Fortnox Q2 2023: Preview
Research Update
2023-06-15
09:37
Redeye reduces its sales forecasts for Q2 2023, mainly as we adjust our estimates to Fortnox’s current ARR definition, negatively affecting the short-term Core Subscription growth forecasts. However, the Base Case remains unchanged, and the effect on our 2024 forecasts is minor.
FN
Fredrik Nilsson
We have lowered our sales forecasts for Fortnox for Q2 2023 as well as for FY 2023 somewhat. The decrease is mostly due to us wrongly using the company’s previous ARR definition. The current ARR definition is “Annual Recurring Revenue comprises the opening value of the next year’s revenue from subscription services in financial administration”. The old one was “Annual Recurring Revenue. MRR multiplied by 12. Monthly Recurring Revenue (MRR) is defined as the opening value of the next month’s revenue from subscription services within financial administration”. Thus, in other words, instead of forward-looking MRR*12, Fortnox is now using forward-looking ARR. While the definition change occurred in Q2 2022, the difference has been small so far. However, considering the price increases implemented in Q2 2023, where prices are increased gradually throughout the coming 12 months as contracts are renewed, the difference between the definitions became substantial.
Instead of a very strong q/q growth in Core Subscription in Q2 2023, as we previously expected, the growth will be smoothed out over Q2 2023 – Q1 2024 as contracts are gradually renewed at a higher pricing point. As a result, while lowering mainly Q2 2023 and Q3-Q4 2023 to some extent, our Core Subscription forecast for Q1 2024 is roughly unchanged. Thus, changing to the right ARR definition will negatively affect the upcoming quarters while leaving our mid- and long-term forecasts unchanged.
In addition, we make a slight cut to Pengar Lending/Transactions due to the macroeconomic conditions in Sweden.
Overall, we forecast 29% sales growth (11% from growth in number of customers and 18% from increased ARPC, mostly driven by price increases) and an EBIT margin of 37.3% in Q2 2023. The report will be published on 14 July. We leave our Base Case unchanged at SEK65.
| Estimate Revisions | ||||||
| Sales | FYE 2023 | Old | Change | FYE 2024 | Old | Change |
| Net sales | 1634.4 | 1713.1 | -5% | 2125.1 | 2178.0 | -2% |
| Y/Y Growth (%) | 28% | 34% | 30% | 27% | ||
| Core Subscription | 1035.7 | 1078.4 | -4% | 1297.9 | 1309.5 | -1% |
| Y/Y Growth (%) | 30% | 35% | 25% | 21% | ||
| Core Transactions | 270.4 | 271.1 | 0% | 372.4 | 375.0 | -1% |
| Y/Y Growth (%) | 20% | 20% | 38% | 38% | ||
| Pengar Transactions/Lending | 188.5 | 198.7 | -5% | 277.4 | 296.1 | -6% |
| Y/Y Growth (%) | 49% | 57% | 47% | 49% | ||
| Pengar Other | 32.3 | 32.3 | 40.3 | 40.3 | ||
| Y/Y Growth (%) | 48% | 48% | 25% | 25% | ||
| Marknadsplatsen | 147.6 | 147.6 | 0% | 177.1 | 177.1 | 0% |
| Y/Y Growth (%) | 20% | 20% | ||||
| OPEX | ||||||
| Other external costs | -250.6 | -250.6 | 0% | -300.7 | -300.7 | 0% |
| Y/Y Growth (%) | 15% | 15% | 20% | 20% | ||
| Personnel expenses | -584.6 | -584.6 | 0% | -692.3 | -692.3 | 0% |
| Y/Y Growth (%) | 22% | 22% | 18% | 18% | ||
| Earnings | ||||||
| EBIT | 654.5 | 727.8 | -10% | 946.8 | 994.3 | -5% |
| EBIT Margin (%) | 40.0% | 42.5% | 44.6% | 45.7% | ||
