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EFECTE Software/Finland, November 16, 2017 IPO Research Report

Efecte – IPO Research Report Rating NOT DISCLOSED

Growing software company with solid market growth outlook Efecte focuses on a SaaS business model offering software solutions within IT service management, and identity and access management. Efecte’s business model offers stability due to the recurring revenues brought by the sale of licenses. During the first three quarters of the year around 60 % of revenue was recurring, mainly from SaaS licenses. Market forecasts are at double-digit CAGR sales growth for 2016-2021 in relevant markets and Efecte’s target is to grow annually organically on average over 20 % during 2017-2022. Efecte is seeking to increase the international operations, opening up room to grow in larger markets such as Germany. We expect a sales growth Latest report on company 16-Nov-2017

CAGR of around 23 % between 2017-2019E. We see that the growth will increase towards 2019 as the expanding sales Web site www.efecte.com organization will start showing results with some delay. CEO Sakari Suhonen CFO Hannu Nyman Growth investments burden profitability Head office Vaisalantie 6, Espoo

Due to growth initiatives the company has not in recent years achieved significant profitability. Efecte currently sees potential Analysts to continue growth and the related up front personnel Analyst Jerker Salokivi recruitments are expected to continue to affect profitability in the coming years. Efecte’s target is to reach a double digit EBIT- E-mail [email protected] margin towards the end of the period 2017-2022. Telephone +358 9 4766 9149 Analyst Tomi Lindell Preliminary equity valuation range of EUR 27.5-37.5m E-mail [email protected] We have derived a preliminary equity valuation range of EUR Telephone +358 9 4766 9204

27.5-37.5m. At the higher end of our valuation range we consider valuation toward the large global SaaS companies and All the important disclosures can be found on the last pages of this report. Nordic software companies, with median EV/Sales of 5.8x and

3.0x for 2018E respectively, adjusted downward to account for

Efecte’s smaller size. At the lower end of our valuation range, we believe that Efecte should be valued well above the Nordic IT- services providers, trading at median EV/Sales 2018E of 1.1x, due to good sales growth outlook and the services revenue being related to SaaS implementation translating into predicatable and recurring Subscription licenses revenues.

KEY FIGURES

Sales EBIT EBIT Ptx profit EPS P/E EV/Sales P/CF EV/EBIT DPS EURm EURm % EURm EUR (x) (x) (x) (x) EUR

2015 7 0 -4.8% 0 -0.22 N/A N/A N/A N/A 0.00 2016 8 0 1.6% 0 0.08 N/A N/A N/A N/A 0.00 2017E 10 0 -2.1% -1 -0.14 N/A N/A N/A N/A 0.00 2018E 13 -1 -4.9% -1 -0.08 N/A N/A N/A N/A 0.00 2019E 16 0 -1.8% 0 -0.04 N/A N/A N/A N/A 0.00

Market cap, EURm N/A BV per share 2017E, EUR N/A CAGR EPS 2016-19, % N/A Net debt 2017E, EURm -5 Price/book 2017E N/A CAGR sales 2016-19, % 23.5 Enterprise value, EURm N/A Dividend yield 2017E, % N/A ROE 2017E, % -27.3 Total assets 2017E, EURm 8 Tax rate 2017E, % 0.0 ROCE 2017E, % -7.4 Goodwill 2017E, EURm 0 Equity ratio 2017E, % 61.9 PEG, P/E 17/CAGR N/A

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EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Investment summary

Finnish software company Efecte is a Finnish software company specialized in IT service management (ITSM) and offering solutions in ITSM identity and access management (IAM) solutions to medium and large size companies and IAM and public organizations. The company was founded in 1998 and employs 92 people (1.11.2017), with sales offices in Finland, Sweden, Germany and Denmark, and has around 300 customers.

SaaS business model with Efecte offers IT solutions mainly as a software as a service (SaaS). In addition Efecte stable recurring revenue offers services which support customers in adopting Efecte’s solutions. Since the release of Efecte’s Edge platform in 2014, the company has gained over 100 new customers. The advantage of the SaaS model is more stable and recurring revenues, with customer licenses typically having a 3 year minimum contract period.

Recurring revenue 60 % of In 2016 the company had net sales of EUR 8.3m. The net sales CAGR between 2012-2016 total revenue during1-9/17 amounted to 17.3 %. The company’s sales mix has improved increasingly towards stable and recurring revenues from the SaaS licenses. During 1-9/17 roughly 60 % of revenue has been recurring, with roughly 46 % of that from SaaS licenses.

Investments have The shift to the SaaS model and growth investments have burdened profitability and burdened profitability during the previous years the company has not yet reached healthy levels of profitability. Due to the scalability of the business model good profitability would in our view be achievable but up-front investments to continue the growth phase are expected to continue to burden profitability.

Good outlook for European The growth outlook for Efecte’s core market areas looks bright. The European cloud- cloud-based ITSM- and based ITSM-market is expected to grow by a CAGR between 2016 and 2021 of 15.5 % IAM-markets and the European cloud-based IAM-market is expected to grow by a CAGR between 2016 and 2021 of 22.0 % (Marketsandmarkets via Efecte). Currently 86 % of revenue comes from Finland but the company has made investments that aim to increase revenue from other countries.

Guidance for 2017 – Sales Efecte has given guidance for year 2017 net sales and EBITDA. The net sales is expected between EUR 10.3m and to be between EUR 10.3 and 10.8m in 2017. In 2016, net sales amounted to EUR 8.3 10.8m and positive EBITDA million. The company also expects its EBITDA to be positive in 2017. The EBITDA-margin in 2016 was 5.9 %.

Long term financial targets Efecte’s long term financial targets cover the period 2017-2022. The company expects on 2017-2022 average an annual organic revenue growth of over 20 % during the period. Investments into internationalization are expected to affect earnings in the coming years but the company aims for a double digit EBIT-margin towards the end of the strategy period.

Estimated good near-term For the years 2017-2019E we expect a sales CAGR of around 23 %. We expect the growth but low stronger growth to start showing with a delay, as investments into the sales organization profitability will take some time to show as revenue. We expect EBIT-margins to remain negative during 2017-2018 due to continued up-front investments in the form of further recruitments of personnel.

Preliminary equity We have derived a preliminary equity valuation range of EUR 27.5-37.5m. At the higher valuation range of EUR end of our valuation range we consider valuation toward the large global SaaS 27.5-37.5m companies and Nordic software companies, with median EV/Sales of 5.8x and 3.0x for 2018E respectively, adjusted downward to account for Efecte’s smaller size. At the lower end of our valuation range, we believe Efecte should be valued well above the Nordic IT- services providers, trading at median EV/Sales 2018E of 1.1x, due to good sales growth outlook and services revenue being related to SaaS implementation, translating into predicatable and recurring Subscription licenses revenues.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Company and business overview

Finnish software company Efecte is a Finnish software company specialized in IT service management and identity focusing on ITSM and IAM and access management solutions. The company was founded in 1998 and employs 92 people (1.11.2017), with sales offices in Finland, Sweden, Germany and Denmark. The company’s headquarters are located in Espoo, Finland.

Efecte’s software solutions areas can be divided into:

 IT service management (ITSM);

IT service management refers to the entirety of activities that are performed to plan, design, deliver, operate and control information technology within an organization.

 Identity and access management (IAM);

Identity and access management refers to the entirety of activities to govern and manage the right to access to information and resources within organizations.

Efecte’s solutions are mainly offered as a so called Software as a Service (SaaS), which means its software is licensed on a subscription basis and centrally hosted and delivered over the Internet. In addition Efecte offers consulting services which support customers in adopting Efecte’s solutions.

In 2016 the company’s net sales were EUR 8.3 million and EBITDA EUR 0.5 million. The majority of net sales (86.5 percent) in 2016 came from Finland.

