Visma: Mission Critical European Software

Sector

Technology

Background

Nic Humphries is a Senior Partner and Executive Chairman at HgCapital. We cover the secular trends underpinning Visma's growth, how it differentiates itself from competitors on product and pricing, and why it's a superb example of the advantages of long-term investing.

Cover

Date

January 17, 2024

Episode Number

145

Background / Overview

Visma was founded in 1996 in Oslo, initially focusing on SMB software for bookkeeping and payroll in the Nordic region. Its early history included a marine software division, which was sold in 1999 for €100 million, providing significant cash reserves to fuel acquisitions. Visma went public on the Oslo Stock Exchange but was taken private in 2006 by HgCapital, a leading European software investor, in a $450 million transaction. HgCapital owns over 50% of Visma and has held the investment for 17 years, a notably long period for private equity.

Today, Visma serves SMBs (typically 1 to 1,000 employees) with a suite of software modules, including bookkeeping, payroll, e-invoicing, expense management, and HR tools. The company operates in 20+ countries, with a strong presence in the Nordics (Norway, Sweden, Finland, Denmark), Benelux, and emerging markets in Central/Eastern Europe and Latin America. Its 15,000 employees support a customer base that relies on Visma’s software for compliance with local regulations and operational efficiency. Visma has acquired 178 companies since its founding, blending organic growth with a disciplined M&A strategy to expand its product offerings and geographic reach.

Ownership / Fundraising / Recent Valuation

HgCapital acquired Visma in 2006 for $450 million and has since overseen its growth to a $21 billion valuation by December 2023, reflecting a remarkable compound return (high 20s to late 30s IRR over 17 years). The ownership structure includes HgCapital (majority stakeholder), management, and other investors. Visma’s private status allows flexibility in capital allocation and long-term strategic planning, avoiding short-term public market pressures. The company has not pursued an IPO recently, with leadership opting to remain private due to frothy market conditions in 2019–2021, though a future public listing is under consideration.

Key Products / Services / Value Proposition

Visma’s core value proposition is delivering mission-critical, compliance-driven software that ensures SMBs meet regulatory requirements (e.g., tax and payroll calculations) while enhancing productivity through integrated modules. Its product suite includes:

1. Bookkeeping Software: Tools for financial reporting, general ledger management, and compliance with local tax regulations.
2. Payroll Software: Solutions for salary processing, benefits administration, and regulatory filings.
3. HR Software: Modules for employee management, time tracking, and expense reporting.
4. Ancillary Modules: E-invoicing, expense management, banking integration, credit checking, and data collection tools, all built around a unified data source to reduce errors and boost efficiency.

Value Proposition:

• Compliance Excellence: Visma’s 25+ year track record of regulatory compliance ensures error-free tax and payroll calculations, critical for SMBs to avoid penalties.
• Productivity Gains: Integrated modules streamline operations, reducing manual processes (e.g., snapping receipts for expense claims instead of using spreadsheets).
• High Switching Costs: Once integrated, Visma’s software becomes entrenched in customer workflows, making it costly and risky to switch providers.
• Localized Expertise: Tailored solutions for each geography’s regulations and market nuances, particularly in smaller markets ignored by global giants like Intuit or SAP.

Visma’s products are predominantly cloud-based (90%+ pure SaaS), enabling real-time data access, cross-selling opportunities, and scalability. The company avoids competing in large, saturated markets like the U.S., focusing instead on fragmented, regulation-heavy markets where local expertise provides a competitive edge.

Note: Volume, price, and contribution estimates are inferred from the transcript’s emphasis on core vs. ancillary products and market dynamics. Exact figures are unavailable.

Segments and Revenue Model

Visma operates as a single-segment business focused on SMB software, but its revenue model can be disaggregated by product type, geography, and customer size. The primary revenue streams are:

1. Subscription-Based SaaS (90%+ of Revenue): Customers pay recurring fees, increasingly usage-based (e.g., tied to API calls or data volume), replacing older per-seat licensing models. This shift enhances revenue predictability and scalability.
2. Ancillary Services: Cross-sold modules (e.g., e-invoicing, expense management) that leverage the core platform’s data, driving upsell revenue.
3. Legacy License/Maintenance (Minimal): A small, declining portion from older on-premise installations.

