FormPipe Software AB

STO:FPIP

Earnings Call Transcript 2022-Q4

[Fredrik Nilsson, analyst]

Welcome to this Live Q with Formpipe. I will be back later for the Q&A session, and you can already now post your questions in the function below the stream.

But now it's time for the CEO, Christian Sundin. You are welcome.

[Christian Sundin, executive]

Thank you very much, Fredrik. And hi, everyone. I guess it's that camera that even though it's not lighted. Okay. Thanks for joining. This is the regular update from our latest quarterly report or the annual statement for full year and Q4 in specific. So I will jump right into it.

What's the highlights? Yes, a very solid highlight is the amazing ACV we do in the fourth quarter of 2022. An ACV of SEK 24 million is a record high ACV in this quarter. It comes both from the public sector and the private sector. So it's a combined effort from all our business areas. And for the year, it brings us to an annual growth of the ARR to 22%, which is really strong numbers.

During the quarter, we also taken 2 significant strategic orders in the public sector. They secure our sustainable growth ahead for the public sector. In Denmark, it's the already communicated Landbrugsstyrelsen deal, and that is 4 plus 3 years and estimated to a value of DKK 80 million to DKK 100 million over this time frame.

And then it's a state agency in the Swedish public sector with very extraordinary security -- information security requirements that has chosen us for both case and document management and e-archiving. That makes us really proud and proves our position as a leader in secure information management in the public sector. It's a 10-year deal with an ACV of SEK 3.5 million, and we see a lot of potential of growing together with this customer over time. So 2 really great deals that proves our strength in the public sector market.

In the private sector and in the banking industry, we have taken our 2 first orders together with the banking system, Thought Machine and Mambu. It's 2 very interesting banking system, quite new chambers, strong growing banking systems. And they broaden our potential customer base. We already have, as many of you heard, a very, very strong partnership with Temenos, and this is adding on the potential for us to grow outside of that and with Lasernet help even more customer in the banking industry with document management. So really great traction on those, and we're looking forward to that to really harvest that potential going forward. So really good with those two.

This ain't really working. Can we have -- I would need another clicker. Okay. Going into the numbers, the comparison from last year, we had a really strong, for those who remember that, Q4 last year. That was especially on the delivery side. But all over the place, it was a really strong quarter. So we had a tough comparison this year. However, we have a strong trend, and we are delivering growth from last year. So -- and as come as no surprise to you, the traditional license sales are continued to be less part of our total revenue. So SEK 3 million in -- from the -- lower in traditional license in this quarter than previous year. So that's one explanation that the growth is not even stronger.

And also, we had -- as you can see and compared to the other quarters there, you can see that Q4 was standing out last year in delivery revenue. And we're not really pushing that hard for delivery revenue. We're pushing for recurring revenue, as you know. And the recurring revenue, it's a 15% growth compared to last year. So strong growth in that, and that growth primarily came from our growth of SaaS. And delivery revenue, as said, slightly down, but there's also a slight hiccup in the public sector of Denmark there or actually, it's due to that, we've launched a major product release of our grant system test there, where the Danish public sector has completely redone the bank ADM solution for the digital signatures in the society of Denmark.

So that has taken some focus of our delivery and put that on product development efforts instead in order to meet up to the customer requirements. We see the light in the tunnel on that and brighter times ahead on that.

So license revenue, as I said, trending down, continue to do so, all in line with our strategy, all in line with our strategy of pursuing softer sales as service rather than selling traditional license.

It's also fair to point out that we now see that trend also happening in the public sector. We've seen it for quite a while in the private sector with Lasernet. But now we see in this quarter that we are producing really strong ACV on SaaS also for the public sector side of the business, which is a really good thing in the long term for us.

When it comes to the cost side of things, yes, we are at a turning point. We were ramping up capacity starting with the growth initiatives 2 years ago. So we've ramped up capacity, and we -- thereby, we see an increase in staff costs in this year compared to last year. And this is now flattening out slightly going forward, meaning that we will -- from now, from this low point in profitability, we will come to better margins ahead.

