FormPipe Software AB

STO:FPIP

Earnings Call Transcript 2022-Q2

[Fredrik Nilsson, analyst]

Welcome to this live queue with Formpipe. My name is Fredrik Nilsson, and I'm an equity research analyst here at Redeye. I will come back later for the Q&A session, and there is opportunity to ask questions on our homepage below the stream. I think last time that didn't really work, but it should work fine today. So we hope there's a pent-up demand for questions.But now it's time for CEO, Christian Sundin. You're welcome.

[Christian Sundin, executive]

Thank you, Fredrik, and thanks, everyone, for joining in. My name is as Fredrik said, Christian Sundin, and I'm the CEO of Formpipe. Today, I will cover the highlights from the report of -- for Q2 that we published earlier this morning. So I will jump right into it. And please post questions in the chat for a follow-up. I will try to do this presentation short and crisp and then plenty of time for questions.So in Q2, very, very glad to announce that we won a quite big deal with Malmo Stad, a tender in the public sector Sweden space. And we see a lot of great momentum in our business area for public sector Sweden. And we are pursuing and having good progress with the shift in strategy to become a full service provider towards our very big market or customer base in the public sector space, both in Denmark and Sweden.In Denmark, we are already a full service provider and doing that very successfully. And we're now tagging along on the same journey in Sweden and see really good traction in that towards that and with that progress right now. So we're happy with that and happy with the deal from Malmo that the evaluation price in the tender, meaning what the customer believes they will buy over a 10-year period exceeds SEK50 million. So a good deal and good for our -- as a sign of that we are moving in the right direction in the public sector space of Sweden.We're also showing a 19% growth of the ARR year-on-year, and that's a strong signal and that is the best indicator for our future growth of recurring revenue, as you all know. And what's really worth underlying here and put the light on is that private sector has been the one driving the ACV for many quarters now historically, we now see clear shift and a trend in the public sector space that much more of our customers in the public sector also wants to buy a Software-as-a-Service or a subscription. So that's a great thing. And the very vast majority of the deals that we won in Q2 were Software-as-a-Service deals. So that's also really good and in line with what we -- how we want to sell our software.Then on the staff side, I will come back. It's been fierce competition for talent in the market, and we have been struggling with recruitment, and we -- there's been turbulence in the job market. But we're really happy to see that we now during this quarter, has landed a lot of good recruitment and specifically in areas outside of the Nordics in the U.S. and in Singapore, and it's to support our partnership with both Microsoft Dynamics in the U.S. and Temenos in the U.S. and Temenos in Asia. So we see that we are increasing capacity to pursue the growth path we're on in private sector here, and we're really happy with that.So -- but having said that, it's a little bit 2 steps forward, 1 step back on the recruitment side. This graph shows it quite clearly. Even though we're [ 16 FTEs ] up from last year Q2, we actually are 6 people down from the end of Q1. There is, as I said, fierce competition in the job market has been. We see the first signs that it actually starts to come down a little bit, but it is something that has been hurting us for a few quarters in terms of new onboarding, new recruitment, recruitment cost and efficiency in that.So with the current state of the IT market, it is a challenge, but we foresee it coming to calmer days ahead. And yes, this quarter includes both additions and reductions. So we have been more successful in recruitment than what this graph actually says in terms of that, we've landed a lot of good new talent into the house. However, we also lost a few people. So turbulent market for recruitment, that's ongoing.And then going into the numbers. And we're showing good continued strong growth. I will start with saying and highlight the thing I have written in the top right corner here, that I will compare our numbers without the huge deal we made to Landbrugsstyrelsen in Denmark in Q1 2021. It was a one-off deal on SEK41 million license deal with a profitability of [ SEK25 million, SEK26 million ] in EBIT. So I will compare without it. It was a one-off deal and the underlying business is moving in the right direction and doing great progress. And I will focus and put my impetus on that.So the total growth is 17% from last year. So we're up SEK18 million from last year's Q2. It's primarily driven by an increase in delivery revenues. It is in line with our shift of business model, especially in the public sector to be the full service provider there. But we also see good growth in the recurring revenue, which is up 15% from last year, where SaaS, the transition to SaaS is the real driver for this and is up 44% or [ SEK7 million ] year-on-year. So strong signals, all in line with our expectations and what we want to pursue here.On that topic, the -- the flip side of that coin is, of course, that the traditional license sales continues to drop. We are now in this quarter on historically low level on SEK2.4 million in traditional license or on-prem sales. Yes, that's not far from 0. So we will never go below 0 that I can promise you. So we're -- what we're seeing here is that the transition is more or less fully done to only go in growth by recurring revenue, so -- or SaaS revenue. So that's a good thing.And as I pointed out before, we see more and more of the deals also in the public sector being SaaS or subscription deals. So that's good. That's good for stability and it's good for the