Revenue Model Dynamics:

• Usage-Based Pricing: As Visma transitioned to SaaS (2010–2017), it adopted usage-based pricing, aligning costs with customer activity and enabling flexible scaling.
• Cross-Sell/Upsell: The integrated platform allows Visma to sell additional modules to existing customers, increasing wallet share.
• Regulatory Tailwinds: Frequent regulatory changes (e.g., tax or payroll laws) create opportunities to introduce new modules or justify price increases (inflation + small premium).

Geographic Mix:

• Nordics (~60% of revenue): Strong market leadership in Norway, Sweden, Finland, and Denmark due to early mover advantage and high GDP per capita.
• Benelux (~20%): Growing presence in Netherlands, Belgium, and Luxembourg.
• Central/Eastern Europe and LatAm (~20%): Emerging markets with higher growth potential but lower penetration.

Customer Mix:

• SMBs (1–1,000 employees): Diverse customer base, reducing concentration risk.
• No significant enterprise focus, avoiding competition with SAP or Oracle.

End-Market Mix:

• Horizontal focus on SMBs across industries, with some verticalized offerings for specific sectors (e.g., retail, professional services).

Headline Financials

Visma’s financial performance reflects its scale, growth, and operational efficiency as a pure-play SaaS business. Below are the key metrics based on the transcript:

Revenue Trajectory:

• Historical Growth: From $200M in 2006 to $2.5B in 2023, a 12.5x increase over 17 years (18% CAGR). Organic growth has accelerated from 6%–7% to 15%, driven by SaaS adoption, cross-selling, and market expansion.
• Revenue Drivers:
• Volume Growth: 1%–2% annual increase in SMBs across Western Europe, expanding the addressable market.
• Software Penetration: 4%–5% annual growth in software module adoption (e.g., e-invoicing, expense management), fueled by increased computing power and digitalization.
• Regulatory Changes: 2%–3% growth from new modules or pricing adjustments tied to compliance needs.
• M&A: 30–40 tuck-in acquisitions annually, adding high-growth SaaS products and new geographies.
• Mix Shift: Shift to usage-based pricing and higher-margin SaaS (90%+ of revenue) has boosted organic growth and cross-sell opportunities.

Cost Trajectory / Operating Leverage:

• Cost Structure:
• Variable Costs (~40% of Revenue): Primarily employee salaries for customer support, cloud infrastructure costs, and compliance updates. These scale with usage but benefit from economies of scale as customer density increases.
• Fixed Costs (~30% of Revenue): R&D (significant in 2010–2017 for SaaS transition), administrative overhead, and facilities. Fixed costs are spread over a larger revenue base, driving margin expansion.
• COGS (~30% of Revenue): Includes direct costs of software delivery (e.g., server costs, licensing fees for third-party integrations).
• Operating Leverage: As revenue grows at 15%, fixed costs (e.g., R&D, admin) decline as a percentage of revenue, leading to ~3% annual EBITDA margin expansion (from 30% in 2022 to 33% in 2023). Incremental margins are high, reflecting the scalability of SaaS.
• EBITDA Margin: 33% in 2023, up from 18%–20% in 2006, driven by SaaS transition, operating leverage, and disciplined pricing (inflation + small premium).

Capital Intensity and Capital Allocation:

• Capital Intensity: Low, typical of SaaS businesses. Maintenance capex is minimal (e.g., server upgrades), and growth capex (e.g., R&D for new modules) is moderate, estimated at 5%–10% of revenue historically.
• Net Working Capital (NWC): Favorable due to subscription-based revenue (upfront payments) and low inventory requirements. Cash conversion cycle is short, enhancing FCF.
• Free Cash Flow (FCF): EBITDA closely approximates FCF (€800M in 2023), as capex and NWC requirements are low. FCF margin mirrors EBITDA margin (33%).
• Capital Allocation:
• Reinvestment (50%–60% of FCF): Historically focused on SaaS development (2010–2017) and now on tuck-in M&A (30–40 deals annually).
• M&A Strategy: Acquires high-growth SaaS businesses at attractive valuations, integrating them lightly to preserve entrepreneurial spirit. M&A is accretive, enhancing revenue and EBITDA growth.
• Distributions: Minimal dividends, with most cash reinvested to fuel growth.
• No Buybacks: Not applicable as a private company.