Figure 1: Efecte’s sales by geography, source, and type (1-9/2017)

Source: Efecte

Efecte’s clients consist of mid-sized and large companies as well as public organizations. In 2016 public sector clients represented around 35 percent of total sales. At the end of Q3 2017, the 10 largest clients made up approximately 30 percent of total sales and the 30 largest clients made up approximately 50 percent of total sales. According to the company, Efecte currently has approximately 300 customers and a high customer retention rate.

In 1.11.2017 Efecte employed 92 people. Efecte has 77% of its employees in Finland and 23% outside Finland in three countries. The company’s offices are located in Espoo (Finland), Stockholm (Sweden), Copenhagen (Denmark) and Munich (Germany). During H2/2017, the company recruited a six-person team from a US competitor in Germany.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 2: Personnel by geography and function (1.11.2017)

Source: Efecte

EFECTE SWOT-analysis

Strengths Weaknesses

 Scalable product  Small size  Fast implementation and low TCO  Brand recognition  Cloud-focus  Most of sales from Finland  SaaS-model with advance  Yet to achieve healthy payments and long contracts profitability

Opportunities Threats

 International expansion  Domestic market saturation  Additional sales to existing  Unsuccessful expansion customers  Technological disruption  Growing IAM and ITSM markets

Efecte’s software solutions can be divided into IT service management (ITSM) and identity and access management (IAM). ITSM also includes Enterprise Service Management (ESM), which can be seen as an extension due to similar process management.

IT service management (ITSM) refers to the entirety of activities that are performed to plan, design, deliver, operate and control information technology within an organization. Some examples of ITSM functions are IT planning and IT support, as well as a range of other functions to monitor and improve a company’s IT infrastructure and processes. In many ways ITSM can be said to be an ERP (Enterprise Resource Planning) system for IT.

Enterprise Service Management (ESM) refers to a suite of integrated applications that serve various business processes within an organization. With the help of ESM companies can effectively manage their business processes in areas of for instance Finance, HR, Facility Management, Legal and Business Service.

Identity and access management (IAM) refers to entirety of activities to govern and manage the right to access to information and resources within organizations. With IAM companies can ensure in an effective and compliant way that the right individuals have access to the right resources at the right time.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 3: Efecte’s cloud-based software solutions offering

Source: Efecte

Efecte offers its solutions predominantly in the cloud. Efecte’s cloud solution is called Efecte Edge and it offers ready made integrated modules that can be expanded according to customer’s needs. The two main modules are IT and Enterprise Service Management, and Identity Management.

In addition to the ITSM and IAM solutions, Efecte offers various services that help customers in adopting these solutions. The services include:

. Professional Services; expert consultancy in implementation projects and customer development needs . Support Services; a broad suite of various support services based on customer needs, for example 24/7 service desk . Training Services . Consultancy Services; service and process consultancy

Fast implementation and According to Efecte, their ITSM solution is the only one on the market with an integrated low TCO IAM solution. The company states as a key differentaing factor that their product requires less customization and consulting hours to implement, which leads to a lower total cost of ownership (TCO) and faster implementation for the customer. According to management the time to implement a typical IT service management software solution for a customer is three to six months.

Business model

Major change in sales mix Efecte started to reorganize the business and shift the strategic focus after 2010. Due to in recent years the change in strategy, Efecte’s Subscription licenses and Services sales have grown significantly since 2012. The Subscription licenses and Services revenues relate to the continuous SaaS licenses, and integration + upkeep of customers SaaS software solutions, respectively. In 2012, licenses and Services represented 21.3% and 16.0% of the net sales, respectively. In 2016, Subscription licenses represented already 41.5% and Services 33.1% of the net sales. At the end of 2016, the recurring business (Subscription licenses + Maintenance) represented 62% of the net sales, which in our view gives a

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

good visibility into sales going forward. According to Efecte’s management, profitability of the recurring business is higher compared to the non-recurring business.

Figure 4: Change in Efecte’s sales mix from 2012 to 2016

Source: Efecte

Strong new customer flow Efecte launched Efecte Edge in October 2014, which according to management is the after the release of Efecte only ITSM solution with embedded identity management. The solution consists of two Edge main product modules: Efecte Service Management (2015) and Efecte Identity Management (2015). An easy-to-use self-service experience, a unified identity management, and an easy-to-customize service management are main customer benefits of the platform. Since the release, the company has gained over 100 new customers, and a majority of existing customers have converted to the new business model.

Good scalability in Due to the high share of own Licenses sales (Perpetual & Subscription), the scalability of Licensing business the operations is relatively high. Efecte has good possibilities to offer SaaS products for several customer departments (IT, HR, Finance & Legal), which enables broad growth potential. The company’s Services business is labor intensive and thus the scalability is limited.

Focus on direct sales Efecte focuses on the direct sales model in its home market Finland and in other Nordic countries. In Germany, the company currently relies more on the use of sales and delivery partners. The recruiments made in Germany during Q4/17 have considerably strengthened Efecte’s own sales force in the country. In general the company sees good potential in increasing the share of services as opposed to having a partner completing the assignments relating to integration and similar services.

Target market medium and Efecte focuses on medium and large size customers in its operating countries. According large sized customers to management, the target market consists of companies with net sales between EUR 100 – 4,000 million. The company also operates in the public sector especially in the Finnish market. Efecte focuses on customers operating in Europe as the solutions are not globally available. A typical new customer project size including licenses is between EUR 0.1 – 0.5 million. According to management contract periods are relatively long, typically the first contract length is 36 months and the average customer relationship is approximately seven years.

Core market segments In the ITSM and IAM markets, Efecte’s core customer segments are companies’ or public entities’ IT, Human Resources (HR), Finance and Legal departments. According to management customer profitability is relatively high in projects related to HR, Finance and Legal, where the degree of possible standardization is lower and a larger amount of integration is required, increasing the amount that can be billed.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Market overview

IT-market shift from The IT-market in general is undergoing a shift from the more traditional on-premise IT traditional infrastructure infrastructure towards cloud-based services, with IT services expected to grow faster to cloud-based services than the whole IT-market in general. Gartner has estimated a CAGR between 2016 and 2020 of 18.4 % in the global Cloud Application Services (SaaS) market.1

Growth in Efecte’s market The growth in Efecte’s main market segments ITSM and IAM is expected to be strong areas expected to be both globally and in Europe. The European cloud-based ITSM-market is expected to grow strong by a CAGR between 2016 and 2021 of 15.5 % and the European IAM-market is expected to grow by a CAGR between 2016 and 2021 of 10.9 %. Growth in the for Efecte more relevant market for cloud-based solutions is expected to grow by a CAGR between 2016 and 2021 of 22 %. (Marketsandmarkets via Efecte)

Rapid shifts offer better A general feature in the rapidly evolving IT-market in recent years has been the ability of growth for smaller, more smaller companies to more flexibly adapt to changing customer demand. The growth in flexible companies the cloud-based market is also expected to be stronger for the smaller companies, as shown in figure 5. For the segment as a whole growth is to a larger extent driven by the shift towards increased outsourcing and a more mobile workforce, with an increasing need to access organizational resources off premises through various mobile devices.

Figure 5: European cloud-based ITSM market (USDb)

CAGR 15.5 % CAGR 15.5 %

CAGR CAGR 13.6 % 14.6 % 1,7 1,8

0,9 0,9 CAGR CAGR 0,7 20.8 % 0,6 18.5 % 0,3 0,3 2016e 2021e 2016e 2021e Large companies Small companies (under 1,000 employees) ITSM-software ITSM-services

Source: Marketsandmarkets via Efecte

Growth driven by cloud- A larger part of the IAM-market has relied on on-premise solutions and cloud adoption based solutions in the segment is still relatively low. However, as cloud adoption rates among companies are expected to increase among other things due to the increasing use of mobile devices, the market for cloud-based solutions is expected to grow faster than for on-premise solutions. Efecte delivers its IAM-solutions primarily as cloud-based.

