FormPipe Software AB

STO:FPIP

Earnings Call Transcript 2023-Q2

[Fredrik Nilsson, analyst]

Welcome to this live here with Formpipe. As usual, you have the opportunity to ask questions below the stream, and I will be back later for the Q&A session. But first, it's time for the CEO of Formpipe, Christian Sundin, to present the second quarter. You're welcome.

[Christian Sundin, executive]

Thank you, Fredrik, and welcome, everyone. Thanks for joining. Yes, I will jump straight into the numbers from Q2, the report we published this morning.

So some highlights, yes, as we communicated now for some while, we have left the high investment phase of our growth strategy and are now flattening out the cost, while the recurring revenue is bringing the margins upwards. And this quarter is another proof of that we are on that trajectory right now where we delivered an EBIT of SEK 13 million this quarter to compare with last year, 0 in EBIT. Looking on where the growth comes from, it's very nice to see that the major part of the growth comes from our recurring revenue, which is in line our strategy to drive recurring revenue, of course, and 21% growth in recurring revenue. And looking on the SaaS recurring revenue alone, it's actually 45% growth on the SaaS [ line ] , also really nice to see.

And even more so, all business areas are delivering according to plan and are on the right track and provides and contribute to the improved margins that we are delivering here. So everything is really good from that perspective.

So going into the actual numbers here. Yes, we are delivering a strong top line growth of 15% or SEK 18 million compared to Q2 last year. As already noted, this is the recurring revenue that grows most rapidly and SEK 16 million, up from last year, and it's primarily from SaaS, but also some growth in the support and maintenance revenue. We have a one-off deal on Lasernet this quarter. That happens every once in a while. Even though we are really pushing for SaaS deals, every now and then, in particular banks, like to buy traditional license anyway and then we agree on that. So that boosts the quarter slightly in terms of revenue. On the other hand, also in line with our strategy, we are continuing the path of pushing more and more deliveries to our partner network within Private.

So a SEK 4 million decline compared to last year on delivery revenue nets -- down the -- the traditional license revenue that we see in this quarter. So -- and that's a really good thing. It gives our partners more work, and that also makes us having a more scalable business, pushing the delivery to our partners and getting more feet on the ground out there in the market to push mainly Lasernet out in the world.

So in total operating expenses, they're up 3% from last year's Q2. If you have had the chance of already reading the -- the report from this morning, in the comments, say 4%. But that's because I calculate without the capitalized development costs. So taking those aside, it's a growth of cost of 4% compared to last year.

The strong development in revenue and controlled cost expansion, I mean, we mentioned it before. We do see great reason for adding a lot of more people or cost into the organization. in order to execute on the growth that we're aiming for ahead with the operations and mainly that we built organization we need in Private. Now it's more -- we will still add people in delivery of Public sector Sweden and we will join more and more for further market expansion in the Private sector business. So there will be added heads and added costs but not to the extent that we've seen previously. And with the strong growth of ARR and recurring revenue coming with that, we see that the profits will continue to -- and the margins will become better and better over the coming periods.

So EBIT is up SEK 13 million from 0 last year, as already noted. And yes, growth in recurring revenue, I always like to show this. It's a strong growth we're having and it's 65% of our revenue or more right now. It's actually 69% right now. Growth year-on-year, 17% in recurring revenue. We have the -- since 2014, we have continuously grown the recurring revenue with more than 10% in compound annual growth rate over that time period. However, the investment we did in further capacity for boosting growth we did a couple of years ago has given a real effect. And we have grown the growth rate up to 13% the 2 last years on recurring revenue. And now it covers more than 85% of our fixed cost.

And as you can see, in the line here on the graph below, the downward trend on profitability is broken, and the trajectory now will continue to go upwards for the coming periods.

So looking into the actual quarter sales or the ACV, which is the accomplishment for this quarter. We have a solid SEK 11 million in the quarter. It's actually quite good sales. As you can see, there is SEK 22 million in added sales. However, we also see some churn in the quarter. In Private sector, it's mainly about some of the customers churning on maintenance in order to move to SaaS. But there are also several customers that are actually in the financial time where we are right now, there are companies struggling, so they decide to terminate their support and maintenance agreement with us and thereby -- or actually customers going in bankruptcy. We see a couple of those as well in this quarter.

And then on the Swedish side, we have actually by -- proactively by us terminated an agreement with a customer on a custom-specific solution, where we didn't see good -- we couldn't deliver on that in a profitable way for us. So that is a one-off in the quarter. So the underlying sales in SE Public, which is 0 here, but it's actually SEK 3 million and then net it down with the SEK 3 million of, for us, a good churn actually. We can see Private on SEK 4 million in this quarter, as I said. The underlying sales is bigger, but it's also affected of churn. And then we see Denmark Public delivering yet another really strong ACV quarter. It's mainly coming from upselling to existing customer on a new frame agreement and securing the relationship over many years ahead on increased users, increased functions for the customers but there is also new customers hidden in that number. So yet another really strong quarter by Denmark on the Public sector there.