And the sales expenses are also up. That's mainly driven by kickbacks to partner. It's a good thing since it shows that our partners are selling great for us. So we're growing as you can see, and thereby the partner kickbacks is also increasing.

Then other costs are higher, mainly marketing efforts that we increased the activity in the market to pursue the possibilities we have of growth in the market, but it's also that we're hit by the U.S. dollar compared to the Swedish kroner shift where a lot of our product development cost is in U.S. dollars, while the -- for example, in Sweden, the revenue in the public sector is completely in Swedish kroner. So we are -- we're naturally hedged in a lot of -- a big part of our business. But when it comes to product development and when it comes to the sale in the country, Sweden, yes, it's -- we're slightly exposed to currency fluctuations. And that is quite significant amount actually that hurts our margin right now.

So total costs are up, all in line with our plans. And thereby, the profitability are at a turning point. We will see from now on and onwards -- or actually the turning point, as you can see on this, was already in Q3. That was the lowest point. But from now and onwards, with the strong ARR we're having and we have produced, we see the revenue growing faster than the cost going ahead. We will still continue to recruit people and increase the capacity, but not at the same pace as the growth will come from the revenue increase from the ARR.

So I've spoken about growth of recurring revenue, and that's, of course, our main focus to grow the SaaS and thereby the recurring revenue. It's -- our total revenue, it's more than 65%. We are growing year-on-year in -- with 15%. And we have a compound annual growth from 2014, above 10% year-by-year, quarter-by-quarter. And now it's actually with a buffer of -- it's going up to 11%, 12% in the latest period. So we're really -- the compound annual growth are -- we're showing a really strong track record of being able to deliver growth in recurring revenue.

The recurring revenue now covers more than 80% of our operating costs. Of course, that gives and provides stability and lowers the risk in the business. And from the investment phase in increased capacity, we also here see that the downward trend is broken and increased margins will come ahead from this.

I've already touched based on the ACV. A record quarter at SEK 24 million, both in SaaS but also increased support and maintenance. Increase in support and maintenance very much comes from the landmark deal with Landbrugsstyrelsen and that we already mentioned. So that's a significant amount in that.

And then, yes, as also pointed out, public sector is starting to really move on this. We're providing to the ACV as well, while we've seen for a long time private contributing strongly to the ACV and ARR growth in the business.

So at the end of the year, we have a kicking SEK 369 million in ARR, and that's a 22% growth since last year. And when it comes to SaaS in specific, we can see the shift in the trend from going into -- from 2020 to 2021, where we launched our accelerated growth initiative, how we have elevated the growth of ACV quarter-by-quarter from this initiative. So the investment in capacity really pays off in ACV and thereby ARR.

And I think that we -- the SEK 11 million here in SaaS growth in the quarter, that's a strong number. But I think this shows even stronger if we come to the Lasernet SaaS ARR where we see an even clearer shift from the investment in capacity, and that's really where we put our effort on growing globally with Lasernet. And here, we see a compound annual growth rate since we launched that initiative of 65% in growth. And as you see, coming from low 30s to now about SEK 80 million in ARR in only 2 years is quite a solid accomplishment.

So I think I'll leave at that for now. We're very well on our path. We see line of sight of our financial targets that we launched with that initiative as well. So as I said, at the turning point and now greater margins ahead.

[Fredrik Nilsson, analyst]

Thank you very much, Christian. And once again, I want to highlight the opportunity to ask questions below our stream. And I want to start with the new deals with Lasernet with the banking industry, Thought Machine and Mambu. Could you tell us more about those companies? And also, what's the potential with those companies?

[Christian Sundin, executive]

Well, I mean, they're very, very interesting, actually. There's 2 new comers, 2 new kids on the block in the banking system world. They are growing a lot. They are addressing not only the neobanks, even though they're very, very successful on the neobanks space, but they're also addressing the traditional big banks.