1 Gartner – Press release, https://www.gartner.com/newsroom/id/3616417

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 6: European IAM-market for cloud-based solutions (USDb)

CAGR 22.0 %

1,3

0,5

2016e 2021e Source: Marketsandmarkets via Efecte

Competitors

Targets mid-sized and Efecte targets mid-sized and larger companies, with the target customers’ annual large companies with revenues at between EUR 100m and 4,000m. During recent years the company has made revenues between EUR investments into enhancing its product offering. As a result, Efecte’s solutions are 100-4,000m increasingly more suited for mid-sized and large companies. The company does not compete actively for the largest customers as requirements are higher and some potential clients seek service suppliers of a certain size.

ServiceNow is one of the In the ITSM-market the main competitors are significantly larger US-based firms. main competitors with According to management the amount of firms with a cloud-based offering, competing broad cloud-based offering for the same target size customers as Efecte, is limited in Europe. ServiceNow is one of the main competitors. Although ServiceNow’s focus lies on the largest customer firms, the company offers cloud-based solutions and has according to management often competed for the same customers. Management has indicated that their hit-rate in tender offers where ServiceNow has been involved has been good. Another large competitor is BMC, also targeting mainly larger customers and offering cloud-based solutions. Gartner has in their Magic Quadrant for IT Service Management tools placed ServiceNow and BMC as the only two companies in the Leaders field (Gartner, August 2017).

Mid-sized competitors Some smaller competitors that according to management focus more on the mid-sized offer solutions through and large customers are US-based Cherwell and Ivanti, and Germany based Matrix42. different platforms, These firms offer different platforms for the software, including cloud-based solutions. increasing focus on cloud Focus of these firms appears to be on moving towards cloud-based solutions but it would seem that at least historically on-premise solutions have played a larger role. Ivanti’s (formed through a transaction combining LANDESK and HEAT Software) cloud- offering was expanded through the combining transaction by the incorporation of HEAT Software.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 7: Efecte’s position among competitors in the ITSM-market Large

< 4 EURb

Medium Customer size Customer

> 100 EURm Small

Narrow Moderate Broad Broadness of software solutions offering

Source: Efecte

Main IAM competitors The main competitors in the IAM-market are all larger US-based firms. According to larger US-based firms management Okta has a credible cloud-based delivery model and Okta has together with Microsoft been given top positions in the Leaders field of Gartner’s Magic Quadrant for Access Management (Gartner, June 2017). Okta has been able to grow impressively, with sales CAGR of nearly 100 % between fiscal years 2015-2017, with revenue mainly subscription based. However, revenue is mainly generated in the US and although the company has been investing in Europe we would see that competition is still limited.

Microsoft relevant In our view Microsoft’s positioning should to some extent limit the competition with competitor but in our view Efecte. Although Microsoft is large and globally active the focus on Azure and perceived different focus areas better capabilities in standardized solutions should benefit Microsoft’s position among smaller firms. In larger organizations that use a vast amount of different software tools, the standardized modules will not prove as beneficial and notably larger amount of integration is required. According to Efecte the target customer for their IAM solutions would be firms with revenue of some EUR 500m upwards. In our view Efecte will still likely encounter Microsoft in the competitive field.

Few competitors with both Efecte’s competitors in the IAM-market are largely different from the competitors in IT ITSM and IAM solutions service management. ITSM and IAM tools in effect have different functions, but as especially larger companies will likely have a need for both types of tools, synergies between the two areas are likely to emerge. According to management only a few competitors, such as IBM, CA Technologies, and BMC, have solutions in both areas. Management has also indicated that these competitors do not integrate these solutions areas as strongly as Efecte.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

The other two main competitors named by management are NetIQ and Quest. NetIQ is a part of software provider Micros Focus. Revenue from Micro Focus Identity, access and security-segment, attributable to NetIQ, amounted to USD 207m in FY2017. The segment revenues have been declining in recent years and revenue is mainly maintenance-based, implying stronger presence in on-premise solutions opposed to cloud-based models. Quest was formed in 2016 after the sale of Dell Software to private equity investors and re-launched as Quest Software.

Table 1: Efecte’s main competitors in the IAM-market

Customers

Approximately 300 Efecte’s targeted customer segment is companies with annual revenue of between EUR customers mainly in the 100m and 4,000m. As the company’s software products have developed during recent private sector years the focus also shifted from smaller customers to the current target customer group. The company has a customer base of approximately 300 mid-sized and large customers. Customers mainly have solutions within ITSM and according to management only a small share currently has both ITSM and IAM solutions in place.

Figure 8: Efecte’s sales split in 2016

Source: Efecte

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Diverse customer base Efecte’s customer base is relatively well diversified, and the revenue generated by the top 10 customers has been decreasing steadily in recent years. The single largest customer has stood for around 10 % of revenue. According to managament, there are no major variations within customer profitability depending on size or sector.

Figure 9: Customers by revenue (1.11.2017)

Source: Efecte

SaaS-model benefits Efecte’s shift towards a SaaS-model has benefited retention of customers and decreased customer retention, the revenue uncertainty brought by one-time software licenses. Due to continuous switching costs high contracts, with certain minimum contract lengths and periodic payments, the customer retention is also improved. The costs relating to the switching of providers in integrating new solutions also offers retention advantages. Management has indicated that customer retention has been good. We note that due to the fact that as Efecte’s cloud- based model has been in place from 2014 onwards, a large part of customers are only now beginning to renew the rather standard 3 year minimum licenses. As such the possible discontinuations among customers will only quite recently have started to show. The reported new order intake from Q4/16 onward has increased significantly. Efecte reported the order mix during H1/17 and a notable part of the increase was due to the renewals.

Figure 10: Illustrative picture of revenue split

Source: Efecte

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 11: Efecte’s customer references

Source: Efecte

Financial performance

A change in strategy Efecte’s net sales have increased from EUR 4.4 million in 2012 to EUR 8.3 million in 2016, accelerated sales growth with double-digit annual growth rates. The net sales CAGR in between 2012-2016 amounted to 17.3%. In 2013, the company changed its strategy and decided to invest heavily in a cloud-based ITSM solution. The target was to combine all Efecte’s products together in order to provide a wider solution compared to independent products. After 2013, the share of Perpetual licenses business has decreased and Subscription licenses increased. The company also decided to focus more on a direct sales model and continue the partnering sales model only in selected markets. Efecte also sharpened its consulting services offering in order to improve customer service. In 2014, the company released Efecte Edge, a platform including three integrated products, which supported the sales in 2015 and 2016. Since 2014, the company has gained over 100 new customers. During 2015-2016, sales growth has been fueled by customers’ IT budget growth, strong growth in Subscription licenses sales and good demand for services. In 2016, recurring revenue accounted for 62% of the company’s net sales.

Figure 12: Efecte’s net sales and sales growth, and EBIT and EBITDA-margins (2012– 1-9/2017)

Source: Efecte

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Low profitability due to Historically, Efecte’s profit margins have been volatile and in our view profitability investments in the new development has been relatively weak. In 2012-2016, the average EBITDA-margin and business model EBIT-margin were at -0.3% and -4.4% respectively. Profitability has been dampened by investments in the new business model, organizational growth and expanding business operations to new markets. Focus on a SaaS-model started to strengthen profitability in 2015. Profitability peaked in 2016 when the company generated an EBITDA-margin of 5.9%. The average Return on Investment (ROI) amounted to 5.0% between 2012 and 2016.

1-9/2017 – continued sales Efecte’s good sales growth has continued during the three first quarters of 2017. Net growth sales grew by 25.1%, amounting to EUR 7.4 (5.9) million. Growth was driven by Subscription licenses revenue as well as strong demand for services. Net sales in Perpetual licenses and Maintenance business decreased as expected. The recurring sales, including Subscription licenses and Maintenance, amounted to EUR 4.5 (3.8) million representing an increase of 18.5 % compared to the previous year. Sales outside Finland (incl. Sweden, Denmark and Germany) grew by 41% and represented 14% of the net sales. Efecte continued growth investments especially in the international markets.

