Review of Q2 2024

The total ARR (S&M and SaaS) was SEK434m (406m), up from SEK426m in the last quarter. The q/q increase was driven by a solid organic ACV of SEK12m, SEK2m from M&A (Dictymatec), and a negative SEK6m due to FX. Compared to the rather soft SEK6.4m organic ACV in Q1, with SEK12m in this quarter, Formpipe is back at solid organic ARR growth. Our forecast was SEK9.5m. Both Private and Public delivered solid numbers with SEK8.7m and SEK3.6m, respectively.

In the Private segment, Banking increased its ACV by 200% relative to Q2 2023 and signed five new Temenos deals. However, growth within Microsoft Dynamics was not as strong, although not bad, with 19 new customers (compared to 13 in Q1 and 23 in Q4). Management sees potential for higher growth within Microsoft Dynamics in particular and believes that the new packaging with Essentials (freemium), Professional and Enterprise – that has received solid feedback from partners – will trigger higher ACV from late 2024 and beyond. The partners are satisfied with being able to include Lasernet in the Dynamics offering without a high initial price tag, expanding Lasernet's de facto addressable market. Formpipe believes that most customers will gradually move to the non-freemium packages as they discover the benefits of Lasernet, which we find reasonable considering Lasernet’s track record.

Regarding Public, it also did well – at least from an ACV perspective. The quarter’s deal flow includes the first cross-border deal of TAS in Sweden – an early sign of the benefits of the merged Public segments. In addition, Platina signed new deals and expansions within the defence segment and the Stockholm region.

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 at our forecast of SEK134m and amounted to SEK133m (138), corresponding to -3% growth y/y. Recurring revenue, S&M and SaaS grew by 13% y/y, largely matching our expectations. Deliveries in Public came in lower than we expected for the second consecutive quarter due to the new deal with Landburgsstyrelsen – which impact we likely underestimated once again – and temporary peaks in R&D in TAS having an impact in Q2 as well.

Total Deliveries declined y/y by 36%. Private had roughly flat Deliveries while Public saw a large drop of 42% y/y. Sweden did rather well and has managed to expand its workforce as planned, with the overall goal of increasing recurring revenue from the Swedish Public sector. However, an increased contribution to profits from Deliveries in Sweden is also welcomed.

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, although the exact timing is uncertain. In addition, Public DK remained 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 some rebound within the next few quarters. However, we have lowered our expectations for deliveries in Denmark – especially in the short term.

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 SEK103m and was SEK105m (101), as Other external costs was higher than we expected. Management mentions that Lasernet’s sales and marketing activity was high during the quarter, including a lot of fairs. Thus, we expect the underlying cost level to be somewhat lower. The number of employees increased by seven while we expected an increase of three. However, that was compensated by somewhat lower personnel expenses per employee.

Also, the Cost of revenues was 7% above our expectations. Those costs are mostly related to kickbacks to partners for selling and implementing Lasernet.

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 SEK7.9m (12.9), corresponding to an EBIT margin of 6.0% (9.4). Our forecast was SEK12.6m and 9.4%. EBITDA - CAPEX was SEK8.2m (14.5), corresponding to an EBITDA - CAPEX margin of 6.2% (10.5), below our forecast of SEK15.9m. NWC was roughly neutral, leaving free cash flow close to EBITDA-CAPEX. So far, in 2024, Formpipe has a stronger cash generation than last year, likely due to the higher share of recurring revenue – typically with a more appealing cash flow profile.

By the end of the quarter, Formpipe’s net debt was SEK-9m.

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 2% for 2024-2025, which, combined with roughly flat OPEX, resulted in a 12-22% reduction of our EBIT forecasts for 2024-2025.

Notable changes:

We forecast an EBIT margin of 17% for H2 2025, below Formpipe’s target of 20% EBIT margin at the end of 2025. Given that Deliveries picked up significantly and that the ACV growth accelerates already in late 2024 (there is a 1-2 quarter lag from ACV to SaaS revenue), we believe Formpipe can reach the target. However, it is not our Base Case, particularly as our expectations for Deliveries are dampened. Nevertheless, we expect Formpipe to continue expanding its margins beyond 2025, reaching 20% in 2027.

Despite making a rather substantial cut to our 2024 and 2025 EBIT forecasts, we only lower our Base Case slightly to SEK31 (32). While the issues in Public Deliveries seem to be more prolonged than we previously thought, the solid ACV is promising and the most important metric for the long term.

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 FWhile 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 2026 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 18% in 2026, the 2024e EV/S of 2.6x 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 reached in 2027)