several quarters, margins will increase significantly as the short-term sales growth will be unaffected. At the same time, significant net recruitment will impact OPEX while leaving short-term sales unchanged, resulting in a drop in margins. However, balanced net recruitment is crucial in the long run, allowing for long-term sales growth and healthy margins.

EBIT was SEK203m, corresponding to an EBIT margin of 39.4% (38.9). Our forecast was SEK195m and 38.8%, and the 4% beat follows higher sales. EBITDA – CAPEX, which we consider the best profit measure in SaaS businesses (although EBIT, as Fortnox focuses on, is fine as well, at least in Fortnox’s case), was SEK191m (154), above our forecast of SEK189m.

Cash flow was softer than we anticipated as net working capital (NWC) did not decrease as much as we expected. Relative to R12m Sales, NWC increased to 9.7% in the quarter compared to 11.7% in Q4 2023. Overall, NWC can fluctuate over quarters due to calendar effects. Investors should look at the underlying trend, where Fortnox has increased its NWC following the strong growth in the financial service offering.

At the end of Q2, net debt was SEK-451m, and, as expected, Fortnox’s financial position is very solid.

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

While Offerta is facing a substantial macroeconomic headwind, the company’s roughly 0% sales CAGR 2021-2023 and flat EBIT margin are far below the rest of Fortnox. A few days ago, Fortnox announced that it intends to merge Offerta with its competitors IPIS and Dorunner into one marketplace for service providers and consumers. Fortnox would receive 48% ownership, meaning that Offerta will no longer be consolidated into the group figures if the deal is completed. The deal is expected to close in Q4 2024.

Considering Offerta's soft performance and non-core characteristics, we believe the initiative makes sense. Reaching a critical mass of suppliers and consumers is crucial for marketplaces – a clear example of network effects. Thus, creating one larger service provider-to-consumer marketplace makes much sense on the demand side. In addition, there are most likely cost synergies as well.

Also, Fortnox wants to focus on its core offering, SME ERP software, with related (including financial) services. Several new products have recently been launched or are planned to launch before year-end. Examples include Fortnox Card for accounting firms, Insights, Payments, and new AI features.

We raise our sales forecast by 1% for 2024 and 2025 while decreasing EBIT for the same years by -0-1%. On a more detailed level, we make the following adjustments:

We forecast 26% and 24% organic growth with 41% and 44% EBIT margins in 2024 and 2025.

We leave our Base Case at SEK73 (73) following largely unchanged forecasts.

Trading at ~15x sales 2025e, Fortnox is the highest-valued business in our comparison. However, we believe that is for good reasons:

With >400 integrations, Fortnox is the leading ecosystem for Swedish SMEs.

We believe the three last factors give Fortnox a competitive advantage that most other Nordic SaaS businesses lack, allowing Fortnox to grow with rising margins for many years. That should result in a premium on 2025 sales and earnings relative to peers.