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Nordic SaaS Report 2020

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Page 1: Nordic SaaS Report 2020 - s3-eu-west-1.amazonaws.com · Nordic SaaS Report 2020 . REDEYE Equity Research Redeye SaaS report 2020 14 April 2020 2 ... the shift from on-premise enterprise

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, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]

Nordic SaaS Report 2020

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REDEYE Equity Research Redeye SaaS report 2020 14 April 2020

2

1. Introduction to the Redeye Software Team 2. Why Invest in SaaS & the Cloud

3. SaaS Companies and Economic Downturns

4. SaaS Metrics 5. Public Benchmarks

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REDEYE Equity Research Redeye SaaS report 2020 14 April 2020

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Redeye Software Team

Havan Hanna [Analyst] [email protected]

With a university background in both economics and computer technology, Havan has an edge in the work as an analyst in Redeye’s technology team. What especially intrigues Havan every day is coming up with new investment ideas that will help him generate above market returns in the long run.

Fredrik Nilsson [Analyst] [email protected] Fredrik Nilsson is an equity analyst within Redeye’s technology team. He has an MSc in Finance from University of Gothenburg and has previously worked as a tech-focused equity analyst at Remium.

Kristoffer Lindström [Analyst] [email protected] Kristoffer Lindström has both a BSc and an MSc in Finance. He has previously worked as a financial advisor, stockbroker and equity analyst at Swedbank. Kristoffer started to work for Redeye in early 2014, and today works as an equity analyst covering companies in the tech sector with a prime focus on Gaming and Software.

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REDEYE Equity Research Redeye SaaS report 2020 14 April 2020

4

1. Introduction to the Redeye Software Team 2. Why Invest in SaaS & the Cloud

3. SaaS Companies and Economic Downturns

4. SaaS Metrics 5. Public Benchmarks

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REDEYE Equity Research Redeye SaaS report 2020 14 April 2020

5

Why invest in SaaS & the Cloud SaaS and Cloud companies provide investors the opportunity to benefit from ongoing secular growth

trend, the shift from on-premise enterprise infrastructure to the Cloud. Other trends within the SaaS

space that works in favor for investors are: Consumerization of IT, and the rise of the subscription

economy and investors craving for recurring revenue.

The BIG one: The shift to the Cloud

The big trend that shapes the Cloud industry is the

shift from on-premise software spend to Cloud. This

is a secular shift that has been ongoing for many

years; however, the transformation is still in the early

days within some verticals. The Cloud service, with

the most substantial revenue, is the application layer

(SaaS).

Global Cloud Service Revenue (bn$)

Year ‘18 ‘19 ‘20E ‘21E ‘22E

BPaaS 41.7 43.7 46.9 50.2 53.8

PaaS 26.4 32.2 39.7 48.3 58.0

SaaS 85.7 99.5 116.0 133.0 151.1

CLd. Mng & sec.

10.5 12.0 13.8 15.7 17.6

IaaS 32.4 40.3 50.0 61.3 74.1

Total 196.7 227.8 266.4 308.5 354.6

In this report we dig deeper into:

SaaS adoption rates by country and application

vertical

Cloud IT spending percentage

Projected growth rates for SaaS

Public market valuation implications

Consumerization of IT

Another trend affecting the Cloud service industry is

the consumerization of IT. That means that the

applications sued in work more resemble consumer

tech products when it comes to usability, UX and UI.

This has also led to another buying pattern within

organizations as the buy decision many times have

become decentralized where the end-user of the

product might be the one who decides which service

to use.

The rise of subscription economy

In many ways Cloud technology is the enabler of the

subscription economy, but the consumer and user

behavior fuel the rise of subscription even further.

The subscription economy is a trend both within B2C

and B2B but is extremely apparent within the

software market where a focus has shifted from

providing a product to an ongoing service.

