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Earnings Call Analysis
Summary
Q2-2024
The company experienced a SEK 13 million revenue drop due to the Landbrugsstyrelsen contract, offset by a SEK 13 million gain in recurring revenues, now covering 80% of total revenue. Recurring revenues have seen 17% year-on-year growth, strengthening cash flow. The quarter’s EBIT was SEK 8 million, down from SEK 13 million last year, attributed to a one-time large license deal in the previous period. The private sector's SaaS growth contributed SEK 6.5 million, with recurring revenues largely driving this trend. The business expects continued profitability improvement as recurring revenue scales and operational efficiency initiatives take hold.
Welcome to this Live Q with Formpipe. We will have a presentation with CEO, Magnus Svenningson, and CFO, Joakim Alfredson. And then I will host a Q&A session. And you can already now send your questions to us below the stream. But now it's time for the presentation. Magnus, you're welcome.
Thank you very much, Fredrik. And it's a pleasure to be here this sunny day in Stockholm. So I will elaborate a little bit on a high level on our numbers, also dive into some business we have done recently. And then Joakim will talk more about our numbers, and then I'll talk a little bit about our Pursue Potential Program. So first of all, we have our net sales that comes in a little bit weaker compared to last period, and this is related to the Landbrugsstyrelsen contract, which we announced almost a year ago that this would have an impact on our numbers. This is -- I still think we are doing a good top line job and especially looking at the recurring revenues because if we look at Private, we are up 16% and Public 12%. And this moves us over to our ARR, which comes in on SEK 434 million, which really shows how stable our contract basis and how it continues to regenerate recurring revenues quarter-after-quarter.
We have an ACV figure of SEK 12 million, which I think is very good. I will elaborate that in the next slides how we have built up that number. And then we have the profitability of 6%. Again, coming back to this last -- to the large contract, Landbrugsstyrelsen. It has an impact on our profitability. We also spoke at the last quarterly report on our delivery situation in primarily in Denmark, where we have -- where we are -- where we have connections between products and certain customers. And we are working on making that dependence, it's making us a little bit more flexible in how we can deliver our consultancy resources over the coming quarters. So my -- I believe now that we have seen the bottom, and from now, we will see a slow progress in our delivery capability in Denmark. Very important here is to note the fact that Private comes in on 7% EBIT, which is a good testimony on its scalability and the fact that we really see Private now coming in and generating a margin to us. So that's very satisfying.
So the business highlights. We have in our Case and Document Management business, the Public sector, we have done some really cool deals, Myndigheten for Familjeratt och Foraldraskapsstod buys the first TAS installation in Sweden. So TAS is a product that we have developed for the Danish market, and it is around distributing contributions like, for example, could be child support or something where you want to make a decision on distributing a grant to someone. And it's really nice to make a first deal in -- make a first cross-sell in Sweden. It's a small deal, but it's the first one. So it's a proof that we can cross-sell between the markets. That's one good deal. Then we see within the Defense segment that our flagship product is maybe a big word, but Platina, our really, really long-lasting, very competent Case and Document product, our customers who has been using it for many, many years, they continue to expand, continue to invest in that product. Really good to see.
Then we have a number of municipalities in Denmark, who is buying Adoxa. And Adoxa is also a very nice product that helps organizations to be GDP or compliant, making sure that you don't distribute health insurance numbers, e-mail addresses by mistake. So it's a really good complement making governmental entities more efficient. Malmo Stad is buying our new product we released here for 2024 Meetings Live. A collaboration tool that helps them make decisions without having to use collaboration tools from the hyperscalers. So data can stay within the -- within Sweden, primarily in this case. And then Region Stockholm, as we have spoken about, we are redesigning how we work with partners going in and doing more of the core product delivery ourselves. That brings the customers closer to us and to the source code and to our developers. And we see this being very appreciated by the -- by our customers. And Region Stockholm now on their Platina installation is -- will -- has signed a significant framework agreement for maintenance and development of their installation.