So they're really, really interesting new technology. And yes, I will encourage you to Google them both and see them. There's 2 really interesting companies, 2 really interesting banking system. They come to us, actually. They've seen Lasernet, what that can do on Temenos. They understand the value we provide with Lasernet and seamlessly integrated their platform. So they were fine with Lasernet. So that's how we see it. And we feel really strong support from both of these, yes, energizing companies and to work with really.

So we see great potential in that. But of course, Temenos is still very much our core partner in the banking world. We feel strongly about Temenos, and Temenos is, yes, a team permanence as well. So that's -- this is just a -- this is an add-on thing broadening the potential for us even more.

[Fredrik Nilsson, analyst]

Okay. Interesting. But I guess you could say it's some kind of indication also that your product is strong within this niche as they came to you, or what's your view on that?

[Christian Sundin, executive]

Yes. I mean we have a view that we've really invested in trying to make our API more easily for other ones to adopt to. So it's nowadays easier to put Lasernet on any platform, banking platform or ERP system. I mean we have a strong focus on Microsoft Dynamics in Temenos with our close partnerships there. However, other ERP system and banking system can use Lasernet and thereby increase the value there their proposition towards their end customers. So I think we will see more and more of that in the coming years, even though we still put all our focus on our close partnerships. So yes, it's interesting, and it's broadened our market potential and increases it.

[Fredrik Nilsson, analyst]

Okay. And as you mentioned, you had a very strong ACV in the quarter, and the public sector was the main driver. You have mentioned some really large orders, but I would say that the underlying performance seems to have been quite strong as well. Could you elaborate a bit? Is the public sector more in favor of soft solutions?

[Christian Sundin, executive]

Yes. We think we see that, and we're pushing for it as well. It's not always true to SaaS. It could be that the business model is more like a hosted at the -- because of security reasons and so forth, it might be something they actually run themselves. But the business model is more and more what they ask for to be comparable with the SaaS world. They want to buy it as SaaS, even though it could be a [indiscernible] SaaS world, so perhaps not completely out in the Amazon or Azure cloud when it comes to -- especially the high security requirements that many of our customers have and also from a country perspective.

So -- but it's still really good for us, for the scalability of things and in order to make sure that all customers are on the same version of our systems because that means that add-ons can easily be sold on top of that rather than they get stuck in older versions. And thereby, it's a really good thing to see this trend shift in the public sector space as well. That really helps us to be more profitable and more scalable and add-on sales on top of our customer base.

[Fredrik Nilsson, analyst]

Okay. And you will leave as CEO. You've been CEO for 16 years, right?

[Christian Sundin, executive]

Yes, yes, that's quite a while.

[Fredrik Nilsson, analyst]

So why now? And what will happen to Formpipe? What should we expect in terms of strategy? And so will there be any changes?

[Christian Sundin, executive]

Well, it will be a lengthy answer. I'll try to cover all the legal bricks of this. I mean, I think we need to go back a couple of years in time from where we launched the growth initiative and ramping up capacity. I mean we did that a little more than 2 years ago. And as you've seen on the graph, we executed quite well on that path. And we're now at, as I told you, the turning point of the profitability. So we've made the investment, and now we will reap the benefits from it going forward.

And with that, we also established -- we also transformed the business model in Sweden public sector from being a delivered by partner to make our own delivery. That has also been an investment and is something that we have shifted the entire organization around. And we're now with all our business area in an excellent place with solid plans ahead. We have great people in place, great organization and solid plans going ahead.

So the timing of doing a shift, yet my -- the -- my predecessor or the other one who will come in after me will have time to learn the company in due time. There's nothing broken that needs to be fixed. It's actually a well-oiled machine that works and have solid plans all the way sort of up to 2025 and where we can see -- we'll see this -- us moving towards the financial targets. But it will give the person time to get acquainted with the company. And then, yes, then there will come a new shift or how do we elevate this company beyond 2025. That work needs to start somewhere up to that time. And I think getting in new ideas, insights from other companies during this process without being in stress or having something to fix, I think that's quite good timing to make a shift.