Investors and recurring revenue

What can be better than always start with an almost

full bucket every month? Well according to investors

nothing is better than recurring revenue. The SaaS

pricing model creates:

Stability

Predictability

High margins

Lower business risk

All the above factors are the reason why investors

crave recurring revenue companies and price them

high. In the early days of SaaS many market

participants did not understand the model, with the

argument that it’s better to have the money in the

bank today than in the future. However, it has

become apparent that the Life-time-value is much

higher for the same type of service when people or

companies pay on a recurring basis over a long time-

period. If the companies have the right type of

structure on their offering there will also be

significant upsell possibilities per client, which can be

compared to selling a one-time license to use a

software with a small support fee.

Source: Gartner

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Source: Redeye Research, Statista, IDC

Software overview We have gathered Cloud service market data which highlights that in many areas, the shift to the Cloud

is just in its early days, the transition will continue for many years to come.

Large variations in SaaS adoption rates

The adoption of SaaS among businesses in Europe

varies substantially from country to country. The

Nordic countries are frontrunners in the migration

towards SaaS. All Nordic countries had a penetration

rate above 50% in 2018 – twice the EU-28 average of

26%. UK, Ireland, and Benelux have rather high

penetration rates of ~45%. DACH and southern

Europe lagged with a penetration rate around 20%.

Interestingly, the increase in penetration from 2014

to 2018 was, on average, larger in countries with high

adoption rates, widening the gap in the SaaS

penetration rate even further.

The difference in SaaS adoption among different

types of software is even greater than the regional

difference. Collaboration, Human Capital

Management (HCM), and Customer Relationship

Management (CRM) are estimated to have a SaaS

penetration of 70-80% this year. Thus, these software

segments are arguably close to reaching maturity in

terms of SaaS penetration. At the bottom, with

estimated SaaS adoption rates of below 10%, we find

operations, manufacturing, and engineering-related

software. Thus, industrial software is lagging in SaaS

adoption.

Interestingly, the increase in penetration from 2015

to 2020 is, on average, expected to be larger in

segments that had a high adoption level in 2015.

Thus, like regarding regions, the gap between early

adopters and laggards is expected to have increased

since the mid-10s.

Only 25% of IT spend heading for the Cloud

While the adoption of SaaS is significant in several

regions and segments, as mentioned before, only

25% of IT spend is currently allocated to the cloud

(SaaS and IaaS/PaaS), according to Flexera. For

comparison, 22% of IT spend is allocated to On-

premises software, suggesting that SaaS still can

gain significant market shares.

53%

22%

7%

18%

IT spend

Other On-premises software SaaS IaaS/PaaS58% 60%

49%

25% 24%

12% 12%6% 6% 2%

81%71% 69%

38% 36%

24% 24%14%

9% 5%

0%

20%

40%

60%

80%

100%

Global SaaS penetration rate 2015-2020, by application

2015 2020E

0%

10%

20%

30%

40%

50%

60%

70%

Fin

lan

d

Sw

ed

en

Den

mark

No

rway

Netherlan…

Irela

nd

UK

Belg

ium

Est

on

ia

Cze

chia

Italy

Au

stri

a

Germ

an

y

Sp

ain

Fran

ce

Gre

ece

Po

lan

d

Use of could computing services in Europe

2014 2018

Source: Redeye Research, Eurostat

Source: Redeye Research, Flexera 2020 State of Tech Spend

Survey

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The numbers show a clear trend towards IT spend

moving from On-premises to cloud. ~80% of

respondents expect to increase their spend on

IaaS/PaaS and SaaS while ~50% expect to lower

their spending on On-premise software.

Solid growth trend expected to continue

While Gartner expects a slowdown from an

impressive CAGR of 33% 2015-2019 – although,

from low levels, SaaS growth is expected to remain

at healthy levels, as Gartner forecasts a 15% CAGR

2019-2022.

Given a current SaaS adoption of +60% in several

software segments and regions, SaaS has reached a

more mature state and slower – although still

substantial – overall market growth seems

reasonable. However, in many software segments

and regions, the SaaS adoption rate is modest. As

mentioned earlier, EU28 had a SaaS penetration rate

of only 26% in 2018. The growth potential going

forward is likely to vary substantially depending on

the software segment and region.

