E 2015E 2016E. Revenue, MSEK Growth 79% 46% 18% 8% 6% EBITDA EBITDA margin 25% 22% 21% 24% 28%

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1 E 2015E 2016E COMPANY ANALYSIS 27 October 2014 Summary Formpipe Software (fpip.st) Good quarter with reduced profit due to focus on future opportunities Formpipe Software s report for the third quarter of 2014 showed revenues slightly above our expectations. They were at 81.9 million SEK, however with a resulting net income of only 2 million SEK. The weaker margins were mainly due to the ongoing build-up of the Swedish delivery organization and other costs related to future growth. The third quarter results include those of recent acquisition of UK-based GXP Limited ( GXPi ), which underlines the company s efforts to get a foothold in the competitive Life Science sector. No updates to Redeye Rating List: Small Cap Market Cap: 266 MSEK Industry: Information Technology CEO: Christian Sundin Chairman: Bo Nordlander OMXS 30 Formpipe Software Oct 26-Jan 26-Apr 25-Jul 23-Oct Redeye Rating (0 10 points) Management Ownership Growth prospect Profitability Financial strength 7.0 points 4.0 points 6.0 points 6.0 points 4.0 points Key Financials E 2015E 2016E Revenue, MSEK Growth 79% 46% 18% 8% 6% EBITDA EBITDA margin 25% 22% 21% 24% 28% EBIT EBIT margin 14% 9% 9% 12% 15% Pre-tax earnings Net earnings Net margin 7% 5% 5% 8% 11% Dividend/Share EPS adj P/E adj EV/S EV/EBITDA Share information Share price (SEK) 5.3 Number of shares (m) 50.1 Market Cap (MSEK) 266 Net debt (MSEK) 140 Free float (%) 80 % Daily turnover ( 000) 146 Analysts: Alexander Sattelmaier alexander.sattelmaier@redeye.se Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report. Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, Stockholm. Tel E-post: info@redeye.se

2 Redeye Rating: Background and definitions Formpipe Software The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation. Company Qualities The aim of Company Qualities is to provide a well-structured and clear profile of a company s qualities (or operating risk) its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company s qualities on a ten-point scale based on five valuation keys; 1 Management, 2 Ownership, 3 Growth Outlook, 4 Profitability and 5 Financial Strength. Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points. The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys. Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company s management are: 1 Execution, 2 Capital allocation, 3 Communication, 4 Experience, 5 Leadership and 6 Integrity. Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company s stability and the board s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 Ownership structure, 2 Owner commitment, 3 Institutional ownership, 4 Abuse of power, 5 Reputation, and 6 Financial sustainability. Growth Outlook Our Growth Outlook rating represents an assessment of a company s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Growth Outlook are: 1 Strategies and business model, 2 Sale potential, 3 Market growth, 4 Market position, and 5 Competitiveness. Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 Return on total assets (ROA), 2 Return on equity (ROE), 3 Net profit margin, 4 Free cash flow, and 5 Operating profit margin or EBIT. Financial Strength Our Financial Strength rating represents an assessment of a company s ability to pay in the short and long term. The core of a company s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company s financial strength is based on a number of key ratios and criteria: 1 Times-interest-coverage ratio, 2 Debt-to-equity ratio, 3 Quick ratio, 4 Current ratio, 5 Sales turnover, 6 Capital needs, 7 Cyclicality, and 8 Forthcoming binary events. 2

3 Investing for future growth Formpipe Software Formpipe s Q3 revenues slightly beat our expectations, but margins were lower due to expansion activities Similar to the first quarter, Q3 has historically been a weaker quarter for Formpipe Software, which was also the case this year after adjusting for the effect of the GXPi acquisition. At the same time, the company s sales have slightly beaten our expectations. After adjusting for the acquisition of British GXP Ltd. (GXPi) effective July 1st, we expected sales around 79 MSEK for the quarter, while Formpipe delivered 81.9 MSEK. This amounts to a 9.8% YoY growth excluding the revenue contribution from GXPi (16.5% including this effect). Expected vs. Actual (SEKm) Q3'13 Q3'14E Actual Diff Sales 70,3 79,0 81,9 4% EBITDA 18,9 20,0 16,8-16% EBIT 9,4 10,0 5,3-47% EPS 0,10 0,12 0,04-66% Sales growth YoY 24% 12% 16% EBIT margin 13% 13% 6% Source: Redeye Research Profitability has however been down, with Formpipe s Q3 EBITDA-margin at 21.3% (26.9%), with both the EBITDA of 17.5 MSEK and net profit of 2 MSEK being below our expectations due to increased sales- and other operating expenses. We see this mainly as an effect of investments in areas of future growth as well as the use of subcontractors in the Danish operations. License and delivery sales were slightly above expectations, while sales costs were much higher While support and maintenance revenue was according to our expectations, both license and delivery sales were slightly higher than we expected. Expected vs. Actual Revenues (SEKm) Q3'14E Actual Diff Support and maintenance 38,0 38,1 0% License 12,0 13,0 8% Delivery 29,0 30,8 6% Source: Redeye Research Expected vs. Actual Costs (SEKm) Q3'14E Actual Diff Sales cost 8,5 13,2 56% Other cost 14,0 15,4 10% Personnel cost 44,1 44,7 1% Activated development cost 8,0 8,9 11% Source: Redeye Research A major difference in the actuals compared to our estimates can be seen in sales and other costs. 3

