Fortnox: Stronger Numbers Despite Macro Headwinds

Research Update

2024-02-19

06:45

Analyst Q&A

Closed

Fredrik Nilsson answered 5 questions.

Redeye takes a neutral view on Fortnox as the stock is trading slightly above our Base Case despite a strong Q4 resulting in a raised Base Case. The strong net customer intake and transaction-based revenue growth drove the sales beat and OPEX was lower than anticipated.

FN

MS

Fredrik Nilsson

Mark Siöstedt

Contents

Review of Q4 2023

Number of Customers: Strong Number in Soft Market

Average Revenue per Customer (ARPC): Solid Growth Despite Soft Macroeconomics

Sales: 3% Above forecast

ARR: New and Better Definition

OPEX: Lower Than Anticipated

Profit and Cash Flow: Margin Improvements Continue

Estimate Revisions: Sales Unchanged, EBIT up 3-4% 2024-2025

Valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Solid New Customer Intake and Transaction Revenue

The net customer intake amounted to 16 000 (14 000), better than the 13 000 we expected and a strong number in the currently soft macroeconomic environment. 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. Total sales came in 3% above our forecast of SEK438m and amounted to SEK451m (357), corresponding to 26% growth y/y – all organic. The deviation was due to strong Transaction and Lending revenue from Core and Pengar. Fortnox seems to offset macroeconomic headwinds by taking market share and product development, driving increased usage.

Significant Uptick in Margins y/y

EBIT was SEK186m, corresponding to an EBIT margin of 41.2% (35.3). Our forecast was SEK168m and 38.3%. EBITDA – CAPEX was SEK182m (120), beating our forecast of SEK158m. The beat was due to a combination of higher sales and lower OPEX. While drawing conclusions from a single quarter is not meaningful, our forecasts regarding net recruitment have been consistently too high recently, and we have lowered them accordingly. The y/y increase in margins highlights the scalability of Fortnox’s business.

New Base Case SEK62 (54)

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. While the share is currently trading above our Base Case, we believe Fortnox deserves a standout valuation for several reasons, such as a market-leading position, wide moats, solid growth, and high margins.  

Key financials

SEKm20232024e2025e2026e2027e
Revenues1,669.02,056.62,539.23,078.83,664.6
Revenue Growth28.6%23.2%23.5%21.2%19.0%
ARR12761423168719382211
ARRGrowth23%12%19%15%14%
EBITDA-CAPEX6678601,0861,3451,628
EBITDA-CAPEXMargin40.6%42.5%43.3%44.1%44.8%
EBIT672.0910.81,200.11,493.61,809.2
EBIT Margin41.0%45.0%47.9%49.0%49.8%
EV/Revenue21.921.116.813.611.1
EV/ARR28.230.125.021.418.3
EV/EBITDA-CAPEX53.949.738.830.824.9
EV/EBIT53.546.935.127.722.4
Net Debt-514.0-1,091.7-1,707.5-2,464.5-3,382.2
NWC/R12mSales3.8%-0.5%-0.5%-0.5%-0.5%

Review of Q4 2023

Estmates
SalesQ4E 2023Q4A 2023DiffQ4A 2022Q3A 2023
Number of customers, eop533,000536,0003,000480,000520,000
Net sales438.2451.03%356.9416.0
Y/Y Growth (%)23%26%34%25%
Core Subscription278.8280.00%223.1268.0
Y/Y Growth (%)25%26%34%26%
Core Transactions68.776.011%63.063.0
Y/Y Growth (%)9%21%44%14%
Pengar Transactions/Lending52.655.05%37.249.0
Y/Y Growth (%)41%48%70%53%
Pengar Other8.67.0-19%7.27.0
Y/Y Growth (%)20%-3%
Marknadsplatsen39.439.0-1%24.937.0
Y/Y Growth (%)58%57%
Gross Profit407.5420.03%330.6392.0
Gross Profit Margin (%)93%93%93%94%
OPEX
Other external costs-72.5-65.0-10%-63.0-58.0
Y/Y Growth (%)15%3%12%17%
Personnel expenses-167.6-161.0-4%-136.3-134.0
Y/Y Growth (%)23%18%31%27%
Earnings
EBITDA - CAPEX157.9183.016%120.4195.0
EBITDA - CAPEX Margin (%)36.0%40.6%33.7%46.9%
EBIT167.8186.011%126.1189.0
EBIT Margin (%)38.3%41.2%35.3%45.4%
Diluted EPS0.220.3142%0.150.24

Number of Customers: Strong Number in Soft Market

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.