Solid operational performance results in significant premiums Companies that can combine high growth with

decent margins or vice versa are unsurprisingly

valued at high multiples, as high combined growth

and margin are indicating that the company can

grow its sales efficiently. Companies with a

combined sales growth and EBIT margin of 40% or

above are generally considered to be successful

SaaS companies. However, several other important

factors determine valuation—for example, company

size, the share of recurring revenue, and total

addressable market.

Fortnox and Admicom, among the largest companies

in our comparison with a high share of recurring

revenue and impressive operational performance, are

trading at significant premiums relative to the rest.

The graph above is only a snapshot of the total sales

growth rate and margin, in this case, for 2019. Thus,

one-off items, affecting either EBIT or sales growth,

or reductions of service revenue, will tilt the numbers.

For example, both Formpipe and Qbank had higher

growth in recurring revenue relative to total sales

growth, as their service revenue declined in 2019.

Also, the valuation of the companies is based on

future sales growth and margins and not what

happened in 2019. However, as many companies

lack estimates and as historical sales growth in

recurring revenues has a high correlation with future

growth, we argue that the 2019 snapshot is

interesting.

86% 81%

23%

-3%

-4%

-55%-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

IaaS/PaaS SaaS On-premisessoftware

Expected Change in IT Spend

Increase Decrease

31

4859

86100

116

133

151

0

20

40

60

80

100

120

140

160

2015 2016 2017 2018 2019E 2020E 2021E 2022E

Global public cloud application services (SaaS) bn$

247

ADMCM

AGILC

CARA

FNOX

FPIP LEADD

LIME

LITI QBNKUPSALE

VIT B

0

5

10

15

20

25

-20% 0% 20% 40% 60% 80%

EV/S

ales

Sales growth + EBIT margin 2019

EV/S vs Sales Growth + EBIT margin 2019

Source: Redeye Research, Flexera 2020 State of Tech Spend

Survey

Source: Redeye Research, company reports Source: Redeye Research, Statista, Gartner

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8

1. Introduction to the Redeye Software Team

2. Why Invest in SaaS & the Cloud

3. SaaS Companies and Economic Downturns

4. SaaS Metrics 5. Public Benchmarks

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9

SaaS Companies and Economic Downturns As of this writing we are in the midst of the corona crisis with a lot of human suffering. The outbreak has turned into

a fully-fledged economic crisis as the virus containment measures affect business of all sorts. In this section, we

discuss SaaS and economic downturns.

Robert Smith, CEO and founder of Vista Equity

Partners famously said: "Software contracts are

better than first-lien debt”. In the coming months, this

claim will certainly be put to the test. We assume that

software contracts will at best be comparable to

first-lien debt and should by no means be immune to

economic downturns, due to the following reasons:

Software payments terms will change

significantly as fewer customers will pay cash

upfront and payment terms should lengthen,

impacting working capital. Accompanied by

growth slowdown it will have a big impact on

SaaS companies.

Bankruptcies among SMBs are already a fact

and the number is likely to increase, and this

group will not be paying their software bills. Also,

businesses that are effectively shut down (i.e.

retailers, hotels, airlines etc.) will probably not be

paying their software bills on time.

To help customers and to reduce churn

discounting will probably go up.

More broadly, software contracts will be

adjusted to reflect lower utilization rates and

fewer seats.

Usage-based models billed in arrears were

gaining ground at the expense of multi-year

subscription models billed upfront. The current

recession will accelerate this transition, which

will impact working capital and cash flow.

The overall impact (or cyclicality) will be a

multivariate output of different variables, we highlight

some of them below:

Customer size: large companies (i.e. customers)

will be much more resilient than SMBs.

Industry mix: i.e. travel-related companies are

going to be under much more pressure than

companies benefiting from working from home

such as SVOD, gaming etc.

Go to market: a company that has a true

enterprise sales motion is going to be

challenged, while those that have freemium or e-

commerce-like distribution models are going to

be advantaged. Net revenue retention has

always been one of the important software

metrics — but it will be even more critical over

the next months.

ROI: This will differ by customer, by industry and

by where each software company sits in the

“stack” for each customer and industry. We will

find out which software companies actually are

“systems of record” without which companies

cannot function.