Value Chain Position

Visma operates midstream in the SMB software value chain, between upstream technology providers (e.g., cloud infrastructure, AI/ML tools) and downstream SMB customers. Its primary activities include:

• Product Development: Building and maintaining SaaS modules tailored to local regulations and customer needs.
• Compliance Management: Ensuring software meets tax, payroll, and HR regulatory requirements across 20+ countries.
• Customer Support: Providing localized support to ensure adoption and retention.
• Go-to-Market (GTM): Direct sales to SMBs, leveraging brand reputation and compliance expertise. Marketing emphasizes reliability and productivity gains.

Value Chain Dynamics:

• Competitive Advantage: Visma’s value-add lies in its compliance expertise and integrated platform, which reduce customer errors and boost efficiency. Its localized approach differentiates it from global players like Microsoft or SAP.
• Forward Integration: Limited, as Visma focuses on software rather than consulting or outsourcing services.
• Backward Integration: Relies on third-party cloud providers (e.g., AWS, Azure) but develops proprietary software in-house.

GTM Strategy:

• Targets SMBs through direct sales and digital channels, emphasizing ease of use and regulatory certainty.
• Cross-sells ancillary modules to existing customers, leveraging high switching costs and data integration.

Customers and Suppliers

Customers:

• Profile: SMBs with 1–1,000 employees, spanning industries like retail, professional services, and manufacturing.
• Concentration: Highly diversified, with no single customer dominating revenue, reducing risk.
• Retention: High due to mission-critical software and switching costs. Churn is low, as SMBs rely on Visma for compliance and operations.
• Pricing Sensitivity: Moderate. SMBs prioritize reliability over price, but Visma avoids aggressive price hikes, targeting inflation + small premium to maintain long-term relationships.

Suppliers:

• Key Suppliers: Cloud infrastructure providers (e.g., AWS, Azure), third-party software licensors, and data providers for compliance updates.
• Supplier Power: Low, as cloud services are commoditized, and Visma’s scale allows favorable terms.
• Dependency: Minimal, as Visma’s core IP is developed in-house.

Pricing

Contract Structure:

• Usage-Based SaaS: Most contracts are subscription-based, tied to usage metrics (e.g., API calls, data volume). This aligns costs with customer value and supports scalability.
• Duration: Annual or multi-year contracts, enhancing revenue visibility.
• Pricing Adjustments: Inflation + small premium (~3%–5% annually), justified by new modules or regulatory updates.

Pricing Drivers:

• Regulatory Compliance: Mission-critical nature allows stable pricing, as customers prioritize accuracy.
• Productivity Gains: New modules (e.g., e-invoicing) justify price increases by reducing customer costs.
• Brand Reputation: Visma’s blemish-free compliance record supports premium pricing.
• Price Sensitivity: Moderate, as SMBs value reliability but resist aggressive hikes.

Bottoms-Up Drivers

Revenue Model & Drivers

• Revenue Model: 90%+ recurring SaaS subscriptions, with usage-based pricing dominating. Ancillary modules drive cross-sell/upsell revenue.
• Volume Drivers:
• 1%–2% annual SMB market growth in Western Europe.
• 4%–5% growth in software module adoption, driven by digitalization and computing power.
• M&A adds new customers and geographies.
• Pricing Drivers:
• Regulatory changes enable new module sales or price adjustments.
• Productivity-focused features (e.g., mobile expense tracking) support premium pricing.
• Mix Shifts:
• Shift to higher-margin SaaS (90%+ of revenue) from legacy licenses.
• Growing contribution from emerging markets (Central/Eastern Europe, LatAm).
• Organic vs. Inorganic: 15% organic revenue growth, with M&A contributing ~5%–10% annually.

Cost Structure & Drivers

• Variable Costs (~40% of Revenue):
• Employee salaries for support and compliance (~20%).
• Cloud infrastructure and third-party licenses (~15%).
• Marketing and customer acquisition (~5%).
• Drivers: Scale economies reduce per-customer costs as usage grows.
• Fixed Costs (~30% of Revenue):
• R&D (~10%–15%, lower post-SaaS transition).
• Administrative overhead and facilities (~15%).
• Drivers: Fixed costs are leveraged as revenue scales, boosting margins.
• Gross Margin: ~70%, reflecting low COGS (server costs, licenses) relative to subscription revenue.
• EBITDA Margin: 33%, driven by operating leverage and disciplined cost management.