4 Formpipe Software This is firstly due to investments Formpipe is making in growth areas. Besides costs resulting from the GXPi acquisition, the company is setting up operations in the US and Netherlands and in the ongoing process of building up its delivery organization in Sweden.A second factor affecting profitability specifically in the Danish operations is that Formpipe uses subcontractors for the delivery of certain contracts. While this reduces the margins on these contracts, it helps to increase operational flexibility and better manage demand fluctuations. Focus of Swedish authorities should be back to normal after double elections, while Danish municipalities remain a challenging market Swedish market back to normal after elections, mixed picture in Denmark The recent elections on both a European and national level have likely captured a big part of the focus of Swedish authorities. Now that this period is over, the planning and budget attention regarding IT solutions should be back to normal, which should be beneficial for Formpipe in the months going forward. The municipality market in Denmark on the other hand still remains somewhat of a challenging environment to be in, with only one contract closed in Formpipe has however constantly signed contracts with other segments in the Danish public sector, reinforcing their positioning as a provider of choice in the overall market. An additional option for accelerated growth in this area could be increased upselling to existing customers, which is potentially faster than the sell-in process for new clients. Acquisition of GXPi underlines efforts in Life Science market Effective at the beginning of the third quarter, Formpipe acquired UKbased GXPi, which provides compliance solutions to clients in Life Science. The firm is active in both Europe and the US, and features several of the leading multinationals in the sectors as its clients. GXPi acquisition could be a key lever for entering the Life Science market successfully Formpipe Software mentions in their report that they had evaluated acquisition opportunities regarding this market segment for a while, and identifies several key benefit areas. The perceived key benefits lie in the takeover of an established sales force and years of product and delivery experience in the Life Science, as well as new cross-sales opportunities, both for Formpipe s Platina QMS as well as GXPi s cloud-based QMS solutions for small and medium sized client firms. We see it as positive that the founder and CEO of GXPi will lead the new merged Life Science business area within Formpipe, and as it seems also the remaining leadership of GXPi remains in the company. 4

5 Formpipe Software In addition, the acquisition has been structured with a performance-based component, allowing for a further maximum 3,5 million GBP purchase price calculated as a 50% share of the EBITDA contribution over 3 years of the new combined Life Science team. Compared to the 1,3 million GBP initial purchase price (of which around 50% was paid in cash and the other half in newly issued shares), this is a quite heavy performance incentive for the new business area, which we see as a catalyst for the market traction of Formpipe s Life Science solutions going forward. Formpipe s net debt reduction slowed down, but the GXPi acquisition was done without additional external financing Financial position Total interest-bearing debt was further reduced to 147 MSEK (166 MSEK) while net debt was at 140 MSEK (160 MSEK). The reduction of net debt after the major acquisition in 2012 therefore seems to have slowed down somewhat. This was however partly due to the financing of the GXPi acquisition without raising any additional financing, which shows the ongoing commitment of Formpipe to the reduction of their debt position. In addition, some of the reduction in amortization is a pure accounting effect, due to exchange rate differences as part of the debt is denoted in Danish crowns. 5

