Fortnox: Expect increasing churn during a slowdown – Introduce

Reduced estimates amid COVID-19
We cut ’20e-’22e EBIT by 7-11%, on lower sales estimates
2020e: 27% sales growth, 25% adj. EBIT growth

Customer intake likely to take a hit in 2020
In our last note on Fortnox (13 March), we conducted a scenario analysis on how the COVID-19 situation could affect the company’s financials. We argued that there are several structural market trends that provide tailwinds for the company. While we continue to see these drivers, we note the many indications that there will be a slowdown in the economy in 2020. The main implications for Fortnox are increased churn rates amid higher default rates, and lower gross customer intake (Fortnox is particularly strong at selling its solution to start-ups, of which there are now fewer). Furthermore, given the low cost for an SME of using FNOX, we see a low risk that Fortnox will lose customers due to potential budget restraints.

Reduced customer intake, but FNOX Finance should flourish
On the back of the above-mentioned indications, we pencil in lower customer intake into our forecasts (cutting ’20e from 50,500 to 18,000, resulting in -1-5% on ’20e-’22e sales). We have left our ARPU assumptions largely intact, as new customers generally have lower ARPU contributions, while we acknowledge that a slowdown in the economy might hurt Fortnox’s upselling of products. That said, there is also positive news amid the current situation: we believe that demand for Fortnox Finance has increased substantially in recent times.

Mitigating risks is key for Fortnox Finance
The key question is whether Fortnox is able to handle the upsurge in demand in its Finance vertical. Fortnox is a relatively small player in this area, which increases the risks. Given the granularity of the data that it holds on its customers, we think it should be able to handle those risks well. Fortnox Finance accounted for ~15% of sales in 2019, and we think that it will outgrow Fortnox Core in 2020. The share trades at 36x ’20e EV/EBIT on our revised estimates.

Link to research:
https://www.introduce.se/foretag/fortnox/Equity-research/2020/3/fortnox---expect-increasing-churn-during-a-slowdown/