Pricing model: It is hard to frame the impact by

pricing model but it will ultimately come down to

utilization. Seat based, transactional and

workload based pricing models should be more

cyclical — one way or another.

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SaaS Companies During the Global Financial Crisis To understand how SaaS companies managed the last economic downturn, we analyzed 15 public SaaS

companies’ revenue growth and overall operating income for 2006 through 2011 (as of our understanding, there

were 18 public SaaS companies prior to the crisis). Lastly, worldwide software spend contracted from 20% growth

y/y in 2007 to 10%/-2% in 2008/2009. The chart below shows the quarterly revenue for 14 of the public SaaS

companies.

The chart to the left shows quarterly revenue and

revenue growth for Salesforce. Numbers for

Salesforce are presented in separate charts due to its

relative size (was an outlier then, and really, still is).

Salesforce saw its revenue growth decelerate from

44% in their January 2009 fiscal year to 21% in their

January 2010 fiscal year.

$-

$20 000

$40 000

$60 000

$80 000

$100 000

Q1-2

00

6

Q2-2

00

6

Q3-2

00

6

Q4-2

00

6

Q1-2

00

7

Q2-2

00

7

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7

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7

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8

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9

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0

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1

Revenue for public SaaS companies during the global financial crisis (thousands), 2006-2011

AthenaHealth

LivePerson

The Ultimate SoftwareGroupZix

Netsuite

Concur

Constant Contact

DealerTrack

Kenexa

RightNow Technologies

Soundbite Communications

SuccessFactors

Taleo

Vocus

0%

10%

20%

30%

40%

50%

60%

$-

$100 000

$200 000

$300 000

$400 000

$500 000

$600 000

$700 000

Q1-2

006

Q3-2

006

Q1-2

007

Q3-2

007

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010

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010

Q1-2

011

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011

Salesforce revenue during the global financial crisis (thousands), 2006-2011

Salesforce Revenue Revenue growth, y/y

Source: SaaS Capital, Redeye Research

Source: SaaS Capital, Redeye Research

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11

There are some interesting anecdotes to see in

terms of operating income, but it is hard to see the

overarching trends when each number is presented

separately. Instead, we highlight a chart of the

average quarterly income or loss as a percent of

revenue for the 14 companies (Salesforce excluded)

and their aggregated average annual growth rate.

The chart below shows operating income and margin

for Salesforce.

Overall, what we see is that SaaS revenue was still

growing, just more slowly, and SaaS companies were

becoming more efficient. As the third graph shows,

the median SaaS company grew 10% in 2009 even

though total software spend declined. This growth

was partly driven by the adoption of SaaS from on-

premise software. What’s even more interesting to

us, however, is the response to growth these

companies took during the recession. Though

growth slowed, these companies improved the

efficiency of their growth (defined as operating

margin), as shown in the third chart. We think that a

bigger focus on existing customers and retention

rates is part of the explanation (i.e. for every dollar of

net revenue they earned, these companies spent less

to get it). What’s more, the group maintained its

efficiency even when the market began to recover.

Any lessons to be learned? Even if our purpose in analyzing SaaS companies

from 2008 is not to make market predictions, or to

compare 2008 to today, the last crisis seems to

make one thing very clear: in a volatile market, SaaS

businesses should focus on efficiency, before

growth. Efficient growth is often a result of retention

(i.e. gross and net) and efficient customer acquisition

(i.e. CAC payback period) and management of

runway/survival (i.e. cut costs, collecting receivables

etc.). Lastly, when it comes to runway/survival: if a

SaaS business is charging its customers annually in

advance, and that business starts to shrink (i.e. faces

a wave of churn), investors must be aware that its

cash flow will go down much quicker than the P&L

will indicate as it consumes deferred revenue, which

generates no cash.

In terms of growth we think we will see revenue

growth deceleration across a broad swath of

software names over the next twelve months and

would not be surprised to see negative revenue

growth from some software companies. Also the

global financial crisis was very different than the

recession we are living through as the world did not

“stop”. Another critical difference is that software has

become a much larger percentage of GDP, which

“mathematically” should make software more

cyclical.

