Visma: Mission Critical European Software - [Business Breakdowns, EP.145]

0:03This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from. and we are here to bring them to you. To find more episodes of Breakdowns, check out joincolossus .com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. My name is Zach Fuss and today we are breaking down the largest privately owned software business in Europe, Visma. To break down the business, we're joined by Nick Humphries. Nick is the senior partner and executive chairman of HG Capital, which is one of the leading software investors in Europe. Nick is intimately familiar with Visma, given HG owns over 50 % of the business and has been invested for over 17 years. HG initially invested as part of a take private transaction in 2006 at just a $450 million valuation.

1:24And based upon the latest recap completed in December, today the business is valued at over $21 billion. Visma is a software company with over 15 ,000 employees offering accounting, payroll, and HR software products for customers across the Nordic, Benelux, and Baltic regions. In 2022, it generated more than €2 billion in revenue and today is doing over €2 .3 billion in sales. The business produces over 600 million euro in EBITDA and continues to grow. Visma was founded in Oslo in 1996 and went on to grow both organically and via acquisition of 178 companies. Despite being a private business, Visma reports a robust set of financials, much like that of a public company.

2:09As part of this conversation, we discuss the business history, growth, and recent leadership transition. And as an investor, the business checks all the boxes as it relates to high switching costs for customers, providing a mission critical service and delivering strong incremental margins as a pure play software business. We hope you enjoy the breakdown of Visma. Nick, thank you for joining us to break down this unique business in Visma. I thought maybe appropriate place to start would be to learn a bit about yourself and your firm, given your involvement with this company? So my personal background, I'm the kind of senior partner or executive chair of HG.

2:49I've been electronic engineer, computer science engineer at the start of my career. And then relatively quickly, my early 20s, moved into investing in private equity. First three years of my career, I was a generalist across multiple sectors from 90 to 93. And I was a really terrible generalist investor. And so I pretty quickly realized that if I didn't do something special, I probably wouldn't have a job. And did a classic engineers thing of going inch wide and mile deep and chose to kind of pick software and tech enable services as a sector that I saw decades worth of secular growth through the 90s and 2000s.

3:28And I thought by specializing that particularly in Europe, which is where I'm based, that would give me a kind of slightly unique or certainly kind of like a focus kind of to my investing. So I've been 33 years in private equity and the last 30 of those 33 years investing exclusively in kind of software. I joined HG in 2001 when we were a small business of about 30 people managing about $500 million in a single fund. Today, we're about 400 people. We are the top two software investor globally, number one software investor in Europe with about $65 billion plus under management. And hopefully there's about 50 software businesses with an aggregate enterprise value of around about $130 billion growing at 20 % compound.

4:15So makes you the appropriate person to educate us on this business, Visma. I think where we'll start is what is the business in simple terms? And then we'll kind of get into how you guys became involved and the current state of the business. So maybe just basic, what is Visma? The simplest way of describing Bisma would be that it's the European equivalent of Intuit. So it's core businesses providing daily mission -critical use software for small businesses. So that can be bookkeeping software, payroll software, a lot of other modules and services that sit around those. And it's providing that typically to small and medium -sized businesses, often anywhere between few employees up to about a thousand employees.

5:01And it's the leader doing that across the whole of Europe. Its genesis was in the Nordic region, and it's based in Oslo. And so its strongest positions are in the kind of Nordic countries and Central and Eastern Europe. But over the last decade, it's also expanded into the Benelux, Spain, Portugal, Germany, France, Italy, etc. as well. And so I understand this was once a public company. It's no longer public. Like, I'd be curious to understand how you learned about the business when you got involved in the broader history around the business as well and how it established its position in the market today.

5:36The way we think about investing at HG is to think about long run secular trends within market sectors of software. And so we looked very carefully at software for small and medium sized businesses 20 plus years ago, back in 2001, 2002, 2003. And we could see that that market had long -term multi -decade trends that were driving approximately three times GDP -type market growth. So really three factors that drive that. One is that the number of SMBs in every Western European economy grows at about one to two percent per year. So there's a volume growth in the number of customers. There's very large institutions, frankly, post the war in the 40s and 50s have gradually fragmented and become more entrepreneurial businesses.

