Review of Q4 2023

The total ARR (S&M and SaaS) was SEK405m (369m), down from SEK409m in the last quarter. While the q/q growth is negative, note that FX negatively affected SEK12m q/q. The total FX-adjusted ACV was SEK9.2, somewhat below our forecast of SEK11.0m.

The gross ACV was impressive once again and amounted to SEK20m, following several new deals in Public SE, and 23 and five Dynamics and banking Lasernet deals, respectively. While five banking deals is a strong number, the number of large ones was somewhat lower than usual. On the other hand, the churn was also higher than usual at SEK-10m.

As mentioned in our Update, we also get the impression that management has a more positive outlook for Private ACV relative to the number seen in the quarter, which is not weak but probably below the potential growth level. Also, management sees potential to strengthen the Lasernet offering and allow for more of a land- and expand-strategy. Today, Lasernet has a strong value proposition, especially to large high-end customers, and management aims to increase its attractiveness to a broader group of potential customers. However, those initiatives are in an early stage, and we do not expect any impact on ARR figures in the short term.

While Public SE had a rather strong Q4 with a total ACV of SEK3.4m, Public DK added a net of just SEK0.2m in ACV. Despite our data (focusing on new tenders) suggesting a rather weak Q4 in Public SE, Formpipe did well.

By the start of 2024, Formpipe merged Public SE and DK into one public segment. Management sees many advantages of the merger, such as size, synergies, and focus, and highlights that the business logic is the same across national borders.

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 matched our forecast of SEK138m and amounted to SEK137m (129), corresponding to 7% growth y/y. As expected, the y/y growth was mainly driven by S&M and SaaS, following the strong ARR growth (ACV) in recent quarters. Recurring revenue, S&M and SaaS grew by 20% y/y, slightly better than our expectations. Deliveries came in somewhat short due to Public SE and DK, while the largely negligible Licenses beat our expectations.

Total Deliveries declined y/y by 6%. 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 was roughly as we had anticipated. Management expects the Deliveries in Private to decline somewhat slowly going forward as even more implementation is passed on to partners.

For Sweden, Deliveries was down by 14% y/y while we forecasted an increase of 5%. However, 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 H1 2024, we believe Deliveries Sweden has solid growth potential going forward – as Formpipe takes its consulting in-house.

Public DK suffered from revenue in the Landburgsstyrelsen moving from Deliveries to S&M. However, we believe the level seen in Q4 is likely a bottom, and we expect slight sequential increases as the new deal structure matures.

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 SEK99m and was SEK105m (105), as both Other external costs and Personnel expenses per employee was higher than we expected. However, the number of employees decreased by four q/q while we expected a net addition of four, which, naturally, all else being equal, lowers our OPEX forecasts. Despite OPEX coming in somewhat above our expectations, Formpipe continues to execute on its plan of growing recurring revenues at limited cost increases.

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 SEK17.3m (5.7), corresponding to an adjusted EBIT margin of 12.7% (4.5). Our forecast was SEK17.2m and 12.5%. EBITDA - CAPEX was SEK15.2m (10.0), corresponding to an EBITDA - CAPEX margin of 11.2% (7.8), below our forecast of SEK21.3m. While high capitalizations of R&D boosted EBIT in the quarter, and the underlying EBITDA – CAPEX was lower than anticipated, both improved substantially y/y. We expect the increase in capitalized R&D to be temporary. The increase was related to the productization of the work connected to the issues with TAS last year and some additional investments in Lasernet.

By the end of the quarter, Formpipe’s net debt was SEK-2m, and the board proposed a dividend of SEK0.50 (0.00) per share.

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 3-4% for 2024-2025, which, combined with roughly flat OPEX, resulted in a 4-9% reduction of our EBIT forecasts for 2024-2025.

Notable changes:

We increase our forecasts regarding SaaS ACV somewhat due to management’s statement of higher activity in the Private market – having a positive effect primarily in 2025 and beyond.

We leave our Base Case at SEK33 (33) despite somewhat lowering our short- and mid-term forecasts. We believe strong growth in recurring revenue fueled by strong ACV, along with margin expansion, will provide solid profit growth over the next few years.

WhilWhile Formpipe does not look very attractive on EV/EBIT multiples 2023, as Formpipe focuses on growth, investors should focus on EV/Sales. 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 12x hints at where the expected margin improvement and decent sales growth make with the EV/EBIT valuation. Also, considering that we believe Formpipe can reach an EBIT margin of almost 20% (19.2) in 2025, the 2024e EV/S of 2.7x is arguably attractive given the company reaches our forecasts or its 20% EBIT margin target.