SaaS Shift And Azure Migration Will Support Stronger Margins And Recurring Revenue

Catalysts

About Lemonsoft Oyj

Lemonsoft Oyj provides cloud based ERP and financial software solutions for small and medium sized manufacturing and wholesale businesses.

What are the underlying business or industry changes driving this perspective?

• Completion of the Azure migration and ongoing platform optimization should reduce overlapping infrastructure costs, supporting a gradual recovery in gross margin and strengthening EBIT as the double running costs fade in the second half.
• Restructuring that reduces headcount by roughly 25 employees, combined with a rebuilt sales management layer, is expected to lower the fixed cost base while improving commercial focus, which should support higher net margins and earnings from Q3 and Q4 onward.
• Continued shift from consulting and transaction based income to a higher share of SaaS subscriptions positions Lemonsoft for more predictable recurring revenue and better scalability, which should lift revenue growth quality and operating leverage over time.
• Strong MRR growth of over 30 percent in acquired cloud assets Spotilla and Applirent, together with increasing cross sell into the core Lemonsoft customer base, can accelerate group wide top line growth and enhance blended gross margins as these higher growth units scale.
• Ongoing product development, including new AI powered features that improve usability and automation in ERP workflows, should increase customer stickiness, support upselling in manufacturing and wholesale segments, and over time translate into higher SaaS revenue and improved lifetime profitability per customer.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Lemonsoft Oyj's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.0% today to 21.4% in 3 years time.
• Analysts expect earnings to reach €6.9 million (and earnings per share of €0.39) by about December 2028, up from €4.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, down from 25.7x today. This future PE is lower than the current PE for the FI Software industry at 25.7x.
• Analysts expect the number of shares outstanding to decline by 3.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The shift from consulting and transaction based revenue towards SaaS could be offset by ongoing weakness in Finvoicer invoice financing volumes and broader customer financial distress, leading to structurally slower top line growth and softer recurring revenue trends.
• Organizational restructuring, unexpected attrition and reliance on key new hires such as a Chief Sales Officer may prolong disruption in the sales engine, which risks extending the current period of negative organic growth and delaying a meaningful recovery in net margins.
• Although the Azure migration is technically complete, any further cost overruns, performance issues or need for remedial work on the platform could keep infrastructure expenses elevated for longer than expected and cap improvements in gross margin and EBIT.
• A slow recovery in the operating environment for Lemonsoft's manufacturing and wholesale customer base, including continued bankruptcies and financial difficulties, could suppress new SaaS deals and upsell opportunities, limiting MRR expansion and earnings growth.
• Ongoing share buybacks and potential future acquisitions may pressure capital allocation if growth in free cash flow does not keep pace, which could constrain investment in product development and sales capacity and in turn weigh on long term revenue and earnings potential.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €7.2 for Lemonsoft Oyj based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €32.4 million, earnings will come to €6.9 million, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of €6.4, the analyst price target of €7.2 is 11.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.