[Fredrik Nilsson, analyst]

Sounds reasonable. You touched it just recently. The public sector in Sweden, the deliveries, I think they almost doubled in this quarter compared to Q4 in 2021. I mean, also, I know you have high ambitions in that segment. I mean are you satisfied with that increase? Or could you tell us a bit what's your ambitions there?

[Christian Sundin, executive]

Yes, I'm very satisfied with the progress and what we have accomplished with public sector Sweden and the business transformation. We see still future growth ahead, not at in the same -- not doubling next year. That will then -- but we will move on this path. We will be, yes, what you say, a full service provider or a one-stop shop for digitalization for the public sector of our customer base in both Denmark and Sweden. So we are obviously in Denmark. So we're sort of copying the same setup that has been very successful in Denmark. That's what we're now doing in Sweden as well and getting closer to the end customer, get the innovation power that they can provide back into product development, building new feature functions and modules that we will sell to the entire customer base in public sector. So it will be a healthy profitable growth ahead in public sector, both Denmark and Sweden. So that's what we see.

[Fredrik Nilsson, analyst]

Okay. So last call for any questions from the audience. And could you tell us a bit about -- you see some delays in Temenos deals as you also did in last quarter. I mean, we're in February now, have you seen any changes to that? Or does that situation remain?

[Christian Sundin, executive]

We still see it to remain. That's what we say -- up to Q4, anyway, I will not start talking about Q1 with you already. But we still see that as longer lead times to decisions in the banking industry. I was happy to read Temenos report. They see the light in the tunnel. I will not comment on their quarterly report, but that's how they see it. But I also read in that was a lot to existing customers and so forth in their growth.

So I don't have a better indicator than that, but there is still a little bit damp on the -- as we see it anyway. Then with the -- both the newcomers that are coming in to broaden our offering, but also, I mean, the world around us, I do believe that there is a lot of potential for us. But there's -- as you know, the banking deals are much fewer than the ERP deals that are smaller and a lot of volume, while the banking deals takes longer time. They are normally 2 or 3x the lead time on a banking deal compared to dynamics deal or ERP deal. Meaning that when it's now delayed, yes, we have line of sight of a lot of business, but we don't really know when it will be closed. What we see that is the portion of Temenos deals that are actually taking place. We are in a greater and greater portion of those deals.

So I mean no one will buy Lasernet to have Lasernet stand-alone because Lasernet is a product that adds value on top of an ERP system or banking system. So when Temenos or Thought Machine starts to -- when they do sign the order, we see that we are in there to a larger extent than before, and that's when we also will see the -- our business coming in. So...

[Fredrik Nilsson, analyst]

Okay. One last question, and it's from the web. Could you give some color on the outlook for this year on a high level?

[Christian Sundin, executive]

Well, that's tricky, of course. I mean we have the financial targets that we published, and what you should bear in mind that we have set out a target of 20% EBIT margin in 2025. And I've said that we just passed the turning point. So of course, the trajectory needs to bring us there. We also said that the growth should be 10% a year in average overall of these years from 2021 to 2025. And we just underline that we're on the path of both of these 2 targets.

So starting at the turning point and dotting the line up to 2025, where it should have been from 2020, a 10% growth at least and a 20% margin in 2025 at least. That's the best outlook I can provide without breaking any regulations here. But for sure, we see ourselves that the table is set, so -- and the -- we will deliver gradually better margins. It will not come overnight. It will be quarter-by-quarter, inch-by-inch, but going forward, we will combine growth with increased profitability.

[Fredrik Nilsson, analyst]

Okay. That's all from us today. Thank you very much, Christian.

[Christian Sundin, executive]

Thank you.