Figure 13: Net sales by business area quarterly

Source: Efecte 2

1-9/17 sales by business During the first three quarters of 2017, Subscription licenses sales increased by 36.2 % area; strong growth in and amounted to EUR 3.4 (2.5) million. Sales of Perpetual licenses continued to decrease Subscription licenses and (-46.0%) and amounted to EUR 0.3 (0.5) million. Maintenance sales declined by 15.2 %, Services sales amounting to EUR 1.1 (1.3) million. Services sales increased by 60.6% and amounted to EUR 2.7 (1.7) million. In the long-run, Efecte expects Subscription licenses and Services sales to grow, while part of the Maintenance sales will convert to Subscription licenses sales. To our understanding, Perpetual licenses are not a focus area for the company but some customers still prefer those license types over SaaS-licenses.

2 Due to a reclassification adjustment for 2016 the quarterly sales split does not exactly compare with full year figures if aggregated separately

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 14: Efecte’s net sales (MEUR) by business area (1-9/2017)

Source: Efecte

1-9/17 profitability Investments in growth continued, which had a negative impact on profitability during 1- impacted by growth 9/2017. The profitability decreased slightly compared to the previous year mainly due to investments higher personnel expenses as the company continued recruitments in order to grow. The company invested in strengthening the Swedish and German organization in the review period. 1-9/2017 EBITDA-margin and EBIT-margin decreased to 3.8% (6.0%) and -0.2% (1.5%), respectively. The company's profitability is typically better in the second half than in the first half of the year.

Figure 15: Efecte’s return on investment, gross profit (MEUR) and margin (2012- 1-9/2017)

Source: Efecte

Strong increase in order During the year Efecte has received orders worth over EUR 8.5 million. During 1-9/2017, intake orders received increased by 121% compared to 1-9/2016. Efecte’s orders have included new customer contracts, additional sales and contract renewals, which the company has reported separately only during H1/17. In H1/2017, new customer contracts and additional sales amounted to EUR 4.8 million and contract renewals EUR 2.1 million of the orders received. Renewals had a significant effect on orders received during H1/17. The usual three year initial subscriptions are now starting to mature, as Efecte’s SaaS product launched in 2014, and need to be renewed. However, in our view the strong development in the order intake still highlights a good demand for Efecte’s solutions.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 16: Efecte’s orders received (MEUR) Q2/2015-Q3/2017

Source: Efecte

Guidance for 2017 – sales Efecte has given guidance for year 2017 net sales and EBITDA. The net sales is expected to amount to between EUR to amount to between EUR 10.3 and 10.8m in 2017. In 2016, net sales amounted to EUR 10.3m and 10.8m, EBITDA 8.3 million. The company also estimates that its EBITDA will be positive in 2017. The to be positive EBITDA-margin in 2016 was 5.9 %.

Cost structure – higher cost base due to the expansion phase

Higher cost base due to Efecte’s cost base has increased due to investments in the SaaS-model and personnel growth investments growth. The company has recruited new sales force and consultants due to re-focus from partnering sales to direct sales as well as to accelerate growth outside Finland. As a result of double-digit sales growth, the company has also strengthened its administration and support functions.

Personnel expenses ~60 % The majority of the company’s costs relate to personnel expenses. The share of personnel of net sales during 1-9/17 expenses of net sales has remained relatively steady at 56-58% in 2012-2016. In the first three quarters of 2017, the share of personnel expenses of net sales was 59.7 %, compared to 56.1 % in the comparison period. Personnel expenses grew mainly due to strengthening of the organizations in Sweden and Germany. Up until 1.11.2017 the number of personnel has increased by 46% compared to the end of 2016. Efecte uses subcontracting in service deliveries when necessary and has outsourced some software development to lower cost countries. Efecte has 77% of its employees in Finland and 23% outside Finland. The company’s offices are located in Espoo (Finland), Stockholm (Sweden), Copenhagen (Denmark) and Munich (Germany). In October 2017, the company recruited a six-person team from a US competitor in Germany.

Figure 17: Personnel by geography and function (1.11.2017)

Source: Efecte

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Profitability in the short- Increasing international sales requires recruitments and new employees generate sales term impacted by on a delayed basis due to a training period as well new sales force building up a sales recruitments network. This has a negative impact on profitability in the short-term while the company is growing. According to Efecte’s management, investments in personnel start to yield results typically after six months from recruitment. We expect that the company will continue strengthening its organization in the Nordic countries and Germany, which will generate additional costs in 2018E.

Share of other OPEX has The share of other operating expenses has decreased from 36.4% in 2012 to 25.6% in decreased 2016. During the first three quarters of 2017 the share of other operating expenses amounted to 26.0% of the net sales. The decrease in other operating expenses has mainly been due to the good scalability of the SaaS business model.

Figure 18: Efecte’s personnel expenses and other operating expenses (2012- 1-9/2017)

Source: Efecte

High R&D expenses due to In order to remain competitive in the software industry, Efecte needs to continuously the development of the invest in research and development (R&D). Efecte increased its R&D expenses SaaS-business substantially in 2014 when the company was developing solutions for the Efecte Edge platform. Since then, the company’s R&D expenses have remained at relatively steady levels. Between 2012 and 2016, Efecte’s R&D expenses represented 16.8% of the net sales on an average basis. According to management, the share of R&D expenses to net sales is expected to remain at relatively similar levels also during 2018-2019.

Figure 19: Efecte’s R&D expenses and number of personnel (2012- 1-9/2017)

Source: Efecte

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Strong balance sheet with negative net debt

Equity ratio at 27 % at the Due to the losses in 2013-2015, Efecte’s equity ratio decreased from 40.2% in 2012 to end of Q3/17 33.1% in 2016. At the end of the Q3/17 the equity ratio adjusted for advances received was 27 %. The equity ratio is negatively impacted by the large advances received. The majority of the customers in the Subscription licenses and Maintenance business pay invoices in advance at the beginning of the year.

Sizeable cash position The company has a sizeable cash position of EUR 1.5 million at the end of Q3/17, already before the IPO representing 35% of the total balance sheet. In our view, the planned IPO would significantly strengthen Efecte’s cash position and enable the company to continue its growth investments. Intangible assets amounted to EUR 1.1 million at the end of Q3/17. Efecte is expected to have amortized all of the goodwill from the RM 5 acquisition in its balance sheet by the end of Q1/18 but will have a very small amount left from another transaction. Efecte operates its business in leased premises in all countries.

Strong balance sheet - Despite double-digit sales growth working capital has remained at relatively low level. At negative net debt the end of Q3/17, working capital was negative due to large advances received. The company’s net debt is negative and amounted to EUR -1.5 million at the end of Q3/2017. Efecte has paid off all of its long-term debt. In our view, the company’s balance sheet is relatively strong and asset light.

Figure 20: Efecte’s equity ratio (2012- 1-9/2017) and balance sheet (1-9/2017)

Source: Efecte

Strategy and financial targets

Targeting accelerated In its strategy, Efecte targets to accelerate international growth. Efecte is already among international growth market leaders in Finland but the company’s ambition is to expand its operations in the other Nordic countries. Currently, the company operates in Sweden and Denmark.

Growth mainly organic Efecte is targeting to grow mainly organically as it has invested in the new business model that is also competitive internationally. In our view, with the current product porfolio, acquisitions would seem unlikely as expansion mainly requires employees, not any new software products. Similar recruitments as the team that was hired in Germany from a competitor would prove much more useful.

Targeting over 20% In our view, Efecte has set ambitious but achievable financial targets for the strategy organic sales growth period 2017-2022. The company is targeting over 20% average annual organic sales growth between 2017 and 2022. In 2016, Efecte grew organically 20.9%. The change in the business model and a favourable market outlook in our view provide good growth opportunities during the strategy period. Also, with Efecte’s size the absolute sales growth does not need be large to achieve the relative growth figures.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Double-digit EBIT-margin In terms of profitability, Efecte is targeting to achieve double-digit EBIT-margins towards towards end of the the end of the strategy period (2017-2022). Historically, the EBIT-margin has been strategy period impacted by investments in developing the business, personnel recruitments, and expansion to international markets. In the strategy period, SaaS sales and Services sales are expected to grow strongly, which in our view supports profitability especially through the recurring license sales. However, continued growth investments are expected to negatively impact profitability in 2018-2019.