To conclude, at the end of the day, there is no such

thing as truly recurring revenue. Some revenue is just

more recurring than other revenue.

-40%

-20%

0%

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60%

Q1-2

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6Q

2-2

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Revenue growth rate and operating margin for public SaaS companies during the global financial crisis, 2006-2011

Average Annual Growth Rate Average EBIT margin

-5%

0%

5%

10%

15%

$(20 000)

$(10 000)

$-

$10 000

$20 000

$30 000

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Q1-2

006

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Salesforce operating margin during the global financial crisis (thousands), 06-11

Salesforce EBIT Salesforce EBIT margin

Source: SaaS Capital, Redeye Research

Source: SaaS Capital, Redeye Research

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12

1. Introduction to the Redeye Software Team 2. Why Invest in SaaS & the Cloud

3. SaaS Companies and Economic Downturns

4. SaaS Metrics

5. Public Benchmark

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13

Metric Definition Calculation

MRR = Number of customers * (ARPU / Month)

Implied ARR = Actual MRR * 12

Customer Acquisition

Cost (CAC)All S&M costs for new customers. S&M / Number of new customers

Customer Lifetime Value

(CLTV)

CLTV is the net present value of the recurring profit streams of a given customer less the

acquisition cost.(ARPU * Gross margin) / Churn

Customer Acquisition

Cost Payback Period

The CAC payback period is a statement in months, of the time to fully payback sales and

marketing investment.

Total S&M costs last quarter / (New MRR added last quarter *

Gross margin)

Customer Gross/Logo

Churn

This is a percentage calculation of all customer names (“logos”) that have churned over the

measured time period.

Customers lost over time period / Customers at the beginning

of time period

Gross Dollar Retention: Looks at how much of the customer ARR are kept over the measured

time period. As such it’s always below 100%.ARR – downgrades – churn / Beginning ARR

Net Dollar Retention: As above, but including upgrades. As such it’s can be higher than 100%

(and should be for a healthy business).(ARR + upgrades – downgrades – churn) / Beginning ARR

Source: Redeye Research

Retention

MRR & Implied ARR Measurment of monthly/annual recurring revenue.

Key SaaS Metrics

SMB Midmarket Enterprise

ARR growth 40-50%+ 50-60%+ 30-50%+

Gross Retention 70-80% 80-90% 90%+

Net Retention 80-100% 90-120% 110%+

LTV/CAC 3-5x 4-6x 4-6x

CAC Payback Period 3-6 Mos 12 Mos 18-24 Mos

Gross Margin

Source: Redeye Research

50-75%+

SaaS Metrics for different customer segments

Bessemer Venture Partners Efficiency Score (< $30 million ARR)

Source: Bessemer Venture Partners

SaaS Metrics There are many metrics to use when evaluating the strength of a SaaS business. Data on CAC, retention, and churn

are crucial to look at. Public SaaS companies in the USA most often report their CAC, ARR, gross margin, and

retention rates. Sadly in the Nordic’s only one, Agillic (AGILIC:CHP) of the publicly listed companies report both their

CAC and retention rates. We hope we will see an improvement in metric disclosure. In the tables below we explain

different kinds of SaaS metrics and provide benchmarks to look at when evaluating recurring revenue business.

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14

1. Introduction to the Redeye Software Team 2. Why Invest in SaaS & the Cloud

3. SaaS Companies and Economic Downturns

4. SaaS Metrics

5. Public Benchmark

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REDEYE Equity Research Redeye SaaS report 2020 14 April 2020

15

Nordic public metrics benchmarks In this section, we present a SaaS index focused on the Nordic, named Redeye Nordic SaaS/Cloud

Index. This index consists of the largest SaaS and Cloud players in the Nordics. For these companies we

also present different valuation and operational metric benchmarks. Data from Bloomberg (2020-04-14)

Index performance

Redeye Nordic SaaS/Cloud Index (RNSC Index) consists of the largest SaaS players in the Nordics. The correlation

to the board BVP Cloud Index is high. Just like almost all companies the SaaS players have taken a hit during the

corona crisis. The RNSC index showed significant traction in the beginning of the year and was up 26% by the 20th

of February. From the high to low level on the 23rd of March the index dropped by close to 39% but has since then

rebounded. The YTD performance amounts to +5%. The EV/S (on last twelve-month basis) also dropped from a

high level of close to 11.0x to a low of 6.0x. The RNSC EV/S valuation currently stands at about 8.9x.

