Review of Q4 2023

Group level sales and EBITA were SEK2 078m and SEK201m (excluding SEK5m in restructuring costs in PLM) relative to our forecasts of SEK1 964m and SEK180m. Organic growth was -2 %, better than our forecast of -8 %. The deviation was primarily due to substantially higher margins in PLM and a more robust rebound in DM, both regarding sales and margins, than expected.

Sales in DM beat our forecast of SEK1 130m by 10% and amounted to SEK1 246m (1 004), corresponding to 16% growth y/y. The organic growth was -6% y/y, better than Q3’s -21% and our estimate of -17%. While the demand from the construction industry, particularly in the US, remains soft, the European business had volumes in line with 2022. However, management believes the market has stabilised.

After suffering from integration focus in Q3, the US-based manufacturing-focused TeamD3 had a stronger performance in Q4. Addnode has a strong track record of integrating larger acquisitions and, thus, seeing TeamD3 having a solid Q4 after a soft Q3 is encouraging, although not surprising.

Lower sales of 3-year deals still hurt the y/y comparison, but the negative impact is not as significant as in Q2 and Q3. Also, the number of customers and the underlying deal value continues to increase. In other words, the underlying ARR has not declined despite sales taking a significant hit in Q2 and Q3 due to Symetri’s upfront revenue recognition.

Autodesk’s change to an agent model is expected to be completed by 2025 and will, as mentioned in our Q4 Preview, all else being equal, not affect gross profit, EBITA, or cash flow. Interestingly, Addnode points out that over 50% of today’s gross profit in Symetri is generated by Addnode’s products and services. We believe that numbers highlight Addnode’s strong value-add, with software and expertise, to Autodesk’s offering.

In line with recent quarters, the proprietary software companies Tribia and SWG experienced stable market conditions and had stable development during the quarter.

EBITA in DM was SEK98m, corresponding to an EBITA margin of 7.9% (11.1) – up from 5.4% in Q3. Our forecast was SEK85m and 7.5%. The cost reductions in its US operations are having an effect along with the expected scalability when sales is higher. Q1 2024 remains the last tough comparison quarter, fuelled by a relatively strong market and 3-year deals. From Q2 2024 onwards, we expect organic growth and y/y margin improvements in DM.

Design Management (DM) comprises three companies, Symetri, Tribia, and SWG. Symetri is the largest one, generating most sales in DM. Tribia and SWG have combined sales of SEKc500m.

Symetri delivers Autodesk products, related services, and add-on software to customers within architecture, engineering, and construction (AEC) and manufacturing, mainly in the US, UK and Nordics. As the bulk of the software is third-party (Autodesk), the margins in this business are lower than the division’s average. Recurring revenues generated in this business are reported as non-recurring revenues (i.e., upfront, for accounting reasons). Symetri is one of the largest Autodesk partners worldwide.

Tribia provides cloud-based collaboration software for the architecture, engineering, and construction (AEC) sector. Its main product is a proprietary software called Interaxo. Given the business's mix of proprietary software and services, its margin level is likely above the division’s average.

SWG delivers products and services for property management and maintenance, mainly in the Nordics and the UK, where it is the market leader. Like Tribia, SWG provides proprietary software and related services, so its margins are likely above the division’s average.

Sales in PLM beat our forecast of SEK490m and amounted to SEK499m (393), corresponding to 10% growth y/y. The organic growth was 4% y/y, matching our forecast. PLM saw a stable demand in the UK, US, and Germany this quarter as well, while the Nordics and Benelux were softer. A few significant license-deals partly fuelled the solid organic growth. However, the overall license sales was in line with Q4 2022, and the y/y growth in total sales was driven mainly by recurring revenue.

EBITA in PLM, excluding SEK5m in restructuring costs, was SEK59m, corresponding to an EBITA margin of 11.8% (9.7). Our forecast was SEK31m and 8.5%. While Q4 is a strong quarter license-deal-wise, boosting profitability, we believe the strong quarter also suggests the cost-savings program is performing well and that PLM is back at a solid profitability level. Management did initiate a cost savings program in H1 2023 that is expected to save SEK40m annually with full effect in Q1 2024. For 2024, we expect 9.8% in EBITA margin – lower than the level seen in H2 2023 but solid from a historical perspective.

Product Lifecycle Management (PLM) consists solely of the subsidiary Technia, which helps customers with complete product lifecycles. The offerings target various sectors, including telecom, manufacturing, automotive, construction, energy, and life science. Technia provides solutions based on Dassault Systèmes’ platform, related services, and proprietary add-on software, mainly targeting the Nordics, DACH, and the UK. Due to the division’s lack of proprietary software besides add-ons, PLM has the lowest EBITA margin in Addnode.

Sales in PM was somewhat short of our forecast of SEK352m and amounted to SEK346m (335), corresponding to 3% growth y/y. The organic growth was 3% y/y, somewhat below our forecast and lower than the 7% seen in Q3. Management mentions that the number of procurements in the public sector continues to be lower on a y/y basis. This aligns with what we have seen, and we believe Addnode did well in relative terms. Also, the demand for customer-specific solutions remained solid, offsetting a weaker procurement market. However, as mentioned before, most of the sales in PM is generated from upselling to current customers.

EBITA in PM was SEK67m (60), corresponding to an EBITA margin of 19.4% (17.9). Our forecast was SEK67m and 19.0%. Overall, it is a solid quarter for PM, and although we expect slower organic growth in 2024 (4%) compared to 2023 (6%), we assume PM can maintain its solid ~19% EBITA margin.