growth of our recurring revenue. It hurts our margins in this quarter. I mean if we -- comparing to last year with [ SEK6.8 million, SEK6.9 million ] in traditional license sales, except the one-off deal with Landbrugsstyrelsen and of course, that's [ SEK4.5 million ] out of EBIT that would have hit this quarter in profitability. So it puts damp on our short-term profitability, but this is what we want to pursue. This is what we want to grow. So all good according to me.And coming to that, the investments we are doing, both the transition of the business model, transition of the revenue model and the increased capacity to pursue those growth opportunities, of course, add some cost. And the cost comes immediately the revenue recognition from SaaS sales comes over the contract period. So there is a pressure on our margins at the moment, which is all in line with what we said when we presented our financial targets for the coming years. The EBIT will go down. When we're flattening out our cost increase, the growth in recurring revenue will bring up our margins way above where we came from. And with the scalability of this business model, the margins and the cash flow will arise when we're flattening out today the cost increase. So no worries in that.But as I said, number of employees compared to last year is up 16 employees. Staff costs are thereby up 14%. And a lot of the people we have brought in are senior people in sales in U.S. and so forth where the salary levels are above our previous average of salaries. So actually, the costs are up more than the number of heads in percentage. So we have a significant number of additions, but also some terminations. And the increased inflation and the FX, the weakened Swedish krona since a lot of our recruitments and cost is actually in U.K. and in the U.S. and in Denmark, where the Swedish krona has weakened, that also adds cost in FX on our cost side. Of course, we get help from it on the revenue side as well. So we shouldn't complain too much. But bear in mind that a lot of our increased investment is in U.S. and U.K.So sales expenses are up, mainly driven by partner kickbacks in Lasernet. That's all good that since it drives sales and growth in the recurring revenue. And in this quarter alone, specifically, we have an increased market cost spend due to increased market activity, increased traveling compared to the last 2 pandemic years. We also have moved even more of our product development to offshore compared to historical years, and this quarter also includes some significant one-off costs for internal projects. So a cost side that is on the high side for this specific quarter. So the total cost year-on-year is up SEK20 million or 24%. And as I said, put a damp on the profitability for the quarter. But it is this slide that shall justify the increased cost, and this is the strong thing.We have another strong ACV quarter with SEK10 million, where [ SEK9.8 million ] of those are SaaS. We see private coming in [ on SEK5.4 million ]. That's not a historical high and perhaps a little bit on the shy side on what we would have liked. A few deals slipped and will be done in Q3 instead. So we have all confidence that we are on the right path, have a strong pipeline and private is moving along well. On the very positive side of this, you see the [ SEK4.4 million ] in Swedish public and actually -- and that is a lot of deals in Sweden public done, and that's also a market that has been slow for a while. And now we have a lot of deals and they are Software-as-a-Service. That's a really good sign.Denmark [ probably ] looks on this slide, very slow. That's actually not entirely true. The [ gross ACV won ] the new deals is quite significant and a few millions, actually. But we also had 2 older clients on old tenders that has churned out and then thereby the net ACV becomes low in this quarter. But there's still been good market activity. It's, of course, sad to lose customers. And the fact will remain. We only add [ SEK0.3 million ] to the ARR this quarter, but still good, good market activity in Denmark. So all in all, the ARR is up to SEK333 million going out of the quarter, which is up 19% from last year.And I will quickly browse through the overall recurring revenue, which is, yes, we have a strong and stable business with more than 60% of our revenues recurring revenue. And we have a growth on 15% year-on-year in the recurring revenue. And all the way back from 2014, we have an average above 10% growth of recurring revenue. So we're consistently growing our recurring revenue. And that covers [ 80% ] of our fixed cost, which gives us stability to Brazilian to shocks like the COVID thing and it also makes us able to invest in the growth path we're pursuing right now with the big investment we're doing in private sector. So strength in our business and strengthening our business model to have shut a significant part of our revenue and recurring revenue.Now to the very last slide of my presentation, and this is what to be extra proud of. The ACV for the quarter is actually not SEK10 million that I've said multiple times during this pretension it's SEK12 million. Why is that? Yes? Because if we should have the right ARR, we need to revalue the ARR to the current FX and the weakened Swedish krona. And that the majority of our recurring revenue contracts are in other currency makes the actual ACV for the quarter for this to line up to SEK12 million. We guide you with only the non-FX affected ACV numbers, but ARR will, of course, always be revalued to the correct FX rate at the end of every quarter. And the value of those -- the sum of all of those contracts in Swedish krona right now for the recurring revenue contracts that are still active are SEK333 million. So a strong quarter in sales and extra satisfied with the momentum in the public sector space.So -- thanks for that. I hope that you have populated the shut with a lot of good questions now, and thanks for listening.

