Q2 for SaaS companies: Tests for growth capacity still ahead

Q2 was good on average for Finnish SaaS companies, although there were individual signs of souring in the operating environment. For example, LeadDesk's growth was hit hard by the energy crisis, as reduced sales activity in the energy sector was reflected in declining software usage and bankruptcies among the company's customer base. QPR commented that the weak general business environment is slowing down its new software sales. In turn, Admicom sees signs of a slowdown in the construction cycle, but this hasn’t yet been reflected in the company's figures. In general, we found companies' comments on the market outlook to be more cautious compared to the Q1 reporting period, although the situation wasn’t yet reflected in many companies' figures.

The SaaS business is fundamentally stable because it relies on continuous revenue streams. However, in a weaker economic environment, the sector faces risks of slower growth. In an uncertain situation, customers of SaaS companies may change their priorities or take longer than usual to make decisions, prolonging the companies’ sales cycles. Furthermore, there may be a willingness to save on the use of certain software and customer churn may increase. We expect the weakening economic environment to act as a test of the business criticality and value of SaaS companies' products to customers. Figures in Q2 reports were only marginally affected, and we expect the next 12 months to be a clearer test for companies in the sector.

In the long term, the growth of the target market for SaaS companies is largely driven by the same trends. With the productivity gains made possible by digitalization, the use of software is generally increasing in companies. At the same time, on-premises software is being replaced by cloud-based software, and the transition is generally still at a relatively early stage in Europe. We expect these trends to continue in the target market for SaaS companies on Nasdaq Helsinki for a long time to come, making their growth environment attractive. Valuation levels in the sector have fallen significantly over the past year and the long-term earnings expectations for many companies in the sector look attractive in our view. However, the situation varies from company to company, and we believe we should be prepared for a period of slower growth than in previous years.

Efecte's revenue continued its upward trend (+19%) in Q2, mainly driven by SaaS growth (+24%). Q2 profitability, adjusted for acquisition costs, also remained neutral (adj. EBIT-% 0%). The weakened economic environment didn’t seem to emerge as a major concern in the report, so the company's growth prospects still look good. Apart from the blemish of a slowing trend in international SaaS growth (Q2'22 +30% vs. Q1'22 +38%), the overall report was good with no surprises. They payback period of the company's customer acquisition remained stable (Q2'22: ~34 months, Q1'22 ~30 months), but the rolling gross outflow of customers (Q2'22: 2.2%) fell to a very strong level. The company's revised guidance indicates a slight slowdown in SaaS growth for the rest of the year, adjusted for the major public sector contract (Kela).

LeadDesk's Q2 revenue increased (+12.5%, Inderes: 16.5%) was weaker than expected, supported by the acquisition (estimated impact +7 pp). The softer growth was mainly due to the very difficult situation of customers in the energy sector and the rollouts of Enterprise customers that were delayed by a few months. As expected, profitability deteriorated at EBITDA level to EUR 0.7 million or 10% of revenue (Inderes: 0.6 MEUR or 9%, Q1'21: 1.1 MEUR or 18%). LeadDesk revised the top end of its revenue guidance downwards and now expects revenue to grow by 13-18%. LeadDesk's growth has faced several slowdowns over the past year (temporary withdrawal of demand during COVID, customer exit from the Loxysoft acquisition in Sweden, crisis in the energy sector, long cycles in Enterprise sales), but we don’t see these as permanent challenges, although the current weak economic environment adds to the uncertainty surrounding growth.

Basware is on its way out of the stock market through a takeover bid and the Q2 report was largely a formality. As expected, growth remained low in Q2 (+5.2%). Reported profitability decreased clearly due to the significant costs of the takeover bid (~10.7 MEUR). With adjusted figures, the EBIT margin (4.8%) and EPS remained positive, as expected. The report didn’t yet provide a clear indication of the strengthening of the growth outlook as Cloud order intake turned down again (Q2'22: 5.2 MEUR vs. Q2’21: 5.6 MEUR), albeit partly due to a large trade in the comparison period. In the light of the figures, the report fell slightly short of our expectations. Realizing the potential of the company will take some time and is likely to remain an unlisted company under new ownership.

Admicom's Q2 revenue increased by 27% to EUR 8.2 million and exceeded our forecast of EUR 7.9 million. About 12 percentage points of the growth came from acquisitions, in line with our expectations. Organic growth (15%) picked up from the previous quarter (Q1'22): 11.5%) thanks to the impact of the customer balancing bills (5 percentage points) and exceeded our expectations. EBITDA increased by 25% to EUR 4.1 million in Q2, also exceeding our expectations. Although the acquisitions made contributed to the pressure on Admicom's profitability, the EBITDA margin (Q2'22: 50%) remained at the excellent level of the comparison period, which reflects the very strong performance of the company's core business. However, the weakening economic outlook creates uncertainty over Admicom's organic growth rate in the coming years, which is also reflected in the company's cautious comments on the outlook.

Heeros’ Q2 revenue grew as expected with the Taimer acquisition (+24%), but the share of organic growth of H1 growth (+25%) was slightly above our expectations (H1'22 +11%, Inderes 2022 forecast +9%). Organic growth was supported by stronger net customer retention (NRR 109%) and the revenue expectation beat was driven particularly by higher-than-expected service revenue. Adjusted EBIT was also stronger than expected, despite the Taimer integration and growth initiatives, and only slightly down year-on-year (Q2'22: 0.05 MEUR vs. Q2’21: 0.08 MEUR). Thus, Heeros' organic growth strengthened clearly in the first half of the year, while profitability was kept well under control. After years of slower growth, the figures were important for the company's growth story, and we believe they offered some visibility to the short-term growth we had forecast. However, the signs of growth are still short-lived, and the deteriorating economic environment may create new short-term obstacles for growth.

Lemonsoft's Q2 revenue increased by 33% to EUR 5.3 million and was broadly in line with our estimate of EUR 5.4 million. Revenue grew organically by 12% and the inorganic impact of acquisitions was 21 percentage points. Lemonsoft's organic growth has been held back in the first half of the year by a backlog of deployments, but the situation is easing through the company's recruitment and productization of deployment services. Lemonsoft's adjusted EBIT increased by Q2 to EUR 1.3 million (Q2'21: 1.1 MEUR) but missed our EUR 1.6 million forecast. Adjusted EBIT margin (24.4%) deteriorated year-on-year (30.8%), while we expected profitability to continue to improve slightly from the Q1 level (26.5%). As expected, Lemonsoft's profitability was weighed down by front-loaded recruitment at the end of last year, higher costs due to the IPO and acquisitions, but the company's Q2 cost level was still higher than expected.

QPR Software's Q2 revenue decreased by 6% to EUR 2.0 million, below our forecast of EUR 2.4 million. The low revenue was also reflected in EBIT (Q2'22: -0.5 MEUR). The decline was explained especially by the fall in the consulting business revenue (-21%), which was slowed down by fluctuating demand from the Finnish public sector and recruitment challenges. Software sales were strong in both licenses (+27%) and strategically important cloud services (+38%). In the big picture, the quarter was still largely spent building the foundations for QPR's new growth strategy with a share issue, strengthening of the management team and new partnerships. Following the Q2 report in early September, QPR issued a negative profit warning due to profitability challenges in legacy software delivery projects and weak new sales of software licenses. The news didn’t come as a complete surprise to us, as we had already expected QPR's revenue to fall slightly from the previous year. However, the profit warning was more severe than we expected and QPR's growth momentum now seems to be picking up from a level below our expectations.