FormPipe Software AB

STO:FPIP

Earnings Call Transcript 2023-Q3

[Fredrik Nilsson, analyst]

Welcome to this LiveQ with Formpipe. We will start with a presentation about the third quarter, and then we will have a Q&A session, and it's possible to ask questions below the stream already now. But now it's time for the CEO, Magnus Svenningson; and CFO, Joakim Alfredson. You're welcome.

[Magnus Svenningson, executive]

Thank you very much, and it's great to be here at Redeye doing my first quarterly report, and it's also a pleasure to do the report as the job that has been done before me has been great, and we are sort of in a very good momentum with Formpipe.

So as a first, a little highlight and I will talk about the 3 important things, I would say, on a high level with Formpipe in this first little section here. And it's, of course, the continued profitability. And it's really good to see that all of our 3 business areas is now profitable. We have renegotiated our contract in Denmark, Landbrugsstyrelsen. And we have also started our transformation of our consultant business, so that we do more application consulting ourselves. And this is 2 things that are driving this profitability increase together with our great job in the private sector.

Then as a second point, our revenue -- or our recurring revenue growth. It is, as you know, we are active in public and private sector. And in the public sector, the transition to cloud is slower than in the private sector. However, we see that as 1 momentum in growing our recurring revenue growth. But of course, it is our private sector that is the main driver for this good development.

And then finally, we have our increased pipeline activity. During spring, we saw that the Dynamics -- Microsoft Dynamics ecosystem was a little bit slower compared to what we used to see. There we now see a much better momentum when we look at customer activities. And I will come back to that a little bit later on the Microsoft event we participated just last week.

And then, of course, also coming to the banking and finance sector, where we lost 4 -- we won 4 contracts, which was great, and that is actually the best number over a quarter we have seen so far. And then 2 banks churned out, which has to do with sort of their financial implications, which is a little bit sad that it happens, 2 in 1 quarter. However, I would like you to take along the fact that we are winning 4, and that is actually the best number we have done in a quarter so far.

And with this little introduction, I was trying to hand over to you, Joakim, who actually knows the number much better than I do yet. I will get into that, but I'm very glad that you're with me today here.

[Joakim Alfredson, executive]

Right. Thank you, Magnus. We will get back to you, and you will have a chance to introduce yourself more detail later on. But 3 very, very important takeaways from this quarter, as we have mentioned here. Diving into the numbers a bit more detail. Starting with the revenue side, going through the numbers, we see that we have a top line growth of around 5%, which is perhaps not a huge number. But what I would like to point out here is that we see a shift in the revenue mix where we now have recurring revenues amounting to 80% of our total revenue, up from 69% last year's Q3.

So this is a movement much in line with what we're trying to achieve, of course. And to look a bit closer to the recurring revenue. Okay, I see that the animations have sort of -- they are not going my way. They have been lost in translation apparently. But looking a bit closer on the recurring revenue, we see that they are up 23% in total. Of course, spearheaded in percentage by the SaaS growth of 38%. But looking in the absolute terms, we see that both SaaS and support and maintenance grew by 9% here.

And we know that Denmark has had a very successful transformation of their agreements and we see effect of this right here and right now. But we also see the effect of the negative development of the delivery revenue. We are part of the -- we're now living under the new agreement with Landbrugsstyrelsen in Denmark, and that contract is much more tilted towards maintenance revenue, which is boosting the support and maintenance, of course, but with somewhat lower numbers coming through from the delivery side of that customer. But also -- and now they've started coming.

But also I'd like to point to the fact that we are following the plan with private, shifting more and more deliveries out to partners and focusing on supporting partners, partner acquisitions. So we're basically keeping the team we have in place, but they are now working more focused on partner acquisition and supporting partners in their first projects and getting them to be self-sufficient going forward. So this is a very important movement here we see in the revenue mix, I would say.

Okay, now we see them catching up. All right, on the cost side then, we see that the total operating expenses actually decreased by 2% in total. Most of the decrease is from the sales expenses, which are down SEK 2.5 million. The other cost lines are relatively flat. Looking at the head count, it's substantially lower though than last year's Q4. So of course, we are hit by cost inflations and salary increases as well as everybody else. But the total cost line is flat is important here.

Other important thing to take away from this is the recorded one-off costs or items affecting comparability, as it says here. SEK 1.5 million coming from the severance pay of our exiting CEO, Christian. So that is affecting the EBIT number and is, of course, a one-off in this quarter. But in total, we see that the strong development of recurring revenue is coupled with the sort of the fixed cost side here is driving the profitability up, and the EBIT is up SEK 5 million compared to last year's Q3.

