FormPipe Software AB

STO:FPIP

Earnings Call Transcript 2022-Q3

[Fredrik Nilsson, analyst]

Welcome to this live q with Formpipe. I'm joined here today by CFO, Joakim Alfredson; and we will later be joined by CEO, Christian Sundin, for the Q&A session. And as always, I want to highlight the possibility to ask questions below the stream on our home page.

But now, it's time for Joakim Alfredson. Welcome.

[Joakim Alfredson, executive]

Thank you very much, Fredrik. And as you can see, yes, I'm not Christian. He is currently in U.S. visiting our American sales team there to discuss Lasernet with them. Good fun.

Yes, happy to be here today and looking forward to this session with you to discuss the Q3 highlights. Diving right in, trying to, now there we go. 3 things that I would like to put emphasis on here today is; the first thing is that we finally see that delivery is delivering, which should, of course, be natural, but has not always been the case in Sweden in the recent quarters. We see very positive signs coming through there now, and we're happy to see that, once again, in the Q3 report.

Also, I would like to highlight the growth of ARR, 19% growth year-on-year, which is a very strong number, and it's the most important one in our numbers, I think. And lastly, I would like to point out that we have been -- that we have won the Landbrugsstyrelsen tender, which is important for us and caters for a continued very solid business in Denmark going forward.

[Technical difficulty] Well, the quarter has some positive trends that I would like to highlight, but as well also some hiccups, I'm afraid. On the positive side, we have the -- what I mentioned about the Swedish delivery organization now finally showing very good improvements, both organizational wise and also numbers wise. So, good to see that, that is finally on the right track on the people side as well, I would like to point out. We also see continued good traction in the business area private. We have a SaaS ACV in the quarter of SEK 6.5 million compared to last year, SEK 5.6 million. It's not a huge difference in numbers, but there's a but there that I will come back to later as well.

And lastly, again, the tender with Landbrugsstyrelsen, I would like to point out that we are still in the standstill period here, and it could well be challenged, but it has been communicated. So, we are free to talk about it. This is a big contract. Total value of around DKK 250 million over 4 years. We are [ siding ] here with a partner, one of the very large international consultancy houses. So, the Formpipe share of this revenue stream is around DKK 20 million per year. And it puts the organization in Denmark at ease and gives us better flexibility to work with the staffing of different projects. So it's really good, and it's a good marketing win as well.

On the negative sides though, we see lower delivery revenues coming through from Denmark that we have been accustomed with the latest quarters. Reasons for that is that we have spent a lot of time preparing for this tender with Landbrugsstyrelsen, which has cost us debitable hours, I'm afraid. And also, we've had a very substantial new release of the product TAS, which also has affected our billability ratios negatively in this quarter.

Looking at the private business area, unfortunately we have witnessed longer sales cycles. Temenos is explaining this in their quarterly report, and we are here depending on Temenos to close the deals. But slower sales cycles in the Temenos channel is not necessarily a bad thing, if I for a second here take off my CFO glasses and put on my sales guy glasses, we have an upside here since we are continuously getting closer and closer in the relationship with Temenos. We are now in around 20% of all of their pipeline deals. A year back, we were only in 2% or 3% of them.

So, the longer it takes for these to materialize, the probability that we will be included in more deals actually is increasing. So, in the short-term, in this quarter, this is a negative, of course. But in the longer perspective, this could actually be good that we get the chance to get included in more deals in the quarters to come.

Also, I would like to point out the currency is, of course, affecting us as well. We gained some on the revenue lines, actually SEK 3.5 million in this quarter alone, which accounts for 3% of the growth we recognize. But unfortunately, we are even more hit on the cost side, where cost expands by SEK 4.9 million. And the reason for this is that we are -- is the offshore account with Ukraine, where we pay them in U.S. dollars and dollar against the SEK has weakened around 30% to the dollar during this year alone. So, a huge hit there unfortunately, and this is a bit out of our hands, of course.

So, to summarize this a bit, the things that we can control, we see really strong good trends with the exception of the Danish billability, of course, in this quarter. But trend-wise, things looks good for the future.

Going into the details here. I see that the animation has been lost here, but I will try to -- this is a really nice picture for you, I can see. If we sum the growth on total sales, we see that, that is up 10% from last year, or SEK 11 million, which is a good number, again, where SEK 35 million comes from the strengthening -- or the weakening of the Swedish krona. Recurring revenues are up 15%, or SEK 11 million, mostly stemming from the increase in SaaS revenue of SEK 7 million compared to last year's quarter 3.