Dividend policy – unlikely In accordance with the strategy, Efecte will continue to invest in growth, due to which to pay any dividends in the company sees that it is unlikely to distribute any dividends during 2018-2020. The ’18-‘20 company has not paid any dividends in 2012-2016.

Table 2: Efecte’s financial targets

Source: Efecte

Risk factors

Main risks to our The main risks to our investment case are: investment case 1) Technology risk. Efecte’s business operations are mainly based on the Efecte Edge platform, which is a risk if the technology turns out to be non-competitive. Competitors may also introduce new platforms that start to eat Efecte’s market shares.

2) Increased competition. Due to high growth expectations in the ITSM and IAM markets, competition may intensify and dampen the price level in the market. Efecte’s main competitors are large US IT-companies that may start price competition in order to gain market shares.

3) Failing to maintain key personnel and recruit new skilled professionals. Competition for skilled employees is currently intense in the IT software industry. Potential recruiting challenges may have impact on project deliveries if the company does not succeed in finding competent workforce. Efecte has also relatively long training period for recruited employees, which has impact on profitability especially when the company is actively recruiting new employees.

4) Unsuccessful expansion in Nordic countries and Central Europe. Efecte may as part of the plans to increase internationalization enlarge its operations to new countries during the strategy period. The company is likely to grow organically, which may create unexpected costs when Efecte starts to build its organization in any such countries.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

5) Cash flow. Growth investments will have a negative impact on profitability in 2018- 2019. Due to low profitability and high investments, the company’s cash flow may turn negative, which may weaken Efecte’s financial position. Currently Efecte’s financial position is good and the planned IPO will significantly strengthen the balance sheet.

Efecte’s options plans

Options as part of Efecte currently has two options plans active, the 2011 options plan and the 2015 incentive plan for key options plan (split into the A, B, C, and D schemes). Efecte has issued options as a part of employees the incentive plan for key employees. All of the options from the different plans and schemes currently active expire on the 31.12.2020.

Over half of the total The options series 2011 has already vested and of the total 130,000 options issued outstanding options have 107,164 are still unused, with which 321,492 shares can be subscribed. Of the 2015 vested options plan currently only series A has vested, giving the rights to subscribing 76,500 shares in total, with the other schemes vesting the year after the previous scheme. Option scheme 2015 – D is the only scheme subject to certain vesting criteria. The options will vest the 30.4.2020 with the following percentages: a) 50 % if Efecte’s international net sales in 2019 exceeds EUR 3.2m, b) 75 % if Efecte’s international net sales in 2019 exceeds EUR 4m, and c) 100 % if Efecte’s international net sales in 2019 exceeds EUR 4.7m.

Table 3: Options schemes and currently granted options

Subscribable Option series Options granted shares Strike price Vesting date Expiration date 2011 107 164 321 492 0,58 31.12.2014 31.12.2020 2015 - A 25 500 76 500 1,5 30.4.2017 31.12.2020 2015 - B 25 500 76 500 1,67 30.4.2018 31.12.2020 2015 - C 26 500 79 500 1,67 30.4.2019 31.12.2020 2015 - D 15 000 45 000 3,34 30.4.2020 31.12.2020

Source: Efecte

Available options could The total shares that could be subscribed for up after the vesting of the 2015–D options increase share amount by (given that the 100 % criteria is fulfilled) would be 598,992 shares. Currently the 13 % if fully exercised company has roughly 4.489m shares outstanding and if every option were to be used the amount of shares would increase by some 13 %. For the 2015 options series the company still has the authorization to issue altogether 42,500 options from schemes 2015–B, -C, and -D, that have not yet vested, giving the rights to subscribe an additional 127,500 shares. If all option authorizations were to be used and all options were to be subscribed for, the total amount of shares would increase by 16 %, based on the current share amount.

Options may have a The dilution caused by the potential subscription of shares with the options affects the dilutive effect in the future earnings per shares and also the dividend per share. Also, depending on the share value when subscribing shares, the value of an outstanding share could decrease if the option is well in-the-money, i.e. the strike price is low compared to the share value. In our opinion we see a high probability that at least a part of the options will be used to subscribe shares based on the strike prices.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Planned Initial Public Offering (IPO)

Planning listing on Nasdaq Efecte is planning an initial public offering (IPO) and a listing of its shares on the First First North Finland North Finland market. The objective of the IPO is to support Efecte’s growth strategy and expansion of operations internationally. The Listing is also aimed at enabling the use of shares as means of payment in potential acquisitions and rewarding the company’s employees. The listing is also targeted to increase number of shareholders, improve access to capital markets and raise awareness of the company. The IPO is expected to consist of a primary offering, where the company issues new shares, and a secondary offering, where shareholders of the company sell their existing shares. In the planned IPO, the objective is to raise EUR 5.7 million of new equity before IPO related fees and expenses.

Estimates

Strong order intake growth The first half of 2017 saw Efecte growing 22 % from the previous quarter. Since Q4/16 from Q4/16 onward, order intake has been exceptionally strong looking at recent years, with order intake translates into revenue growth at around 110 % from Q4/15-Q2/16 to Q4/16-Q2/17. Based on available H1/17 with some delay figures we estimate some 30 % of the order intake to have been renewals of existing customers’ contracts. Despite the increases due to renewals, order intake growth has also been driven by increased new customer sales and additional sales to existing customers. This can be seen in the good growth in services, up 57 % from EUR 1.2m in H1/16 to EUR 1.9m in H1/17. As services sales are mainly related to customer implementation projects, new customer orders tend to generate revenue early on and after the implementation license revenue will follow over the license period (initially typically 36 months).

Expected sales of EUR 5.4m Due to the strong order intake and stable license sales we expect growth to continue to in H2/17 be good in H2/17. We expect Subscription licenses revenue to continue a good and steady growth. We expect the seasonally slower Q3 to affect H2/17 figures and as such Services revenue to remain at H1/17 levels. For Maintenance and Perpetual licenses sales we expect sales to continue a slow decline. We expect total sales during H2/17 of EUR 5.4m.

EBIT in H2/17 expected to We expect EBIT to be slightly negative in H2/17, affected by the upfront investments into be slightly negative at EUR growth in the form of personnel expenses. The company has quite recently recruited a -0.1m sizeable amount of new employees, for instance the six person team in Germany, which will have an impact on costs. We expect H2/17 EBIT to amount to EUR -0.1m with an EBIT-margin of -2.1 %.

Full year net sales and Our full year 2017 net sales estimate is EUR 10.4m. Efecte has guided net sales to be EBITDA estimates of EUR between EUR 10.3 - 10.8m in 2017. Our full year EBITDA estimate is EUR 0.2m. Efecte 10.4m and EUR 0.2m has guided that the EBITDA-margin in 2017 is expected to be positive. respectively

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 21: Group net sales and sales growth 2015A-2020E

25,0 100 % 90 % 19,6 20,0 80 % 15,7 70 % 15,0 12,7 60 % 10,4 50 % 10,0 8,3 40 % 6,9 30 % 5,0 20 % 27 % 25 % 24 % 25 % 21 % 21 % 10 % 0,0 0 % 2015 2016 2017E 2018E 2019E 2020E

Net sales Sales growth

Source: Evli research

Long-term estimates

Conditions supportive to We expect Efecte to continue good growth in the coming years. Good leading indicators continued good growth for the short term growth are the strong order intake track record from Q4/16 onwards as well as accelerated recruitments. Growth is supported by the expected growth of the underlying markets, with the European ITSM- and cloud-based IAM-markets expected CAGR between 2016 and 2021 at 15.5 % and 22.0 % (MarketsandMarkets via Efecte). We see some potential growth limitations in Efecte’s core Finnish market, due to a limited number of potential target size customers. We expect the share of foreign sales to increase, supported by the recruitments in Germany and the larger target market. We expect the ramping up of the business in Germany to take some time, as the recruited team builds up the sales network.

