cBrain: A Scalable Software Play for the Public Sector

cBrain is a Danish software company specializing in standardized digital solutions for government institutions. Its F2 platform simplifies public sector workflows, replacing traditional custom-built IT systems with an efficient, ready-to-use alternative. With a strong presence in Denmark and a growing international footprint, cBrain is benefiting from the accelerating shift toward commercial off-the-shelf (COTS) software for government. As the company expands globally, invests in its F2 ecosystem, and strengthens its subscription-based business model, it is positioning itself for long-term growth. The question remains: Should this government software provider have a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in cBrain. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of  cBrain either. Thus, I have no personal stake in  cBrain. If you want to purchase shares (or fractional shares) of cBrain, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $50.

The Business

cBrain is a Danish software company founded in 2002 that specializes in developing software to help governments digitize their work processes. Its main product, F2, is a ready-to-use digital platform that enables government institutions to handle paperwork, approvals, and case management more efficiently. Unlike traditional IT solutions that require extensive custom development and expensive consultants, cBrain offers a fully standardized software system designed specifically for government use. This allows public institutions to implement the system quickly, at lower costs, and with fewer technical challenges. Initially developed for Danish government ministries, F2 has expanded to serve a wide range of public institutions, including regional authorities and municipalities. Today, more than 75 Danish government bodies, including 21 ministries, use F2, and cBrain has successfully introduced its software to over a dozen countries worldwide, including France, Germany, the UK, the US, the UAE, and several African nations. What gives cBrain its competitive moat is its ability to simplify digital transformation for governments. Many public sector IT projects are large, expensive, and take years to complete because they rely on custom-built systems. These projects often run into delays, budget overruns, and technical difficulties. cBrain challenges this outdated approach by providing an off-the-shelf, fully integrated software platform that can be deployed quickly with minimal setup, reducing both cost and risk. cBrain has a profitable business model based on long-term contracts with government clients. Instead of relying on costly one-time projects, it provides its software as a subscription service, ensuring stable revenue.

Management

​Per Tejs Knudsen is the CEO and founder of cBrain. He earned a degree in civil engineering from the Technical University of Denmark (DTU) in 1982 and later completed a Graduate Diploma in Business Administration (HD) in accounting from Copenhagen Business School in 1988. Per Tejs Knudsen began his entrepreneurial journey in 1983 when he founded PPU Software, which was later renamed Maconomy A/S in 1988. Under his leadership as CEO, Maconomy went public on the Copenhagen Stock Exchange in 2000. In 2002, he founded cBrain and took the company public in 2006, where he continues to serve as CEO. Beyond his corporate roles, Per Tejs Knudsen is actively involved in the academic and technological communities. He serves on the advisory board of the Department of Applied Mathematics and Computer Science at DTU and is a member of the representative board at DTU. Additionally, he is a member of the Danish Academy of Technical Sciences and Dansk IT, reflecting his commitment to advancing technology and education in Denmark. Per Tejs Knudsen also owns Putega Holding ApS, which holds a significant stake in cBrain. Under his leadership, cBrain has achieved notable financial success and expanded internationally. He is recognized for his innovative approach to digital transformation in the public sector. In an interview, he highlighted Denmark's proactive stance on digitalization, stating, "Our government identified the need to formulate a digitalization strategy several years before anyone else." His leadership and vision have been instrumental in positioning cBrain as a key player in providing standardized software solutions for government institutions, both in Denmark and internationally. I personally like when founders also serve as CEOs and maintain a large stake in the company, as it ensures they have skin in the game. I also appreciate Per Tejs Knudsen’s extensive experience and track record. For these reasons, I am confident in Per Tejs Knudsen’s leadership of cBrain moving forward.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. cBrain has achieved a ROIC above 10% in seven out of the past ten years. While I would prefer to see the company maintaining a ROIC above 10% every year, it is encouraging that cBrain has delivered a ROIC above 15% in each of the past five years and exceeded 20% in three of the last four years. This upward trend suggests strong capital efficiency. Looking ahead, I believe cBrain is well-positioned to sustain a high ROIC due to its asset-light business model, high-margin recurring revenue, and low capital expenditure requirements. With a standardized software approach that minimizes development costs and long-term government contracts that provide pricing stability, cBrain should continue generating strong returns on invested capital in the years to come.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2014 to 2015 as Finbox only provides data for the past ten years. These numbers are highly encouraging, as cBrain has managed to grow its equity every year except for one, where it remained flat. Another promising trend is that since 2020, cBrain has achieved equity growth of more than 10% year over year. This consistency highlights the company's strong financial position and ability to generate value for shareholders.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that cBrain has delivered positive free cash flow every year for the past decade. While free cash flow has shown some volatility over the years, it remained relatively steady from 2021 to 2023 before nearly doubling in 2024. This strong cash flow generation bodes well for the company’s future. cBrain has stated that its free cash flow allows for both dividend increases and investments in business growth while also reducing long-term loans associated with company-owned buildings. The company does not have a buyback program, which is understandable given its low free cash flow yield. As a result, if cBrain continues to grow its free cash flow, investors can reasonably expect further dividend increases. The levered free cash flow margin has remained consistently high over the past five years, except in 2023, when cBrain made an extraordinary repayment on borrowings related to the purchase of Utzon House, leading to a negative cash flow from financing activities. Currently, the free cash flow yield suggests that cBrain is trading at a premium valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a three-year period, calculated by dividing total long-term debt by earnings. Upon analyzing cBrain’s financials, the company currently has no debt, making this a non-issue for investors. Additionally, management has demonstrated a commitment to using free cash flow for debt reduction, as seen with the repayment of loans on company-owned buildings. Given this approach, I do not expect debt to be a concern for cBrain in the future.

