Review of Q1 2023

The net customer intake amounted to 15 000 (16 000), slightly better than the 14 000 we expected. The solid number indicates Fortnox continues to gain market share and shows no signs of increased bankruptcies – where the churn typically lags the bankruptcy a few quarters though – or fewer new businesses. However, considering the decline in transaction revenue from lagerbolag (pre-made starting companies) – implying fewer new businesses – the solid net customer intake might mean a better underlying intake than previously. However, we do not want to draw such a conclusion from a single quarter. The y/y increase in the number of customers was 12%, and the total number of customers was 495 000 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, the market will mature, likely resulting in a lower net customer intake. We assume a gradual decline in absolute net customer intake from 2026. 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 SEK253 per month, somewhat below our forecast of SEK259. The ARPC increased by 18% y/y and 2% sequentially at an annualized rate. The deviation from our forecasts was due to softer growth than expected in Core Transaction, following less revenue from lagerbolag (pre-made starting companies), likely related to the slowdown in the Swedish economy. Both Core Subscriptions and Pengar Transaction/Lending matched our forecasts. Note that neither the recent nor 2022’s price increases have an impact on the q/q numbers, while the downturn in lagerbolag has.

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 came in somewhat below our forecast of SEK384m and amounted to SEK370m (279), corresponding to 33% growth y/y. Organic growth was 32%. Nevertheless, Fortnox is one of the fastest-growing SaaS companies in the Nordics despite its large size. The sales mix slightly deviated from our forecasts as Core Transactions came in softer than expected, while the other roughly matched our predictions.

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 Entreprenören – 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 SEK1103m (887), up from SEK994m in the last quarter, corresponding to an annualized q/q growth of 86%. The q/q growth was 17% and about 14% in ARPC, which seems reasonable considering that the most important products were increased by 9-18%, some increased at a higher rate, and some remained unchanged. We believe the strong growth following the price increases will result in a Core Subscription y/y growth of c30-40% over the next 12 months.

The graph below shows the significant impact of price increases on the ARR, such as in Q2 2022 and Q1 2023.

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.

Overall OPEX roughly matched our forecast of SEK228m and was SEK224m (184). Other external costs was in line with our expectations. Personnel expenses matched our forecasts as the net recruitment of employees was somewhat lower than expected, while the cost per employee was slightly higher than anticipated. All in all, the deviations were too small for us to draw meaningful conclusions, and Fortnox continues to show significant scalability, as expected, considering its business model.

Also, on a segment level, Pengar reached break-even, proving its potential to scale.

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. In general, current R&D projects generate meaningful revenue in 2-3 years.

EBIT was SEK140m, corresponding to an EBIT margin of 37.8% (32.1). Our forecast was SEK150m and 39.2%, and the miss was mainly due to softer sales at Core Transactions. Free cash flow was SEK97m (59), and excluding changes in net working capital, free cash flow was SEK86m (39). Net debt at the end of Q1 was SEK-324m, and, as expected, both Fortnox’s financial position and cash flow generation are 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.

We like that Fortnox, like us, uses EBIT margin in its R40 caluations or rather in its Rule of Fortnox (RoF), which is Fortnox's term for what in general would be called R60.

Fortnox continues to expand its offering, which we believe is important both to drive ARPC and increase stickiness. We want to highlight the Quotes & Contracts and the Signing products, powered by the acquisition of Cling (made in November 2022), and launched in March this year. While Cling only had sales of SEK2.2m during 2021, if the product is of high quality and needed by a reasonable share of SMEs, we believe Fortnox has the conditions to scale such a product fast.

Fortnox evaluates over 100 potential acquisition targets yearly, with product quality and scalability being key factors. We believe this kind of smaller product acquisition offers a good risk/reward, as the acquisition price likely is rather small most of the time while the potential upside in terms of both ARPC and stickiness is high.

See page 36 for larger picture.

We raise our sales forecast by 3% for 2023 and 2024 while increasing EBIT for the same years by 7-8%. On a more detailed level, we make the following substantial adjustments:

Overall, we forecast 34% and 27% organic growth, fueled by price increases and higher usage, with EBIT margins of 42.5% and 45.7% in 2023 and 2024.

We raise our Base Case slightly to SEK65 (62) on the back of increased forecasts.

Trading at ~19x sales 2024e, Fortnox is the highest valued business in our comparison. However, we believe that is for good reasons:

We believe the three last factors give Fortnox a competitive advantage that most other Nordic SaaS businesses lack, making Fortnox able to grow with rising margins for many years. That should result in a premium relative to peers on 2024 sales and earnings.