6 Seasonally weak third quarter and bigger expectations for Q4 although signing of major contract with Stockholm city is delayed further Financial forecasts Formpipe Software After the second quarter had been in line with the previous year s development, also the third quarter followed historical patterns, showing a slower sales growth after adjusting for the GXPi acquisition. The expectations for the upcoming fourth quarter are therefore as usual higher, since this is seasonally the best performing time in the financial year. We have adjusted our expectations higher to include the revenue contribution of GXPi. It is however unclear whether sales patterns in the life science sector follow the seasonality of the rest of Formpipe s business, and we will follow the future developments in this regard. The signing of a major contract with the city of Stockholm is now further delayed, after a competitor had requested a review of the contract allocation process, which is not unusual in the industry. Unfortunately, the allocation process has been declared as uncompliant in the first instance, but both the city of Stockholm and Formpipe have used their right to oppose this decision. During the next weeks, a decision will be made whether this opposition is approved. In that case, a potential following review of the case in the next court instance could take several months, so that a potential positive outcome of the case probably can be expected by Q A high share of recurring revenues contributes to a strong cash flow and lowers the company s risk profile Formpipe s business model builds on a combination of recurring license as well as support and maintenance revenues, which the client either pays as part of a SaaS (Software as a Service) licensing model or in addition to a delivery fee for initial implementation of the software. How clients choose to negotiate the model for the recurring fees has a significant impact on Formpipe s license revenues and margins in individual quarters, but makes no major difference in the long run. The trend, in accordance with the overall software industry, goes towards more clients opting for a SaaS model, similar to hiring a solution. The analysis below focuses on the steady growth of support and maintenance revenues, which is a critical driver for long-term profitability in the firm. Around 50% of revenues are now recurring, which is a big stability factor for the firm. 6

7 Formpipe Software No major adjustments have been made to our estimates for 2014, apart from the inclusion of GXPi, which we expect to have a positive EBIT contribution from around the second half of Actuals & Forecasts (SEKm) 2013 Q1'14 Q2'14 Q3'14 Q4'14E 2014E Q1'15E Q2'15E Q3'15E Q4'15E 2015E Sales EBITDA EBIT PTP EPS (SEK) Sales growth YoY 46% 18% 16% 16% 21% 18% 16% 12% 4% 3% 8% EBIT margin 9.3% 6.7% 7.1% 6.5% 12.8% 8.6% 12.0% 13.0% 8.8% 13.7% 12.0% EPS growth YoY 15% 609% 56% -60% -3% 1% 147% 160% 108% 12% 75% Source: Redeye research Our DCF valuation motivates a value of 8.7 SEK per share Valuation Since the acquisition of GXPi, mainly due to its size and the chosen performance-based purchase pricing, had no major long-term effect on the debt and risk profile of Formpipe, our WACC remains at 11 percent. We calculate with an average growth of 4,8 percent between 2016 and 2023 and an EBIT margin of 15 percent. The resulting motivated value per share is 8.7 (9) SEK. The bull scenario value is 15 SEK per share Bull case In a bull scenario, both the long-term archiving and Life Science propositions will get traction in the market under 2015 and contribute to sales and profit above current expectations. The overall market conditions for the firm increase somewhat and all in all, revenues therefore increase quicker at an average rate of 7,5% while long-term average EBIT margin would be at 20%. This results in a motivated value of 15 SEK. A bear case development indicates a value of 4 SEK per share Bear case In our bear case, neither the long-term archiving nor the Life Science solutions get significant traction in the market. The overall market remains somewhat on hold, meaning that sales growth and resource utilization for Formpipe Software will be slower as a result. All in all, revenues would increase at an average 4% and long-term average EBIT margin would lie at 11%. The resulting motivated value is 4 SEK. Formpipe still misses a strong major shareholder, which we see as a long run disadvantage Stock and owner information Median turnover in Formpipe s stock during the last 12 months was at around shares per day. A key weakness in the firm today is in our opinion the lack of a strong major shareholder, the addition of which would be beneficial for Formpipe in the future. We have not seen any major changes in the shareholder structure since our last update after Q

