Formpipe: Q1 Preview – Increased Sales and OPEX due to FX

Research Update

2024-04-03

06:45

Redeye retains its Base Case despite cutting its short-term EBIT forecasts slightly. We raised our ARR, sales, and OPEX forecasts due to FX – where both the EUR and USD appreciated during Q1. Combined with a slight increase in underlying OPEX assumptions, we cut our short-term EBIT forecast somewhat while slightly increasing the long- and mid-term.

Fredrik Nilsson

Contents

We Expect Continued Improvements in Margins y/y

Higher Sales and OPEX due to FX

Valuation: Base Case Unchanged at SEK33

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Key financials

SEKm	2022	2023	2024e	2025e	2026e
Revenues	485.1	525.2	562.0	626.1	678.8
Revenue Growth	2.5%	8.3%	7.0%	11.4%	8.4%
ARR	369	425	470	517	562
ARRGrowth	20.5%	15.0%	10.6%	10.0%	8.7%
EBITDA-CAPEX	10.8	55.6	80.1	111.1	134.7
EBITDA-CAPEXMargin	2.6%	12.0%	16.2%	20.1%	22.5%
EBIT	15.8	48.8	75.4	114.3	140.1
EBIT Margin	3.3%	9.3%	13.4%	18.3%	20.6%
EV/Revenue	2.5	2.7	2.7	2.3	1.9
EV/ARR	3.3	3.4	3.2	2.7	2.3
EV/EBITDA-CAPEX	113.97	25.95	18.78	12.70	9.66
EV/EBIT	77.9	29.5	19.9	12.3	9.3
NetDebt	39.4	-27.2	-78.6	-172.8	-282.3
NWC/R12mSales	-26.5%	-27.5%	-25.0%	-25.0%	-25.0%

We Expect Continued Improvements in Margins y/y

For Q1 2024, we expect an organic ACV of SEK11m (10m from SaaS and 1m from S&M), roughly in line with Q1 2023. We assume a total y/y sales growth of 5%, fueled by 16% total ARR growth and -20% in Deliveries – mainly due the new more S&M-heavy deal with Landburgsstyrelsen and moving implementations to partners within Private. We expect an EBITDA – CAPEX margin of 12% (8) and an EBIT margin of 10.9% (5.5).

Estmates
Sales	Q1E 2024	Q1A 2024	Diff	Q1A 2023	Q4A 2023
Net Sales	132.6		-100%	127.6	136.2
Y/Y Growth (%)	4%	-100%		4%	11%
Support & Maintenance	61.5		-100%	60.1	64.9
Growth y/y	2%	-100%		11%	20%
ARR (S&M)	246.6		-100%	249.2	245.6
ACV (S&M)	1.0		-100%	3.3	-1.8
SaaS	39.3		-100%	28.1	36.1
Growth y/y	40%	-100%		45%	86%
ARR (SaaS)	169.6		-100%	133.5	159.6
ACV (SaaS)	10.0		-100%	7.4	11.0
Licenses	2.8		-100%	2.8	6.1
Growth y/y	0%	-100%		-71%	-39%
Deliveries	29.0		-100%	36.6	29.2
Growth y/y	-21%	-100%		-6%	-25%
OPEX
Cost of revenues	-15.6		-100%	-15.9	-15.4
% of sales	-12%	#DIV/0!		-12%	-11%
Other external costs	-28.5		-100%	-27.7	-32.6
Y/Y Growth (%)	3%	-100%		3%	21%
Personnel expenses	-69.5		-100%	-73.4	-72.3
Y/Y Growth (%)	-5%	-100%		12%	10%
Earnings
EBIT	16.4		-100%	7.1	17.3
EBIT Margin (%)	12.3%	#DIV/0!		5.5%	12.7%
Diluted EPS	0.24		-100%	0.09	0.34

Higher Sales and OPEX due to FX

We raise our sales and OPEX forecasts for Formpipe regarding both Q1, 2024 and 2025, resulting in a 6% and 2% cut on EBIT for 2024 and 2025 respectively. The increases are mainly due to FX following the strengthening of the EUR and USD relative to the SEK during Q1.

The stronger EUR and USD relative to the SEK has a positive effect on ARR (both SaaS and S&M) as well as on sales, due to Formpipe having a substantial share of its sales in DKK (pegged to the EUR), EUR, and USD. At the same time, Formpipe has a substantial share of its OPEX in DKK, EUR, and USD (including its Ukraine-based offshore development).

In addition to the FX effects, we also increase our underlying OPEX forecasts somewhat. This as we expect Formpipe to focus slightly more on growth than profitability for the first half of 2024 compared to our previous assumptions. At the same time, we raise our ARR growth assumptions for 2025 and 2026 slightly, improving long-term EBIT.

