Review of Q1 2024

The net customer intake amounted to 20,000 (15,000), better than the 17,000 we expected. Despite rather tough market conditions for SMEs, Fortnox delivered a strong new customer intake – implying further gains in market share. While Boardeaser and VisualBy contributed with about 3,000 new customers, the organic increase of 17,000 improved y/y and beat our expectations. 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 – that positive impact seems to increase somewhat quarter by quarter. The y/y increase in the number of customers was 12.3% – constituting an improving growth rate q/q, which we have not seen in a long time. The total number was 556,000 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, largely matching our forecast of SEK284. The ARPC increased by 13% y/y and was flat sequentially due to Q4 being a seasonally strong quarter.

The deviations to our forecasts were limited overall, although Core Transactions did somewhat better than expected.

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 aligned with our forecast of SEK463m and amounted to SEK467m (370), corresponding to 26% growth y/y – 25% organic growth. 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.

ARR was SEK1447m (1202), up from SEK1276m in the last quarter, corresponding to an annualized q/q growth of a solid 66%. The substantial q/q growth is primarily driven by the price increases announced at the beginning of March – impacting ARR in Q1 and revenue over the next 12 months.

The graph below shows the significant impact of price increases on the ARR, such as in Q2 2022, Q1 2023, and Q1 2024. We assume 5% increases per annum in our forecasts. However, Fortnox will aim for a more dynamic pricing strategy from now on.

See our earlier Update on the impact of the most recent price increases.

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 was above our forecast of SEK232m and amounted to SEK245m (199). Both Other external costs and Personnel expenses were higher than expected. The net recruitment of 87 people (including 37 from Boardeaser and VisualBy) exceeded our expectations. Considering the average net intake of 21 employees per quarter 2022-2023, 50 new employees (excluding Boardeaser and VisualBy) is a rather high number. However, before 2023, we expected a substantially higher net recruitment for 2023 than the outcome. Thus, we believe it makes sense to increase the headcount more substantially after a rather long period of small increases. Most of the new personnel will be working within tech/R&D. The softer employee market has opened opportunities that Fortnox has exploited, resulting in high net recruitment. Considering the tough talent market seen in recent years, we believe the move make sense.

We expect lower net recruitment for the next few quarters, roughly in line with the 2023 average.

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 SEK185m, corresponding to an EBIT margin of 39.6% (37.8). Our forecast was SEK195m and 42.0%, and the 5% miss follows higher 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 SEK174m (135), below our forecast of SEK195m.

Cash flow was on the soft side following a substantial increase in net working capital (NWC). Relative to R12m Sales, NWC increased to 11.7% in the quarter compared to 3.8% in Q4 2023. While the easter ending Q1 had a negative temporary effect, solid growth in the financial services is likely hurting NWC. However, as the bulk of financial services in Fortnox are related to factoring, the revenue from factoring is not necessarily closely linked to the amount lent out on the balance sheet, as the balance sheet is just a snapshot of 31 March, and factoring usually is short-term.

Although financial services do not have such an appealing NWC as SaaS, considering that Fortnox’s financial offering is closely related to its software, we believe it is an attractive business. We believe the close connection to the software gives Fortnox’s financial services a competitive advantage, making it more scalable and stickier. Thus, we see no reason to worry about the substantial buildup in NWC.

At the end of Q1, net debt was SEK-377m, 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.

As usual, Fortnox is continuously expanding its product offering. Below are a few recent examples highlighted at the Q1 earnings call.

A continuous flow of new products and features is crucial to secure long-term ARPC growth. However, the new products will likely have a limited impact on sales in the near future. Also, it is essential to keep the offering attractive.

We leave our sales forecast unchanged for 2024 and 2025 while decreasing EBIT for the same years by -7%. On a more detailed level, we make the following adjustments:

We forecast 24% and 23% organic growth with 42% and 45% EBIT margins in 2024 and 2025.

We lower our Base Case marginally to SEK66 (67) following lowered short-term EBIT forecasts and roughly unchanged long-term estimates.

Trading at ~14x 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.