© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to this Live Q with Formpipe. I will be back later to host the Q&A session, and you can already now send your questions below the stream. But now it's time for the CEO of Formpipe, Christian Sundin, to present the first quarter. You're welcome.
Thank you, Fredrik. Thanks for joining, everyone. Yes, today, I will address the ones of you that are already familiar with Formpipe and jump right into the Q1 report highlights. For those of you who want a more generic introduction to Formpipe, please reach out to me by e-mail or phone to arrange for that at another time.
So Q1 report published this morning. We are yet again showing strong growth in the ARR, a 22% growth since last year or SEK 68 million in added ARR contract value over a year. So strong growth in -- continued strong growth in ARR. We're also doing what we've said we are going to do. We are going -- we are on the -- had passed the turning point on profitability. We are past the phases where we had cost increases to increase capacity and resources to drive our accelerated growth mainly in the public sector of Sweden and in private sector to support the partner network over the world and also establish a real operations in the U.S. We are now seeing times ahead where we will still continue to invest and add more people, but not close to the levels that we've done in the past 2 years since we initiated the growth agenda. So we're continuing on that path that we've done for a couple of quarters and now see the evidence of that in this trend shift of profitability. And it's really nice to see that all our business areas are delivering on their plans. Every business area and all the 3 of them are on track, and we're pursuing both growth and increased profitability in all 3 business areas. So looking on the P&L. We can see quite a modest top line growth. It's only 6% or SEK 7 million compared to last year's Q1. However, the important thing here is that the recurring revenue is up 15%. So in the revenue mix, we're really driving the right type of revenue growth and also refocus on SaaS conversion and SEK 7 million out of this growth are from -- are on the SaaS line. So in the revenue mix, real good underlying growth. When it comes to deliveries, we're slightly down. And that despite the fact that we are successfully shifting our business model in the public sector, Sweden part of the business to be a full-service provider to all our customers in that business area. However, we are comparing with really strong Q1 numbers in Denmark. So Denmark is down, but also more important we are not driving to increase delivery revenues in the private sector, where we have a really true partner model, and we're pushing deliveries to be done by our partners, and we are, in this quarter, more successful with that than we've done in previous quarters and especially compared to last year's Q1 where we did a lot of the deliveries ourselves. So yet again, looking on the revenue mix, it's the right type of movement we're seeing here. And we had some challenges in Denmark during the fall of 2022 due to a release of the product task in grants management TAS that were bigger and more complicated than we thought. We are now -- we have now released that version that supports the new bank ID, MitID in Denmark, and it's working at our customer base. So we see actually, even though it's down slightly in Q1, it's improving and will continue to improve the billability in Denmark deliveries as well. So having said that, I also need to highlight, we are very close to 0 in traditional licenses now, and it will not go below 0 that we know. So when we are on these low numbers in traditional license, yes, the growth we are delivering in recurring revenue will, in future periods, more or less be the total growth that we are executing on or delivering on. So we are through the business transformation to recurring revenue in terms of business model to a large extent. As I said, we passed the turning point when it comes to cost increase compared to growth in revenue. So looking on the cost lines, they're fairly flat compared to last year. And the operating expenses increased 1% compared to last year.
Looking on depreciations, however, we can see that they are up quite significantly, and that is due to capitalization of R&D from previous periods and especially from last year, where we were with the run rate we had on hours put in R&D and our software, the dollar compared to SEK shift during last year really made the cost for R&D significantly higher than we were used to. Now we are bringing down the number of hours we push into that and to be more normal levels of cost and thereby normal level of capitalization. But as you can notice, there is quite a big gap between capitalized development costs and depreciation, which hurts the EBIT at the moment. However, looking on the -- as I already pointed out, the growth in recurring revenue makes us having real comfort in that we will continue to deliver profitability increases and better margins ahead. And we can see that it's already starting to climb upwards in this quarter compared to last year. The recurring revenue is -- I'm reminding you all of that, but the recurring revenue is the thing for us to drive the recurring revenue. It's now above 65% of our total revenue and it's a growth since last year of 15%. Actually, we've been having this agenda for quite a while. We have a compound annual growth rate since 2014 that exceeds 10%.
So we are doing the same thing over and over again, but we're now finally starting to see and reap the benefits in also margins from the growth in recurring revenue that we're driving. And we're now covering, again, more than 80% of our fixed operating cost with the recurring revenue, which gives a lot of stability and lowers the risk in the business. And we can also see as pointed out in the circle around the shift in the trend where from initiating the growth agenda in early 2021, we were trailing downwards in the margin here and now we are through that shift, and we are -- the recurring revenue compared to the operating fixed cost. We can see that we are covering a larger percentage of the total of fixed operating costs with our recurring revenue, and that is what provides us with the increased margins ahead.