Forecasts
Sales	FYA 2023	Q1E 2024	Q2E 2024	Q3E 2024	Q4E 2024	FYE 2024	FYE 2025	FYE 2026	FYE 2027
Net Sales	525.2	134.0	141.1	138.2	148.7	562.0	626.1	678.8	726.0
Y/Y Growth (%)	8%	5%	3%	12%	9%	7%	11%	8%	7%
Support & Maintenance	252.8	62.8	64.3	64.6	64.9	256.6	262.9	267.9	272.9
Growth y/y	12%	4%	3%	-1%	0%	1%	2%	2%	2%
ARR (S&M)	255.4	256.4	257.9	258.9	260.4	260.4	265.4	270.4	275.4
ACV (S&M)	2.5	1.0	1.5	1.0	1.5	5.0	5.0	5.0	5.0
SaaS	130.0	39.3	43.5	46.0	48.5	177.4	223.9	265.2	303.4
Growth y/y	39%	40%	36%	37%	35%	36%	26%	18%	14%
ARR (SaaS)	169.2	179.2	189.2	199.2	209.2	209.2	251.2	291.2	326.2
ACV (SaaS)	36.6	10.0	10.0	10.0	10.0	40.0	42.0	40.0	35.0
Licenses	18.8	2.8	3.6	2.2	4.4	13.0	12.7	12.7	12.7
Growth y/y	13%	0%	-55%	15%	-28%	-31%	-2%	0%	0%
Deliveries	123.6	29.2	29.7	25.3	30.9	115.1	126.6	132.9	136.9
Growth y/y	-17%	-20%	-15%	11%	6%	-7%	10%	5%	3%
OPEX
Cost of revenues	-61.9	-15.8	-16.7	-16.3	-17.5	-66.3	-73.9	-80.1	-85.7
% of sales	-12%	-12%	-12%	-12%	-12%	-12%	-12%	-12%	-12%
Other external costs	-119.2	-29.3	-32.0	-29.9	-32.2	-123.5	-129.1	-133.5	-137.2
Y/Y Growth (%)	2%	6%	5%	5%	-1%	4%	5%	3%	3%
Personnel expenses	-286.3	-72.3	-74.3	-66.1	-75.3	-288.0	-301.8	-317.6	-333.9
Y/Y Growth (%)	1%	-1%	-1%	1%	4%	1%	5%	5%	5%
Earnings
EBITDA ex CAPEX	55.6	16.0	17.9	23.5	22.7	80.1	111.1	134.7	154.3
EBITDA ex CAPEX Margin	10.6%	11.9%	12.7%	17.0%	15.3%	14.3%	17.7%	19.8%	21.3%
EBIT	48.8	14.6	16.5	22.5	21.9	75.4	114.3	140.1	160.7
EBIT Margin (%)	9.3%	10.9%	11.7%	16.3%	14.7%	13.4%	18.3%	20.6%	22.1%
Diluted EPS	0.68	0.21	0.24	0.33	0.32	1.10	1.67	2.04	2.34

Valuation: Base Case Unchanged at SEK33

We retain our Base Case at SEK33, as the short-term cut in EBIT is compensated for by slightly higher assumptions for the long- and mid-term.

Fair Value Range - Assumptions
	Bear Case	Base Case	Bull Case
Value per share, SEK	19	33	43

Sales CAGR
2024 - 2031	3%	6%	8%
2031 - 2041	0%	2%	4%

Avg EBIT margin
2024 - 2031	17%	21%	22%
2031 - 2041	20%	23%	25%

Terminal EBIT Margin	13%	20%	22%
Terminal growth	2%	2%	2%

WACC	9%	9%	9%
Source: Redeye Research

Investment thesis

Case

Margins to Increase as Private Sector Initiatives Pays Off

Since 2021, Formpipe has invested most of the cash flow generated in the highly profitable non-cyclical segments Public SE and Public DK into growth in the Private segment – the company’s most significant growth opportunity. As the investments have paid off in the form of higher SaaS growth and as we foresee a slowdown in the cost expansion, we expect Formpipe’s margin to increase gradually, starting in 2023. We expect quarterly reports during 2023 and 2024 showing gradually improving margins to be the main catalyst.

Evidence

Substantial Improvements in SaaS Growth Suggest Efficient Investments

Following the growth investments in 2021, the ACV (absolute ARR growth) has increased from about SEK10m to SEK~30m yearly. We believe the substantial increase implies the investments into the Private segment have been a success so far, and we believe their full effect is still to come. With the Public segments SE and DK having a long track record of high profitability and strong cash flows, the group is set to return to solid margin levels.

Challenge

Limited Growth Compared to Average SaaS Business

Although Formpipe’s SaaS revenues and Private segment have grown by over 20% for years, its total sales growth has been in the single digits for the last few years. While the relatively low growth is partly due to lower non-core consulting sales (Deliveries), the large Support & Maintenance revenue grows slowly. Although we do not expect Formpipe to become a high-growth SaaS company, we believe recent initiatives, such as the investments in the Private segment and increased delivering capacity in Public SE, pave the way for ~10% sales growth.

Challenge

Diversification or Diworsification?

