Expectations Ahead of the Reports

After a couple of years of declines, especially for Nordic small and mid-sized companies, things had warmed up somewhat ahead of the reporting period. For the Q3 reports, the extreme demands for delivery had been significantly reduced. It was no longer necessary for companies to crush expectations for the stock to trade up; merely meeting expectations was often enough for a price increase. This will, of course, not affect our work in sifting out the companies we believe in most going forward. But it does create a bit more peace and calm in the market, which should not be underestimated.

Did the trend continue when the Q4 reports were released? Below are summaries of our top 10 positions' reports.

Evolution
Live Casino dominant Evolution has grown its revenue by 17 percent. Operating profit rose by 21 percent and totaled 303 million euros. The EBITDA margin took another step upward, reaching an exceptionally high 70.9 percent during the quarter. Live casino continues to grow strongly, while the "one-armed bandits" (slots) are performing sluggishly. However, the slots business did grow compared to Q3, and those who are curious about how the work is progressing to increase growth in the future would do well to listen to Martin Carlesund, who visited our investor meeting in January. Carlesund admitted that the work with the acquisition of Netent (which constitutes the majority of the slots business) has taken slightly longer than planned but all the code has been replaced and they expect to be able to capitalize on the improvements going forward.

Previously, the company distributed 50 percent of its profits and used the remainder to build cash reserves or acquire companies. However, the company is able to grow quickly while still distributing 90% of its profits in the form of dividends and buybacks, resulting in the company being able to grow and become a dividend machine at the same time!

Novo Nordisk
Already during 2022, we wrote in our report reviews that Novo was close to fulfilling the dream that "you could take a pill and get slim". Although their obesity medication is still administered via injections, there is now no doubt that it reduces sugar cravings and leads to weight loss. Many have even heard of the drugs being called Ozempic and Wegovy. In addition, Novo is extensively researching to see what additional benefits semaglutide (the active substance in Ozempic and Wegovy) can offer humanity. Some of the areas being explored include reducing the number of strokes, treatment for Alzheimer's, and relief for knee osteoarthritis.

Sales rose by 36 percent to 66 billion Danish kroner, and operating profit increased by 57 percent, amounting to 27 billion DKK. One of the company's continued major problems is that they cannot produce enough weight loss drugs to satisfy the demand from patients with obesity. The company plans to address this by investing 45 billion Danish kroner in the supply chain! However, those worried that this will completely deplete the cash reserves can rest assured. The company is returning 20 billion in buybacks to investors while significantly increasing dividends. Novo has truly exceeded our forecasts, and there is much to suggest that the company will continue to deliver good returns in the future, as we write in the February newsletter.

Surgical Science
One of the global healthcare sector's greatest challenges is how to minimize medical errors. Here, Swedish Surgical Science plays an influential role as one of the world leaders in robotic surgery and simulation. The company offers aspiring surgeons the opportunity to train on operations in a simulated environment in a realistic manner.

Revenue amounted to 227 MSEK, a decrease of nine percent. The drop in revenue is explained by the fact that the training division performed weaker than expected, where the classic Q4 effect of "using up the budget," which we are accustomed to, was absent. Operating profit fell by 38 percent, primarily due to the strengthened krona. Currency effects, which had been a tailwind for the past two years, turned into a headwind during the quarter. License revenues (software revenues) grew strongly.

The future continues to look bright for robotic surgery, as confirmed by CEO Gisli Hennermark: "We are confident that in three years we will reach our goals," which are to achieve 1.5 billion in revenue with an EBIT margin of 40 percent. The long-term positive trend is further strengthened by the fact that the market leader Intuitive Surgical (a client of the company) reported record numbers of operations per robot in 2023.

Biogaia
BioGaia develops, markets, and sells probiotic products. A significant competitive advantage is that the company's products are clinically proven. Perhaps the biggest challenge for the company is convincing potential customers that the products are "real" and actually effective. The new CEO, Theresa Agnew, also notes in the report that they are working on educating pharmacists. The flagship product is the colic drops, which make life easier for both parents and infants by alleviating stomach pains for the very young and helping them manage daily life. Revenue for the quarter increased by 9 percent, while operating profit rose by 13 percent to 81 MSEK.

BioGaia has been successful in direct-to-consumer sales through channels such as TikTok advertising, which was certainly not a given beforehand. In this way, the company can, among other things, launch a broader selection of its product portfolio and further strengthen its brand. The EBIT margin is already high at 34 percent, but with probiotic products (high gross margin) and direct-to-consumer sales, it is likely that it could further increase over time.

The growth company BioGaia proposes an increasing, regular dividend and spices it up with a special dividend. The company is ready to accelerate growth and take further steps toward becoming the world’s most trusted probiotic brand.

Nemetschek
Nemetschek is the world-leading German company in software for architects, engineers, and builders, among others. The company, which did not release a full annual report, delivered strong results in a challenging (construction) economic climate. Despite the ongoing transition to a SaaS model and the challenging market environment, revenue increased by 6 percent in 2023. Profit remained unchanged over the full year. The most critical metric for the company is annual recurring (ARR) revenues, which increased by 24 percent. Recurring revenues now account for 77 percent of the company's revenues, which is a substantial increase from last year.

This very high proportion of this revenue category creates security and increases the opportunities to plan and invest for the future.