Figure 22: Efecte’s personnel expenses and share of net sales (2014-2020E)

14,0 100,0%

12,0 80,0% 67,2% 10,0 63,0% 65,0% 62,8% 57,3% 57,5% 56,4% 8,0 60,0%

12,3 6,0 40,0% 10,2 4,0 8,5 6,6 20,0% 2,0 4,0 4,7 3,1 0,0 0,0% 2014 2015 2016 2017E 2018E 2019E 2020E Personnel expenses of net sales %

Source: Evli research

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Services revenue from new For 2018E we expect net sales of EUR 12.7m. We expect a strong sales component to be and additional sales the Services business, as we expect the company to actively sell both additional licenses expected to drive 2018E to existing clients (such as IAM-software to customers currently with ITSM-software) as growth well as seeking new customers. The Services component of the sales will be visible before revenue from Subscription licenses, as the latter will start to accrue once the integration and implementation of a customers project is complete. The focus mainly on a direct sales model as well as increased recruitments during the latter part of 2017 and a good demand for Efecte’s products support increasing Services revenue.

Growth expected to keep The growth initiatives are expected to affect profitability in the coming years. We expect profits low; Evli EBIT the share of personnel expenses to net sales to increase as the company recruits estimate EUR -0.6m 2018E personnel to continue growth. We expect profitability to be slightly negative in 2018E, with our EBIT estimate for 2018E at EUR -0.6m. Amortization of acquisition related goodwill will be completed during Q1/18, which will have a minor improving effect on EBIT-margins.

Profitability to start slow For 2019-2020E we expected the sales growth to continue and profitability to start catch up as personnel catching up but remaining at low levels. We expect the main contributor to improved expenses share of net sales profitability to be a lower share of personnel expenses to net sales, as scalable decreases Subscription licenses revenue grows in importance and the labour-intensive Services revenues stabilize.

Targets ’17-’22 – Over 20 Efecte expects profitability to remain low in the coming years but a double digit EBIT- % average organic growth; margin towards the end of the period 2017-2022. In our view with those targets in 2022 double digit EBIT-margin net sales could amount to some EUR 25-30m and EBIT to some EUR 3-4m. We believe towards end of period that double digit EBIT-margins can be achieved without completely giving up growth once Efecte has been able to expand operations further. We see future improvements in profitability to be supported by the scalable software solutions and a decreasing proportional share of new customer sales of revenue as the customer base is built up. We see improved profitability being driven by a lower personnel expenses share of net sales as well as to some extent the general scaling of currently rather small operations.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Table 4: Operating model for Efecte

Operating model 2014 2015 2016 H1/17 H2/17E 2017E 2018E 2019E 2020E Net sales (Group) 5,4 6,9 8,3 5,0 5,4 10,4 12,7 15,7 19,6 growth % 27 % 21 % 22 % 28 % 25 % 21 % 24 % 25 % Subscription licenses 2,6 3,4 2,2 2,5 4,7 6,0 7,7 10,2 growth % 35 % 36 % 40 % 38 % 26 % 29 % 32 % Perpetual licenses 0,2 0,5 0,2 0,1 0,3 0,3 0,3 0,3 growth % 120 % -46 % 17 % -37 % -11 % -7 % -7 % Maintenance 1,9 1,6 0,7 0,7 1,5 1,3 1,1 0,9 growth % -13 % -7 % -13 % -10 % -11 % -15 % -18 % Services 2,2 2,6 1,9 2,0 3,9 5,1 6,6 8,3 growth % 19 % 57 % 39 % 47 % 31 % 30 % 25 %

Other income 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Materials and Services -0,6 -1,2 -1,0 -0,6 -0,7 -1,3 -1,6 -2,0 -2,4 of net sales % 10,7% 16,7% 12,1% 11,5% 13,0% 12,3% 12,5% 12,5% 12,0%

Gross profit 4,9 5,7 7,3 4,5 4,7 9,1 11,1 13,7 17,2 Gross margin % 89,3% 83,3% 87,9% 88,5% 87,0% 87,7% 87,5% 87,5% 88,0%

Personnel expenses -3,1 -4,0 -4,7 -3,2 -3,4 -6,6 -8,5 -10,2 -12,3 of net sales % 57,3% 57,5% 56,4% 62,8% 63,2% 63,0% 67,2% 65,0% 62,8%

Other operating costs -2,0 -1,7 -2,1 -1,2 -1,2 -2,4 -2,9 -3,5 -4,3 of net sales % 36,0% 25,4% 25,6% 23,8% 22,3% 23,0% 23,0% 22,5% 22,0%

EBITDA -0,2 0,0 0,5 0,1 0,1 0,2 -0,3 0,0 0,6 EBITDA-margin % -4,0% 0,4% 5,9% 1,8% 1,5% 1,6% -2,7% 0,0% 3,2%

Total D&A -0,3 -0,4 -0,4 -0,2 -0,2 -0,4 -0,3 -0,3 -0,3 Depreciation and amort. -0,2 -0,2 -0,2 -0,1 -0,1 -0,2 -0,3 -0,3 -0,3 Goodwill amortization -0,1 -0,1 -0,1 -0,1 -0,1 -0,1 0,0 0 0

EBIT -0,5 -0,3 0,1 -0,1 -0,1 -0,2 -0,6 -0,3 0,3 EBIT-margin % -9,7% -4,8% 1,6% -2,1% -2,1% -2,1% -4,9% -1,8% 1,7%

Source: Evli research

Valuation

Our peer group consists of large global SaaS companies, mainly US-based, as well as Nordic IT-services companies and software companies. The SaaS companies are by market capitalization measured considerably larger and include some direct competitors such as ServiceNow and Okta as well as other companies with SaaS business models.

Size, growth outlook and We see that Efecte should be mainly viewed as a SaaS company. Although Services recurring revenues in SaaS account for a notable part of revenue the majority will translate into recurring licenses businesses affords higher revenue. SaaS companies are usually afforded higher multiples due to the recurring multiples revenues, growth outlook, and high scalability. When considering the SaaS company peers with similar business model, it should be noted that these firms are substantially larger and mainly US based, which has an effect on valuation multiples.

Of the SaaS firms only Micro Focus is listed in the UK whilst the other are listed US companies. The firms have a strong median sales growth expectiation of 20 % for 2017- 19E. Earnings-multiples are to some extent distorted by the negative earnings estimates for some firms but median EV/EBITDA and EV/Sales 2018E are at 37.7x and 5.8x respectively.