[Fredrik Nilsson, analyst]

Thank you, Christian. I will start with a question. You have evaluated whether you want to split your company into 2 or stay as Formpipe is today, and you have decided for now at least to remain in the current setting. Why is that?

[Christian Sundin, executive]

Yes. We've made -- we've taken help and advice and looked into an internal project to really evaluate that if we could make if it would be better for the business to be more focused on the different strategies we have slightly different strategies for public compared to private. And we also looked into if it's value creating for our owners to do that. Both of them shows very clearly right now in the current analysis that we are stronger together than apart. We have very independent management of the business area, meaning that we are able to pursue exactly the growth path and the way we want to execute on those strategies in the business area, meaning that they are not stopping each other in any way. However, we also have a lot of help of doing things together. So the conclusion in the current analysis is that we are stronger together than apart.

[Fredrik Nilsson, analyst]

Okay. Given that especially private continued to grow, is a spinoff still on the table for the long term?

[Christian Sundin, executive]

We're not disqualifying any such thoughts. If the -- I mean, we will continue on our path of growth. We will be -- both the public sector and private sector will continue to grow. And at some stage, where the size is big enough and the market conditions are where they are, it could make sense if we see that it would generate value for the owners and be good for the business. That -- so we were not disqualifying that thought. But for now and for foreseeable future, we're moving along with the strategy we're having, with the structure of the company we're having and the setup we're having. And as I said, truly -- we truly truly have found evidence that this is the -- this will be good for the cost side, and it will not hurt the growth side and thereby, we're stronger together. And we share a lot of experience and resources. So there are synergies by staying together that would be dissolved in the split. But of course, not disqualifying it in any way. And we will follow that that and make new analysis of it at a later stage.

[Fredrik Nilsson, analyst]

Okay. We got a related question coming in from the chat. Market professionals have suggested the market would see favorable on a spin-off of either public or private. You have now concluded that the 2 segments belong together, in fact, strengthening one another. And you have stated that both segments will drive growth organically and through M&A. Can you please comment on whether you see significant M&A opportunities for both segments? And what type of acquisitions you have in mind?

[Christian Sundin, executive]

