Incidents:
Foxit Software released its 2023 annual report and 2024 quarterly report: In 2023, the company achieved operating income of 611 million yuan, an increase of 5.33% over the previous year; net profit to mother was -91 million yuan, compared to -102 million yuan in the same period last year. With 2024Q1, the company achieved operating income of 1.69 yuan, an increase of 16.87% over the previous year; net profit to mother was 10.61 million yuan, compared to -11.34 million yuan in the same period last year.
Investment highlights:
Revenue growth has slowed, and losses have increased slightly. In 2023, the company's revenue increased 5.33% (YOY-1.83pct) year-on-year, and increased 0.66% (YOY-4.45pct) after excluding fluctuations in foreign currency exchange rates. The main reason was the decline in perpetual license revenue, while the subscription price for the core product PDF Editor was lower than that of a permanent license. Gross margin remained high, falling 0.54 pct year over year to 94.79%. Sales/management/R&D expenses increased by 5.93pct/3.65pct/4.49pct to 55.64%/22.65%/36.75%, respectively, and the investment of relevant personnel increased in line with business development. The final net profit attributable to mother was -0.91 billion yuan, a slight increase in loss compared to the same period last year of -102 million yuan. Operating cash flow was -0.38 billion yuan, compared to 58 million yuan in the same period last year, mainly due to an increase in employee remuneration and other current expenses paid in the current period.
The transformation of subscriptions is advancing at an accelerated pace, and the amount of business value is steadily increasing. The subscription transformation will have a negative impact of a slowdown in apparent revenue growth in the short term, but as the overall business value increases steadily in the process, positive financial contributions are expected to be released over a long period of time. In 2023, the company's subscription revenue reached 35.36% (YoY+14.36pct), with subscription revenue in the European and American markets increasing by more than 80%; ARR reached 250 million yuan (YoY +80.60%), contract liabilities amounted to 161 million yuan (YoY +71.30%), and the subscription renewal rate for core products remained above 90%.
Channel transformation has deepened, and channels in Europe and China have expanded significantly. In 2023, the company's channel revenue accounted for 34.01% (YOY+5.01pct), and revenue increased 22.39% year over year. Growth was constrained by the decline in global PC shipments; core PC channel vendor (Dell) revenue remained flat year on year. Looking at the subregions: North America is the company's main market, with a high revenue base. Channel revenue increased by 8.55% this year; channel revenue in Europe and China increased by 59.53%/45.45%, respectively.
Iteration of AI functions is expected to increase the added value of products in the long term. In 2023, the overseas version of the PDF Editor, the company's core product, has integrated GPT3.5 in all product forms (including Editor PC, mobile and cloud), which can implement functions such as document summarization and content rewriting, and can perform routine operations in natural language based on Smart PDF Commands.
The 2024Q1 dual transformation strategy is beginning to pay off. The company achieved revenue of 169 million yuan (YoY +16.87%, CC +13.14%), of which subscription revenue increased 73.30% year over year, accounting for 44.07%. The quarterly ARR was added to $31 million (YoY +41.00%), and the total ARR reached 281 million yuan (YoY +75.20%); channel revenue increased 49.01% year over year, accounting for 37.44%. In terms of AI functionality, the company signed a software agency agreement with Dell in January 2024 to provide its users with Foxit PDF Editor with integrated AI capabilities.
The company plans to obtain control of Foxin Kunpeng and achieve merger. The company plans to use 90 million yuan of overraised capital to acquire 38.27% of Fuxin Kunpeng (Beijing) Information Technology Co., Ltd.; after the acquisition is completed, the company holds a total of 73.24% of the shares, and Fuxin Kunpeng is included in the scope of the company's consolidated statements.
Profit forecasting and investment rating companies continue to deepen subscription transformation. Short-term apparent performance is under pressure, but overall business value is steadily increasing, and growth certainty is high; iterative AI functions further boost subscription conversion and increase customer stickiness. At the same time, as channel transformation progresses and the distribution system matures, it is expected that the input-output ratio will increase. In summary, we expect the company's 2024/2025/2026 revenue to be 701/8.22/1,018 million yuan, and net profit to mother of -0.35/0.11/0.55 billion yuan, corresponding P/S to 8/7/6x; the first coverage gave it an “increase in wealth” rating.
Risks suggest that the progress of subscription transformation falls short of expectations; PC market recovery falls short of expectations; generative AI technology development falls short of expectations; risk of deteriorating competitive landscape; and geopolitical risks.