So that's really a good quarter we are putting behind us, and we are, so to say, well in pace for the first half year of 2024. And if we look at Private sector, we have 2 legs there for the Lasernet platform. One is Dynamics, where we work in the ecosystem around Microsoft Dynamics, where we have won 19 customers this quarter. And as always is a big split between different industries. And I've just chosen two rather randomly. And one is Visual Comfort and they do light systems. So sort of if you want to have a lamp somewhere, they are the -- they are globally distributing lights and that kind of equipment. And then as another example, Eneco Energy, a Dutch utility company. And there you have the mass communication piece where you really talk -- where you really communicate to a large amount of subscribers to, in this case, energy solutions.
So again, we are all over the different verticals, and we serve these verticals with a partner network that are very niche into certain industries. And just as an example of that, I would like to bring up XAPT, it's a partner to us. And last quarter, I spoke about Caterpillar. That is a partner very much focused on the Caterpillar distribution network. So that shows that we are coming with a very horizontal product and then we have very niche partners help -- making sure that our product makes total sense in a certain vertical. So a good quarter from the ERP side. And then if we move to Bank & Finance, we have won 5 new deals with our -- through our cooperation with Temenos. And it's -- as you know, we have a really good long-lasting relation with Temenos.
If we look at where we were last year, we have made a 200% increase in ACV on the banking business, which is a -- it just shows the momentum in that part of our business. And we tend to talk about customers here that is churning in and churning out, which is a very natural thing to happen. And just as a side note here, we have a customer returning. They wanted to develop Lasernet functionality themselves and then they see that, that is a bit complicated and then they are coming back to us. So that is a little positive side note. So with this little introduction and some business highlights, I would like to hand over to you, Joakim, to talk a little bit more about our numbers.
Okay. Hello, everyone. Going into the numbers. And as always, there will be a lot of arrows and circles to guide you through this and to know where we are in the sheet. First of all, of course, that stands out the lower delivery revenues that we also experienced in Q1. They are contracting with SEK 13 million compared to last year's Q2. And yes, it is the Landbrugsstyrelsen agreement that is doing -- having this large effect on us. And we have spoken at length about this before, but it's worth repeating that we know that this was coming in a way. On the flip side of that, we see that the recurring revenue is growing very well and evidently as well as we're losing out on the delivery line, we're gaining on the recurring revenue line. So plus SEK 13 million there. And we can now conclude that they are covering more than 80% of our total revenue.
And this shift, as we see, it is strengthening our revenue mix and is also having a very positive effect on the cash flow since the recurring revenue is invoiced in advance and prepaid. So when we are growing this side of the business, it generates positive cash flow for us. Looking further down, we have a decent quarter when it comes to traditional license sales. However, last year's Q2 had one very large license deal of a Pakistanian bank of more than SEK 4 million. So it looks a bit shy in that comparison. But as a normal quarter, the SEK 3.6 million there in license is a good number for us. It's a rather high number actually. We see that the costs are pretty much on the same levels as last year. So we are not expanding the cost at all actually. And this is something that we see will continue. We will expand costs slower now going forward where we have reached a satisfying level of the Private business area. We will expand the delivery capacity in Sweden, but at a controlled pace. So this will remain fairly intact going forward. Which sums this up to an EBIT of SEK 8 million for the quarter, a bit below last year's SEK 13 million, but then again, we had a really big one-off license deal there.
So zooming in on the different business areas, here, we can clearly see that the drop in delivery revenues comes from the Public sector. And unfortunately, it's not fully compensated, of course, by the other revenue line. So -- but it partially is. So the total negative revenue effect is SEK 8 million. And also, we're able to even better that on the profit line. So compared to last year, where the EBIT is SEK 7 million lower for the Public sector. Looking at the Private business area, we see that SaaS is what is driving the growth there, expanding by SEK 6.5 million. And of course, as mentioned, just the license sale is lower this quarter compared to last year. But -- so the total revenue is up by only 3.5% even though the SaaS line is growing that much.