Icebound has its roots in Sokigo and has been a part of Addnode since 2003. It has the ambition to become an international market-leading player in digital solutions for the forest sector and other basic industries. The company has a strong position in the forestry industries in Sweden and Europe and has net sales of SEK60m.

Process Management (PM) comprises +15 companies, mainly serving the Swedish public sector. The solutions target a variety of the public sector’s needs, including document and case management and digitalised public services. The +15 units target most public sector-specific needs, and PM’s combined offering is broader than its competitors. Unlike DM and PLM, this division relies solely on proprietary software, meaning it has the highest EBITA margins in the group. However, these are dampened by about 50% of sales from services.

EBITA was SEK201m (excluding SEK5m in restructuring costs in PLM), corresponding to an EBITA margin of 9.7% (11.2). Our forecast was SEK180m and 9.2%, and the beat was mainly due to a stronger-than-anticipated rebound in DM and strong margins in PLM. EBITDA – CAPEX, which we typically prefer in software companies where EBITDA and EBITA are boosted by capitalised R&D, was (ex one-offs) SEK169m (189), corresponding to an EBITDA – CAPEX margin of 8.1% (10.6). The y/y decline is partly due to increasing CAPEX related to proprietary software – as Addnode put more focus on product development.

Addnode’s net debt was SEK837m at the end of Q3, corresponding to 0.8x EBITDA 2024e, leaving financial room for further larger acquisitions.

As for any SaaS business capitalizing R&D, EBITDA and EBITDA margin are unsuitable metrics for Addnode. 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. The same holds for EBITA in Addnode's case. 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. However, as Addnode has amortizations related to M&A, the underlying profit generation is somewhere between EBIT and EBITDA. We believe EBITDA - CAPEX (excluding M&A) is the most suitable earnings metric for Addnode.

Since our last Update, Addnode has made two minor acquisitions, Efficture and Jetas Quality Systems, adding SEK7.5m in sales in total. Efficture offers proprietary forest and timber management software and will strengthen Addnode’s newly created subsidiary, Icebound. Jeta offers software used primarily by public transport providers for supervision, maintenance, repair of stops, weather protection, and train stations. Both companies join Process Management.

Notably, management seems rather positive regarding the prospects for M&A in 2024. The pipeline with potential targets is solid, and management notes that valuations on potential targets are getting reasonable.

Addnode’s R12m acquisition activity is currently high, as the large acquisition of Team D3. As usual, we expect additional acquisitions and assume that Addnode will add SEK800m in sales from M&A during 2024 on a full-year basis (from Q2 2024 and onwards in current forecasts). As the larger acquisitions in Addnode tend to occur sporadically, the R12m contribution to sales from acquisitions tends to differ significantly.

Addnode has a strong track record of value-adding acquisition. In addition to significant valuation-multiple arbitrage, Addnode has a track record of extracting value from acquisitions by using its expertise and selling add-on software to the acquired companies’ customers, and cross-selling acquired software to the customer base. The substantial margin improvements in larger low-margin acquisitions such as Transcat, Excitech and Microdesk are evidence of Addnode’s ability to extract value from M&A

We leave our overall sales growth assumptions flat on the group level for 2024 and 2025. Regarding earnings, we raise EBITA by 1-3% for 2024 and 2025. We believe the overall market outlook is slightly more optimistic than last quarter.

On the Divisional level, we increase our sales and margin forecasts for DM following a stabilising market and a better momentum in TeamD3. For PLM, we leave sales unchanged while increasing our margin assumptions. Although the positive effect from high licenses might fade in 2024, we believe the Division has improved structurally, and Q4 had solid growth in recurring revenue – positively affecting 2024 as well. Regarding PM, we lower sales and EBITA slightly on weaker demand while keeping our margin assumption unchanged.

We increased our Base Case to SEK 108 (100) based on raised forecasts.

Addnode’s valuation of 20x EBIT for 2025e is below the average but above the median SaaS business in our peer list. Addnode has a relatively low share of SaaS revenues versus these peers. On the other hand, the group does have a very successful acquisition record. Considering EV/EBITDA - CAPEX, which we believe is a more relevant multiple for Addnode, considering its high M&A-related D&A, it is trading at 17x for 2025e. Also, we believe the uncertainty in the estimates is lower in Addnode compared to many other companies in the list, where analysts expect significant margin improvement. Addnode is trading at a discount to Vitec, another successful software-focused M&A compounder. However, Vitec has solely proprietary software, indicating the potential in Addnode as its proprietary solutions grow. Note the forecasts for Addnode are Redeye’s and include future M&A.

From an EV/Sales versus sales growth and margins perspective, Addnode stands out as attractive versus the other larger companies. However, Addnode’s high share of third-party software and services, which limits its margin potential, likely holds its valuation back. Also, the forecasts include future M&A. On the other hand, the smaller, often unprofitable, and more “pure” software companies trading at an EV/Sales in line with Addnode are often followed by only a single or a few analysts. Thus, considering companies with a long track record of profitable growth, Addnode’s valuation stands out, at least partly justified by its business model with a high share of third-party software and services.

Compared with the successful traditional M&A-compounders, at 20x EBIT for 2025e, Addnode is in line with the average and median. As all serial acquirers have a high M&A-related D&A, comparing on EBIT makes sense. EBITA is probably even better, but the number of EBITA forecasts for the peers is not as extensive as for EBIT.