So ending the quarter, we can see an ARR of SEK 406 million or actually 22% up from last year. So of course, that's something that brings great comfort in the future and our future revenue recognition of recurring revenue going ahead.

And as we have shown before and continue -- and this includes FX, if you don't recognize the SEK 14 million in ACV here. But there is a SaaS ACV in this quarter of SEK 14 million. And as you also can see here, from starting the investment phase we did in order to increase capacity in the market, comparing the years 2018 to 2020 with the year 2021 up to now, you can see there's a great shift upwards in what we bring in, in added ACV every quarter from that point. And looking on Lasernet specifically, where we put most of the investment for SaaS growth. Yes, we have a compound annual growth rate for these years of 55%. And it's really a strong growth we see in Lasernet as SaaS.

So summing this up. We -- and comparing this to our financial targets, yes, the average annual growth rate that we communicated that we should achieve over the years 2021 to 2025, I think we can see clear evidence of that we are on that path and that will reach that target. 70% of our revenue should be recurring revenue coming in 2025. We're already on 69%. So I would say that's in the bank. And then I think this report clearly shows that we are on the right path of the EBIT growth as well and the trajectory ahead will lead us up to achieving this number of 20% EBIT or more in 2025. And given that fact that we will reach that, of course, we are a cash-generating company. The EBIT is a cash EBIT. Thereby, we will return to giving dividends to our shareholders ahead, and we have set out to, over time, pay out 50% or more of our profit over time.

So do we feel comfort in all of this? Yes, we feel great comfort in this going ahead. So thanks.

[Fredrik Nilsson, analyst]

Thank you, Christian. And once again, I want to highlight the opportunity to ask questions to Christian through the chat function below the stream.

And I want to start with the strong ACV in the Public segment. I mean, you touched upon it, but we've seen this trend for several quarters now that you have a strong ACV particularly in Denmark. I mean, could you elaborate a bit what's driving those numbers?

[Christian Sundin, executive]

Yes. It's actually -- it's an opportunity we have with renegotiating on a new frame agreement that came in place, I think, a year ago. We're meeting up with our customers. They see the benefit our software provides, and what we have built in add-ons over the years, meeting them and discussing with our customers on how can we use our software more, how can we get greater value of it. Many customers realize that they can use our software for even more tasks, and thereby, it will be upsell opportunities. But there is also a matter of price. The new frame agreement is more favorable for us, meaning that we have an opportunity of, yes, charging the customer a higher price per user and per module. So it's us executing on the frame agreement that came in place a while ago.

That also includes securing a lot of the -- it's both new customers and existing customers. But these are long-term extensions. I would say, in average, we're extending every one of these customers that -- on the new terms for four years. So it's to secure the relationship and have the opportunity to upsell even more over that time period. So it's really good for us.

[Fredrik Nilsson, analyst]

Okay. So would you say that this is a general trend in the Danish market? Or is it that you have succeeded in convincing your customers that your additional modules and so on can create additional value for them?

[Christian Sundin, executive]

I don't -- I wouldn't stretch it that as far as a trend. I think it's us working with our customers and they realizing that our software is providing great value to them. And then we've taken the opportunity to renegotiate and get better revenue from each and everyone and also won a couple of new ones or sold another add-on module to existing customers and so forth. But no, I wouldn't see it in the macro context here or a trend, really. I think we should just see -- we've been really successful the two past quarters. And yes, hopefully, we will be going ahead as well, but there's -- it will be hard work to do that as well. So...

[Fredrik Nilsson, analyst]

Okay. So now let's move to the Private segment, which had ACV that might be a bit softer than what we have seen. However, you mentioned that one Lasernet customer chose to go for a traditional license instead, and that of course is impacting. But I mean, you mentioned longer sales cycles, for example. Is that the main explanation for the somewhat softer number? Or is there anything else you see?

[Christian Sundin, executive]

I'll try to elaborate a little bit on that and explain it in the comment in the report. And what we see or what our partners are telling us that in this -- there's longer lead times. That's clearly what they tell us and what we reckon here. But there is also -- I mean, Microsoft Dynamics is gaining market share. That's still, as we see it, a fact in the ERP market. However, Microsoft Dynamics has two different ERP offerings, two completely different system: one is called Microsoft Dynamics 365 Finance and Operations; and the other one is Dynamics 365 Business Central.

Historically, the Finance and Operation, or F&O, has been the bigger ERP system, addressing multi-country, global organizations in manufacturing and so forth. While Business Central has been very strong on SMEs and mid -- also large-sized companies, but slightly smaller. And it's more packaged solution, less configuration model and so forth. Over the years, this -- and what we see right now is that when customers are faced with the opportunity to choose between those two, we see somewhat movement towards Business Central. Our historic USP here has been on Finance and Operation. However, Lasernet is making the same contribution or completing the Business Central just as much as F&O. And technology-wise, it's not a difference.