On the acquisition side, we will pursue and look for acquisition in both areas. However, we do prioritize to -- with bolt-on acquisitions in the public sector space. We see that geography expansion in the public sector space would quite -- we see a lot of synergies by sharing the same sort of customer base because a lot of our add-on sales is modules on top of the repositories as Software-as-a-Service modules. Those could be addressed to greater market by having more customers around EU and being -- becoming the EU go-to vendor when it comes to digitalization of public sector space, we really believe that's a good thing for both the customers and the citizens and for the company. We also see bolt-on acquisition of buying modules that are already present in our markets on the public sector space as an opportunity to add on more value to become, as we say, the full service provider with a greater footprint at every customer. I mean, we are market leaders in both Denmark and Sweden. We have a good market there. If we can provide more products and services to those customers, that is a good thing for the customers and for us.On the private sector space, we see opportunities of acquisition also there where we would like to pursue having other similar offerings as Lasernet, not doing the same thing as Lasernet doing, but our products that complement Microsoft Dynamics or Temenos with sorting out some other pain than Lasernet is doing for the same customer base that is buying dynamics of Temenos. Those sort of bolt-on acquisition would be great, especially if that sort of product also have a partner strategy. So we would gain an increased bandwidth in more and new partners. So that is definitely an interesting acquisition target criteria there. That -- to this point, it's been sort of difficult due to valuation of those sort of companies. So it's a challenge, but we're still very much pursuing that possibility to add more value to our customers through acquisition also in the private sector channel.

[Fredrik Nilsson, analyst]

Okay. I'm happy to see that the question function seems to work today. So I once again want to highlight the opportunity to ask any questions. And let's continue with some of my questions for now. And as you mentioned, the ACV in Public Sweden was strong this quarter. Could you elaborate a bit on what kind of stuff is driving the growth? Is it additional modules? And if so, which ones?

[Christian Sundin, executive]

Yes. And that's exactly what drives the ACV. It's additional modules. I think I mentioned before on several updates that during the pandemic, we were working closely with one of our customers and got the idea from them that the commercial signature digital signature products that you all are familiar with that many private companies is using for digital signatures. They are not completely living up to the regulatory requirements on archiving and the security that the public sector space requires. So together with that customer, we built a digital signature product that also integrates seamlessly with our repositories, making it the registration of every case that should be signed in public sector space, much simpler for the customer. That module is an add-on.[ We will that ] with one customer. I believe the counting today, we are somewhere 25 customers on that product that are bolt-on add-on module and counting it, and we're selling that both to Swedish customers and Danish customers for public sector space. That's one example. We have a few other similar example on that. And that's where we see we are providing the best value for the customers as well. The repositories are very function-rich and solid and works well. A lot of the value for the customers and for society is to really use the case and document management system even more and bringing more citizens to do their self services and so forth. So that's where a huge growth potential is in the public sector space.

[Fredrik Nilsson, analyst]

Okay. Interesting. So I suppose you could say that that's a very good example of the co-creation that you have talked quite a lot about recently.

[Christian Sundin, executive]

Yes, exactly. That's definitely a co-creation case. And that's also the reason why we believe the full service provider route is the right one for us getting closer to the end customer instead of for every customer to have a partner in between making us understand the customer base more and getting the innovation power from them and co-create things going forward. So I'm very happy with the traction and the progress we're making with our delivery revenue, service revenue on the public sector space as well.

[Fredrik Nilsson, analyst]

Okay. So let's continue with the public Sweden. You announced a quite large deal, although it spans quite a lot of years with Malmo Stad recently I mean, could you elaborate a bit on that? I mean, is that a sign of public Sweden taking off? And should we expect similar deals with new municipalities going forward?

[Christian Sundin, executive]

Yes. If it's a sign of the market taking off, I wouldn't really state the public sector is almost always stable and growing but not growing with high double digits. It is a stable, predictable market that reinvests and increase the investment in digitalization and we are the market leader here. So it's a matter of finding the right things to actually address to our market, both in Sweden and Denmark. And as I said, increase the offering we can give to them. Then they will be very happy to adopt that and make that worthwhile for them and implement that in order to, yes, save taxpayers' money over time. That is -- so it's not that volatile. So I'm not -- it could be interfered with elections and stuff like that. Our frame agreement can halt the investment willingness for a while and then it releases again. But over time, it's quite stable. It's a matter of our -- I would say it's more about our ability to execute and provide them with new offerings and increased things, both services and products, then we will pursue a healthy growth in both Public Denmark and Public Sweden.

[Fredrik Nilsson, analyst]

Yes. Actually, I asked the wrong question. I was supposed to ask if it's a sign of your initiatives picking up rather. And I think you answered that quite well.

