Event Overview:
1) On April 30, Foxit Software released the “2023 Annual Report”. In 2023, the company achieved operating income of 611 million yuan, up 5.33% year on year. After excluding the impact of foreign exchange rate fluctuations on revenue of about 4.67%, an increase of 0.66% over the same period of the previous year; a net profit loss of 91 million yuan to mother was deducted from net profit loss of 179 million yuan.
2) On the same day, Foxit Software released the “2024 First Quarter Report”. In the first quarter of 2024, the company achieved operating income of 169 million yuan, a year-on-year increase of 16.87%. After excluding the impact of foreign exchange fluctuations of about 3.73%, the year-on-year increase was about 13.14%; net profit loss to mother was 10.609 million yuan, after deducting a net profit loss of 206.562 million yuan. The loss narrowed year-on-year.
Revenue grew rapidly after restoration, and the transformation of both subscription channels showed initial results. Since apparent revenue did not reflect the company's actual business situation (especially the subscription transformation), according to the annual report, the company achieved an annual comprehensive business volume of 850 million yuan (YoY +20.05%) to measure the company's actual business value in 2023, and the overall business developed healthily.
In terms of subscription transformation, in 2023, subscription business revenue was 216 million yuan (YoY +75.55%), accounting for 35.36% of revenue; subscription business ARR (annual recurring revenue) of 250 million yuan, an increase of 80.60% over the end of the previous year; subscription related contract liabilities amounted to 161 million yuan (YoY +71.30%); and the overall subscription renewal rate for core products was about 91%. 2024Q1, subscription revenue of 74.3785 million yuan (YoY +73.30%), accounting for 44.07% of revenue; the ARR amount of subscription business was 281 million yuan, up about 13.09% from the end of the previous year. In terms of ARR growth in a single quarter, there was a net increase of 30.7346 million yuan in the first quarter of 2024, an increase of 41% over the same period last year; the subscription renewal rate for core products was about 94%.
In terms of channel transformation, in 2023, the company achieved revenue of 208 million yuan from channels, accounting for about 34.01% of revenue, an increase of 22.39% over the previous year. Among them, due to the decline in global PC shipments, the company's revenue from core PC channel providers was basically the same as in the same period last year. If the influence of this channel is excluded, the company's revenue from the channel increased by 38.24% over the same period last year. 2024Q1, the company's revenue from channels was 63.1871 million yuan, an increase of 49.01% over the previous year, accounting for 37.44% of revenue.
In 2023, the company maintained a high gross profit margin (94.79%); the sales/management/R&D expenses ratio was 55.64%/22.65%/36.75%, respectively, +5.93/+3.65/+4.49pct, respectively, mainly due to the increase in the number of sales staff, management personnel and salary levels; the company continued to increase R&D, investing 236 million yuan (YoY +26.4%), accounting for 38.71% of the total number of R&D personnel, accounting for 49.57% of the total number of people in the company.
Global layout, rapid progress in subscription transformation in North America and Europe
The company has established a differentiated two-wheel drive strategy at home and abroad: the overseas market focuses on continuing to develop the general PDF software market and continues to expand market share based on the business growth strategy of dual transformation; the domestic market not only insists on developing the general layout software market in the context of localization, but will also further lay out the vertical industry market. The software-based subscription model is more popular in the North American and European markets, and customer acceptance is high. The company further promoted subscription transformation in the North American and European markets, achieving an increase of more than 80% in subscription revenue in both markets over the same period last year. By region, in 2023, North America/Europe/mainland China/ other regions accounted for 56.53%/23.57%/10.55%/9.35%, with year-on-year growth rates of 0.34%/19.45%/14.58%/-3.24%, respectively; 2024Q1, North America/Europe/mainland China/other regions accounted for 54.8%/25.65%/8.54%/11.02%, respectively, with year-on-year growth rates of 11.01%/25.97%/3.65%/44.84%, respectively. The results of the dual transformation are gradually showing.
AIGC is deeply integrated with PDF layout documents, enabling efficient office companies to continuously iteratively optimize the AI functions integrated into the core PDF editor. The implemented conventional document interaction functions such as document summarization, content rewriting, protected translation, grammar & spelling correction can go through many iterations, and the product experience continues to improve. The company has also gradually AIized PDF functional instructions through the Smart PDFCommands function. It can now implement more than 100 AI-based instructions, covering typical functions such as page replacement, page splitting, and document format conversion. In January 2024, the company signed a software agency agreement with the core PC channel provider to provide its users with Foxit PDF Editor with integrated AI capabilities to seamlessly connect the digital office needs of core PC channel provider users with more intelligent PDF document management capabilities.
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 integrates AIGC capabilities. We believe that the company's development will usher in major marginal changes. Taking into account the possibility of a loss in net profit during the subscription transition period, we used a PS valuation. The company's revenue from 2024 to 2026 is estimated to be 688/8.22/1,014 million yuan, respectively, and net profit to mother is -0.42/-0.05/74 billion yuan, respectively.
Maintaining the buy-A investment rating, the 6-month target price is 82.67 yuan, which is equivalent to 11 times the dynamic market sales ratio in 2024.
Risk warning:
Subscription transformation progress falls short of expectations, risk of performance decline or loss, and risk of overseas operations.