Friday came the report from Fortnox. It held no surprises: growth is high as turnover rose by 35 % compared to last year and new customers keeps coming at an even higher pace than last year. The only stain is the margin (20.4) which the subsidiary Nox Finance affect negatively by its very low margin (2.3%). After tax, profits were 10 MSEK, up from 6.4 MSEK last year. Per share 0.17 SEK in Q2 compared to 0.11 SEK last year. A fine report, no doubt. I cannot help wonder, thogh, if Fortnox can keep the current growth rates.
Fortnox can grow in two ways: either they can get more customers – or each customer can buy more. In both cases turnover will rise. Luckily, Fortnox succeeds in both. Nevertheless, the main source today is gaining more customers, and this might become a problem for Fortnox in the future.
Number of Fortnox customers
There are in Sweden approximately 800.000 small businesses, which are potential customers for the company. Of these 181.805 today uses Fortnox’ services. To my own experience, the official number of small businesses contain many companies with little or no activity. This might be as high as 35-40 %. The number of relevant, potential customers are there for, say, 500.000. In terms of market share, it gives Fortnox a 35 % share today.
The question is then for how many more year Fortnox can grow on a Swedish market adding app. 50.000 new customers a year. You can only take 10% of the total market a limited number of times. Then you have it all – and then what?
My guess is that in a year or two will the company find it increasingly hard to keep up the pace gaining new customers to grow. For the simple reason that they have a huge market share.
…And how much they buy
Higher purchase per customer then is the other place to gain growth. In Q2 each user generates an ARPU (Average Revenue per User calculated on a rolling 12 month basis) of 118 SEK. Compared to Q1 it is up one SEK from 117 SEK. Without the increasing number of customers, the growth in ARPU is not impressive. The growth from Q1 to Q2 is <1 % – adding up to perhaps 3-5 % on a yearly basis. This growth rate can by no means justify the current P/E of app. 50.
We must see The Nox Finance subsidiary and other initiatives in this light. Fortnox must find additional services to raise the user revenue. Therefore, it is logical that Fortnox founded another subsidiary during Q2 selling insurance services. We will probably see other initiatives to strengthen the product portfolio in order to increase user revenue.
I am sure the company also calculates on the price as part of this. Higher prices might improve ARPU and raise margins fast but on the other hand, it might slow customer growth. No doubt, the price behaviour of competitors have a thing to say as well.
If Sweden is too small
A few year back Fortnox tried to sell their services internationally. I do not remember the details, but Fortnox used the brand and software in Sweden and internationally FINT (short for Fortnox International) used it. They were to separate listed companies using the same software platform. Today FINT is BRIOX and the ties are cut.
A possible next step for Fortnox would be an international expansion. I cannot imagine the arrangements with BRIOX should hinder this. Many European markets are less digitalized and far larger than the Swedish is, and would be a perfect next step when it comes to keeping up growth. Furthermore, the common EU legislations in theory should keep ‘translation’ costs low.
Find the Q2 report here (in Swedish only).