Source: Fortnox

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.

Average Revenue per Customer (ARPC): Solid Growth Despite Soft Macroeconomics

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.

  • ARPC Core Subscriptions grew by 8% y/y – Driven mainly by the price increases in late Q2 2023.
  • ARPC Core Transaction grew by 8% y/y –  Strong numbers compared to the 1-2% seen in Q2 and Q3, implying that Fortnox has found ways to drive Transaction revenue despite softer macroeconomics. Management has not seen any improvements in the macroeconomic conditions.

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

  • ARPC Pengar Transactions and Lending grew by 32% y/y – While slightly lower than the 37% seen in Q3, the comparison number was strong, with a 50% growth in Q4 2022. Thus, Pengar continued its streak of strong ARPC growth, implying continued momentum in the segment, which has a potential ARPC far above current levels. The soft macroeconomic environment likely has a small negative impact on the segment.

Source: Fortnox, Redeye

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.

Sales: 3% Above forecast

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.

Source: Fortnox, Redeye

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: New and Better Definition

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.

Source: Fortnox, Redeye

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.

OPEX: Lower Than Anticipated

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.

Source: Fortnox

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.

Profit and Cash Flow: Margin Improvements Continue

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.

Source: Fortnox

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.

Estimate Revisions: Sales Unchanged, EBIT up 3-4% 2024-2025

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:

  • Core Transactions are increased by 1% as new initiatives seem to offset the soft macroeconomic environment to a greater extent than expected.
  • Pengar Transactions/Lending are increased by 2% as new initiatives seem to offset the soft macroeconomic environment to a greater extent than expected.
  • OPEX is decreased due to the lower outcome in Q4 and as we expect lower recruitment in 2024.