6:27The second most important factor is that a bunch of really smart guys in Silicon Valley invented this thing called the transistor and then the microprocessor 40, 50 years ago. As you're going to get more microprocessing power, of course, you can do more with software. And that has gradually filtered down through the kind of Wintel period, obviously through the SaaS period, to small and medium -sized businesses that now have way more computing power on their laptop or even on their mobile phone than they could possibly thought about 10 or 15 years ago. And as that processing power has obviously been in the hands of small businesses, they're using more and more software, more and more data, more and more machine learning and AI to get around their businesses.

7:04And that trend is delivering about a 4 % to 5 % per annum growth in terms of the proliferation of software modules into small businesses. So just to pick a couple of quick examples, even today, most businesses with one or two employees wouldn't be using a particularly sophisticated e -invoicing or e -tax or bookkeeping type module. So there's a huge penetration in the very low end of the business market. Or if you look to the mid -range business market, maybe a business of two to three to 400 people, five, six, seven years ago, they would have probably done their expense claims on an Excel spreadsheet or something pretty similar to that.

7:44Today, of course, we all use our mobile phones, we snap the receipt, it loads automatically the general ledger, etc. So it's compute power that's essentially enabled us to kind of provide more modules that deliver more value to those small, medium -sized customers. And that's driving about a 45 % gross per annum in the market. And then the third factor is basically legislation and regulation. Every government on the planet tells you they're cutting those things. And of course, they're not, They're all increasing them all the time. And so that provides for the software provider that is doing bookkeeping or payroll, an opportunity to either build new modules or to get a price that products at kind of inflation plus a period of time.

8:24So this is a market that grows at about 8 % to 9 % per annum, has done for the last two decades, is doing currently, and we think we'll do so for the next 10 to 15 years because of those secular factors. Because you're also providing business critical software, bookkeeping, payroll, things that has to happen for your business to stay in business. It means that it's very anticyclic. Basically, this is pretty much the last thing you turn off before you turn off the lights on the business and appoint the receiver. But I say that actually, even the receiver continues using this software for about a year after they've been appointed.

8:59So it's very robust. It's the kind of business that will grow consistently through all market cycles and will grow through GFC, grew through COVID, et cetera. So we've been tracking this sector and these types of businesses for a long period of time. We've made some investments in a couple of business, one called Iris Software in the UK in 2004 that was very similar to Visma, another one called Addison Software in Germany in 2005 that was very similar to Visma. And we used those investments to build a relationship with the Visma CEO, who was at the time in a public company on the Oslo Stock Exchange.

9:36But our strategy is to just meet every good company in a sector that we want to pursue, build relationships with them. And hopefully over time, a number of those companies will want some ball of investment. And that's precisely what happened with Visma. We built a relationship from 2003 onwards, myself and the chief executive, Oystin Moon. And in 2005, they got approached by a large public company to buy them. They felt that that offer didn't really represent true fair value, even though it's at a premium to their share price. And we got called on a bilateral basis to basically provide an alternative to that trade bidder.

10:13That's what we did through the spring and summer. And we ultimately kind of consummated a public to private of the business back in kind of spring of six. And now that we have the backstory of your involvement, I think you alluded to some dominant businesses that are more familiar with a US -based audience, namely Intuit. But it seems like this business has undertones of businesses like ADP and Workday and a lot of kind of the cloud -native dominant payroll and ERP -oriented businesses in the US. What is differentiated about their suite of products beyond just their geographic focus? So I think what you tend to find in these regulated products of bookkeeping and payroll and other areas is that a business establishes a brand and a reputation for being extremely strong at compliance, i .e.

11:05providing the right tax calculations at the right time, submitting them to the right authorities, etc. And when you establish that degree of quality, you know, you can't get your tax calculations wrong. You can't get your payroll calculations wrong. You have to get them 100%. When you built a business that has established that within a particular geography, it's often a go -to product for the customers because they know it works. They know they're not taking any risk with regulatory compliance. And so Visma's, I guess, number one special source is that over a 25, 30 year period, it's got a almost blemish free record of delivering those products on time with any regulations in a way that the government and the customers both value and know that they're getting certainty of everything being correct.

