Review of Q4 2023

The net customer intake amounted to 16 000 (14 000), better than the 13 000 we expected. Despite bankruptcies increasing and new companies’ starts decreasing, Fortnox delivered a strong new customer intake – implying further gains in market share. Fortnox’s competitor Bokio removing its freemium version and increasing the price (which took place in Q3) along with Billogram referring its small customers to Fortnox might have had a slight positive impact. However, according to management, the solid number is mostly a result of long-term initiatives focusing on making it easier for accounting bureaus to transfer customers from other systems to Fortnox. The y/y increase in the number of customers was 11.7%, and the total number was 536 000 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 SEK285 per month, somewhat above our forecast of SEK277. The ARPC increased by 13% y/y and 25% sequentially at an annualized rate. 25% is a strong q/q growth, but keep in mind that Q4 generally is seasonally stronger than Q3. For Q3, the annualized q/q growth was a mere 2%.

The deviation from our forecasts was due to a higher contribution from Core Transactions, while the others beat our forecasts slightly.

Note that Fortnox has moved some revenue related to pay slips from Core Subscriptions to Core Transactions, affecting the numbers slightly.

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 SEK438m and amounted to SEK451m (357), corresponding to 26% growth y/y – all organic. Despite its large size, Fortnox remains 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 Transactions and Lending – despite soft macroeconomics.

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.

In conjunction with the Q4 report, Fortnox has changed its definition of its ARR to the following:

“Annual recurring revenue (ARR) has been redefined to include all subscription-based revenue within the Group. The previous definition limited ARR to include only subscription-based revenue from financial administration. In the new definition, subscription-based revenue are also included from the acquired companies Offerta, Cling and Monto”

We believe the new definition is an improvement as it considers all subscription revenue in Fortnox – making it comparable to other SaaS businesses.

ARR was SEK1276m (1040), up from SEK1266m in the last quarter, corresponding to an annualized q/q growth of a mere 3%. Besides a seasonal effect where the q/q growth in Q4 tends to be somewhat lower due to the seasonally high net customer intake and price increase taking place in Q1/Q2, Fortnox moving some revenue related to pay slips from subscriptions to transactions, also had a negative effect.

The graph below shows the significant impact of price increases on the ARR, such as in Q2 2022 and Q1 2023. As the price hikes typically occur in early spring, the next few months will likely tell if Fortnox will increase prices this year. We assume 5% increases per annum in our forecasts. However, going forward Fortnox aims for a more dynamic pricing strategy.

On the contrary, we note that Fortnox has removed the SEK4.90 per transaction fee regarding automated bookkeeping of transactions paid with the Fortnox Card. Although it might lower the short- and mid-term revenue, we believe it is a wise move as it is likely to stimulate usage. As pointed out during the earnings call, Fortnox receives 1% on spend and 50% of the credit earnings. Thus, the Fortnox Card has major potential despite cutting the SEK4.90 fee. Also, higher usage will provide Fortnox with more data and additional switching costs for its customers. Interestingly, the Fortnox Card is now completely free as long as the company has a license for Fortnox Bookkeeping. Thus, we believe the conditions are set to stimulate high usage, which we consider the most important long-term.

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 was below our forecast of SEK240m and amounted to SEK226m (199). Both Other external costs and Personnel expenses were lower than expected. The net recruitment of 21 people was lower than we anticipated. While drawing any conclusions from a single quarter is not meaningful, we note that our forecasts regarding net recruitment have been consistently too high recently.

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 SEK186m, corresponding to an EBIT margin of 41.2% (35.3). Our forecast was SEK168m and 38.3%, and the 11% beat follows stronger sales and lower OPEX. 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 SEK182m (120), beating our forecast of SEK158m.

At the end of Q4, net debt was SEK-514m, 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.

We leave our sales forecast unchanged for 2024 and 2025 while increasing EBIT for the same years by 3-4%. On a more detailed level, we make the following adjustments:

We forecast 23% and 24% organic growth with 45% and 48% EBIT margins in 2024 and 2025.

We raised our Base Case to SEK62 (54) following increased forecasts.

Trading at ~17x sales 2025e, 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 2025 sales and earnings relative to peers.