So looking a bit closer at recurring revenue. You've seen this graph before. The recurring revenue now makes up over 75% of our revenue. In this quarter alone, it was 80%, as I said. But with Q3 being a bit lower than other quarters in delivery revenue, we're expecting that number to come down a bit. So above 75%, I would say.

Looking at the rolling 12 numbers of the recurring revenue, we see that we have a growth of 18% year-on-year quarter-to-quarter. Okay, the animations do not work with me. And our CAGR for a long period is well above 10% and actually 16% over the last 2 years. That is a strong growth in the recurring revenue we've seen for quite some time now.

Looking at the cost coverage, we see that -- well, anytime soon they will come. There is the graph. We see a quite big step-up here in the coverage percentage, and we're now at 90% coverage of the fixed operating costs. So as you can see here, there has been some positive development from Q1 and onwards here in this.

Turning to the ACV, we can conclude that we had a really good sales this quarter, but unfortunately, also some larger churns. In total, we have an ACV number of SEK 8 million. Net ACV, that is not taking into the FX exchange in effect, where SaaS was a plus 9% and support and maintenance actually was minus 1%.

Private had a good quarter sales-wise, but unfortunately, also recorded 2 larger churns to American banks having some financial difficulties. So we have churned these contracts, which has quite a big effect on the ACV. Still they managed to get plus SEK 5 million a net ACV number, while Public Sweden had plus SEK 1 million and Denmark came in at plus SEK 2 million.

So the outgoing ARR is up 18% from last year, landing on SEK 408 million. And with this quarter actually seeing a negative effect from the currency revaluation there, the minus 5%, as you can see in the graph.

Just zooming out and zooming in on the SaaS side of things, a bit longer time perspective here, we see that we are continuing building up SaaS revenue quite rapidly here also in the Q3. The numbers you see here are including the FX effect. So that's why, in Q2, for example, we had a positive effect from the currency, while in Q3 now we have a negative effect from the currency. But looking at a bigger scale, we see that the ACV numbers coming through nowadays are much larger than historically.

And also, just to summarize with zooming in on Lasernet development here, we see that we now, for 3 years, had a CAGR of 57% growth on that Lasernet SaaS business side.

That was a run through of the numbers. And now I'm handing back to you, Magnus, for a bit of introduction of yourself. And yes, the floor is yours.

[Magnus Svenningson, executive]

Thank you very much, Joakim. And I have, for now, the luxury of just enjoying the great numbers you were presenting Joakim, but I also assume that you are interested a little bit in who I am and what I've done before. And I can put a few points together that I think is valid here. I'm based out of Stockholm. I'm a family man together with Louise, Ebba and David, my daughter and son, who are 20 and 22 years old. And I have an engineering background, and that's 1 reason why I engendered a like for Formpipe and the cool technology we're doing. And I've been working quite a lot within IT telecoms with Ericsson, and I worked with biometrics with a company called Speed identity.

And now most recently, I was the CEO of PrimeKey, who you all use in mobile banking or if you have an Apple phone. That was a cybersecurity company that I managed for around 5 years, where we finally sold it to the inside partner company, Keyfactor, and that was a very good exercise where it's an open source company, where we made a transition from being a sort of a classic open source company to more and more packaging that software into appliances, into the cloud, and then delivering a managed solution.

And I think this kind of journey is very relevant for Formpipe as well, even though the development within public sector is slower, yet faster in the private sector. I've also worked extensively with the large ecosystems out there like Azure, like AWS and Google Cloud, which was very important distribution channels for the PrimeKey software.

And if I look a little bit on sort of Formpipe for the first 2 months I've spent here, which is not a very long time, and it's a lot of things to learn, I must say that first of all, the team we have here in the company, it is really a great team with extensive experience of our 2 business areas. I would say it's not that common to see in the IT industry that a company has been around for sort of more than 20 years and a lot of the employees have really seen the history and the developments of this market. And I think it's a great asset for us because this business is very much about trust and trust is built among people. So I think it's a great asset we have, and it's a great team. Very good spirit in the company.

Then if I look a little bit at the 2 business areas. Public sector, I would say public sector is part of the charm of Formpipe given the stability it provides. Yes, it is a bit slow. It is a bit legacy oriented. It is a little bit of old technology. However, it's stable revenues. And as a company, we are doing something extremely important for our clients. And of course, we do contribute to the important task of running a state or a government. And I just want to bring out 1 example that we are now -- we are now introducing a meetings live app where our municipalities and other governmental entities can do all of their meetings and voting online by being more efficient and transparent. And that's sort of 1 of the opportunities within public sector to continue the journey to more efficiency.

And then private. Also visited our team mostly based out of the U.K. And it's really a cool team and a fantastic opportunity. And I had the opportunity to go to Charlotte in North Carolina for a Dynamics show where you get to meet clients. And it's pretty cool. When these people who come to these Dynamics -- so they're a little bit like you, working very much into the figures, into the numbers. And as soon as they get to see the Lasernet product, they immediately say that this product does exactly what we want it to do.

And it's not that often. Often when you are at exhibitions, it's a lot of tire kicking, looking around, but here, when you meet the right people, it's a really good match. And we do have a very good position in the Dynamics field. Now Dynamics is not the only thing. As you know, we have banking and finance. I met our largest partner there, Temenos. And they see us as a great contribution to the business, because customer communication is getting more and more important and that's sort of 1 important part we do for them. So good momentum there, and we also attract more partners like Temenos, Thought Machine, and Mambu. So we have a good momentum in the bank and finance business.

And then, of course, interesting enough, there is a lot of other ERP ecosystem out there as well, which I believe represents a great opportunity for the private sector. So all in all, private sector, great team also and very, very interesting opportunities that I genuinely look forward to dive into in more detail in the coming months.

And with that said, I think we come to the end. No, we have the financial targets, which -- I mean, these have been presented before. But again, just reemphasizing the fact that we will continue to deliver on these targets, and we don't see any reason to sort of change these targets. So they remain as they are. And with that little note, I would say that I'm coming to an end here, and maybe we should then start with the Q&A session.

[Fredrik Nilsson, analyst]

And I think I will start with you. You're the new CEO. It's your first time presenting here. I mean, you've touched upon it, but what are your key experiences that you take from your time at PrimeKey?

[Magnus Svenningson, executive]

I would say it's -- of course, as I touched upon, the people and the competence are very important. And then also very fine customer base. We have a lovely installed base where we have a very stable and sticky business, which I really look forward to develop further. So probably these 2 things.

[Fredrik Nilsson, analyst]

Okay. And I mean, why did you decide to join Formpipe specifically? What was interesting?

[Magnus Svenningson, executive]

It's a good question. So I have had the luxury of -- as we did an exit to Keyfactor inside partner, I've had the luxury to give some thought on what I want to do with my life. And I genuinely enjoy doing business working with people. And with Formpipe, I saw a very good opportunity or a very good baseline, given the customer base, given the technology, and then also where we are in society today, where we want to go with digitalization, I saw that this is an excellent platform to have a good time and to do some business.

[Fredrik Nilsson, analyst]

Okay. Once again, I want to highlight the opportunity to ask questions below the stream. So let's continue to the Dynamics Fair that you visited. I mean what were the highlights from there?

[Magnus Svenningson, executive]

The highlights is, to me -- I've been working quite a bit with different ecosystems. But around the -- what I think is very cool with the Dynamics ecosystem, which was very well represented in Charlotte, is sort of it is 300 ISVs or independent software vendors, that is actually doing the Dynamics ERP system much better. And it's very niche players. They do a great job, and it's really a way to facilitate innovation and drive innovation, and it gives companies like us a great market, but also a great platform to really deliver a sharp product and reach out to the customer base. And it also attracts very, very competent buyers and competent people. So it is a great ecosystem. So very positive leaving from that.

[Fredrik Nilsson, analyst]

Okay. And the ERP market has been a bit slower perhaps in recent quarters. What's your take on the outlook?

[Magnus Svenningson, executive]

Yes. If I look at the 2 slower quarters, my hunch is that sort of financial uncertainties has extended sales cycles. I've seen that in other companies where I'm active that sales cycles tend to be extended. Now if we look into our ERP system, into our CRM system, then we see a higher activity in Q3. So my hunch now is that we are getting the momentum back. Now it's a little bit early to say how it will end up in the books. However, when we look at this in the CRM, more activity.

[Fredrik Nilsson, analyst]

Interesting. Okay. So let's move on to the delivery organization in Sweden. You have changed your model going from using partners to using an in-house organization. What's the outcome so far? Are you happy with the transition, and what's left?

[Magnus Svenningson, executive]

Yes, I think it's a great transition that has been started within Formpipe. And it is about us delivering more of the consulting services closely related to our application. And I believe it's a great transition because it's good for our customers. They get consultants who have a very tight connection to us, who owns the IP, which is really good if you want to deliver good, high-quality professional services. It's good for our clients because we can build our -- we can improve the pace in which we develop the product.

So the products are getting better and better thanks to the different development efforts that our consultants do for our clients. And that is, of course, good for our ecosystems and our partners who are also delivering consulting, because they get a better product to do consulting around, so I see it as a good way to improve the ecosystem around our products, which actually have a very good large installed base in Swedish and Danish public sector.

[Fredrik Nilsson, analyst]

Okay. And just to clarify, as far as I understand, all partner agreements has been terminated, although you use them as subconsultants currently?

[Magnus Svenningson, executive]

Yes. That's correct. And this is also sort of the way we want this to pan out. We want to continue to be a very good partner for our partners, so that our product is put into context, which is then, of course, absolutely necessary for our clients.

[Fredrik Nilsson, analyst]

Okay. So once again, I want to highlight the opportunity to ask questions below the stream. So let's move on to deliveries in Denmark. You are in a transition with Landbrugsstyrelsen and are moving some revenue from deliveries to support and maintenance. However, there was a quite significant decline relative to last quarter and also last year. I mean, is this a level we should expect going forward? Or is there anything other that happened in the quarter?

[Magnus Svenningson, executive]

It's a very good question. And what we have done here is that we renegotiated the contract, and that means that part of the revenues, as Joakim said, moved up to support and maintenance. And it forms a new baseline with sort of the basic functionality, which we are supposed to deliver. But then as we all know, the world changes, new requirements come. And of course, we will support our clients in developing those, which will mean increased consulting revenues and also increased support revenues because that code needs to be supported. So we should expect to see at least a bit more professional services and increased revenues from Denmark the coming years.

[Fredrik Nilsson, analyst]

Okay. So let's continue to the banking side of your private segment. I mean, as you mentioned, 4 new customers, which is a record high. But at the same time, you lose 2 customers due to financial trouble. But I mean, how should we interpret that number? What's your view of the market and your offering?

[Magnus Svenningson, executive]

Yes. One, our offering is very strong, as I said, around the Dynamics market. As soon as we get a competent buyer in front of the product, they immediately say, "this is what we want". So we are in a very good position there. When it comes to bank and finance, I would like a positive take and look at the 4 we win. I mean, clients -- there is things happening in the market. And sometimes you lose a client to -- they have financial problems. You can't do too much about it. And now we have 2 of those in this quarter. I would look at the 4 we win, because that sets the trend for us going forward. The trend is positive.

[Fredrik Nilsson, analyst]

I see. Okay. And also I want to ask about the ACV for support and maintenance in Denmark. It was slightly negative. Why is that?

[Magnus Svenningson, executive]

I think I'll pass that one over to you, Joakim.

[Joakim Alfredson, executive]

Yes. I think you find a negative on the support and maintenance as you say. Well, what's happened there is that there have been renewals of those contracts with those customers. And they have renewed to a subscription contract instead of support and maintenance. So it's actually a -- and since we are so detailed in our ACV reporting, we have 2 different lines for this. So it's actually a contraction then on the support and maintenance and an expansion on the SaaS line. So we haven't lost those customers. They're actually renewed at a higher price point as well.

[Fredrik Nilsson, analyst]

Okay. Interesting. Last chance to ask any questions from the web. And I mean, you're still quite new to Formpipe, but I mean it's not that far until we are at 2025. I mean any thoughts so far? I mean, what could possibly be the next step?

[Magnus Svenningson, executive]

It's a good question, and it's a little bit early to raise that question. But what can I say -- I'm very impressed by the customer relations we have, the installed base, the partners we have in the ecosystem. And I do believe that at least 1 thing, more people out of our relevant customer base needs to know about us. And I think we should work a little bit more on -- we should work much more on that because there is potential. When we get in front of a customer, we do really make a good -- we do kick ass. We do really great job in winning the business. So that is 1 thing. We need to be better known out in primarily private sector, but potentially also in the public sector. We can do more.

[Fredrik Nilsson, analyst]

Okay. Thank you very much.

[Magnus Svenningson, executive]

Thank you. It's great being here. Fantastic, and thanks to everyone listening.