11:50I mean, it's really, number one is about things being correct from a compliance point of view. The second thing they've done is then add a lot of productivity benefits for their customers into the products. So by having a bunch of products that are forming a suite, a bunch of modules that sit around that core, all feeding from the same data source, you enable the customer to potentially use the expense package and the bookkeeping package, maybe banking, maybe data collection, maybe credit checking, all from the same app. And by doing so, you massively reduce customer waste and improve customer productivity.

12:29And at the same time, you also improve fidelity of the product, i .e. by not having to rekey data, not having to move out of one application into another, you avoid errors essentially. So it's those two, I think it's being absolutely top of the game on compliance from both the government and the business point of view, and then being very thoughtful about how you increase business productivity and markets that they started in. And the Nordics are some of the most advanced, but also from a GDP and GDP per capita point of view, some of the most expensive markets in the world. So those markets are pretty much bound to have productivity as a very, very core requirement early on.

13:07Sweden, Norway, Finland, Denmark are not regarded as cheap places to employ people. In terms of the size and scope of the business today and the trajectory of growth, obviously, as GDP per capita grows and businesses digitize, they have a naturally growing TAM. Is it largely an organic growth strategy? How big is the business and how has growth been driven? Yeah. So when we bought the business back in 2006 with management of the stock exchange, it was approximately $200 million revenue, making around about $35 to $40 million of EBITDA. And in this business, the management are absolutely religious about cash flow and EBITDA being cash flow.

13:48So EBITDA equals cash flow, essentially. The business at the time was growing at about 6 % to 7 % organically, and it also added some M &A each year. Today, the business is about two and a half billion of revenue. It's around about 800 million of EBITDA and cashflow. And the organic growth in the business is 15%. So basically, after 16, 17 years, the business is 20x the size. In terms of EBITDA, it's more than 12x the size in terms of revenue. But it's actually growing at two and a half times the rate that it was growing at when we bought the business from an organic revenue point of view. And organic EBITDA grows at about 20 % per annum.

14:30There's a small amount of margin expansion every year. And then in addition to that, the businesses continue to do a succession of relatively small tuck -in kind of M &A transactions, essentially using M &A to add high -quality SaaS products around those cool bookkeeping and payroll applications. And so it makes about 30 to 40 relatively small acquisitions per year. Very firmly in the camp of Rule 40 as well, which obviously software investors seem to orient to with margins plus growth exceeding 40 % being in the sweet spot of where you want to invest in software. I'd be curious, given the success they've had in the Nordic countries and Europe and Benelux, have they made efforts to come to North America and compete with the North American businesses?

15:15How do they think about geographic expansion and the opportunity set there? No, we're very clearly not focused on coming to North America. And there are really two drivers. One is we think Intuit is an amazing business with a very big market share and a very strong ability to defend its own territory. And so we don't want to come up to be against a huge gorilla that is a very, very successful gorilla as well. We got massive admiration for their business. And the second more positive reason is that we see a very large term spread across not not only 20 plus countries in Western Europe, but also across Central and Eastern Europe.

15:51LATAM, we've also kind of moved into a fairly significant way through M &A in the last four or five years and potentially in due course in other geographies. So business specialization is really into smaller geos where you need to understand the nuance of the kind of local regulation and local competition, a lot of the depth. And frankly, we want to avoid the largest markets in the world, like the US and China, where they're already very, very good players. And we frankly don't think we would add a lot. And then from a competitive perspective, do they tend to compete in specific verticals broadly across their different suite of products?

16:28I'm just trying to get a better sense for the competitive landscape that they operate within. Yes, the competitive landscape is towards the higher end, the larger customer base, the likes of Microsoft with its Dynamics products. There's also in the past been applications from people like SAP, a little bit less so kind of Oracle. And then I say in each of its geographies, there are typically many, several, maybe even a dozen plus local competitors that have good understanding of kind of local markets, local regulation, local nuances. Some of those can be verticalized and some of them might be slightly more horizontal in payroll, for example.