And EBIT is expanding by SEK 1 million. So -- which isn't that much, but again, with a big one-off license deal last year, putting that aside, we see that the trend is really strong in the profit growth here. Looking a bit more on the recurring revenue. You've seen these graphs before, but they are continuously expanding. We now have SEK 409 million in the rolling 12 recurring revenue. And we are covering more than 80% of the total revenue we have. Year-on-year growth on the rolling 12 is 17%, which is a really strong number in my mind. And we have been growing at a fairly high pace for a long period of time now over 10 years, above 10%. And this graph now reads 100%.
The recurring revenue is covering 100% of the fixed operating costs. And we can see the trend is strong and clear here and continuing. So it shows the scalability in the business, where we are at a satisfactory level for the cost side, and we are continuously expanding the recurring revenue will -- which will have a great impact on the profitability going forward. ACV for the quarter. This quarter, we actually have a negative ARR effect of SEK 6 million, which means that the Swedish krona has strengthened towards other currencies. And we also did a very small acquisition of the French Dictymatec company, which brings in SEK 2 million in added ARR. On the quarter, the transactions, we saw that SaaS expanding by SEK 10 million in ACV and support and maintenance by SEK 2 million. So it's quite clear that it is the SaaS line that is driving the business right now. And as Magnus pointed to, we see continued good traction in the banking side of the Private sector business with 5 new banks in the quarter. And yes, there is also a churn in there. And there's also the ones that Magnus mentioned a returning customer, which is good news.
So the Private ACV sums up to SEK 9 million, while the Public had a SEK 4 million ACV, which is actually a fairly good number in the Public sector side. Last year's had SEK 7 million, but then we must remember that the Danish public sector was in a transition, where the Case and Document Management agreements were transiting to the new frame agreement, which led to a rather large ACV numbers for a period of quarters there. Outgoing ARR of SEK 434 million, which is up 7% from last year. How was the numbers? Thank you.
Thank you, Joakim. And when you've seen this, of course, we are excited about what we call our Pursue Potential Program. And when you look at Formpipe, of course, the installed base, the fantastic people, the very, very well proven product portfolio in combination with the ARR growth gives us a very good foundation and gives us a lot of potential to run forward too. So we have started the One Public business area, and we are doing the customer journey overhaul in the Private business areas. And this is what I will talk a little bit about now what has happened since we met last time in Q1. So what we're doing here for those of you who have followed Formpipe for a while, it is -- we have a rich product portfolio in the Public sector. And given the Public sector market with procurements, et cetera, just making a lift and shift upgrade of a product is a complicated way to move forward.
So what we have been looking at this first 6 months is how can we look at the strong features of the different products? Can we combine that in a way so that strong features is benefiting all the different products, thereby also allowing us to reallocate R&D money more to new cool features rather than maintaining 3 or several parallel tracks of products. And we see that this is possible to do, meaning that in the autumn here, we will start talking more to our customers on how we can introduce new functionality and start upselling new functionality to them. And as a Public customer, you always look at doing more with less, and we see that by -- with our modification to the product portfolio and with adding on features like AI, for example, we can do -- we can help the case manager be more efficient. We can pre-populate forms. We can do certain -- we can filter, we can make the process more efficient when receiving large amounts of data applications, et cetera.
There, we see a good efficiency potential, and we see an interest from the market in pursuing that. So that is where we are standing right now when it comes to the Public sector transformation. When it comes to Private, I spoke a little bit about all of the -- how vertical the product is, so many different kind of customers, and then the niche partners working in these different verticals. Now we launched our new -- we started talking to our partners with -- around the new product portfolio, and we get good feedback because what they see now is that with our Freemium model, where we start with Essentials, then you can move up to a Professional and then to Enterprise for the high end user. We will make Essentials available through Microsoft AppSource. And that is for everyone using Dynamics.
That's one source where you go to find a new application. If you have a problem, that's where you go looking to find a new application. Essentials will be downloaded there, meaning that certain end users somewhere in the world can start using Lasernet and get a feeling for what we can do. And we see that our partners appreciate that we take this step forward to start generating leads to be more active in their sales cycle. They also appreciate the fact because we see a bit of competition in the low end of the market. And with Essentials, we come with a really strong proposition for the low end of the market, also allowing these customers to then migrate up through Professional up to Enterprise. So 2 things are being very appreciated by the partner network. So -- and there, we look forward to releasing it fully in October in the Dynamics Community Show in Austin. So that will be a great fun.