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

Estimate Revisions
SalesFYE 2024OldChangeFYE 2025OldChange
Net sales2024.62029.30%2507.22516.80%
Y/Y Growth (%)23%25%24%24%
Core Subscription1255.61260.90%1497.21504.30%
Y/Y Growth (%)21%22%19%19%
Core Transactions330.1327.61%440.6437.51%
Y/Y Growth (%)24%27%33%34%
Pengar Transactions/Lending270.0265.52%351.7346.02%
Y/Y Growth (%)38%37%30%30%
Pengar Other35.538.344.347.9
Y/Y Growth (%)63%76%25%25%
Marknadsplatsen173.5176.9-2%213.4221.2-4%
Y/Y Growth (%)23%25%
OPEX
Other external costs-268.9-282.3-5%-317.0-336.5-6%
Y/Y Growth (%)13%15%18%19%
Personnel expenses-684.3-717.2-5%-807.2-859.0-6%
Y/Y Growth (%)14%19%18%20%
Earnings
EBITDA - CAPEX859.6829.54%1085.91038.35%
EBITDA - CAPEX Margin (%)42.5%40.9%43.3%41.3%
EBIT910.8887.63%1200.11157.74%
EBIT Margin (%)45.0%43.7%47.9%46.0%
Diluted EPS1.191.163%1.561.514%
Forecasts
SalesFYA 2023Q1E 2024Q2E 2024Q3E 2024Q4E 2024FYE 2024FYE 2025FYE 2026FYE 2027
Number of customers, eop536,000551,000566,000576,000592,000592,000642,000672,000697,000
Net sales1641.0470.1496.3514.1544.22024.62507.23046.83632.6
Y/Y Growth (%)29%27%23%24%21%23%24%22%19%
Core Subscription1035.0293.3307.4320.5334.41255.61497.21737.81973.4
Y/Y Growth (%)29%26%21%20%19%21%19%16%14%
Core Transactions266.075.979.783.890.8330.1440.6563.0692.2
Y/Y Growth (%)18%20%24%33%19%24%33%28%23%
Pengar Transactions/Lending196.060.967.567.474.2270.0351.7468.2609.7
Y/Y Growth (%)55%42%38%37%35%38%30%33%30%
Pengar Other29.08.89.28.88.835.544.355.469.2
Y/Y Growth (%)37%25%15%25%25%22%25%25%25%
Marknadsplatsen147.041.342.543.746.0173.5213.4262.4328.0
Y/Y Growth (%)20%18%18%18%18%18%23%23%25%
Gross Profit1537.0437.1461.5478.2506.11882.92331.72833.53378.3
Gross Profit Margin (%)94%93%93%93%93%93%93%93%93%
OPEX
Other external costs-238.0-63.3-66.7-65.5-73.5-268.9-317.0-368.2-421.3
Y/Y Growth (%)10%13%13%13%13%13%18%16%14%
Personnel expenses-598.0-168.8-175.7-153.2-186.6-684.3-807.2-962.8-1131.5
Y/Y Growth (%)24%18%10%14%16%14%18%19%18%
Earnings
EBITDA - CAPEX667.0191.3203.9237.5227.0859.61085.91344.71628.5
EBITDA - CAPEX Margin (%)40.6%40.7%41.1%46.2%41.7%42.5%43.3%44.1%44.8%
EBIT672.0201.1215.7251.4242.7910.81200.11493.61809.2
EBIT Margin (%)41.0%42.8%43.5%48.9%44.6%45.0%47.9%49.0%49.8%
Diluted EPS0.940.260.280.330.321.191.561.942.36

Valuation

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

Fair Value Range - Assumptions
Bear CaseBase CaseBull Case
Value per share, SEK326297
Sales CAGR
2024 - 203114%18%21%
2031 - 20414%7%10%
Avg EBIT margin
2024 - 203147%50%53%
2031 - 204143%49%52%
Terminal EBIT Margin30%42%47%
Terminal growth2%2%2%
WACC8%8%8%
Source: Redeye Research

Peer Valuation

Trading at ~17x sales 2025e, Fortnox is the highest-valued business in our comparison. However, we believe that is for good reasons:

  • We expect Fortnox to have the highest combination of sales growth and EBIT margin (c70% in 2025).
  • Fortnox dominates a market which we believe will grow rapidly for many years.
  • Fortnox has unmatched access to Swedish SME data.

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.

Investment thesis

Case

Swedish SME’s leading software provider

With about 1/3 of all Swedish SMEs as customers, Fortnox has an unmatched position regarding data, integrations, and active accountants. While we believe Fortnox can continue to grow its customer base rapidly until ~2025, we believe the significant upside lies in increasing the revenue per customer. Providing a “must-have” SaaS product for a wide range of industries makes Fortnox both scalable and resistant to economic cycles.

Evidence

Impressive track record of cost-efficient growth

Fortnox turned profitable as a small company and has since then combined high sales growth with high margins for several years, with an R40 often above 60%. Despite its solid track record, the average revenue per customer remains far below the potential, both regarding the SaaS core offering and new areas such as financial services. Some offerings within financial service have ARPC of several thousand SEK but are currently used by less than 1% of Fortnox customers. Thus, the potential is huge.

Challenge

High profitability attracts competition

While new entrants threaten every profitable market, we believe Fortnox has several sustainable competitive advantages. First, we believe most SMEs focus on its core business rather than switching ERP software, resulting in switching costs. Second, thanks to its large number of integrations and active accountants using the software, we believe Fortnox’s ecosystem has network effects.

Challenge

How many modules and services do the average SME need?

