Review of Q2 2023

The net customer intake amounted to 15 000 (15 000), slightly better than the 13 000 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. Management states that the focus on smaller companies might have positively affected the intake, and some accounting firms moving all their customers to Fortnox for efficiency reasons. However, we are still talking about rather small numbers making it unwise to draw any major conclusions. The y/y increase in the number of customers was 12%, and the total number of customers was 510 000 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, probably around 2025, the market will mature, likely resulting in a lower net customer intake. 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 SEK268 per month, somewhat above our forecast of SEK264. The ARPC increased by 17% y/y and 26% sequentially at an annualized rate (boosted by the recent price increases on subscriptions). The deviation from our forecasts was due to a somewhat higher contribution from Core Subscriptions and Pengar Transactions/Lending, while Core Transactions came in somewhat short of our expectations.

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 above our forecast of SEK397m and amounted to SEK404m (308), corresponding to 31% growth y/y. Organic growth was 30%. Despite its large size, Fortnox continues to be one of the fastest-growing SaaS companies in the Nordics. Although partly driven by price increases, sales growth was also driven by positive net customer intake and strong momentum, especially in Pengar.

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 SEK1163m (914), up from SEK1141m in the last quarter, corresponding to an annualized q/q growth of 15%. The average ARR per customer (ARPC ARR) was SEK186.4, a slight increase relative to SEK185.7 in Q1 2023, indicating a modest increase in the average number of modules. However, that figure is also affected by the mix of larger and smaller customers.

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 SEK213m and was SEK219m (179). Other external costs were lower than anticipated while Personnel expenses were somewhat higher. The net recruitment and the cost per employee were slightly higher than expected. Fortnox has seen an increase in the cost per employee lately due to expansions in areas outside Växjö with higher salaries on average. However, Fortnox’s cost per employee is still lower than the typical software company, and we do not expect any substantial increase from now on.

On a segment level, Pengar reached profitability with a segment EBIT margin of 13%, further highlighting its scalability.

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.

EBIT was SEK157m, corresponding to an EBIT margin of 38.9% (33.6). Our forecast was SEK148m and 37.3%, and the beat follows the stronger-than-expected sales. EBITDA – CAPEX, which we consider the best profit measure in SaaS businesses (although EBIT, as Fortnox focuses on, is fine as well), was SEK145m (87), beating our forecast of SEK128m.

At the end of Q1, net debt was SEK-402m, and, as expected, 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 raise our sales forecast by 0-1% for 2023 and 2024 while increasing EBIT for the same years by 1-3%. On a more detailed level, we make the following adjustments:

We forecast 29% organic growth with EBIT margins of 41% and 45,3% in 2023 and 2024.

We leave our Base Case at SEK65 (65) despite the slight increase in our forecasts.

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

With >400 integrations, Fortnox is the leading ecosystem for Swedish SMEs.

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