And we see that delivery revenues are up SEK 2 million despite the shortfall of revenue from Denmark, which amounts to approximately SEK 4 million, SEK 4.5 million in this quarter. License revenue, as we've discussed in previous quarters, are trending down. We are losing out SEK 2 million compared to last year. And this is something that we are accustomed to, and even more so now when also public sector is turning towards SaaS and subscription purchases. So this will continue along this way.

Moving to the cost side. Top line is up by 18% from last year. We have grown the headcount by a net 8 persons. In that number, there are both plus and minuses, but the net is up 8. We see that we are affected by salary inflation and also some exchange rates come in here to increase that number.

Looking at the sales expenses, they are driven by the increased sales of SaaS and Lasernet, but also has been affected by a bigger use of subcontractors in the Danish delivery organization. With the Landbrugsstyrelsen tender not being certain, we have used subcontractors instead of hirings. So, now with the possible win of that contract, we will be able to plan the organization better going forward.

Other costs are higher. We are still comparing with the last year that was sort of affected by the pandemic still. We see more marketing and more traveling compared to last year. And also here, we get the effect from the dollar in the offshore account. In this quarter alone, the dollar has increased our offshore spending by SEK 1.7 million, which is percentage-wise pretty big, SEK 1.7million on the total spend of SEK 13 million is where it is.

So, summing up the costs, they are up SEK 20 million, which leaves SEK 6 million in EBIT, which is down quite substantially from last year, as you can see. But we are considering this to be sort of the low point of our transitioning towards -- we have worked very hard with the organization, and we feel that we now have passed the low point with profitability, and things are starting to progress in the right direction profit-wise. So, we see that we are in the low point here and are expecting better quarters to come.

Looking at the ACV, we see that this year's ACV -- this quarter's ACV is SEK 6 million compared to last year's SEK 10 million. The big difference there is actually Denmark, who had a really good last year and accounted for SEK 4 million out of that SEK 10 million. And we see that the SaaS is driving this with SEK 7 million out of that SEK 6 million. And again, it's private driving the most of the SaaS -- the sales in this quarter. Q3 is not a really strong quarter when it comes to sales in the public sector. So this is as expected, I would say.

The outgoing ARR is SEK 345 million, which is up by SEK 54 million from last year, or 19%. Also here, of course, there is a currency effect. So, out of those SEK 54 million, some SEK 80 million is currency related. But then again, if the Swedish krona does not strengthen against the other currencies, SEK 345 million is what we're expecting in revenue as of now.

And you have seen this graph before. It pretty much looks the same each quarter. What is interesting is to see that the top right graph is, actually the staples there are getting higher and higher. The increase from quarter-to-quarter is bigger, it's getting larger. So, year-to-date, we cover 66% of the revenues from recurring. And we see that year-on-year growth is 15% in this quarter. And we've had a long-term trend here from going back from 2014 with a strong growth in recurring revenue.

The graph down to the right used to be my favorite graph. It's not really anymore. By that time, since the line is pointing downwards, but we're still over 80% of the fixed operating costs, and we see that now we are stabilizing the business, and this line will start climbing upwards again. Again, the level of recurring revenue is what has allowed us to be so forward-leaning in this growth strategy that we have been driving quite aggressively in the past quarters or years.

So, ending with this picture to see how the SaaS has been built up during the years. This graph is starting to stretch out pretty long. So next year, we will have to get rid of 2017. But the picture is very clear that the emphasis we put on growth is paying off, and we are on a different level now than a couple of years back. So -- and we're continuing on this route forward.

So, that was my last slide, I think. Thank you. Here we go.

[Fredrik Nilsson, analyst]

Thank you, Joakim. And once again, I want to highlight the opportunity to ask question below the stream. And I will start with ACV. Like you mentioned or showed us, it's still a lot higher than it was a few years ago. But at the same time, it's slightly lower than what we have seen in recent quarters. You mentioned that banking customers has postponed their investment decisions. Why is that? And do you expect the softer banking market to continue?

[Joakim Alfredson, executive]

So, I'd say, I don't really have a good answer to you what the expected banking business -- where the banking business go. And -- but we see that terminals is not losing out the deals from the pipeline. They are still there, and they are working with them. They are just not converting into sales as of right now. So, as long as they're there, we're still in the game. So -- and as I mentioned, the longer they take, the more and the higher the probability that we will be included in more of their deals. So, yes, was negative and positive, I think.

[Fredrik Nilsson, analyst]

Okay. While the private and SaaS ACV were quite okay or quite good support and maintenance and Sweden had a negative ACV, what are the reasons behind that?

[Joakim Alfredson, executive]

Well, I think, there is always some churn in the numbers. Normally though, Q3 is a very slow quarter when it comes to new sales. So, the churn number comes through, which it wouldn't otherwise. So, nothing radical.

[Fredrik Nilsson, analyst]

Okay. The positive momentum in public, Sweden continued in the quarter. What response have you got from your customers regarding the reorganization so far?