If we look at Bank & Finance, as always, I would say, a strong market position. Still, Temenos is our #1 partner. We are having a great cooperation. What we do see now is that other core banking providers are starting to look at Lasernet and wanting to integrate and adding on the Lasernet functionality to their proposition. We take that on a little bit opportunistically right now because Temenos is still the bulk of the business. That is a very interesting trend that we see that Lasernet is being so appreciated out there. And we are also in the Private business, doing a little bit the opposite thing that we do in Public, looking more to work with partners. So just as an example, there is a Pakistanian system integrator called Systems around 3,000 employees or so that we have now scaled up and allowing them to sell, deliver and support our product. And of course, that's the way we need to act when we have these very specialized verticals all over the globe to be relevant for our end users. So good progress within our Private business as well.
Then we have our financial targets. We spoke a little bit about the turnover. We are making that goal with minimal margin, but we are there. We have spoken about the 7 -- more than 70% recurring revenue. And as Joakim said, we are doing that with a good margin, really good progress there. The dividend, you have probably received the first part of that already. So we have a green light on that one as well. And then we have the margin goal where we are behind and working hard to make sure that we will see an improvement on the margin the coming quarters. So 3 takeaways before I leave this, the strong development of recurring revenues, the One Public transformation is starting to materialize, and we have a continued good momentum and profitability in Private.
I -- we are -- I really look forward to meet you in the third quarter because autumn will be very exciting when our new offering from Private hits the market and our new offering from Public start to materialize. So as always, there will be a very interesting autumn. Before we meet, I will have some vacation and recharge my batteries. And I hope you will do the same.
And with that said, I hand over to you, Fredrik, for the Q&A session.
Thank you very much, Magnus and Joakim. And once again, I want to highlight the opportunity to ask your question, send them in to us below the stream. I want to start with the solid ACV number. It was quite on the weak side in last quarter, but now it was, in my view, at least a quite strong number and both in Public and Private. So could you give us some color on that? Is Formpipe doing a better job? Is the market getting better? What's driving the numbers?
Formpipe is doing a better job. There is also seasonal bits and pieces in here. I -- when I look at our sales numbers, we have been very good in really keeping track of our pipelines, how the business have been building over the -- over this first half year. I see, if I'm sort of a little bit evaluating, good traction in banking. I think, I would say, given the changes we do in the Dynamics ecosystem and with Essentials and the new packaging, I believe we can still -- we want to improve the performance from Dynamics. So the sales in the Dynamics ecosystem was okay, but I would like to -- we are doing the changes to make it even better. That's what I'm saying here. And then Public, good, solid on our expectations. But of course, we want to do more than we have done going forward.
I see. So let's continue with the Private side. And you've touched upon it, but the response from partners regarding your new packaging has been promising so far. I mean could you give us some examples of the feedback you are getting?
No, but it's always in this -- in the Dynamics business, we -- we usually come in when you sort of -- when you contemplate to make a change of an ERP system. And of course, the leading question here is, of course, around the ERP system. And believe it or not, not everyone believes that sort of the Output Management and the Lasernet problem area is the most important. And there -- so there is always a struggle to initiate and accelerate the sales cycle. And what we hear from our partner is these wordings that good that we can now come in earlier in the sales cycle before our -- the end user starts using low-end products so that we don't have to throw out the low-end product and bringing your product in. So that is a typical quote from user that it's really good to have you sort of present at the end user before we start talking about sort of Output Management and the Lasernet product. So partners appreciated that they will see more of a help and us not leading the sales cycle, but be more present out with the end users so that they don't have to do all of the sales work themselves.
Interesting. Sounds reasonable. So let's move on to deliveries and particularly in the Public segment. You mentioned that Sweden, where I know you have a strong market and you want to find new employees to expand your business. We're doing well, but Denmark remained a bit soft. So let's start with Sweden, what's happening there?