Looking on sales in the quarter. Yes, the ACV was strong, SEK 11 million in ACV plus another SEK 3 million in FX help provides us with almost, yes, SEK 13.5 million, SEK 14 million in increased ARR for the quarter. So that is strong. And also, you can see that the SaaS ACV is strong here. And it's mainly driven by Denmark public that has another really strong quarter in terms of ACV, which is a combination of the newly established new frame agreement with Landbrugsstyrelsen and -- where we increased activity at that customer, but also a number of municipality deals in Denmark drives that. Looking on private, it's slightly more shy level than we are used to see in ACV.
However, the new business was actually quite okay, SEK 7 million in private sector. However, we, in this quarter, also saw a little bit more churn on older support and maintenance agreement than we've seen before. Some customers going in bankruptcy or the general market condition makes them to terminate the support and maintenance agreement and run -- yes, they are allowed to run the software if they bought it proprietary back in the days without a support and maintenance agreement and when businesses are pushed on margins, perhaps that's what we're seeing here that they terminate the support and maintenance agreement with us.
So we see that in this quarter. So the churn is actually -- it's not the new sales that really hurts us in the quarter here. But all in all, SEK 11 million in the quarter is a solid ACV number for us, and the growth of ARR compared to last year and also in this quarter is 22%. So that's good numbers. And we're now on SEK 383 million in ARR, and that's SEK 68 million up since last year.
Looking on the SaaS ACV alone, we can see yet again that we've established a new level of ACV growth per quarter since we launched the growth initiative in early 2021. You can see back from 2018 to 2020, trailing on quite low growth on ACV on SaaS, then we initiated this increased capacity to support our partner network.
And now we are, yes, if not the average is 10, it's 9 at least per quarter that we grow the ACV of SaaS. And looking on the area of the product that we put most resources in the Lasernet product as SaaS, we can see compound annual growth rate from initiating this of 55%.
So that's -- that gives us comfort that what we're doing, we're doing successfully. And we now have the path forward as I pointed out in the beginning that we are slowing down the increase of capacity. We'll still increase. However, the increase in cost will be slower than the increase in revenue from now and onwards up to reaching our financial targets in 2025 having 20% EBIT and have delivered a growth in average of 10% per year since we initiated the financial targets in 2021. Thank you.
Thank you, Christian. [Operator Instructions] I will start with Denmark, where you had a really strong quarter, especially in terms of ACV, as you mentioned, but also, the deliveries were a bit soft in the second half of last year. Now they were back. Could you tell us a bit about the situation in Denmark? Do you expect a solid momentum to continue?
Yes, I expect the solid momentum to continue. I mean I think we have mentioned it before that the fall last year, we had some challenges, was a big shift of the Danish Bank ID MitID that we needed to adopt to with our grants management product, TAS. We didn't do that flawless and our customers were slightly hurt by that, meaning that we had to give a lot of delivery capacity away in order to help our customers back to actually follow the law. We estimate DKK 8 million to DKK 10 million in lost billability during 2022 due to that. We're now past that. We have a fully working software out there implemented at all customer that needs that functionality. We still see in Q1 some effect of that, where we are cleaning up after that challenge, and we are making sure that our software really lives up to the expectations of the market. But this has also helped us really put a much better product in place than it was previously prior to this. So we've been really helped by it, but it has hurt us during 2022. It's actually hurting us slightly in Q1 as well, but we see the light in the tunnel on that. And we -- as you pointed out, we are doing a better delivery quarter in Q1 than previous quarters.
And what about the ACV? I mean you mentioned Landbrugsstyrelsen and some municipalities, but what kind of software is it that you're selling to them, if you could elaborate a bit.
Yes, the municipalities is Acadre, the case and document management platform we have in Denmark and with the add-ons we have with Adoxa and signature portal and so forth on that platform. So that's what we're selling, and we're also increasing at existing customer that they want to do more with more users and so forth. And so it's add-on sales to a large extent on the -- but also some new customers on -- in the municipality sector of Acadre. But also, as you pointed out, Landbrugsstyrelsen, the new agreement, we've taken over from their former partner a lot of work, and that work we are selling, and it's contractual revenue that we're selling in terms of what -- how they, the customer, want us -- you can say that they are helping us to build our product even better with features and functions that they want to be built on our platform, our IPR, and that they are paying annual fees for us to do in terms of recurring revenue, and that drives ACV on Landbrugsstyrelsen.
We have a question from the audience here. Why is Swedish public a bit slow?
