The Value Investor v.39 ikea of sweden has just begun its journey

When I, as a finance manager recorded in the student world in Uppsala in the end of the 90s, we used various expensive accounting software, which (of course) was delivered on floppy disk and with most copy protection could be installed with a user once, etc, At the same time began, in many different contexts and if they would be able to use the internet and not at least web browser to work with different applications without having to download them. Judge then of my surprise when I earlier in the year, hear that accounting is still running locally to around 75 % in Sweden. An anachronism and completely unbelievable considering the development in the past decade, what comes to mobility, streaming, and social media.

Thus, this is a conservative industry but Fortnox called the company that holds that to turn upppchned on the whole of the Swedish accounting profession. They have with its cloud-based redovisningslösning and other related services since 2001 created a dominant position in Sweden and currently has more customers (140 000) than all cloud competitors combined. The focus is small businesses who outsource their accounting, and other services.

Of course, it is against the cloud, all accounting is on the way – it is difficult to find any reason to work locally when the data to be shared with auditors and accounting firms. Just redovisningsbyråerna is the key to Fortnox success, as by agreement with all the Swedish agencies sell their services with their customers.

Redovsiningsbyrån simply add up their customers at ikea of sweden, and these pay a standard fee of sek 99 per month for the service, and any other fees for additional services – billing, fakturalån, företagsförsäkringsförmedling m.m., a total of 25 different modules. The average customer purchases today only standardmodulen and possibly a further but according to the company, it has managed to sell on to customers more and more additional services the longer they have been customers. The focus however is clearly on the growth in the number of customers today, and no international expansion is planned.

As I wrote earlier, I am a staunch supporter of the prenumerationsintäkter because they tend to be recurrent and scalability give a very nice spin on the profitability when you come over the threshold in terms of profitability. Both customer loyalty and the scalability is also just as apparent here as in Netflix (see previous post). It says itself that you do not change the supplier of bokföringstjänsten in the first place, and the erosion is very quite, only 5% per year. Or better put, 95 % of last year’s customers are retained the next year.

To the fine, customer loyalty, a growth which today is located between 30% and 40% per year. With only 25% market penetration for cloud-based services, it is obvious that the growth will continue for the foreseeable future. Anyone who thinks that the foreign players to come in should think about that accounting is a very nationally specific service. You can not take t.ex. an american or German program and translate it into Swedish, and since the sale as I said mainly takes place through the accounting so is the moat around a dominant Swedish companies in the sector are very large.

The sector is, therefore, against cloud-based services and the supplier of the old technology, Visma, tried last year to buy ikea of sweden, which nobbades of the owners as well as the competition authorities. To Vimsa wanted to buy Fortnox says probably a lot about Fortnox position as well as opportunities to switch to modern solutions for a company that is stuck in the old technology. It reminds a little bit about how a couple of my other favorites LEO and EVO (links go to previous columns about these fine companies) who ”was born” in the new technology dominate the market today. In Leo Vegas case from the start emanated from the mobile gaming and for Evolution Old-timer that specializes on Live Casino.

The service is very affordable with 99 sek/month and as well as for many other companies, not least Netflix, is a part of the lure of the possibility to raise the fee. The chance to it must be considered good when the customers said, are reluctant to switch supplier and I think you can raise pretty much every year from the day you no longer can grow the number of subscribers today.

As all fast growing companies with loyal customers are valued Fortnox today relatively high. PE is upward 40 in 2017, and the dividend yield is only 1.2 %. The dividend, however, increased by 150 % from last year, and with so fine development so will certainly continue to grow at a nice pace. Operating profit landed last year on the 42 million and the margin right on the target of 20 %. The company’s growth target is currently 25 % but it is clear that this will be looked sharply after two quarters with a total of 44,5 % increase in turnover and 22,8% operating margin.

Both the operating profit and the profit increases faster than revenue is, as I see it the heart of the matter in this kind of case. Business scalability beating rapidly through an improvement in margins as sales increases more than costs. Or to put it differently – the costs are not with sales.

Analytikerprognoser tend to underestimate this and is often down to a matter of prudence marginalförväntingarna over time. I think, on the contrary, both margin and profit will be enhanced over time even if you now apparently have to employ in order to manage the rapid growth.

Despite a ”high” score I believe of several reasons at ikea of sweden as a long-term placement (three to five years). You have a great market to grow and loyal customers. Even if the share has risen a lot in the past year, so it will be very likely to continue upwards in line with rising profitability. Probably Fortnox within a few years twice as large as today and broadened to an increasing number of services with time.

I own since quite recently the share.

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