Lasernet Expansion And Hybrid Solutions Will Unlock Potential

Key Takeaways

• High recurring revenues and focus on cost efficiency will likely stabilize finances and enhance profitability.
  
• Strategic expansions and mergers are expected to drive growth through improved product offerings and operational streamlining.
  
• Exposure to currency fluctuations and reliance on subcontractors, alongside slow public sector tech adoption, may pressure growth and earnings stability.

Catalysts

Provides software and consulting services for capturing, managing, and distributing information in Sweden, Denmark, Germany, the United Kingdom, and the United States.

• Formpipe's growth in recurring revenues, which now constitute over 80% of net sales, suggests a stable revenue stream that is likely to positively impact their financial stability and predictability, potentially leading to increased revenue.
  
• The company's focus on cost reductions, particularly in the Lasernet business, has already resulted in a higher EBITDA margin, increasing from 17% to 21.6%. This focus on efficiency is projected to further enhance net margins and overall profitability.
  
• The expansion of Lasernet into new deals and the introduction of a four-tiered packaging strategy, including a freemium model, is expected to enhance the annual contract value (ACV) and drive future revenue growth through larger deal sizes and increased customer engagement.
  
• Formpipe's successful piloting of hybrid (cloud and on-prem) solutions in public sector clients indicates potential for future expansion in this sector. Their ability to introduce new technologies like AI is expected to drive demand and revenue growth while maintaining customer satisfaction.
  
• The strategic merger of Formpipe’s Swedish and Danish operations aims to improve product development efficiency and enhance communications and delivery capabilities. This organizational streamlining is anticipated to drive better operational efficiency and long-term earnings growth.

Formpipe Software Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Formpipe Software's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 16.6% in 3 years time.
• Analysts expect earnings to reach SEK 113.6 million (and earnings per share of SEK 2.1) by about May 2028, up from SEK 17.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK125.2 million in earnings, and the most bearish expecting SEK102 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, down from 83.8x today. This future PE is lower than the current PE for the GB Software industry at 33.7x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

Formpipe Software Future Earnings Per Share Growth

Risks

• The company's exposure to currency fluctuations, particularly the instability of the Swedish krona, poses a risk as it negatively impacted annual recurring revenue by SEK 19 million, potentially affecting future revenues and earnings stability.
  
• The slower-than-expected growth in the Bank & Finance segment, with only two banks signed in the quarter, could hinder revenue growth expectations in that sector if this trend continues.
  
• The company has experienced costs associated with restructuring, totaling SEK 8 million, which might be a concern if further restructuring is needed, impacting net margins negatively.
  
• The reliance on subcontractors for deliveries increases sales expenses, which could pressure net margins if the company cannot effectively manage subcontractor costs.
  
• The ongoing need for careful navigation and slow adoption of new technologies by risk-averse public sector clients might delay potential revenue enhancements from new AI functionalities, impacting future earnings potential.

Valuation

• The analysts have a consensus price target of SEK34.0 for Formpipe Software based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK684.6 million, earnings will come to SEK113.6 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of SEK26.4, the analyst price target of SEK34.0 is 22.4% 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.