FCF Drivers

• Net Income: High, as interest and taxes are minimal (private company with low debt).
• Capex: Low (5%–10% of revenue), split between maintenance (servers) and growth (R&D).
• NWC: Favorable due to upfront subscription payments and low inventory.
• Cash Conversion: Near 100%, as EBITDA (~€800M) approximates FCF.

Capital Deployment

• M&A (~50% of FCF): 30–40 tuck-in acquisitions annually, targeting high-growth SaaS businesses. Accretive deals enhance revenue and margins.
• R&D (~10%–20% of FCF): Focused on AI/ML and new modules to maintain product leadership.
• Distributions: Minimal, prioritizing reinvestment for growth.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Total Addressable Market (TAM): The SMB software market in Europe grows at 8%–9% annually, driven by:
• Volume: 1%–2% SMB growth.
• Penetration: 4%–5% software module adoption.
• Pricing: 2%–3% from regulatory changes and inflation.
• Market Size: Estimated at €20B–€30B in Western Europe, with additional growth in Central/Eastern Europe and LatAm.
• Industry Growth Stack:
• Population growth (~0.5%).
• Real GDP growth (~1%–2%).
• Digitalization (~4%–5%).
• Regulatory complexity (~2%).

Market Structure

• Fragmented: Numerous local competitors in each geography, with a few large players (Microsoft Dynamics, SAP) at the high end.
• Minimum Efficient Scale (MES): Moderate, as localized expertise and compliance require significant investment, limiting new entrants.
• Penetration Rates: High in Nordics (80%+ SMB adoption), lower in emerging markets (50%–60%).

Competitive Positioning

• Position: Visma is the market leader in Nordics and Benelux for SMB software, competing with local players and large vendors (Microsoft, SAP) for larger customers.
• Differentiation: Compliance expertise, localized solutions, and integrated SaaS platform.
• Risk of Disintermediation: Low, as global players struggle with smaller markets’ regulatory nuances.

Market Share & Relative Growth

• Market Share: Dominant in Nordics (30%–40%), growing in Benelux (15%–20%) and emerging markets (~5%–10%).
• Growth vs. Market: Visma’s 15% organic growth outpaces the 8%–9% market, driven by SaaS adoption and M&A.

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale:
• Strength: High. Visma’s fixed costs (R&D, admin) are spread over a $2.5B revenue base, enabling 33% EBITDA margins. Smaller competitors struggle to match this scale.
• Impact: Allows reinvestment in R&D and M&A, reinforcing market leadership.
2. Network Effects:
• Strength: Moderate. Visma’s integrated platform creates intra-customer network effects, as additional modules enhance value. No significant cross-customer network effects.
• Impact: Increases customer stickiness and cross-sell opportunities.
3. Branding:
• Strength: Strong. Visma’s 25-year compliance track record and reputation for reliability command premium pricing and customer trust.
• Impact: Reduces price sensitivity and supports market share gains.
4. Counter-Positioning:
• Strength: Strong. Visma’s focus on smaller, regulation-heavy markets avoids direct competition with Intuit, SAP, or Oracle, which target larger markets.
• Impact: Creates a defensible niche, as global players lack local expertise.
5. Cornered Resource:
• Strength: Moderate. Visma’s proprietary compliance data and localized software are difficult to replicate, but not entirely unique.
• Impact: Supports differentiation but not a primary moat.
6. Process Power:
• Strength: Strong. Visma’s globally best-in-class software development lifecycle and entrepreneurial culture drive rapid innovation (e.g., early SaaS adoption, AI/ML integration).
• Impact: Sustains product leadership and organic growth.
7. Switching Costs:
• Strength: Very Strong. Mission-critical software is deeply integrated into customer workflows, making switching costly and risky.
• Impact: Ensures low churn and high recurring revenue (90%+).

Porter’s Five Forces Summary:

• New Entrants: Low threat due to high barriers (compliance expertise, scale, switching costs).
• Substitutes: Low threat, as manual processes or spreadsheets are inefficient.
• Supplier Power: Low, as cloud providers are commoditized.
• Buyer Power: Moderate, as SMBs prioritize reliability but resist aggressive pricing.
• Industry Rivalry: Moderate, with local competitors and large players at the high end.