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Figure 23: Global SaaS companies and Nordic IT-services and software companies EV/Sales to growth comparison

Source: Bloomberg, Evli research

Table 5: Peer companies valuation multiples

COMPANY MCAP EV/EBITDA EV/EBIT EV/SALES P/E MEUR 17E 18E 19E 17E 18E 19E 17E 18E 19E 17E 18E 19E Workday 18827 65,0x 45,9x 34,1x 125,1x 77,7x 51,3x 10,0x 8,0x 6,8x 133,3x 104,2x 76,8x ServiceNow 18082 49,3x 33,0x 25,9x 67,5x 46,1x 29,1x 10,8x 8,3x 6,4x 102,9x 69,0x 45,7x Micro Focus 12829 13,6x 10,3x 10,5x 16,2x 12,7x 12,0x 5,0x 3,9x 4,2x 17,8x 16,2x 14,7x Atlassian Corp 10140 55,2x 41,3x 33,7x 91,5x 61,4x 15,5x 11,9x 9,8x 126,9x 99,4x 76,7x LogMeIn 5113 15,5x 12,8x 11,2x 18,5x 14,8x 13,0x 5,6x 4,9x 4,5x 27,2x 23,2x 20,6x Zendesk 2948 249,1x 118,0x 68,5x 914,7x 7,4x 5,7x 4,5x 163,7x Box 2480 271,0x 47,8x 5,7x 4,6x 4,1x Okta 2323 10,6x 8,1x 6,6x Cloudera 1788 4,7x 3,7x 3,1x Qualys 1854 22,2x 19,1x 15,9x 29,4x 26,1x 22,4x 8,2x 7,0x 6,0x 54,7x 49,5x 42,4x Callidus Software 1596 48,3x 34,1x 72,5x 49,0x 6,8x 5,7x 4,7x 80,9x 53,7x 39,0x Five9 1183 84,9x 62,8x 41,5x 172,8x 128,0x 59,8x 7,0x 5,9x 5,0x 317,0x 192,6x 82,1x SaaS firms average 6597 67,0x 64,8x 32,1x 74,2x 52,0x 157,5x 8,1x 6,5x 5,5x 107,6x 76,0x 62,4x SaaS firms median 2714 49,3x 37,7x 33,7x 70,0x 47,5x 29,1x 7,2x 5,8x 4,9x 91,9x 61,3x 45,7x Acando 285 10,9x 9,9x 9,2x 11,2x 10,4x 9,7x 1,2x 1,1x 1,1x 14,4x 13,3x 12,4x Atea 1196 11,2x 9,8x 8,8x 16,7x 13,5x 11,7x 0,4x 0,4x 0,4x 20,1x 15,9x 13,7x EVRY 1260 10,1x 8,8x 8,3x 13,4x 10,4x 9,7x 1,3x 1,3x 1,3x 12,1x 10,1x 9,8x HiQ 316 13,6x 12,5x 11,5x 14,2x 13,0x 12,0x 1,7x 1,6x 1,5x 19,3x 17,6x 16,2x Innofactor 33 16,0x 8,3x 6,4x 49,5x 12,2x 8,4x 0,7x 0,7x 0,6x 65,7x 11,5x 7,9x Knowit 279 10,7x 9,8x 9,1x 11,5x 10,2x 9,4x 1,1x 1,0x 1,0x 14,8x 12,9x 11,8x Digia 64 9,5x 8,0x 6,2x 17,6x 10,5x 7,5x 0,7x 0,7x 0,6x 26,6x 13,7x 9,2x Tieto 1953 10,8x 10,1x 9,7x 14,3x 13,3x 12,7x 1,4x 1,3x 1,3x 16,0x 15,2x 14,5x IT-services average 673 11,6x 9,6x 8,6x 18,5x 11,7x 10,1x 1,1x 1,0x 1,0x 23,6x 13,8x 11,9x IT-services median 301 10,8x 9,8x 9,0x 14,2x 11,4x 9,7x 1,1x 1,1x 1,0x 17,6x 13,5x 12,1x Basware 654 466,9x 61,6x 35,0x 952,9x 78,3x 4,5x 4,2x 3,8x 7573,3x 99,2x Qt Group 127 70,8x 327,6x 3,0x 2,6x 2,1x 1070,0x F-Secure 642 33,3x 20,2x 14,0x 47,6x 25,6x 16,6x 3,3x 3,0x 2,7x 52,5x 36,7x 23,8x CLX Communications 401 14,1x 11,0x 9,7x 22,4x 14,5x 1,4x 1,2x 1,1x 24,6x 22,7x Vitec Software Group 246 12,1x 10,6x 10,3x 26,4x 21,9x 20,1x 3,3x 3,0x 2,9x 33,2x 28,6x 25,9x Software average 414 131,6x 25,9x 28,0x 32,1x 253,7x 110,7x 3,1x 2,8x 2,5x 36,7x 1915,3x 304,7x Software median 401 23,7x 15,6x 14,0x 26,4x 23,7x 49,2x 3,3x 3,0x 2,7x 33,2x 32,7x 62,6x Source Bloomberg

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

COMPANY Country Sales Sales growth CAGR EBIT-% Div. yield 16A 17E 18E 17-19E 17E 18E 19E 17E 18E 19E Workday USA 1421 29 % 20 % 19 % 8,0 % 10,3 % 13,2 % 0,0 % 0,0 % 0,0 % ServiceNow USA 1257 31 % 31 % 30 % 16,0 % 17,9 % 22,1 % 0,0 % 0,0 % 0,0 % Micro Focus UK 1265 128 % 26 % 8 % 30,8 % 30,7 % 35,2 % 2,5 % 2,9 % 3,1 % Atlassian Corp USA 569 14 % 24 % 23 % 16,9 % 19,4 % LogMeIn USA 304 189 % 14 % 11 % 30,4 % 33,2 % 34,7 % Zendesk USA 282 30 % 29 % 29 % -10,2 % -6,9 % 0,5 % Box USA 361 23 % 20 % 16 % -12,2 % -5,9 % Okta USA 145 41 % 29 % 26 % -32,0 % -22,7 % -9,7 % Cloudera USA 236 26 % 26 % 22 % -37,2 % -24,1 % 0,0 % 0,0 % 0,0 % Qualys USA 179 10 % 16 % 16 % 27,8 % 26,9 % 27,0 % Callidus Software USA 187 14 % 20 % 20 % 9,4 % 11,6 % Five9 USA 147 15 % 18 % 18 % 4,0 % 4,6 % 8,4 % SaaS firms average 529 46 % 23 % 20 % 4,3 % 7,9 % 16,4 % 0,6 % 0,7 % 0,8 % SaaS firms median 293 28 % 22 % 20 % 8,7 % 11,0 % 17,7 % 0,0 % 0,0 % 0,0 % Acando Sweden 233 8 % 7 % 6 % 10,6 % 10,7 % 10,9 % 5,1 % 5,4 % 5,6 % Atea Norway 3357 0 % 5 % 4 % 2,4 % 2,9 % 3,2 % 6,1 % 6,2 % 6,4 % EVRY Norway 1318 0 % 3 % 3 % 9,9 % 12,4 % 13,0 % 3,4 % 5,3 % 6,5 % HiQ Sweden 175 4 % 6 % 6 % 12,0 % 12,3 % 12,5 % 5,8 % 6,1 % 6,2 % Innofactor Finland 60 14 % 4 % 6 % 1,4 % 5,5 % 7,5 % 0,0 % 1,4 % Knowit Sweden 256 9 % 7 % 6 % 9,4 % 10,0 % 10,2 % 3,5 % 4,1 % 4,8 % Digia Finland 86 9 % 6 % 7 % 4,1 % 6,4 % 8,4 % 3,3 % 2,3 % 2,7 % Tieto Finland 1493 3 % 4 % 3 % 9,6 % 10,0 % 10,1 % 5,0 % 5,3 % 5,5 % IT-services average 872 6 % 5 % 5 % 7,4 % 8,8 % 9,5 % 4,6 % 4,3 % 4,9 % IT-services median 245 6 % 5 % 6 % 9,5 % 10,0 % 10,1 % 5,0 % 5,3 % 5,6 % Basware Finland 149 1 % 8 % 9 % -5,5 % 0,4 % 4,9 % 0,0 % 0,0 % 0,1 % Qt Group Finland 32 16 % 18 % 20 % -10,8 % -12,8 % 0,6 % 1,9 % F-Secure Finland 158 8 % 10 % 10 % 6,9 % 11,6 % 16,3 % 2,0 % 2,8 % 2,6 % CLX Communications Sweden 115 179 % 10 % 11 % 6,2 % 8,6 % 0,0 % 0,0 % 0,0 % Vitec Software Group Sweden 71 22 % 12 % 7 % 12,5 % 13,6 % 14,4 % 1,2 % 1,4 % 1,6 % Software average 105 45 % 12 % 11 % 1,9 % 4,3 % 9,1 % 0,8 % 1,1 % 1,2 % Software median 115 16 % 10 % 10 % 6,2 % 8,6 % 9,6 % 0,6 % 0,7 % 1,6 % Source Bloomberg

Predictability in SaaS Considering our estimates for Efecte’s profitability, due to the intended strong growth business affords higher phase in the coming years, we see EV/Sales as the most reasonable multiple. In our view multiples the size difference to the much larger SaaS peers as well as the more predictable sales and scalability in comparison to IT-services providers should be considered in valuation against peers. At the higher end of our valuation range we consider valuation toward the large global SaaS companies and Nordic software companies, with median EV/Sales of 5.8x and 3.0x for 2018E respectively, adjusted downward to account for Efecte’s smaller size. At the lower end of our valuation range, we believe that Efecte should be valued well above the Nordic IT-services providers, trading at median EV/Sales 2018E of 1.1x, due to the services revenue being related to SaaS implementation which largely translates into predicatable and recurring Subscription licenses revenues.