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Risks

Competition poses a significant risk for cBrain because the company’s core strength - offering a standardized, off-the-shelf software platform for government institutions - is expected to become more common over time. As public sector digitalization advances, other IT providers are likely to develop similar standard platforms that reduce the need for custom-built solutions, directly challenging cBrain’s current competitive position. Historically, cBrain benefited from being a first mover in offering a standardized platform for government IT solutions, setting it apart from traditional custom-built systems. However, as the industry moves toward standardization, more competitors will develop commercial off-the-shelf platforms targeted at government agencies. This could weaken cBrain’s unique market position, making it harder to justify premium pricing or maintain high customer retention rates. As new competitors enter the market, government agencies will have more alternatives to choose from. If well-established enterprise software providers or large IT consulting firms decide to invest heavily in standardized public sector platforms, they could leverage their brand recognition, financial resources, and existing government contracts to gain market share. This increased competition could lead to pricing pressure, forcing cBrain to lower margins or offer additional services to remain competitive. Larger competitors with greater global reach, strong government relationships, and more extensive service offerings could also outcompete cBrain in bidding processes. This is particularly relevant if multinational IT firms begin offering integrated government solutions that combine software, cybersecurity, and cloud infrastructure. The initial advantage cBrain had in building a fully integrated, ready-to-use government platform is diminishing as more companies invest in similar solutions. Advances in low-code and no-code development tools are also making it easier for new entrants to develop configurable platforms without extensive software development costs. With more competitors offering comparable standardized platforms, governments may push for lower prices, making it harder for cBrain to sustain its high-margin business model.

Failing to build an F2 ecosystem is a major risk for cBrain because its long-term growth depends on expanding its platform beyond direct sales. The company wants to create a network of partners, including customers, IT firms, consultants, and NGOs, to help more organizations adopt F2, grow faster, and reduce reliance on cBrain’s own resources. If cBrain struggles to develop this ecosystem, it could limit its ability to scale, weaken its competitive position, and slow down future growth. A successful F2 ecosystem would allow third parties to introduce, support, and expand the use of F2 without cBrain being directly involved in every project. The idea is that by providing ready-to-use tools, knowledge, and guidance, cBrain can make it easier for governments and organizations to implement digital solutions on their own. This would also enable partners to offer F2-based services to public institutions, further expanding its reach. If cBrain fails to market this approach effectively or does not provide the right support for partners, adoption could slow down. Without a strong ecosystem, cBrain would remain too dependent on direct sales and government contracts, which can take a long time to finalize. Building a network of trusted partners would allow the company to grow faster in new markets by leveraging their expertise and customer relationships. However, if cBrain’s business model does not provide enough incentives for partners to invest in F2, they may hesitate to commit time and resources to promoting it. This could limit cBrain’s expansion and make it harder to compete internationally.

Cyber attacks pose a significant risk for cBrain due to the sensitive nature of its software solutions and its focus on the public sector. Governments rely on cBrain’s F2 platform for mission-critical operations, including case management, administrative workflows, and compliance processes. Any disruption caused by a cyber attack could have serious consequences, not only for affected institutions but also for cBrain’s reputation and financial stability. As cyber threats become more frequent and sophisticated, cBrain faces the risk of unauthorized access to networks and data breaches. If hackers were to gain control over government data or disrupt F2’s functionality, it could compromise national security, expose confidential information, or halt essential public services. Given that many government contracts require strict security compliance, any breach could lead to regulatory scrutiny, legal liabilities, and a loss of trust from existing and potential clients. Reputation is one of cBrain’s key assets, as public institutions prioritize reliability and security when selecting digital solutions. A successful cyber attack could damage cBrain’s credibility, making it harder to retain and attract customers. Governments may turn to alternative software providers that offer stronger cybersecurity measures, leading to lost contracts and slower growth. Beyond reputational damage, cyber attacks can have direct financial consequences. