FormPipe Software AB

STO:FPIP

Earnings Call Transcript 2024-Q3

[Fredrik Nilsson, analyst]

Welcome to this live queue with Formpipe. I will be back later for the Q&A session, and you can already now post your questions below the stream. And today I joined by CEO Magnus Svenningson; and CFO, Joakim Alfredson. And Magnus, I think you will start the presentation, right?

[Magnus Svenningson, executive]

We do as we always do I will start it. Then we have you Joachim, coming in with some numbers. Then I talk a little bit more about the developments, and then the Q&A. And if we, and of course, really good to be here and see you again after three months of doing business, and also having a bit of vacation and summer before starting up the new season.

So if we look a little bit at the numbers. First of all, we have the net sales, SEK 130 million. I think this is a good number, given our changes in customer mix, the last year. Also, I would like to emphasize the recurring revenue, we are now up to more than 80% of our net sales being recurring revenue. And I think this is a really, really good sign of Formpipe developing in the right direction. Then, of course, our SaaS revenues, again, developing very nicely. And this is also something that we work very hard to continue this momentum in the top line development.

And finally, for this slide, the profitability 12% out of EBIT. And there we have this quarter, a few one offs regarding reduction of personnel in our public business area. And I think this is a good sign that we can be a bit more efficient as we go forward. So this was a short summary, and Joakim will of course, talk a little bit more about these numbers in a bit.

So if we then look at the highlights, we have had a few new contracts, and I would like to mention that we did some new sales to our Danish municipalities. We also got an extension from Landbrugsstyrelsen, and this is a contract that we've been talking a lot about. This is not a too big thing, but it is a sign that we have a good development, good relation with the client, which is still is an important contract for us. So small step in the right direction. Then we have also made extensions in the Swedish defense sector. So that was a few deals that came in, and given that the ACV for public was zero, that is also balanced by a few churns in Swedish municipalities, that that we've been aware of for quite some time.

If I then look at the Lasernet business, we did around a dozen deals there, and we did two deals in Banking and Finance. This is not really sort of -- I wouldn't say it's not really good enough. We can do better there. But it is also, given that it is the third quarter, little bit hard to explain, but it is lot of vacation. We had a fairly good Q2, so we see, when I look forward and look into the pipeline, I'm still positive around the ACV development going forward, for the next quarter.

Then we have also intensified our in our one public intensified our development, which Joakim will talk a little bit more about. But it is about modernizing our case and document management platform, where we made some progress and some extra effort during the quarter, and then after the period as we press released the 18th of October, we had a cyber attack. And there are no new news there, what we said in the press release still holds. We have our Danish IT team and our UK IT team working on this, and I really want to extend my thank you for the hard work you are putting into to mitigating this. And we have contained this to the internal servers, there is no external leakage of customer data. So still stable situation.

And then finally, we recruited our new CFO, Sophie Reinius, I just would like to give a warm welcome. And here today with us, we have Joakim, who has been very helpful in getting Sophie up to speed, which I really, really, I am really, really grateful for that.

And with that, Joakim, I was planning to hand over to you to let us indulge some numbers, so the stage is yours, Joakim.

[Joakim Alfredson, executive]

Okay, well, still here. Yes, some more numbers, details on the numbers, we see a clear positive uptick in the underlying profitability in this quarter, which I find very, very nice. Like Magnus pointed to, we still see very continued good growth in the SaaS line in particular, and SaaS is, as you can see, driving the recurring revenue base here with the support and maintenance holding relatively flat over a long period now, but SaaS is adding SEK 10 million from last year, which corresponds to 30% growth.

And the delivery line, we talked a lot about this in the last couple of quarters, we see really strong improvements in the delivery efficiency and availability now in this quarter from the previous quarters. As you can see from the numbers, it's still SEK 2.5 million lower than last year, but we need to keep in mind that we have a changed setup from that period, Q3 last year, we had just started up the new agreement with Landbrugsstyrelsen. We were sort of closing down the old agreement and starting up the new agreement. So we were basically working on two large agreements at the same time, which we did for almost a full half -- second half year there.

So with this new setup, we've had some bumps in Q1 and Q2 and we now see clear evidence of improvements in the third quarter, which is really good. It's also a vacation period in this quarter that brings the number down. So my view is that this positive is tracking the right way here. Summing the revenue, we grow by SEK 6 million from last year, corresponding to 5% growth in total revenue.

The operating expenses increased by SEK 2.5 million, primarily within the marketing and the development side of things, other than that, we can see that the increase is relatively shy in this inventory landscape we're in. So happy with the cost side of things as well, and we are having, we have had intense efforts in the marketing side, particularly Lasernet in Q3 and also within the development side, both in the Lasernet business and the public sector during this quarter. Magnus will elaborate more on those specifics later on.

We recognized that we have one-off cost in this quarter of total SEK 6 million hitting the EBIT due to the organizational changes in public sector and of course in group management as well. With those aside, we see that the EBIT is increasing SEK 3 million from last year up to SEK 16 million, and that the arrows are now pointing in the right direction.

Focusing on the recurring revenue, we're now up to SEK 420 million on the rolling 12 revenue side, which and we're more than 80% covering the total revenue with these recurring contracts. Comparing to last year, we see 14% year-on-year, growth on the rolling 12 numbers, that is. And looking even further back, we still see that we have a strong increase dating back to 2014. This graph, now turn the corner we see that the recurring revenue covers more than 100% of the fixed operating costs, and we see this as a strong evidence of the scaling in the business and that we are on the right track to increase profitability for real.

Looking at the ACV for the quarter, we see that we have a negative currency effect this quarter of SEK 4 million. And the net ACV is 7 million, not a very high number. Q3 is not the most interesting quarter for us, we see that it's the SaaS line that again was driving the ACV, but the quarter as a whole is overall pretty soft. Private is the business area taking in the contracts. There are some roundings there that makes the numbers don't add up, but SEK 6 million increasing in private, and a minor zero, therefore for public.

In the private numbers, we also have the churn that Magnus briefly mentioned. We have communicated end of life of the plot in our Life Science product which -- and we're therefore expecting some churns. And we saw SEK 1.2 million churning in this quarter. The outgoing ARR grew by 7% from last year. So we're now almost up at SEK 440 million in ARR. Sticking with the ARR a bit. We're looking at some longer trends here dating back from the first quarter of 2019. We see a steady long-term growth delivering quarter-by-quarter. And we have grown by -- from SEK 213 million to SEK 440 million almost, corresponding to a CAGR of around 14% during this timeframe.

Focusing in on the SaaS side of things, we see that we have grown quite a lot faster, especially from 2022 and onwards. The SaaS line has expanded from SEK 39 million up to SEK 186 million, corresponding to a CAGR of 33% over this relatively long time frame. So this is impressive I think, and really what we're driving in the business. So Magnus, stage is yours.

[Magnus Svenningson, executive]

Thank you very much, Joakim. And as you showed in your last slides how we grow the recurring revenues, I genuinely believe is really, really good. And this gives us also a fantastic position to transition and develop our business under profitability. Now we have spoken about this before. It is our Pursue Potential program where we merge our public business under one public business for Sweden and Denmark. And then we are overhauling the customer journey in our private business area, which we will change to Lasernet going forward.

So if we look at the public business area, it is first of all, we have made a cost reduction. So we are now a little bit more efficient going forward. And the big thing here we are doing now is that we have been working with our tech platform. As you know, we have 3 main platforms for case and document management. And of course, they have different qualities, they are necessary to serve the market, but it also has historically given us a fairly high maintenance cost. And now we have worked with the team and with the products to see that we can extract certain functionalities and share functionalities and resources among the platforms, allowing us to primarily reduce the resources needed for maintenance of the products. And of course, when we can reduce that cost, we will invest that in new functionalities going forward.

So we have now proven that this is possible. And the coming -- during 2025, we will also, of course, bring this to the customers to take this development cycle from the platform development and out to the delivery to the customer. So this is an exciting development of the public business. Now if we then look at the Lasernet business, we have now launched the new product packaging. And this means that we have the entry-level product Essentials, where any dynamic users in the world can download Essentials, start working, start being productive with this fantastic Lasernet tool.

As this person then is more confident and interested he or she can start showing the organization that this is actually a fantastic tool and start a pay-as-you-grow customer journey. And this means a few things for us. One is that there is no barrier to entry for new customers, but it also means that we can -- the customer pay as they grow, and it means that we, over time, will be -- we can increase the ticket size. That is the high-scale enterprise customers, there we will charge more going forward, whilst the smaller company can use less functionality and pay less. There is now a 4-step tier with Essentials, Professional, Advanced and enterprise going forward. So that will be extremely interesting to see how that pans out in the coming quarters when we get more and more data on usage, et cetera.