On deliveries, I would say it's -- the market demand is really strong for us, helping our customers with more services and deliveries. It's a matter of capacity, and we have some vacancies in delivery capacity at the moment. So we're looking for more people -- more skilled people. We are going to be -- become the full-service provider. There's a lot of growth for us to take from that and also to get better growth together with -- on the software part of the revenue together with our customers, as we pointed out a lot of times in the strategy. When it comes to the ACV, it looks very soft since it's more or less 0. However, the new sales of our add-ons, that's somewhere between SEK 2 million and SEK 3 million, but we also have a couple of -- 3 customers, actually, old customers on older platforms that have churned in the quarter. So the net looks like 0, while there is actually new sales of almost SEK 3 million in Sweden this quarter. But that's not visible here in the numbers. But -- so it's not as soft as it looks here, and the deliveries will continue to grow from the levels we are delivering today going ahead. And as you can see, the margins are improving quite significantly in Sweden as well.
Okay. I have one follow-up on that. I mean, you seem quite confident in the CEO comments. So -- and that makes more sense now when you elaborate a bit about the numbers. But what should we expect from Sweden for this year? I mean you seem confident in the transition. Should that also play out in a higher net ACV as well?
Well, not net. I think the ACV levels of public Sweden, I think a quarter in new sales that we do, that's quite -- that's an okay Q1, then Q4 should be a little bit stronger and so forth. But in average, in ACV on public sector Sweden cannot be compared with the numbers we're having on SaaS ACV for Lasernet, for example. But that's add-on to an existing customer base. That's where we drive our recurring revenue in terms of public Sweden. So it's not on the same level as private, but a healthy good ACV number per quarter. This specific quarter, yes, we have a churn from 3 customers that were out in the tender 3 years -- 2.5, 3 years ago, and the requirement in those tenders we didn't see that fits the purpose for us.
So now those older platforms in our support and maintenance have churned in this quarter. So it's not a trend. It's a one-off, as I see it. And going forward, we will see solid numbers from Public Sweden and especially growth in deliveries as well from the current levels and margin approval during this year as well continued.
Okay. So let's move on to the private side. You mentioned that you see a slight slowdown in the ERP market. How is that affecting Lasernet? You mentioned churn. Is that related to bankruptcies to some extent? Or why are the customers churning? And do you see any effect on new sales as well?
Well, it's only 1 quarter, but given the market and the world around us, one quarter with slightly lower number of transactions made in the ERP space immediately makes me think that it's a market effect. It could be just a bump on the road. However, what we do see is, yes, increased volume of churned customers. It's some bankruptcies, but also some customers saying we don't need the support and maintenance agreement. And this refers to older installations where the customers has bought Lasernet as a proprietary license and then they have the right to run the software without the support and maintenance agreement. And I assume when businesses are pushed to survive, they look everywhere where they can save some cost. And that seems to affect us now in churn numbers. And as I said, the -- even though the -- it was not a kick a** quarter in terms of new sales, it was still SEK 7 million in ACV when it comes to new sales in Lasernet or in private. So it is the churn that's hurt us this quarter in terms of private ACV.
Are there any particular markets or sectors where you see the weakness?
Well, I mean we are pursuing, as you heard before, Dynamics -- Microsoft Dynamics 365. The bigger ERP offering they have is mainly addressing retail, utilities and manufacturing. And I would assume, especially retail customers have not been unhurt by the market conditions the recent years. So that's where we can see a slightly softer market demand. But as I said, it's one quarter. It's more our view of the world. I don't foresee -- I don't have firm evidence that Microsoft thinks that the market is softer. It might be just a bump on the road for us.
On the positive side is that we also, in this quarter, for the first quarter or a couple quarters back, see some increased activity in the bank sector. So -- and on the same page as that's also only one quarter and one data point, I will not promise that's a trend shift in the bank sector either. So that's how I see it. But we still have strong growth in our pipeline, a lot of partner initiatives going on. So we have a firm belief of steady growth ahead on ACV, ARR in private sector and especially Lasernet as SaaS.
We got another question from the web. You evaluated the potential to spin-off any of your segments. Could you give us an update on how you think about this area currently?
Yes. I mean, we did that evaluation more than a year ago, and then we, at the Q2 report, last year said let's put this in the drawer for foreseeable time ahead. We still -- we see that we are functioning very well as one company. Now all business areas are on the right track and in terms of profitability as well, we do not see a great reason to -- for us to act on such a split at the moment anyway. But I think that's something that will be continuously evaluated over time in -- but we are on our 2025 journey. We want to prove ourselves that we will meet the financial targets that we set out to reach. And then I think it will be up to the Board and my -- the one -- the person replacing me to have a say or thinking about whether or not we should stay as one company or at some given time in the future become 2 companies. So I don't have much more to say about that. At the moment, we're focusing on one Formpipe and executing on the strategy that we have set out to deliver on.