[Joakim Alfredson, executive]

Good reactions, I'd say. They like doing that the product company takes more ownership of their solution, and customers want to do more. They want to expand the use of their products. So, they are looking very, very positive on this change and us coming closer, also driving development initiatives together with them is good, both for them and for us. So, positive, I would say.

[Fredrik Nilsson, analyst]

Okay. Public, Denmark came in rather soft compared to a strong third quarter last year, I should say, due to lower deliveries primarily. I mean, you have talked a bit about why, but what should we expect going forward? Should we expect those factors that you mentioned to fade or what's the best?

[Joakim Alfredson, executive]

Yes, I would expect them to fade out. Of course, the tender with Landbrugsstyrelsen is over and done with. So, that will not -- we will not spend more time on that. Now, of course, should the -- we understand still period runs out on 31st of October. If we then signed a contract with them, we go into a period of initiating how we will work together and the handover phase. So that will, of course, require some time, but not in the amount of what has gone in there yet.

And also, the TAS release has now been released to the customers. There are still some work being done here during October. So -- but I'm expecting better numbers to come through in Q4 already.

[Fredrik Nilsson, analyst]

Okay. Once again, I want to highlight the opportunity to ask questions below the stream on our web page. Since the last quarter of 2021, you reached a new higher level of ACV. However, since then, you have continued investing in the private segment, especially when should we expect the investments to pay off in even higher ACV possible?

[Joakim Alfredson, executive]

Yes, we are investing for growth, which has paid off pretty well so far. But what we have experienced is that there is a lag. There is a time lag of around almost 1 year when we do invest in capacity before that pays off in actual sales. Where we are now is that we sort of have reached -- and we will continue to grow in terms of staff, but we will not grow at the same pace as we had done during the last couple of periods. So, the cost increase will slow down, and the revenue increase will keep up or increase faster is the plan.

[Fredrik Nilsson, analyst]

Okay. Let's talk a bit about macroeconomics. I mean, your public segments are probably quite resilient, I suppose. But what about the private segment? What's your view on the sensitivity to the economic cycle?

[Joakim Alfredson, executive]

Well, really hard to have an answer on that, I would say. I think, we have 2 big segments in the private side. I mean, one is the Dynamics side, which spans from very small companies to quite large organizations. And then, of course, we have the Temenos track as well. But I'm sure that some of the smaller businesses will be perhaps postponing investments like this. But it's too early to say. We don't really see that yet. So it's just speculation, but it could well be.

Regarding the public sector, yes, they are resilient. But in the end, we are using taxpayers' money. So, when the taxes go down, so does the budget for public sector. So, there's just a longer lag before we see that effect, I would say.

[Fredrik Nilsson, analyst]

Okay. And you mentioned that currencies have a negative effect on the result. And we also see some inflation, but you also have some indexing on your deals in most cases at least. I mean, could you tell us a bit about the impact of those factors and how they get into your numbers relative each other?

[Joakim Alfredson, executive]

Yes, absolutely. I mean, in the public sector, we have agreements clearly stipulating that we have the right to index our agreements. They're on different terms, different indices, et cetera, but -- and some only allows us to account for 80% of the index uplift and so forth. But in the total pictures, we are allowed to index the contracts.

In Denmark, however, we have a slightly worse situation because many of the new contracts there are on a fixed uplift of 1.5%. So, actually there's a lot of IT companies now in Denmark joining forces to call this a force majeure and thereby allow them to index the higher uplift basically. But we're not sure where that will land in as of now. What is, though, is that there will be a time lag here. We see the cost effect coming right now, and we'll be very apparent in the coming periods, while the indexation will be a more smooth uplift and have a dragged out effect since these are billed on 12 months or annually, and the effect will come on the next invoice going out to the customer. So, there will be a gradual increase here.

[Fredrik Nilsson, analyst]

Okay. Last chance for you in the audience to ask any questions. And as I mentioned, you can ask questions below the stream on our home page. For the second consecutive quarter, you have a negative net recruitment. I suppose you would prefer to add to the headcount. What can you do to reverse the trend?

[Joakim Alfredson, executive]

We have been working very hard with that. And it's mostly in Sweden that this has been a factor. So, what we see now, we see that we have sort of come to terms with it, and then that we are now in a good trend with the staff. But of course, when people resign, they take some time before they sort of drop out. So that's what we see now. So, we're crossing our fingers that things will be smoother now, not as turbulent as has been, but the ambition is, of course, to grow. And we will continue to grow and recruit people.

[Fredrik Nilsson, analyst]

Okay. Thank you very much, Joakim.

[Joakim Alfredson, executive]

Thank you. Thank you. Pleasure.