Review of Q3 2023

The net customer intake amounted to 10 000 (10 000), slightly better than the 9 000 we expected. While bankruptcies have increased and new companies’ starts have decreased, it is not seen in the net intake numbers in this quarter. Fortnox’s competitor Bokio removing its freemium version and increasing the price of its premium offering has resulted in a positive contribution to net customer intake, as some displeased customers have migrated to Fortnox. The y/y increase in the number of customers was 11.6%, and the total number was 520 000 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 SEK269 per month, somewhat below our forecast of SEK273. The ARPC increased by 12% y/y and 2% sequentially at an annualized rate. While 2% might seem low, note that Q3 typically is a weaker quarter for q/q ARPC growth due to seasonality.

The deviation from our forecasts was due to a somewhat lower contribution from Core Subscriptions, while Pengar Transactions/Lending and Core Transactions largely matched our forecasts.

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 SEK422m and amounted to SEK416m (332), corresponding to 25% growth y/y. Organic growth was 25%. Despite its large size and slowdown relative to Q2 (31% growth), Fortnox continues to be one of the fastest-growing and profitable SaaS companies in the Nordics. Although partly driven by price increases, sales growth is also driven by positive net customer intake and strong momentum 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 Entreprenären – 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 SEK1171m (944), up from SEK1141m in the last quarter, corresponding to an annualized q/q growth of 11%. The average ARR per customer (ARPC ARR) was SEK187.7, a slight increase relative to SEK186.4 in Q2 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 SEK190m and was SEK192m (155). Other external costs were higher than anticipated, while Personnel expenses were somewhat lower. The net recruitment of 10 people was lower than we anticipated. However, drawing any conclusions from a single quarter is not meaningful in this case and we expect a higher rate in Q4. The cost per employee aligned with our expectations and remains rather low relative to most software companies.

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 SEK189m, corresponding to an EBIT margin of 45.4% (43.8). Our forecast was SEK197m and 46.8%, and the miss follows the somewhat lower-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, at least in Fortnox’s case), was SEK195m (160), beating our forecast of SEK186m.

The cash flow was somewhat weaker than usual relative to profits, mainly related to calendar effects – such as 30 September being a Saturday. Also, Fortnox previously had a negative NWC but is now financing its factoring and lending business with the negative NWC from its software business. While resulting in a higher NWC – which we believe should be viewed as negative in isolation – it is cost-efficient to finance its growing lending business.

At the end of Q2, net debt was SEK-331m, and, as expected, Fortnox’s financial position is 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.

“For management: We've introduced a new product for authorization management – Employees Approval – which includes grouping, streamlined workflows, and automatic reminders.

For employees: We’ve added functionality enabling employees to self-report their working hours and manage their personal details, process.”

“The product Fortnox Group was added to the Report portfolio to facilitate corporations of all sizes to prepare financial consolidations in a quick and easy way. Annual reports, powerful analysis tools, and secure digital submission of annual accounts are among the features offered.

Full integration with Annual Accounts & Taxes is available although Group also works great as a standalone.”

“The Fortnox Business Card has been launched. Within seconds, the first customer activated and then ordered a card. Several customers made their first purchases already on launch day. The card automates the entire process from purchasing to bookkeeping. It also eliminates private expenses among employees, and the company can easily keep track of all costs as each purchase is displayed in real-time in Fortnox.”

Fortnox continues to deliver a steady stream of new products, and among those released in this period, we find the Business Card the most interesting. While the card is free, customers pay SEK4.90 for every transaction they want to be automated into the accounting. It can be used without automation for free. Although, it can easily add up to a few hundred SEK for a frequent user, it is still likely much cheaper than handling the transactions manually. We believe it is an interesting product with significant potential that should be attractive to a large share of the customer base.

We lower our sales forecast by 1-3% for 2023 and 2024 while reducing EBIT for the same years by 2-4%. On a more detailed level, we make the following adjustments:

We forecast 28% and 26% organic growth with 40.6% and 44.5% EBIT margins in 2023 and 2024.

We lowered our Base Case to SEK54 (65) largely because we increased our risk-free rate from 2.5% to 3%, resulting in a higher WACC. However, slightly reduced forecasts have a minor negative impact as well.

Trading at ~12x 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.