Paradox
The video game company focused on strategy games increased its revenue by 72 percent compared to the same period last year, driven in part by Cities: Skylines 2. Operating profit amounted to 124 million, 49 percent lower than the previous year. The weak result is largely due to the failure of the game Lamplighters League, and the company has written off the entire value of the game. Although it is a failure, it does not affect the cash flow for the quarter, which totaled 369 million.

CEO Fredrik Wester is excited about the future and believes that the journey has just begun. This can be seen in relation to the fact that the company, without any external capital, has increased its revenue from 10 million in 2003 to 2.6 billion in 2023. Over these 20 years, revenue has thus grown by 32 percent annually, and according to Wester, the customers are far from satiated. Like Evolution and Novo Nordisk, the company states that there is higher demand than what the company is able to produce.

Chemometec
Danish Chemometec develops instruments for cell counting and cell analysis. Customers include not only cancer research companies but also universities and food companies. The case for Danish Chemometec is primarily focused on recurring revenues from consumables, which grow in line with increased instrument sales over time.

The company has built up a stable base of recurring revenues over many years. As we have written in the past quarters, the market for new research projects has been more cautious, which negatively affects the sales of the instruments. However, the company continues to sell its highly profitable consumables to existing customers to a great extent.

Total revenues only fell by 15 percent despite a 37 percent drop in instrument sales. This means that consumables continue to grow and that the instruments sold in previous years are still appreciated by customers. EBITDA fell by 36 percent and totaled 52 million DKK.

The company has just launched the next generation of products, which have been received with great interest and positive feedback. Chemometec expects the new instruments to drive revenue in the coming quarters. This will, in turn, mean increased sales of the highly profitable consumables in the future.

Take-Two Interactive
It's the American developer and publisher of video games with iconic rights like Grand Theft Auto and NBA 2K. Revenue fell by 3 percent to $1.4 billion while the loss decreased to $92 million.

Take-Two, which is partly in a development phase, showcased its trailer for the flagship game GTA 6. How big can it get, some non-gamers might wonder? Since last quarter alone, GTA 5 has sold five million units, and in total, the game has sold 195 million copies since its release in 2013! We promised in the last report review to evaluate the trailer and we were certainly not disappointed. The feel of the game seems solid, and the graphics are outstanding. Take-Two's fans also seem satisfied, based on the comments. The trailer has been viewed 178 million times on YouTube and you can watch it here. Of course, not all players will immediately buy GTA 6. But with a price that will surely be among the highest in the industry, the potential is breathtaking.

Sectra
Sectra, a medical technology and cybersecurity company, offers products and services to hospitals, authorities, and defense.

They are perhaps best known for:

1) Protecting society's most sensitive information.

2) Offering efficient management of medical images within healthcare.

In recent years, the company has begun transitioning to service sales, that is, from traditional sales to a SaaS (Software as a Service) model. Over time, this leads to better service for customers and more predictable growth for Sectra. In the short term, however, it negatively impacts sales and margins. Recurring revenues continue to grow rapidly, and the future looks very bright. A significant reason for these favorable conditions is that, unfortunately, hackers are increasingly targeting more companies and agencies. Hospitals are particularly affected as they often have to pay perpetrators to prevent critical information from leaking or their infrastructure from being shut down. Due to this alarming trend, Sectra's offerings are business-critical for hospitals and important for individuals.

Revenue increased by 20 percent and amounted to 694 MSEK. Operating profit decreased by 15 percent and totaled 74 MSEK. The contracted order intake increased by 238 percent! CEO Torbjörn Kronander explains the declining profits with taking on large orders that they must deliver, but they do not get paid until the products and services begin to be used. This does not make the business worse in the long term, but in the short run, it negatively affects the margin.

Fortnox
Fortnox is the cloud-based accounting company that completely dominates among small and medium-sized Swedish companies that want to streamline their administration. During Q4, the company increased its revenue by 26 percent and, thanks to good scalability, the pre-tax profit increased by 49 percent.

We are customers of Fortnox ourselves and are satisfied with their receipt accounting, time reporting, payroll tools, and recently, the company card. Instead of using one's own card and trying to remember to report receipts, with their card, you receive a notification in the app as soon as a card purchase is made. This highlights the case and the future. Once they have captured the customer with one or a couple of core services, they can add new services and as long as these save time (and thereby money), the likelihood is high that customers will further increase their engagement.

Additional licenses for new employees and more services for existing customers mean good revenue growth with fantastic scalability. Over the last 10 years, Fortnox has increased its revenue by 34 percent per year and earnings per share have risen by 51 percent!

Report Period with Significant Fluctuations

The reports were, just like throughout 2023, overall solid. Perhaps the volatility in the profit level was somewhat surprising. Novo Nordisk and Fortnox had fantastic profit growth, while Surgical Science and Chemometec reported declining results. We continue to be optimistic about all four mentioned companies and are cautious about extrapolating quarterly results. Novo will have difficulty maintaining profit growth of nearly 60 percent, while Surgical Science is unlikely to see the same decrease by 40 percent going forward. On average, our top 10 positions in the fund saw revenue growth of 16 percent organically for the quarter, while profit growth was marginally positive. If this was a cyclical bottom delivery (16 percent revenue growth and non-declining profits), there is every reason to be optimistic about the future.

Read more about the fund here.