17:05But it's a kind of combination of the bottom end of the big guys, if you want, Microsoft, SAP, et cetera. and then local players that are focused more on the S &B market. From a go -to -market perspective, much of the largest and growing software business today are cloud -natives. I don't have a sense of on -premise versus SaaS and how you think about this business. And perhaps if there was a transition at some point in time, just given how rich the business's history is. Yeah, that was one of the kind of fundamental decisions we made around about 12, 13 years ago now. So back in the GFC, you know, the tail end of the GFC, we had a big, big decision to make.

17:44Now, looking back, it seems completely obvious that cloud and SaaS would win. But at the time, we had a big decision to make about whether we would reinvest a lot of our profits, which is not a typical thing to do for kind of private equity firms. Whether we'd invest a lot of the company's profits back into developing both organically and through M &A SaaS applications. we've got a very very technically qualified management team that come out of a tech and engineering background so this is not a business just run by finances it's basically a business run by entrepreneurs and technologists and so i think they frankly understood the potential long -term implications of kind of sas and cloud well ahead of most people in europe and so we made very big commitments investing substantial parts of the annual EBITDA back into sas and cloud development back in 2009, 2010 onwards, because we've got a number of applications across a number of geographies, that investment wasn't just a one -off product or two products in a particular geo.

18:42It was actually across multiple products, across multiple countries. And so it's taken us a decent period of time to basically convert those bases to be pure SaaS. That's meant that in that transition period, roughly 2010 through 2016, 2017, the business was growing at a slightly slower rate as it transitioned by its revenue model to subscription and also obviously invested heavily in the technology to have world -class products. But having done so and done so early, it's put the business in an amazing position in the last three or four or five years. And that's really why the organic growth of the business has accelerated significantly from high single digits to kind of mid -teens over the last five or six years as the business has now become 80, 90 % plus pure SaaS.

19:27And then by that, I mean, modern multi -tenant SaaS, not BS SaaS, as I might describe it, which you see a fair amount of. And as we've done that, you know, the business is clearly benefiting from what we all know, the SaaS model and cloud provides, which is more access to your customers, your customers having more live data, more live information on their business, your customers being able to use in -app applications and to use kind of additional features and additional products. So all of those things provide the business with a benefit, its customers with a benefit as a result. Frankly, they spend more.

20:03So our wholesaler and our upsellability from our core products has increased significantly as the business has become 90 % plus pure SaaS. So with a business like this, they're clearly structural and secular tailwinds that are benefiting its growth. They've navigated their competitive landscape it seems like incredibly well. Presumably there've been mistakes along the way. No story is perfect. Are there any that you can think of that are an interesting story in regards to lessons learned? Yeah, I'd say the business makes mistakes all the time. And I think part of the idea of innovation and a culture of entrepreneurship is not being afraid to make mistakes.

20:48So if we go back to those early days of thinking about how we built cloud products, Unfortunately, we can list several products where we invested, you know, 5 million, 10 million plus dollars, and we didn't get the product we wanted or we didn't get the commercial results we wanted. I think the bit we have to embrace is that in order to be successful in new technologies, you're almost certain to never get it right first time. And so Visma has this kind of entrepreneurial culture of investing in many ways in these big transitions. So we made 10, 15, 20 relatively small bets on SaaS and SaaS products and SaaS product development.

21:25Sure, we got some of them wrong and they wasted, in inverted commas, 10, 20 million, 30 million dollars, a decent proportion of our profits at the time. But of course, the ones that were successful provided us foundations for the future of the business. And we then invested in those much more significantly and built them to be very major parts of our business today. So it's almost that kind of, when you're not really sure what's going to work back in 2010, 2011, be prepared to invest in multiple areas, watch very carefully for those that get product market fit, for those that have good product quality, et cetera, and then put your money behind those that are working and be prepared to acknowledge that some of those bets won't work and you can turn them off and put your money elsewhere.

22:05So lots of examples of that from 2012, 13, 14 period. And I would say that same attitude is applied over the last four or five years to kind of ML and AI, which is, again, I don't think anybody is bright enough. Maybe they are in California or elsewhere. We don't think anybody's bright enough to tell you this is 100 % the AI platform or AI application or whatever you should definitely be using for all your products. So we've made a whole series of relatively small bets, but you know, 10, 15, 20 different investments in those areas across the business, all of them kind of multimillion dollar bets.