8 Formpipe helps to manage an ever increasing flow of information Investment Case - Formpipe Formpipe Software Formpipe s solutions help its clients to manage an ever increasing flow of information, which is a strong underlying driver for the business. The firm has a stable customer base which primarily consists of public sector actors in Sweden and Denmark, with a strong base of recurring revenues which creates stability in the business. Growth opportunities exist both in existing as well as new markets, such as the Life Science sector. The company has several key growth opportunities which have not yet gotten full market traction Formpipe has several organic and acquisition-based growth opportunities. Cross-selling can be realized by bringing solutions from the Swedish to the Danish market and vice versa, which is a result of the Traen acquisition in We expect such cross-selling to contribute positively to growth during In addition, Formpipe has created an offer targeted at the Life Science sector called Platina QMS (quality management system), which can be a future growth driver for the firm. The Life Science industry shares many parallels with the public sector as it is highly regulated by rules and regulations, not least from the US FDA (Food and Drug Administration). Life Science is however a highly globalized market, which could be of importance for Formpipe since current public sector solutions are rather customized to individual geographic markets. We see Formpipe's acquisition of UK-based GXPi, a provider of compliance management solutions to the Life Science sector, as a confirmation for this, since the UK is one of the hubs for Life Science within Europe and globally. Another product-based opportunity is Formpipe's solution for long-term archiving, where Formpipe is continuing to carry this solution it developed out to the market. While the benefit proposition for customers is strong, the market seems to take its time to adapt such solutions. As a result, we expect this area to gain traction earliest during Formpipe s two key growth opportunities have not been priced in yet Stable cash flows reduce risks, but the market competition is a risk The current stock valuation has not priced in a full successful commercialization of both key growth opportunities described. After a slowing market 2013, Formpipe exceeded our revenue expectations for most of At the same time, profitability was put under pressure due to growth-related costs, which impacted the stock development. For 2015, we however continue to see Formpipe as a strong player in a stable market, with two opportunities for additional growth in the Life Science and longterm archive propositions. If any one of these gain significant traction in the market, a strong revaluation of the stock might be possible. Key risks in the stock are mainly related to the level of debt, a result of the acquisition in Denmark 2012, in addition to increased competition both from local players as well as international firms. Another risk is that the public sector might face reduced budgets over time and therefore might have less economic freedom to invest in systems such as Formpipe s. 8

9 Summary Redeye Rating Formpipe Software The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points. Rating changes in the report No changes to Redeye Rating Management 7.0p Ownership 4.0p Formpipe Software's CEO Christian Sundin has a long experience from the IT sector, has worked with Formpipe since 2006 and is knowledgeable about the market. The company has no specific financial goals, which would be positive to have. Management shows however a high ambition level for the firm by using both product development and acquisitions to get into new markets. The acquisition of Traen and the following equity issue however still surprised many stockholders and could have been announced through clearer communication by the company. The ownership rating for Formpipe Software is relatively weak since the company currently misses an active major shareholder, which we see as a disadvantage. On the positive side, CEO Christian Sundin, CFO Joakim Alfredson as well as Head of Sales & Marketing Erik Lindberg all have relatively high holdings in the firm's stock. The company also has a number of institutions among its major shareholders, which is positive. Growth prospect 6.0p Profitability 6.0p Formpipe Software's market seems stable with underlying growth. Customers are mainly from the public sector and a big part of revenues are recurring, which creates stability in the business model. We see good growth possibilities since the company has both cross-sales opportunities between its Danish and Swedish operations after the Traen acquisition. In addition, new solutions for long-term archiving and the Life Science sector are being established in the market, but have not seen their breakthrough yet. Formpipe's profitability has been relatively stable apart from some quarters. Recurring revenues are increasing, mainly due an increase of sales through a SaaS-model (Software as a Service). This in turn can influence profitability in individual quarters quite heavily since license revenues temporarily could be lower, which has a big impact on the net margin. In the long run, we see this however as being positive for the firm's profitability. Financial strength 4.0p Before the acquisition of Traen, Formpipe Software had negative net debt. Due to the acquisition, the capital strength rating has however decreased since the debt level increased. Since the company has a clear amortization plan, we expect to increase the rating over time as the debt level decreases. 9