Okay. [Operator Instructions] You touched upon it in your presentation, but the D&A is higher, while the capitalization is lower compared to last year. Is that a trend we should expect to continue throughout the year?
Yes. I do believe so that the depreciations will be higher than the capitalization. I think the capitalization number that we're seeing this quarter perhaps is slightly, slightly lower than we will see the -- but that's on a very limited level that we see some increase in capitalization.
But the depreciation, yes, I mean, that is already from the balance sheet from previous periods. So those numbers will continue to be there. But please bear in mind that the SEK 16 million we have in depreciation also includes IFRS 16 movement from operating leases and rents and so forth. So it's not like-for-like to say that we are capitalizing much lower than we are depreciating on software. There is an element of IFRS 16 as well.
That's a good point. And you mentioned that in public Sweden, you have some vacancies. What's the potential to find the people that you want? I mean we see some unprofitable companies doing quite substantial layoffs?
Yes. I mean, it's -- we believe it's easing up in the job market. However, it has been really difficult to find good, experienced people and working with the public sector delivery on very complex product as ours that not only requires good skills in software, it also requires good skill in understanding public sector. And that's -- so -- but we're not looking to any hyper growth or excessive recruitments either. We will take this step by step in, yes, baby steps, but there will be recruitments, but it will be over time. And the potential is huge for us to grow that part of our business, but we're taking it customer by customer. We're taking it one step at a time and have a solid growth and execution plan on how we grow the deliveries and become that full-service provider, and we are well on our way with it. So that's how we see it. Going back to the depreciation question, I think looking on our EBITDA improvement, excluding capitalization, i.e., the cash EBITDA would be relevant for the ones who want to do proper analysis of us instead of only looking on EBIT, where the cash EBITDA is actually how we have developed operationally over here and the improvement is even stronger than in EBIT compared to last year.
Yes. [Operator Instructions] And one last question from me. I mean there has always been a discussion about the economic status of municipalities, regions and so on. And it's a topic that is increasing in importance right now, I believe, with inflation and so on. And, I mean, from your point of view, it's also, I mean, a trade-off between investments and efficiency. Do they have the money? Should they invest in efficiency? So what's your view on that topic and your view of the current situation?
Yes, that will be an everlasting conflict, I believe. I mean we know that we are providing cost efficiency to our customers. But in order to reach that cost efficiency, they need to make an investment. And if there's no money, it's hard to make the investment and thereby no cost savings. And for the smaller municipalities that is a constant challenge, I would say. So yes, it -- the market as it looks right now, where it hurts is especially the small municipality. When it comes to the larger central government authorities, now they do invest in our -- they see the benefits that our products are delivering, and they do invest regardless of how the GDP is going or how the market is. So they're quite immune in their behavior, while the smaller municipalities are not immune to market conditions.
Yes. We have, I think, some more questions from the audience -- or the web, I should say. The low Swedish krona, there should be a big advantage with the global and Danish income measured in Swedish krona.
Yes, we see that. But we also see -- I mean, the Danish -- all our Danish staff is in Danish krona as well. And all our -- we have -- the greatest portion of our people in private sector are in England or in U.S. and then the cost is also really hurting us from the weak Swedish krona. On top of that, we don't -- we have a natural hedge in that sense that a lot of the revenue in Danish krona is matched by cost in Danish krona. A lot of the revenue that we come from outside of Sweden in England and in Germany, which euro and U.S. that will also have costs in those currency.
However, we are -- all our product development in Ukraine is also in dollars. So when it comes to the Swedish public sector business area, we do not have a natural hedge because that -- the revenue in Swedish krona that is not getting any help from the -- while the costs and hence also the higher depreciation we see due to increased cost of product development last year in terms of that went in through capitalization -- high capitalization now comes through the depreciation.
So those are -- but -- all in all, we have quite a good natural hedge in our business since we have the cost at the same place as the revenue with the exception of the Ukraine account that is costing us in dollars.
I think we got one...
But we do get help in terms of growth. We get to help in terms of growth of ARR since we have a lot of our contracts in foreign currencies. So that helps. But that's also the best proxy for our revenue going ahead. And I also pointed out in the CEO comment of the report that I mean, we see a growth of 15%. That's a good solid growth of recurring revenue.
However, the ARR is 22% and that's the best -- everything alike in the future, that would be the best indication of our growth going ahead of recurring revenue with the strong ARR growth that we have delivered the past year. But we are helped by currency in that, of course. Yes.
One last question or maybe a statement. Thank you for your time as CEO at Formpipe, Christian. You have done some amazing things with Formpipe. That was very nice. Thank you.
That was very nice. Thank you.
And that's all for today. Thank you very much for watching.