[Christian Sundin, executive]

It's definitely so. This is a sign of that. We're getting traction on the shift of business model. We -- I mean, we -- no secret and I've told you before that we were for trying to execute on this business model shift 2 years ago or 1.5 years ago with own resources. But the acquisition we did of Alkemit, a former partner in January really has been the facilitator for us to move along this journey and execute on it. And now we are moving in the right direction, and we will continue to onboard more people, increase delivery capacity on this journey. So yes, it is the first time you see on us actually being successful on executing on that strategy, while in Denmark and on the private sector, we follow the strategy all the way through. So there has been -- so now we're catching up with Sweden as well. So that's the sign you see here.

[Fredrik Nilsson, analyst]

Okay. We got another question from the web. You mentioned that churn in Denmark was higher than normal during Q2. Can you elaborate a little bit about your churn going forward?

[Christian Sundin, executive]

Well, to put that in perspective, it's 2 customer contracts that we're talking about that tenders for many years past that now has been expiring. So that is the [ churn ]. So it's not a trend with an increased churn. It is 2 customers that went into new tender and on price competition, someone else won and thereby a churn. While we won a couple of other ones, thereby a positive ACV because that value was greater than we lost. So there is no sign of an increased churn in neither Denmark or Sweden in any way. It's, as I said, both Denmark and Sweden are stable and growing. And it's a matter for us to execute and be the best supplier on the market that we're all one of the leaders in.

[Fredrik Nilsson, analyst]

Okay. And there's no sign of pricing pressure in the Danish market, given what you said here.

[Christian Sundin, executive]

Yes, it is on some parts and there's blended tenders in -- where we face fierce competition on price, for sure. That it's a matter of what value you provide as well. And depending on how the tender is written, we either choose to bid on it or not bid on it. But that is -- for us, the majority of our growth is already on the current customer base. And the contracts are normally 4 or 4 plus 4 years and so forth. So it's long contracts, it's long relationships and it's up to us to grow those relationships, both in terms of value for the customer, but also value for us.

[Fredrik Nilsson, analyst]

Okay. You mentioned that there is a tough competition for talent out there, and I think that's what you hear from most tech companies. However, you seem quite satisfied with your achievements in U.S. and Singapore. Could you elaborate a bit on that? Why have you been able to make good -- or at least as you believe good recruitments?

[Christian Sundin, executive]

Endurance would be the honest answer on it to not settle for something less than really, really good recruitments. But also it's constant. And you see that in the profit and loss day, it is expensive, both in recruitment cost and in salary levels with the inflation we see in the U.S. and the U.K. at the moment. So that's, of course, the downside. But we're happy with the capacity we have now. We will continue to add on more capacity, but we are really now feeling that we have a good capacity to take the next step on the growth journey for private and health dynamics and Temenos. The Singapore recruitment is specifically for Temenos, where we see that Temenos has a lot of potential in Asia. So that's good.

[Fredrik Nilsson, analyst]

Okay. Once again, I want to highlight the opportunity to ask questions in the form beneath the stream. And also, as we've talked about in the recent quarters, you have some exposure to Ukraine where you are using offshore resources. Could you give us an update about the situation?

[Christian Sundin, executive]

Yes. Yes, it still affects us very much emotionally of course, the tragic situation that is in Ukraine. However, the Ukrainian government has been very supportive to the IT industry, avoiding drafting people in the IT industry to the Army and also provided help in order of infrastructure help and so forth. And so far, we're very relieved to find that our entire team through our partner in Ukraine has been reallocated and work from safe places and in full production. If things goes even worse, we are in the starting grid to be able to swiftly shift around our product development elsewhere. We have full control over all the source code, documentation, routines and so forth. So we will be able to shift that to other vendor or to other geography. However, at -- in the current state, we don't want to -- we don't want to take the support away from Ukraine, and we get great productivity out of our partner in Ukraine at the moment. So for now, we're closely looking in -- following the progress and hope for it to improve, of course, and supporting Ukraine or especially our people in Ukraine or our partners people that is doing the work for us. So at the moment, the status quo from Q1 actually.

[Fredrik Nilsson, analyst]

Okay. That was all for today. Thank you very much, Christian.

[Christian Sundin, executive]

Thank you, Fredrik. Thanks, everyone, for listening in.