So for -- to use Lasernet on Business Central, we are really strong there as well. It's more that historically, our partners has focused on selling F&O and now more customers chose Business Central, and perhaps then there are partners that -- or delivery system integrators that are having a history of being really strong on Business Central. And our partner network has been very much focused on F&O. So for us now, it's a matter of -- and we see that our partners really want to move more to Business Central, to have that as an additional offering to their customers. But it's also a matter of us recruiting or finding more partners that are really strong in delivering Business Central.

So in the short view. This is slightly hurting our ACV right now. On the other hand, it really adds a new addressable and strong market opportunity for us and with Lasernet going ahead. So for us, it's actually, long term, a good thing that this is going on.

[Fredrik Nilsson, analyst]

Okay. Interesting. And I mean, approximately for how long do you think you will see a negative short-term impact due to the focus on Business Central?

[Christian Sundin, executive]

Well, I mean, we can't really -- two quarters is not enough statistical data to say that this is a strong trend. We -- it could be just two quarters where we have lost out -- or our partners has lost out on a couple of deals to -- where they have not offered Business Central. So I wouldn't overexaggerate to say that this is a really strong trend. But we're up to -- if it's a trend, we're up to meet it, and we will bounce back on it. However, I mean -- and there are also quite a lot of positive nuances from our partner network coming and the outlook for the autumn as well. So I wouldn't see these two slightly softer private sector quarters as a trend in any way. I think we're up to bounce back strongly on Private.

[Fredrik Nilsson, analyst]

Okay. Let's continue with the question from the web. It was sent to us in Swedish, but I will try to translate it. What are the biggest challenges for your -- for the new CEO, in your view?

[Christian Sundin, executive]

I mean, I do believe we have a very solid business plan for each and every business area right now and we're -- all business areas are executing accordingly. So I think Magnus will have plenty of time to get to know the business, learn the people, understand our customers and partners and then -- and continue to execute on the plans that are already present. And then after doing that, his experience and knowledge will add in another injection into the Formpipe journey ahead, I believe. So challenges, I don't really know. I mean, it will be the daily challenges, I mean, that -- in the market or at our customers and so forth. But I don't really see one major challenge right now for him.

[Fredrik Nilsson, analyst]

Okay. Once again, I want to highlight the opportunity to ask questions in the chat below the stream. And let's continue with deliveries in Sweden. That has been an area where you have a focus on increasing your capacity. So what's new there? How is the work going? I mean, it was a quite tough quarter in terms of working days. But still, I think you increased your delivery sales in Sweden somewhat year-over-year. Could you elaborate a bit on the situation?

[Christian Sundin, executive]

Yes. We're doing a great job on that. And it's actually what we've been working with is the billability to be more productive and efficient in our delivery organization. And I mean, we come from a time where we didn't do that as well as we're doing right now. And 1.5 year ago, we acquired one of our partners, Alkemit, and then we got in the experience and knowledge on how to do that. But it still has taken some time to adopt to that way of working and so forth. So the majority of the growth here right now is not us adding more people, quite the same number of people actually in deliveries as last year in Sweden. So it's a matter of doing it more professionally and with better productivity. So the added on with more capacity, we're doing that in a very controlled way. And we'll continue to do that. We'll continue to add resources, but doing that in a very controlled way going ahead over the coming years in order to be the full service provider to all our customers that we want to be a couple of years from now.

[Fredrik Nilsson, analyst]

Okay. And let's move back to Denmark again. And the Landbrugsstyrelsen deal, I mean, what's -- how has it been so far? I mean, there was some -- between the mix in deliveries and support and maintenance and so on. What's your key takeoffs so far?

[Christian Sundin, executive]

No. About what we -- with the new agreement, we also took over another system integration work at Landbrugsstyrelsen, which was their own configuration customization of things outside of our core product. So we're also helping the customer with that. And we now -- during the spring, we've been having both the old agreement in place, doing quite a lot. But we work on that. But from the 1st of June now, we are on the new agreement and have taken full control over all the code that the other system integrator had built. And so now we have documented that. We have it fully working with the entire solution at the customer. Customer and us are really happy with the collaboration and see many years ahead of a really strong collaboration there. So yes, in terms of outlook on revenue, I can't really provide that for you. But the solution is now in place and we have full control over it, and we're now working on the new agreement. So that's good.

[Fredrik Nilsson, analyst]

Okay. Last chance to ask questions through the chat. And I mean, in general, we have seen or at least expect a slower IT consulting market in general, while the public sector seems to be doing quite well. I mean, is there opportunity for you to acquire more talent as the competition for employees might decline somewhat? Talking about the Swedish market, in particular.

[Christian Sundin, executive]

Yes. As I said, we will continue to recruit, but we're doing that in a very controlled pace. So we will add on more people, more capacity over the coming years. But we are also very keen on not breaking the [ Shy now ], which we did a couple of years ago and sort of failed with that scale up of the business. So we will do this in a very controlled manner. But there will be more and more people driving more and more delivery revenue in the Swedish Public sector business going ahead.

[Fredrik Nilsson, analyst]

Okay. Thank you very much, Christian.

[Christian Sundin, executive]

Thank you, Fredrik. Thank you, everyone.