Valuation, Growth and Growth + Profit ratio

0

20

40

60

80

100

120

140

2020-01-01 2020-01-21 2020-02-10 2020-03-01 2020-03-21 2020-04-10

SaaS Index performance

BVP Emerging Cloud Index actual Redeye Nordic SaaS/ Cloud Index

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2020-01-01 2020-01-21 2020-02-10 2020-03-01 2020-03-21 2020-04-10

SaaS Index EV/S LTM

BVP Emerging Cloud Index EV/ S LTM Redeye Nordic SaaS/ Cloud Index

22.2x21.5x

10.8x

9.1x

6.9x6.1x

5.6x 5.1x4.0x 3.6x 3.5x 3.3x

2.6x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

EV/S LTM

112%

42%37% 35%

29%

19% 19% 16% 14% 12% 10%

-3%

-20%

0%

20%

40%

60%

80%

100%

120%

LTM net sales growth, %

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Operational metrics

11 439

6 421

3 683

2 623

1 010 994 820 554 460 343 277 164 930

2 000

4 000

6 000

8 000

10 000

12 000

14 000

EV (mSEK)

121%

79% 74%

37%30% 26% 24% 22% 18%

8%

-12%

-83%-100%

-50%

0%

50%

100%

150%

G+P ratio. %

1 156

532

394

290

166 143 134 13176 68 52 41 28

0

200

400

600

800

1 000

1 200

1 400

LTM net sales (mSEK)

158

139

45 4437

2719

14 11 93

-13

-40

-20

0

20

40

60

80

100

120

140

160

180

LTM net add sales (mSEK)

42%

32%

18% 18%12% 12% 9% 8% 5%

-13%

-40% -41%

-99%

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

LTM EBIT-m

58%

46%44%

23%19%

17% 16%14% 13%

10%7%

-4%-10%

0%

10%

20%

30%

40%

50%

60%

70%

Growth efficiency, %

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17

1849%

1283%

438%

298% 295% 290%

117% 103%

0%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

1800%

2000%

VITB 247 QBNK CARA LEADD FNOX BIM ADMCM

CSS LTM

1351%

195%140% 132%

73% 48%7%

0%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

CARA FNOX 247 QBNK VITB LITI BIM

Marginal CSS LTM

693

329

250225 216

145 144

8259

42 3819 17

0

100

200

300

400

500

600

700

800

Current nr of employees

2.2

1.8 1.81.7 1.7 1.6 1.6

1.31.2

1.2 1.1

1.0

0.6

0.0

0.5

1.0

1.5

2.0

2.5

Net sales per emply. (LTM) (mSEK)

3.0

1.81.7

1.5 1.5 1.51.3

1.21.1 1.1 1.1

0.9

0.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

OPEX per emply. (LTM) (mSEK)

0.6

0.5 0.5

0.30.3

0.3

0.20.2 0.2

0.1

0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

CARA FNOX LITI ADMCM UPSALE 247 VITB LIME LEADD QBNK BIM

Net add in sales per emply. (LTM) (mSEK)

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Glossary and calculations:

LTM – Last Twelve Months

EV/S – Enterprise Value to annual net sales

G+P ratio – Growth in percentage and EBIT margin in percentage combined.

Sales growth – Net sales growth on an annual basis, in percentage

Net add sales – Increase in net sales on an absolute basis in million SEK

EBIT-m – Earnings Before Interest and Taxes (EBIT) as a percentage of sales (margin)

Growth Efficiency – Calculated LTM OPEX by Net add in sales. Meaning the OPEX required to grow sales

CSS – Cash Conversion Score, net sales divided by Capital Employed

Marginal CSS – CSS based on the net add in sales and the increased Capital Employed during the

timeframe

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