Table 6: Valuation range on EV/Sales 2018E (EURm) Equity value 20 22,5 25 27,5 30 32,5 35 37,5 40 42,5 45 47,5 50 Enterprise value 14,9 17,4 19,9 22,4 24,9 27,4 29,9 32,4 34,9 37,4 39,9 42,4 44,9 EV/Sales 1,2 1,4 1,6 1,8 2,0 2,2 2,4 2,6 2,8 3,0 3,2 3,4 3,5

Source: Evli research

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

INCOME STATEMENT, EURm 2014 2015 2016 2017E 2018E 2019E Sales 5 7 8 10 13 16 Sales growth (%) N/A 26.7 20.9 25.2 21.4 24.0 Costs -6 -7 -8 -10 -13 -16 Reported EBITDA 0 0 0 0 0 0 Extraordinary items in EBITDA 0 0 0 0 0 0 EBITDA margin (%) -4.0 0.4 5.9 1.7 -2.8 0.1 Depreciation 0 0 0 0 0 0 EBITA 0 0 0 0 -1 0 Goodwill amortization / writedown 0 0 0 0 0 0 Reported EBIT -1 0 0 0 -1 0 EBIT margin (%) -9.7 -4.8 1.6 -2.1 -4.9 -1.8 Net financials 0 0 0 -1 0 0 Pre-tax profit -1 0 0 -1 -1 0 Extraordinary items 0 0 0 0 0 0 Taxes 0 0 0 0 0 0 Minority shares 0 0 0 0 0 0 Net profit -1 0 0 -1 0 0 BALANCE SHEET, EURm Assets Fixed assets 1 1 1 1 1 2 % of sales 12 11 10 10 10 10 Goodwill 0 0 0 0 0 0 % of sales 8 5 2 0 0 0 Inventory 0 0 0 0 0 0 % of sales 1 1 0 0 0 0 Receivables 2 1 2 2 2 3 % of sales 30 20 19 17 17 17 Liquid funds 0 1 1 5 5 5 % of sales 8 8 12 51 40 31 Total assets 3 3 4 8 8 9 Liabilities Equity 1 1 1 5 5 4 % of sales 18 9 9 49 36 28 Deferred taxes 0 0 0 0 0 0 % of sales 0 0 0 0 0 0 Interest bearing debt 1 0 0 0 0 0 % of sales 15 6 2 0 1 0 Non-interest bearing current liabilities 1 2 3 3 4 5 % of sales 27 29 32 30 30 30 Other interest free debt 0 0 0 0 0 0 % of sales 0 0 0 0 0 0 Total liabilities 3 3 4 8 8 9 CASH FLOW, EURm + EBITDA 0 0 0 0 0 0 - Net financial items 0 0 0 -1 0 0 - Taxes 0 0 0 0 0 0 - Increase in Net Working Capital 0 1 0 0 0 0 +/- Other 0 0 0 0 0 0 = Cash flow from operations 0 1 1 0 0 1 - Capex -1 0 0 0 0 -1 - Acquisitions 0 0 0 0 0 0 + Divestments 0 0 0 0 0 0 = Net cash flow -2 0 1 -1 0 0 +/- Change in interest-bearing debt 1 0 0 0 0 0 +/- New issues/buybacks 0 0 0 5 0 0 - Paid dividend 0 0 0 0 0 0 +/- Change in loan receivables 0 0 0 0 0 0 Change in cash 0 0 0 4 0 0

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

COMPANY DESCRIPTION: Efecte is a Finnish software company specialized in IT service management (ITSM) and identity and access management (IAM) solutions to medium and large size companies. The company was founded in 1998 and employs over 90 people, with sales offices in Finland, Sweden, Germany and Denmark, and has around 300 customers.

OWNERSHIP STRUCTURE SHARES EURm % First Fellow Oy 22.5 % Oy Fincorp Ab 12.8 % Jaakkola Kristian 10.1 % Sarkkinen Jussi 9.0 % Apajalahti Jaan 6.7 % Aloitusrahasto Vera Oy 6.7 % Montonen Markku 5.9 % Kosonen Jukka 5.2 % Havacment Oy 2.7 % Ervi Pertti 1.6 % Ten largest 83 % Residual 17 % Total 100%

EARNINGS CALENDAR

OTHER EVENTS

COMPANY MISCELLANEOUS CEO: Sakari Suhonen Vaisalantie 6, Espoo CFO: Hannu Nyman Tel: +358 9 2535 0400 IR:

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

DEFINITIONS

P/E EPS Price per share Profit before extraordinary items and taxes Earnings per share  income taxes  minority interest Number of shares

P/Sales DPS Market cap Dividend for the financial period per share Sales

P/BV CEPS Price per share Gross cash flow from operations Shareholders' equity  taxed provisions per share Number of shares

P/CF EV/Share Price per share Enterprise value Operating cash flow per share Number of shares

EV (Enterprise value) Sales/Share Market cap  net debt  minority interest at market value Sales  share of associated companies at market value Number of shares

Net debt EBITDA/Share Interest bearing debt  financial assets Earnings before interest, tax, depreciation and amortisation Number of shares

EV/Sales EBIT/Share Enterprise value Operating profit Sales Number of shares

EV/EBITDA EAFI/Share Enterprise value Pretax profit Earnings before interest, tax, depreciation and amortisation Number of shares

EV/EBIT Capital employed/Share Enterprise value Total assets  non interest bearing debt Operating profit Number of shares

Div yield, % Total assets Dividend per share Balance sheet total

Price per share

Payout ratio, % Interest coverage (x) Total dividends Operating profit Earnings before extraordinary items and taxes  income taxes  minority interest Financial items

Net cash/Share Asset turnover (x) Financial assets  interest bearing debt Turnover Number of shares Balance sheet total (average)

ROA, % Debt/Equity, % Operating profit  financial income  extraordinary items Interest bearing debt Balance sheet total  interest free short term debt Shareholders' equity  minority interest  taxed provisions  long term advances received and accounts payable (average)

ROCE, % Equity ratio, % Profit before extraordinary items  interest expenses  other financial costs Shareholders' equity  minority interest  taxed provisions Balance sheet total  non interest bearing debt (average) Total assets  interest free loans

ROE, % CAGR, % Profit before extraordinary items and taxes  income taxes Cumulative annual growth rate  Average growth per year Shareholders' equity  minority interest  taxed provisions (average)

EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

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Name(s) of the analyst(s): Salokivi and Lindell

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EVLI EQUITY RESEARCH EFECTE Software/Finland, November 16, 2017 IPO Research Report

Contact information SALES AND TRADING HELSINKI

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Structured Investments Corporate Bonds sales and trading Derivatives Trading

Heikki Savijoki +358 9 4766 9726 Jukka Hyvönen +46 8 407 8138 Sami Järvinen +358 9 4766 9110 Aki Lakkisto +358 9 4766 9123

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EQUITY RESEARCH

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Technology, Software Strategist Research Analysts

Jonas Forslund +358 9 4766 9314 Valtteri Ahti +358 9 4766 9773 Olli Pöyhönen +358 9 4766 9643 Jerker Salokivi +358 9 4766 9149

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