Although Fortnox has over ten different modules, the average customer uses about 2.5. Also, a few percent of customers use any financial service, the figure is even lower for the most lucrative financial services. The relatively low usage could indicate most SMEs are not interested in more than the basic “must-have” modules such as Accounting. However, we believe the usage of modules and service will increase as more SMEs mature digitally and Fortnox increases automation.

Valuation

Fair Value SEK 62

Based on our DCF model, we see a fair value of SEK 62. While our Base Case implies high EV/S and EV/EBIT multiples for the next few years, we believe that is fair considering Fortnox’s scalability, competitive advantages, and growth prospects.

Quality Rating

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. 

Financials

Income statement
SEKm20232024e2025e2026e2027e
Revenues1,669.02,056.62,539.23,078.83,664.6
Cost of Revenue104.0141.7175.5213.3254.3
Operating Expenses703.0804.9955.01,135.31,328.5
EBITDA834.01,078.01,376.71,698.22,049.9
Depreciation17.415.612.711.011.8
Amortizations95.2107.1119.4149.1184.4
EBIT672.0910.81,200.11,493.61,809.2
Shares in Associates0.000.000.000.000.00
Interest Expenses4.00.000.000.000.00
Net Financial Items-4.00.000.000.000.00
EBT676.0910.81,200.11,493.61,809.2
Income Tax Expenses-106.0-187.6-247.2-307.7-372.7
Net Income570.0723.2952.91,185.91,436.5
Balance sheet
Assets
Non-current assets
SEKm20232024e2025e2026e2027e
Property, Plant and Equipment (Net)28.019.917.218.421.1
Goodwill610.0610.0610.0610.0610.0
Intangible Assets545.0648.8810.21,002.41,224.8
Right-of-Use Assets139.0139.0139.0139.0139.0
Other Non-Current Assets66.066.066.066.066.0
Total Non-Current Assets1,388.01,483.71,642.41,835.72,060.9
Current assets
SEKm20232024e2025e2026e2027e
Inventories0.000.000.000.000.00
Accounts Receivable680.0708.6877.51,066.41,271.4
Other Current Assets72.070.987.8106.6127.1
Cash Equivalents514.01,091.71,707.52,464.53,382.2
Total Current Assets1,266.01,871.22,672.73,637.54,780.8
Total Assets2,654.03,354.84,315.15,473.26,841.7
Equity and Liabilities
Equity
SEKm20232024e2025e2026e2027e
Non Controlling Interest0.000.000.000.000.00
Shareholder's Equity1,772.02,373.23,145.34,093.05,233.0
Non-current liabilities
SEKm20232024e2025e2026e2027e
Long Term Debt0.000.000.000.000.00
Long Term Lease Liabilities113.0113.0113.0113.0113.0
Other Long Term Liabilities44.044.044.044.044.0
Total Non-Current Liabilities157.0157.0157.0157.0157.0
Current liabilities
SEKm20232024e2025e2026e2027e
Short Term Debt0.000.000.000.000.00
Short Term Lease Liabilities33.033.033.033.033.0
Accounts Payable45.040.550.160.972.7
Other Current Liabilities645.0749.1927.71,127.31,344.1
Total Current Liabilities723.0822.61,010.81,221.21,449.7
Total Liabilities and Equity2,652.03,352.84,313.15,471.26,839.7
Cash flow
SEKm20232024e2025e2026e2027e
Operating Cash Flow646.0962.51,131.91,393.21,680.1
Investing Cash Flow-254.0-218.4-290.8-353.4-421.4
Financing Cash Flow-314.0-166.4-225.3-282.7-341.0

Rating definitions

The team

Disclosures and disclaimers

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Contents

Review of Q4 2023

Number of Customers: Strong Number in Soft Market

Average Revenue per Customer (ARPC): Solid Growth Despite Soft Macroeconomics

Sales: 3% Above forecast

ARR: New and Better Definition

OPEX: Lower Than Anticipated

Profit and Cash Flow: Margin Improvements Continue

Estimate Revisions: Sales Unchanged, EBIT up 3-4% 2024-2025

Valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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