I've also been to -- just back from San Antonio in Texas, where the Dynamics User Summit has met up. So it's a large number of ISVs meeting up to talk about what they do to improve the Dynamics ecosystem. And of course, it was really fun and really cool to hear the feedback we got from this but it's also -- a lot of our partners came and spoke to us and said that this is a really good move. Now in every ERP implementation we do, we can send this along free of charge, people can try it, and it's really a good sales tool for us. So good feedback so far. And for those of you who are interested, there is a little bar code here with that you can try and then download the software, or at least look -- start that cycle of downloading. So that is sort of a cool thing.

Now we also have our financial targets, and we are ticking off the revenue growth, the share of recurring revenue, the dividend policy. And with the report today, we take a step in the right direction to reach our goal of a 20% EBIT margin.

With this, I'm coming to the end, and I would like to give you 4 key takeaways before we start the Q&A. And it's one, we are now starting to realize the stronger offering on our case and document platform in public. And we do this under profitability as we move forward. And the Lasernet business, we have now established a new customer journey, a new platform for continued growth, and it will be very exciting to see how that pans out in the coming quarters. And finally, as always, we continue to build our recurring revenues.

So that was my message for this quarter, and thank you very much for listening in. And I think now we have the Q&A, Fredrik, don't we?

[Fredrik Nilsson, analyst]

Thank you very much, Magnus and Joakim. And once again, I want to highlight the opportunity to send questions to us with the function below the stream. So you touched upon it, but I think we could talk a bit more perhaps on the Dynamics Community Summit in Texas. I mean, what was your role there and Formpipe's presence and so on.

[Magnus Svenningson, executive]

But this is one of the big larger investments we do in marketing being present in this forum where I think it's around 3 -- it is a few hundred ISVs meeting up to see how the basic functionality of Dynamic is being improved. And for us, this is of course, an excellent opportunity to showcase what we do, but also get instant feedback from our users and our partners because the -- one of the cool things with Dynamics is of course, that it is a fantastic basic functionality. But with ISVs, given the vertical where you are, et cetera, you get kind of a very tailored experience.

And for us to see how we fit in that ecosystem, how we contributed, that is a really good reason to be there -- and again, get this instant feedback where people say that this is-- you are on the right track or also that we have opportunities on very. So I've been there meeting customers and partners and of course, spending a lot of time with our team as well.

[Fredrik Nilsson, analyst]

I see. So you touched upon the feedback, which has been good so far. And you mentioned that they like to see that they can give Lasernet into the customer software suite for free initially, but I mean still they get revenue share from pushing customers to the other tiers. So have they said anything about how easy they believe it is to move customers up there?

[Magnus Svenningson, executive]

Fredrik, it is really a good question. It is a little bit too early to ask. But what -- so historically, Lasernet has really been the sort of the state-of-the-art product, really, really good in its niche, really extremely competent. And we have started a lot of our sales cycle by sort of taking out low-end alternatives, like, for example, configurable documents or some of the standard functionality in Dynamics. And given this new move, we see that we can start the journey directly with the sort of the small-scale customer or the growing customer, which will then facilitate the growth, and exactly how that pans out. That is one of the really interesting things we will find out the coming 2 or 3 quarters.

[Fredrik Nilsson, analyst]

I agree. So let's continue with that. I mean you are releasing it now, but of course, it takes some time before we could see a positive inflow on customers and then probably additional time before we perhaps could see it in the numbers as well. You're talking about a few quarters, in that -- are we talking revenue or inflow of customers?

[Magnus Svenningson, executive]

That's absolutely inflow of customers that we should be able to see. But then given our business model where we have a SaaS and subscription model, before that trickles down to the revenue, will, of course, take more time. But this is very much a -- I have worked quite a bit with open source software, which is a sort of a freemium business model. And one thing I learned is that you do a change and then you adapt to what you learn, so there will be a learning here going forward. But we also see companies in the Dynamics ecosystem being very successful with freemium business models.

So the first step, we are convinced is correct. And then, of course, there will be a little bit of tweaking and nudging in different directions, depending on what partner says, depending on what end user says to make this journey as smooth and easy as possible for our customers and partners.

[Fredrik Nilsson, analyst]

Sounds reasonable, and just one last question on Lasernet. Historically, you have one offering, then it was 3 and now it's 4. Why? Could you explain a bit more in detail?

