Event Overview:
On October 30, Foxit Software released the “2023 Third Quarter Report”. In the first three quarters of 2023, the company achieved operating income of 443 million yuan, a year-on-year increase of 3.67%, net profit of -61.3221 million yuan, net profit of -98.7928 million yuan after deduction of net profit of -98.7928 million yuan.
Q3 Performance improved month-on-month, and the share of subscription revenue continued to rise
In the first three quarters, the company achieved operating income of 443 million yuan (+3.67% year-on-year), a year-on-year decrease of about 0.81% after excluding the impact of changes in the exchange rate between the US dollar and the euro on revenue; net profit of -61.3221 million yuan; net profit after deducting non-recurring net profit and loss of -98.7928 million yuan after excluding share payment expenses of -8,1913,400 yuan. The main reason for the loss ① Apparent performance declined during the transition period due to lower revenue from the subscription model according to instalment confirmation during the subscription period and subscription pricing compared to permanent licensing; ② the net profit of some joint ventures declined due to factors such as finance and customer budgets, and the company estimated investment losses of 2,15452 million yuan in terms of shareholding ratio; ③ R&D investment in new products continued, while new products were still in the R&D period or initial marketing promotion period, which did not cover current expenses, accounting for losses during the reporting period. The company invested 173 million yuan in R&D in the first three quarters (+65% year-on-year). Operating income is 39.15%. Looking at Q3 alone, the company achieved operating income of 156 million yuan (+10.4% year-on-year) and net profit of 13.87 million yuan. Looking at Q2, the revenue side accelerated and the loss narrowed.
The company's product transformation based on the whole family bucket model helped accelerate subscription transformation. In the first three quarters, the company achieved subscription revenue of 148 million yuan (+70.92% year-on-year), accounting for 35.5% of revenue, a significant increase of 21% over subscription revenue in 2022; the amount achieved in subscription business ARR was 213 million yuan, an increase of about 53% over the end of the previous year. Looking at the growth rate of ARR in a single quarter, there was a net increase of 22 million in the first quarter of 2023, a net increase of 26 million in the second quarter, and a net increase of 27 million in the third quarter. The growth rate was stable. The company's subscription revenue and perpetual license revenue for the third quarter of 2023 both increased compared to the second quarter.
The global market is advancing subscription transformation, and the share of channel revenue is gradually rising
Demand in the PDF generic software market is stable, business is progressing normally in regional markets around the world, and the subscription model is progressing well in all major regional markets. In the first three quarters, the operating income of the North America/Europe/China market accounted for 57.68%/20.56%/8.86% of total revenue, respectively. The year-on-year revenue growth rate was -2.08%/+15.94%/+17.19%, respectively, and the year-on-year growth rate of subscription revenue was +76.61%/+111.80%/23.27%, respectively.
The company cooperates with large IT agents such as Dell, Xinjusi, Shenzhou Digital, and Weishijiajie to expand the market through their sales channels. Revenue from channels continued to rise. In the first three quarters, the company's revenue from agency channels reached 146 million yuan (+21% year-on-year), accounting for 32.89% of revenue during the same period, up from 28.17% of revenue in the same period last year. Revenue from channels accounted for 34.83% of revenue in the third quarter alone.
Core products are continuously upgraded to improve user experience and payment conversion rates
In September 2023, the company's core product, the PDF Editor, ushered in the 13th major version upgrade, and released a number of versions such as PDF Editor for Windows & Mac & iOS & Android.
After this major version upgrade, all forms of the company's overseas PDF editors have integrated AIGC technology. The desktop and mobile editors can achieve the three initial functions of document summary, content rewriting, and real-time interaction. Subsequent small versions will continue to change and enrich more relevant AIGC functions to thoroughly implement the corporate mission of “helping knowledge workers improve productivity when processing documents”. After the domestic version of the PDF editor was upgraded, a format exchange function for OFD and PDF documents was added to meet the needs of domestic users for dual format support. At the same time, this version adds support for splitting multiple pages on a single page and OCR text recognition in any region, and enhances functions such as electronic signatures. The company continues to innovate and upgrade in the AIGC+ office field to improve user experience and payment conversion rates with higher product flexibility.
Investment advice
Foxit Software is a leading domestic PDF company. The subscription model enhances customer life cycle value, channel transformation obtains more business opportunities, and combines the integration of AIGC capabilities. We believe that the company's development will usher in major marginal changes. Considering the possible loss of net profit during the subscription transition period, we adopted a PS valuation. It is estimated that the company's operating income from 2023 to 2025 will be 594/6.82/812 million yuan, respectively, and net profit will be -0.58 million -0.20 million yuan, respectively.
Maintaining the buy-A investment rating, the 12-month target price is 96.92 yuan, which is equivalent to a dynamic market sales rate of 13 times in 2024.
Risk warning:
The progress of subscription transformation falls short of expectations, risk of declining performance or loss, and risk of overseas business.