Strategic Logic

• Capex Cycle Bets: Early SaaS investment (2010–2017) was offensive, positioning Visma as a cloud leader. Current AI/ML investments are defensive, maintaining technological edge.
• Economies of Scale: Visma operates at MES, leveraging scale for margins and reinvestment. No diseconomies, as its decentralized structure preserves agility.
• Horizontal Integration: M&A adds complementary SaaS products, enhancing the platform.
• Geographic Expansion: Focus on smaller markets (e.g., LatAm, Central/Eastern Europe) avoids head-on competition with global giants.
• M&A Synergies: Light-touch integration preserves entrepreneurial spirit, ensuring accretive growth.

Valuation

Visma’s $21B valuation in December 2023 implies:

• Revenue Multiple: ~8.4x ($21B / $2.5B).
• EBITDA Multiple: ~25x ($21B / $840M).
• FCF Multiple: ~25x ($21B / $840M).

Valuation Context:

• Comparable public SaaS companies (e.g., Intuit, Workday) trade at 8–12x revenue and 20–30x EBITDA, suggesting Visma’s valuation is reasonable given its 15% organic growth and 33% margins.
• Private status allows Visma to reinvest FCF without public market scrutiny, potentially justifying a premium.
• Future IPO potential could command higher multiples if markets stabilize, given Visma’s Rule of 40 compliance (15% growth + 33% margin = 48%).

Key Takeaways and Unique Dynamics

1. Mission-Critical Software with High Switching Costs:
• Visma’s software is essential for SMB compliance, creating a sticky customer base with low churn. This drives 90%+ recurring revenue and predictable cash flows.
• Unique Dynamic: The combination of compliance certainty and productivity gains creates a dual value proposition, entrenching Visma in customer workflows.
2. Localized Expertise in Fragmented Markets:
• Visma’s focus on smaller, regulation-heavy markets (e.g., Nordics, Benelux) avoids competition with global giants like Intuit or SAP, which lack localized solutions.
• Unique Dynamic: By mastering local nuances, Visma captures defensible niches, enabling 15% organic growth in an 8%–9% market.
3. SaaS Transition and Operating Leverage:
• The early bet on SaaS (2010–2017) transformed Visma into a 90%+ cloud-based business, accelerating growth from 6%–7% to 15% and margins from 18%–20% to 33%.
• Unique Dynamic: High incremental margins reflect SaaS scalability, with fixed costs leveraged over a growing revenue base.
4. Entrepreneurial M&A Ecosystem:
• Visma’s 178 acquisitions (30–40 annually) are integrated lightly, retaining entrepreneurs to drive innovation. This contrasts with heavy-handed integration models.
• Unique Dynamic: The “entrepreneur ecosystem” fosters 75%–80% retention of acquired founders, sustaining organic growth and product development.
5. Disciplined Capital Allocation:
• Visma reinvests ~50%–60% of FCF into M&A and R&D, prioritizing long-term growth over short-term distributions. This aligns with its 17-year ownership by HgCapital.
• Unique Dynamic: Long-term ownership enables patient capital deployment, avoiding price gouging or excessive leverage.
6. Regulatory and Digitalization Tailwinds:
• Regulatory changes and digitalization (e.g., mobile adoption, AI/ML) drive 8%–9% market growth, with Visma outperforming due to its compliance expertise and SaaS platform.
• Unique Dynamic: Visma capitalizes on regulatory complexity, turning compliance burdens into revenue opportunities.
7. Cultural and Leadership Strength:
• Visma’s entrepreneurial culture, led by a technically proficient team (average management age in late 30s/early 40s), drives innovation and resilience.
• Unique Dynamic: The successful CEO transition (Øystein Moan to Merete Hveren) and retention of young, long-tenured leaders ensure continuity and agility.

Conclusion

Visma’s business model is a masterclass in combining mission-critical software, localized expertise, and disciplined growth to dominate the European SMB software market. Its high switching costs, SaaS-driven scalability, and entrepreneurial M&A strategy create a defensible moat, reinforced by economies of scale, branding, and process power (per Hamilton’s 7 Powers). Financially, Visma’s 15% organic growth, 33% EBITDA margins, and ~€800M FCF reflect its operational excellence and market tailwinds. By focusing on fragmented, regulation-heavy markets and reinvesting cash into accretive M&A and innovation, Visma sustains a virtuous cycle of growth and profitability. Its $21B valuation is justified by its Rule of 40 performance and long-term potential, with a future IPO likely to attract significant interest. The key lesson is that deep market specialization, patient capital, and a culture of entrepreneurship can yield outsized returns in a structurally growing industry.

Transcript