22:42And some of them won't work. And some of them will work spectacularly well. And our entrepreneurial mindset, we were happy with that. And we then obviously go and put bigger money behind the ones that have been successful. I think we've highlighted the financial profile, the business and the growth. You talked about a team that comes from an engineering background first, rather than a host of financiers. How big is the team to scale to a business of this size? So the total business is about 14 ,000, 15 ,000 people. And that grows at high single digit number kind of every year. So we're really pleased that in the knowledge economies of kind of Western Europe, we can add thousands of employees over an investment lifetime.

23:22We think that's good for us, good for the economy, good for those people, obviously, as well. And a lot of those people have equity in the business, as well as obviously good and high quality jobs. In terms of the senior management team, it's around about 15 people. Most of those people have been with the business for very long periods of time. So the chairman today is a guy called Oyston Munn. And Oyston was the chief executive back in 1997. Originally, he was a chief exec in 2006 when we took the business private together. And his journeys lasted all the way through chief exec till about three years ago and then became chairman.

23:59The lady, Kinamaretta Heveren, who took over, Oyston as chief exec, has been with the business for a decade. several of the management team joined the business as graduate trainees in their early 20s and are now in the most senior positions in the business. So it's a business that has a relatively young team. The average age of the management team is in the late 30s or early 40s. But those people often spend 10 or 15 years with the business already because they joined it at a very early age. And then on top of that, we have a fantastic track record of retaining entrepreneurs when we buy their businesses and those entrepreneurs becoming key managers within FISMA, growing their own business, but also helping to grow other businesses over time as well.

24:41So we pride ourselves on being an incredibly entrepreneurial management team still. It's a pretty lean business for the scale it's at. And that entrepreneurial mindset is attractive to us as investors because clearly working pretty well from a gross and returns point of view, but it's also super attractive if you're an entrepreneur that is thinking about selling a business. there really is no better home for a high growth SaaS entrepreneur in Europe than deciding to go invest with Visma and become part of that family. As you've highlighted, the switching costs for an enterprise are relatively high, just given how entrenched a product that this gets within their operations.

25:17In the context of that, you presumably have a lot of pricing power, but how do you think about price and how much you take on an annual basis? I think you have to be very clear and very conservative with how you think about price. I think it's pretty much the oldest private equity trick in the book to kind of buy a sticky business and whack prices up. And I think if you're going to hold a business for three or four years and then sell it to make a quick buck and a quick IRR, that's clearly a strategy that could work. What we'd prefer to do is to hold great businesses for long periods of time. And we've been investing Visma since 2006.

25:50So for nearly 17 years at this point, if you're going to be a 17 year plus owner, you know, a Buffett -esque type, very, very long -term compander. You don't want to take short -term decisions. You want to make long -term decisions. So we basically try and price at kind of inflation plus a small amount. We only change that where we think we've got value that we've added through new modules or new ways of kind of helping the customer to improve their productivity. And we're trying to take a very long -term view of providing customers with extremely high value, extremely high productivity, for which, of course, we deserve to be able to get paid well and we do but we don't and we're in any way in that abusive pricing power we think that's just the wrong way to run businesses if you intend to be a long -term shareholder and is it an enterprise license model to customers get charged per seed do they grow with the business as their needs expand i'm trying to better appreciate the revenue model on like a economic basis with a particular customer yeah it's changed over time so obviously if you go back 10 or 15 years, there was a license model with kind of maintenance 15 plus years ago.

26:56We moved that model to be a subscription license per seat around about 10, 15 years ago. And that applied across most of the business eight, nine, 10 years ago. And then gradually as forms of usage have become both a more common way of thinking about pricing products and also more applicable to the customer because on a SaaS model and an online cloud model, you can obviously kind of measure usage in different ways that you couldn't measure in the old offline world. So as SaaS has become a larger proportion of the business, we're basically moving the business to be much more usage -based for different types of products that will apply in different ways.