Review of Q2 2024

Group-level sales and EBITA were SEK2,005m and SEK162m relative to our SEK1,997m and SEK199m forecasts. Organic growth was 11%, better than our forecast of 9%. While sales large matched our expectations, the deviation in EBITA was due to softer margins in DM and PLM, primarily.

Sales in DM beat our forecast of SEK1,184m by 3% and amounted to SEK1,214m (778), corresponding to 56% growth y/y. The organic growth was 22% y/y, better than Q1’s -1% and our estimate of 14%. EBITA in DM was SEK86m (48), corresponding to an EBITA margin of 7.1% (6.2). Our forecast was SEK107m and 9.0%. The relatively soft margins (although a rebound from last year’s weak number) despite the solid organic growth was due to a high share of 3-party software in the sales mix, highlighted by the relatively soft gross margin of 42% (50). Also, Q2 is typically a soft quarter margin-wise for DM.

Demand for the Symetri-related offering (where gross margins are lower) was strong during the quarter, partly driven by high demand for 3-year licenses (revenue recognised upfront). The high appetite for 3-year deals is probably because some customers wanted to secure a deal to reduce uncertainty before Autodesk changed the transaction model. The UK market saw strong demand from both AEC and manufacturing, while the demand from AEC in the US increased y/y.

The fully proprietary offerings, SWG and Tribia, had stable growth during the quarter. Considering the softer gross margin, they were most likely outgrown by the Symerti-related offering.

Autodesk’s change to an agent model was implemented in June for the US market and will be implemented in Europe in late September. As there is a lag from transaction to revenue recognition, the US will start to see an effect in Q3 and Europe in Q4 (full effect likely Q4 in the US and Q1 2025 in Europe). 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.

We have adjusted our forecasts accordingly, which we discuss in detail in the Estimate Revisions section.

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 below our forecast of SEK497m and amounted to SEK468m (468), corresponding to 0% growth y/y. The organic growth was -2% y/y, slightly below our forecast of 2%. EBITA in PLM was SEK37m, corresponding to an EBITA margin of 7.9% (4.3). Our forecast was SEK45m and 9.0%. While the margin was below our expectations, the y/y improvement is substantial, mostly thanks to the cost-cutting initiatives in 2023.

The Nordic market remained solid while the UK, US and Germany experienced lower sales y/y due to less license sales in the automotive industry. However, the recurring revenues grew by a solid 7%, while licenses was down 60% y/y – relative to a high number last year. While the numbers suggest somewhat lower sales volumes, the negative organic growth in the quarter is largely driven by continued migration to SaaS – where PLM is in an earlier phase compared to the other Divisions. Thus, the underlying development in the quarter was stronger than the sales and EBITA numbers suggest.

Approximately one week ago, Dassault Systemes announced a profit warning, mainly due to delayed larger transactions. However, Addnode has pointed out that longer lead times result in fewer large transactions for several quarters. Thus, while what Dassault Systemes says typically is of interest to Addnode, in this case, it has only a minor impact on our forecasts.

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 slightly exceeded our forecast of SEK326m and amounted to SEK335m (320), corresponding to 5% growth y/y. The organic growth was 4% y/y, above our forecast of 2%. EBITA in PM was SEK59m (60), corresponding to an EBITA margin of 17.6% (18.8). Our forecast was SEK62m and 19.0%. Although Q2 did not reach the strong ~19% EBITA margin we have been used to in PM lately, 17.6% is a decent level; the variation is driven primarily by the sales mix.

Although there was two more working days y/y, the organic growth rate accelerated compared to recent quarters. Addnode continues to see a weaker demand from municipalities and authorities regarding investments in larger projects, resulting in few procurements. On the other hand, Addnode is doing a lot of work for existing customers. Also, Addnode will not get any meaningful impact this year from index adjustments. Thus, volumes and higher pricing on new contracts must drive sales growth.

Despite the somewhat softer EBITA margin, we see yet another solid quarter from Process Management.

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 SEK162m, corresponding to an EBITA margin of 8.1% (7.1). Our forecast was SEK199m and 10.0%, and the miss was due to softer margins in all Divisions. EBITDA – CAPEX, which we typically prefer in software companies where EBITDA and EBITA are boosted by capitalised R&D, was SEK131m (80), corresponding to an EBITDA – CAPEX margin of 6.5% (5.1).

Addnode’s net debt was SEK826m at the end of Q2, 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 Swedish Addoceo and Austrian Prime Aerostructures, adding SEK15m and SEK45m in sales and will join the PM and PLM Divisions, respectively.  Although small acquisitions, both are typical Addnode acquisitions. Addoceo adds case management systems for transportation services, which complements Addnode’s offering to the Swedish public sector. Prime Aerostructure boost Addnode’s know-how in advanced simulations towards its global customer base within the Dassault Systemes ecosystem.

Addnode’s R12m acquisition activity is currently low in terms of sales, as the large acquisition of Team D3 was completed just over one year ago. 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 Q4 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

Note that our sales forecasts in Design Management (and thus also at the Group level) are incomparable to our previous forecasts as we incorporate Autodesk’s new transaction model into our forecasts, resulting in lower sales, higher EBITA margins and unchanged gross profit and EBITA. Thus, from now on, we will focus on gross profit and EBITA in DM. Also, our sales forecasts (in DM) are more uncertain than usual.

Excluding the technical estimate changes related to Autodesk’s new transaction model, we somewhat lower our overall sales growth and reduce our EBITA assumptions by 6% for 2024 and 1% for 2025.

On the Divisional level, we lowered our underlying forecasts for DM following the quarter’s somewhat soft margin – we likely had slightly too high expectations on the margins in TeamD3 following the strong Q1 2024. We slightly lower our PLM forecasts on the somewhat more cautious market outlook outside of the Nordics. However, the solid growth in recurring revenue will provide support into coming quarters. Regarding PM, we leave our organic forecast largely unchanged.

Note that the underlying increase of our forecasts is slightly higher as we remove future M&A from Q3 2024.

Based on the reduced forecasts, we decreased our Base Case to SEK 112 (117).

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 17x 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.

From an EV/sales versus sales growth and margins perspective, Addnode stands out as being attractive compared to other larger companies. However, Addnode’s high share of third-party software and services, which limits its margin potential, likely holds its valuation back. Also, the forecasts include future M&A. On the other hand, the smaller, often unprofitable, and more “pure” software companies trading at an EV/Sales in line with Addnode are usually followed by only a single or a few analysts. Thus, considering companies with a long track record of profitable growth, Addnode’s valuation stands out, at least partly justified by its business model with a high share of third-party software and services.