[Magnus Svenningson, executive]

Well, we felt that 3 was a little bit too bumpy. So we said that 4 is probably better to get this -- to get the -- especially the opportunity to offer value at each tier, allowing us to really make a really good enterprise and advanced sophisticated enterprise that the high-end customer is prepared to pay a lot for now, then we need to have a few steps in between there, and now we have ended up that. Maybe our first learning that 4 is the right one.

[Fredrik Nilsson, analyst]

I see. I see. Let us stick to private and Platina Life Science. You make that product end of life now, why is that?

[Magnus Svenningson, executive]

Well, that product has served us extremely well, and it was -- has been successful in its niche. But we see now where we are in our development with Lasernet, we see that we need to focus on the Lasernet business. We have so much to do there. Right now, we are doing a lot in the Dynamics ecosystem. But as you know, we have in bank and finance around Temenos, and we have also other ecosystems and geographical expansion lying around the corner. So we have so much to do, so we need to focus on Lasernet, which we genuinely see as promising and developing in the right direction.

[Fredrik Nilsson, analyst]

Yes. And that is also the new name of the private segment, as you mentioned.

[Magnus Svenningson, executive]

Yes, that's good.

[Fredrik Nilsson, analyst]

Any further comments on that?

[Magnus Svenningson, executive]

No, it is -- if you have an inside-out perspective, of course, we have the public business areas and then we do other things, which is then private. Now for an external viewer, it doesn't really make sense. So we -- it's a way to change according to how our customers think. They think about our Lasernet business areas as, of course, as Lasernet. And that's -- it's just an adaption to the market.

[Fredrik Nilsson, analyst]

I see. So once again, I want to highlight the opportunity to ask questions in the stream. So let us move on to the public segment. And I'm interested in the intensified development for cross-functionality between the 3 major platforms you have. I mean, could you explain a bit why is that?

[Magnus Svenningson, executive]

We believe that within the public sector, we have a very solid footprint. We also believe or see that we have a very good potential. But in order to harvest that potential, we need to accommodate new functionality. And as we have 3 platforms for very good reasons, we need to adapt. We need to be more efficient in how we maintain these platforms. And we do so by extracting functionality, that is commonly usable for this platform, and then we maintain that jointly. Now given that we have succeeded in that, we also see that one -- and I think this is probably the most important point, we can be more efficient in the maintenance of the product.

Now that efficiency gain, we will invest in new functionality. And of course, when you look at public sector today, there is this continuous question around how do we do more with the same resources. Of course, we see that we can contribute there. A challenging and a very sort of interesting and intriguing example of this is artificial intelligence where our case managers in the future can be more efficient and get help in, for example, getting an overview of a new case, et cetera. And of course, we want to take part in that development and support our public customers going forward with this. And that's why this is a -- we are very pleased with coming this far in the development.

Now as everyone knows, of course, public sector, it takes time to introduce new technology, new solutions. So a little bit of patience will be needed here. But again, I thought it was -- it is really appropriate that we have taken this step moving forward.

[Fredrik Nilsson, analyst]

I see. And going forward, you will make pilots with chosen customers. Can you elaborate a bit on what will that mean for those customers?

[Magnus Svenningson, executive]

Well, it is a -- in all software developments, especially when you work in markets like this where the requirements on integrity, reliability, et cetera, are extremely high. Of course, you -- as we have done now, you work on your platform, you see that you can make these changes. And then, of course, to really be confident and have our customer confident in that we can take this whole way over our development cycle. Of course, you need to pilot this with customers. And then when you see that you have this development flow established with some functionality, then of course, it's easy to -- natural and easy to grow to new customers and richer functionality. And this is what we plan to do over 2025.

[Fredrik Nilsson, analyst]

Interesting. And I mean, you're not, in most cases, competing directly with the more generalist IT consulting firms, but many of them have a quite weak view of the public sector currently. What's your view on the market?

[Magnus Svenningson, executive]

Our view is conservatively positive. So we -- as Joakim as you said in your presentation, we see that we have a good start on -- in our delivery organization for this semester. And we are planning and building for recruiting personnel and to deliver more going forward. Then, of course, we are a relatively small player, and we are not recruiting hundreds. We are recruiting handfuls. And we see that we have a demand in the market, and we also have a supply from the market that allows us to recruit in a pace where we can serve this demand, but also train our consultants becoming efficient quickly and get a good start in our organization when they start serving our clients.

[Fredrik Nilsson, analyst]

Okay. Thank you very much, Magnus and Joakim.

[Magnus Svenningson, executive]

Okay. Thank you very much, and thank you for listening in.