10 Formpipe Software Income statement E 2015E 2016E Net sales Total operating costs EBITDA Depreciation Amortization Impairment charges EBIT Share in profits Net financial items Exchange rate dif Pre-tax profit Tax Net earnings Balance E 2015E 2016E Assets Current assets Cash in banks Receivables Inventories Other current assets Current assets Fixed assets Tangible assets Associated comp Investments Goodwill Cap. exp. for dev O intangible rights O non-current assets Total fixed assets Deferred tax assets Total (assets) Liabilities Current liabilities Short-term debt Accounts payable O current liabilities Current liabilities Long-term debt O long-term liabilities Convertibles Total Liabilities Deferred tax liab Provisions Shareholders' equity Minority interest (BS) Minority & equity Total liab & SE Free cash flow E 2015E 2016E Net sales Total operating costs Depreciations total EBIT Taxes on EBIT NOPLAT Depreciation Gross cash flow Change in WC Gross CAPEX Free cash flow DCF valuation Cash flow, MSEK WACC (%) 10.9 % NPV FCF ( ) 37 NPV FCF ( ) 221 NPV FCF (2023-) 329 Non-operating assets 20 Interest-bearing debt -172 Fair value estimate MSEK 436 Assumptions (%) Average sales growth 4.3 % Fair value e. per share, SEK 8.7 EBIT margin 15.0 % Share price, SEK 5.3 Profitability E 2015E 2016E ROE 7% 6% 6% 10% 13% ROCE 10% 6% 6% 9% 12% ROIC 19% 5% 6% 7% 10% EBITDA margin 25% 22% 21% 24% 28% EBIT margin 14% 9% 9% 12% 15% Net margin 7% 5% 5% 8% 11% Data per share E 2015E 2016E EPS EPS adj Dividend Net debt Total shares Valuation E 2015E 2016E EV P/E P/E diluted P/Sales EV/Sales EV/EBITDA EV/EBIT P/BV Share performance Growth/year 12/14e 1 month % Net sales 31.3 % 3 month % Operating profit adj 1.8 % 12 month -8.6 % EPS, just 7.9 % Since start of the year -4.5 % Equity 8.2 % Shareholder structure % Capital Votes Avanza Pension Försäkring AB 9.3 % 9.3 % Swedbank Robur fonder 6.1 % 6.1 % SHB fonder 5.6 % 5.6 % Nordnet Pensionsförsäkring AB 4.7 % 4.7 % SEB fonder 4.6 % 4.6 % Andra AP-fonden 4.2 % 4.2 % Humle fonder 4.0 % 4.0 % Wallinder & Co AB 2.7 % 2.7 % Wernhoff Thomas 1.7 % 1.7 % Lindeberg Erik 1.5 % 1.5 % Share information Reuters code List Small Cap Share price 5.3 Total shares, million 50.1 Market Cap, MSEK Management & board CEO CFO IR Chairman Christian Sundin Joakim Alfredson Bo Nordlander Financial information FY 2014 Results February 10, 2015 Capital structure E 2015E 2016E Equity ratio 42% 45% 44% 46% 50% Debt/equity ratio 81% 64% 68% 57% 43% Net debt Capital employed Capital turnover rate Growth E 2015E 2016E Sales growth 79% 46% 18% 8% 6% EPS growth (adj) -77% 15% 1% 75% 46% Analysts Alexander Sattelmaier alexander.sattelmaier@redeye.se Redeye AB Mäster Samuelsgatan 42, 10tr Stockholm 10

11 Formpipe Software Revenue & Growth (%) EBIT (adjusted) & Margin (%) E 2015E 2016E 90,0% 80,0% 70,0% 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% E 2015E 2016E 20,0% 18,0% 16,0% 14,0% 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% Net sales Net sales growth EBIT adj EBIT margin Earnings per share Equity & debt-equity ratio (%) 1,4 1,2 1 0,8 0,6 0,4 0, E 2015E 2016E 1,4 1,2 1 0,8 0,6 0,4 0,2 0 0,7 0,6 0,5 0,4 0,3 0,2 0, E 2015E 2016E 90,0% 80,0% 70,0% 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio Sales division Geographical areas License revenues Support and maintenance Delivery Conflict of interests Alexander Sattelmaier owns shares in the company : No Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this. Company description Since its start in 2004, Formpipe showed strong growth and increasing margins. The firm's main sales focus is in the public sector, reducing sensitivity to economic cycles. Recently, an additional focus on selected private market actors has been added with the Life Science segment. Increasing recurring revenues from support and maintenance make Formpipe's business model attractive. 11

12 Formpipe Software DISCLAIMER Important information Redeye AB ("Redeye" or "the Company") is a specialist investment banking boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the IT, life sciences, media, betting, clean tech and commodities sectors. We provide services within Corporate Broking, Corporate Finance, equity research, investor relations and media services. Our strengths are our award-winning research and analysis department, experienced advisers, a unique investor network, and powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. 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This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decisionmaking. Redeye s recommendations for technical analyses are: Buy (Köp) and Sell (Sälj). The investment horizon for these recommendations is very short, at usually less than 1 month. Redeye Rating ( ) Rating Management Ownership Growth Prospect Profitability Financial Strength 7,5p - 10,0p ,5p - 7,0p ,0p - 3,0p Company N Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB. 12