| Diluted EPS | 0.84 | 0.94 | -11% | 1.23 | 1.29 | -5% |
| Forecasts | ||||||||
| Sales | Q1A 2023 | Q2E 2023 | Q3E 2023 | Q4E 2023 | FYE 2023 | FYE 2024 | FYE 2025 | FYE 2026 |
| Number of customers, eop | 495,000 | 508,000 | 516,000 | 529,000 | 529,000 | 585,000 | 635,000 | 665,000 |
| Net sales | 370.0 | 396.6 | 417.0 | 450.8 | 1634.4 | 2125.1 | 2668.9 | 3289.4 |
| Y/Y Growth (%) | 33% | 29% | 26% | 26% | 28% | 30% | 26% | 23% |
| Core Subscription | 232.0 | 250.6 | 268.6 | 284.4 | 1035.7 | 1297.9 | 1563.5 | 1832.7 |
| Y/Y Growth (%) | 35% | 31% | 26% | 27% | 30% | 25% | 20% | 17% |
| Core Transactions | 63.0 | 67.5 | 65.5 | 74.5 | 270.4 | 372.4 | 497.5 | 636.2 |
| Y/Y Growth (%) | 23% | 20% | 19% | 18% | 20% | 38% | 34% | 28% |
| Pengar Transactions/Lending | 43.0 | 45.0 | 47.1 | 53.4 | 188.5 | 277.4 | 376.0 | 520.9 |
| Y/Y Growth (%) | 61% | 48% | 47% | 44% | 49% | 47% | 36% | 39% |
| Pengar Other | 7.0 | 7.4 | 8.9 | 9.0 | 32.3 | 40.3 | 50.4 | 63.0 |
| Y/Y Growth (%) | 150% | 80% | 25% | 25% | 52% | 25% | 25% | 25% |
| Marknadsplatsen | 35.0 | 36.1 | 37.0 | 39.4 | 147.6 | 177.1 | 221.3 | 276.7 |
| Y/Y Growth (%) | 22% | 22% | 25% | 15% | 21% | 20% | 25% | 25% |
| Gross Profit | 345.0 | 366.9 | 385.8 | 416.9 | 1514.6 | 1965.7 | 2468.7 | 3042.7 |
| Gross Profit Margin (%) | 93% | 93% | 93% | 93% | 93% | 93% | 93% | 93% |
| OPEX | ||||||||
| Other external costs | -56.0 | -65.3 | -56.8 | -72.5 | -250.6 | -300.7 | -362.3 | -429.6 |
| Y/Y Growth (%) | 17% | 15% | 15% | 15% | 15% | 20% | 20% | 19% |
| Personnel expenses | -143.0 | -148.0 | -129.3 | -164.2 | -584.6 | -692.3 | -833.2 | -1015.2 |
| Y/Y Growth (%) | 23% | 21% | 22% | 20% | 22% | 18% | 20% | 22% |
| Earnings | ||||||||
| EBIT | 140.0 | 148.0 | 190.0 | 175.5 | 654.5 | 946.8 | 1256.3 | 1574.3 |
| EBIT Margin (%) | 37.8% | 37.3% | 45.5% | 38.9% | 40.0% | 44.6% | 47.1% | 47.9% |
| Diluted EPS | 0.17 | 0.19 | 0.25 | 0.23 | 0.84 | 1.23 | 1.63 | 2.05 |
Case
Swedish SME’s leading software provider
Evidence
Impressive track record of cost-efficient growth
Challenge
High profitability attracts competition
Challenge
How many modules and services do the average SME need?
Valuation
Fair Value SEK 65
People: 4
The management has solid and relevant experience, although many are rather new to Fortnox. Some institutions are found among the owners, which we find positive. Fortnox's largest shareholder, Olof Hallrup (19%), is present in the board, while other board members and management do not have any significant shareholdings.
Business: 5
The company has a stable and diversified customer base, generating +80% recurring revenue with very high gross margin. Also, the currents estimated SaaS penetration and low usage of some of Fortnox's services allows for further growth, and thanks to its close relationship with the accounting firms, customer acquisition costs are low. However, some of its software, such as the Accounting module, are probably large enough to make a notable share of Fortnox's revenue exposed to single a product.
Financials: 5
The company's debt-to-equity- and the interest coverage ratios are excellent, and it holds a solid net cash position. Also, its growth and profitability figures has been outstanding in recent years.
Disclosures and disclaimers