No, but in Sweden, we have done the transition to do more of the deliveries ourselves, and that is showing good results. That is being appreciated by the customers and our partner network. We are recruiting and building our delivery capacity. Now we have a -- our product platform is it is a -- it is a very competent platform. So we are taking on resources and starting to scale up deliveries, delivery resources in a moderate pace, allowing us to train our people well in order to also give a good customer experience. So that is ongoing. And then I would also like to highlight the fact that Region Stockholm that I spoke about that we see now end users coming to us. So we see also the demand in the market. And then it's always a balance on how fast you can build and accelerate your delivery capacity to meet the demand. But I believe that we are reasonably well balanced in the Swedish market.
And regarding Denmark, I mean, we know about the Landbrugsstyrelsen situation. But can you tell us -- I mean, except for that, what are you seeing in the Danish market?
No, but we -- this is the beauty of -- the beauty and also the complexity with the Public business. It is a limited number of customers. We do consulting that is very related -- closely related to our products. And we see a good demand in the Danish market. But we also see how it is connected to certain products and that individuals, our delivery resources are also connected to the -- to our products. And we need to move away from that dependencies and be a little bit more flexible in how we can deliver services to our customers. And then we should see a slow growth in the -- in our delivery revenues from the levels where we are right now.
Okay. And you merged your Swedish and Danish public organizations quite recently, and now you got your first cross-border deal. I mean, what is your expectations on the potential for cross-border deals going forward?
I have high expectations on that because if I look at how we can combine our product portfolio, for example, around GDPR compliance with our installed base in Sweden, our collaborations tools, et cetera, there are obvious synergies and value we can bring to our customers. So I am optimistic on that, and our team is optimistic. Now with that said, we also have the Public market complexity with Public procurement, but also around how careful Public entities are with personal data, how well tried out and tested new solutions need to be before they go into our -- before they are bolted on to our platforms. So yes, optimistic. But again, it is a journey that commences this autumn on bringing new value to our installed base, primarily in Sweden and Denmark.
Okay. Also in the Public segment, you have several products in some areas, and you see potential for consolidation of your product portfolio. Could you elaborate a bit on that?
Absolutely, Fredrik. So just taking one example, when it comes to the Case and Document Management, we have [ W3D3 ], we have Acadre, we have Platina, they on -- for the layman, they sort of solve the same -- the similar problem, but they have very, very unique capabilities on their own, like cloud readiness, scalability, adaptiveness, et cetera. There are certain things here that they do extremely well. So what we see that we can do is that we can actually lift out certain functionality and have them used by the 3 different products, but they can then be maintained on one hand. So that means that we can, going forward, reduce, we can shift maintenance spend to functionality spend, and we can offer a customer on Acadre, richer functionality from, for example, Platina, allowing us to upsell on the installed base to Acadre, for example.
So that is what we want to achieve. It will take some time to get it going, but that's where we want to go to give our customers a better -- maintaining the user experience, but receiving better functionality and us to have shift the spend from maintenance to a sharper offering. So that's where we want to go with the new product portfolio. And of course, over time, you would -- we would also like to be more flexible, for example, on the delivery side, being able to share resources over the borders. But again, Public sector markets are very domestic. You have to bear that in mind as well.
I see. And lastly, after 17 years, Joakim, it's time for you to leave Formpipe early next year. I mean could you give us some color on that? And what is you looking for in a new CFO, Magnus?
So first of all, I really want to say that this is no drama. This is something that is very common when a new CEO is coming into a company. I am very -- Formpipe would not be where Formpipe is if Joakim hadn't been with the company for this time, and Joakim has done a great job in giving me an introduction to how Formpipe works. And going forward, I, of course, want to build a team that I have some -- I need to build my own team moving forward. And this is, again, I'm really glad for Joakim also staying along with us and helping this transition into the -- into -- up to the first quarter in 2025.
Yes. Thank you for those words. I feel that, that is important to actually stick around for quite some time to make sure that a new CFO is properly introduced to the business and -- because it is a rather complex business like you have experienced. And so there are a lot of different products, different business models, et cetera, et cetera, that needs to be grasped.
Thank you very much, Magnus and Joakim.
Thank you, Fredrik, and thanks to all of you listening out there.
Yes. Thank you.