With +20 products, although some are add-ons to others, Formpipe has a broad product portfolio, sometimes with overlapping functionality. While the broad portfolio provides diversification, it also reduces the scalability, as every product requires R&D. To improve scalability Formpipe develops new functionality jointly for all relevant products, such as for Platina, Acadre, and W3D3. In addition, the Private segment is gradually becoming dominated by the fast-growing Lasernet. Thus, we believe the diversification will decrease, and the scalability will improve.

Valuation

Fair Value SEK 33

Our DCF model shows a fair value of SEK 33, which is also supported by a peer valuation. While its margins are temporarily depressed, we believe Formpipe’s non-cyclical recurring revenues combined with the growth in the Private segment support a higher valuation.

Quality Rating

People: 4

The new CEO Magnus Svenningson has vast experience in international sales of software as well as working towards both the private and public sectors. Our first impression is that Svenningson seems to fit the needs of Formpipe well, considering his experiences. CFO Joakim Alfredson have relatively high holdings in the firm's stock and most major shareholders are active in the board. The company also has several institutions among its major shareholders.

Business: 4

Formpipe Software's market seems stable with underlying growth. Customers are mainly from the public sector and a big part of revenues are recurring, which creates stability in the business model. Recently, Formpipe has had success with its Lasernet product within the private sector. Unlike the Swedish and Danish public sector, the private sector is global, making the potential much greater.

Financials: 3

Formpipe has non-cyclical recurring revenue streams and a solid financial position. The margins have improved in recent years and are now at robust levels, independent of large License deals. Formpipe is now focusing on growth, and so far, the strategy seems to play out very well.

Financials

Income statement
SEKm	2023	2024e	2025e	2026e	2027e
Revenues	525.2	562.0	626.1	678.8	726.0
Cost of Revenue	61.9	66.3	73.9	80.1	85.7
Operating Expenses	348.6	356.8	373.6	390.7	407.6
EBITDA	114.6	138.9	178.7	208.0	232.7
Depreciation	3.6	3.4	2.8	2.0	1.5
Amortizations	51.8	51.2	52.6	57.0	61.7
EBIT	48.8	75.4	114.3	140.1	160.7
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	-2.1	-0.60	-0.60	-0.60	-0.60
Net Financial Items	0.94	0.60	0.60	0.60	0.60
EBT	45.7	74.8	113.7	139.5	160.1
Income Tax Expenses	-8.7	-15.4	-23.4	-28.7	-33.0
Net Income	36.9	59.4	90.3	110.7	127.1
Balance sheet
Assets
Non-current assets
SEKm	2023	2024e	2025e	2026e	2027e
Property, Plant and Equipment (Net)	13.4	10.1	7.2	5.2	3.8
Goodwill	441.3	441.3	441.3	441.3	441.3
Intangible Assets	175.2	182.8	197.7	214.1	230.9
Right-of-Use Assets	9.7	9.7	9.7	9.7	9.7
Other Non-Current Assets	6.3	6.3	6.3	6.3	6.3
Total Non-Current Assets	645.9	650.2	662.3	676.7	692.0
Current assets
SEKm	2023	2024e	2025e	2026e	2027e
Inventories	0.00	0.00	0.00	0.00	0.00
Accounts Receivable	151.2	146.1	162.8	176.5	188.8
Other Current Assets	0.00	0.00	0.00	0.00	0.00
Cash Equivalents	39.7	91.1	185.3	294.8	418.5
Total Current Assets	190.9	237.3	348.1	471.3	607.2
Total Assets	836.8	887.4	1,010.4	1,148.0	1,299.2
Equity and Liabilities
Equity
SEKm	2023	2024e	2025e	2026e	2027e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	479.4	538.9	629.1	739.9	867.0
Non-current liabilities
SEKm	2023	2024e	2025e	2026e	2027e
Long Term Debt	12.5	12.5	12.5	12.5	12.5
Long Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Other Long Term Liabilities	48.6	48.6	48.6	48.6	48.6
Total Non-Current Liabilities	61.1	61.1	61.1	61.1	61.1
Current liabilities
SEKm	2023	2024e	2025e	2026e	2027e
Short Term Debt	0.00	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Accounts Payable	295.5	286.6	319.3	346.2	370.3
Other Current Liabilities	0.00	0.00	0.00	0.00	0.00
Total Current Liabilities	295.5	286.6	319.3	346.2	370.3
Total Liabilities and Equity	836.0	886.5	1,009.5	1,147.1	1,298.3
Cash flow
SEKm	2023	2024e	2025e	2026e	2027e
Operating Cash Flow	102.6	119.1	170.7	191.8	210.9
Investing Cash Flow	-59.0	-58.8	-67.6	-73.3	-78.4
Financing Cash Flow	-10.0	-8.9	-8.9	-8.9	-8.9

Rating definitions

The team

Disclosures and disclaimers

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Contents

We Expect Continued Improvements in Margins y/y

Higher Sales and OPEX due to FX

Valuation: Base Case Unchanged at SEK33

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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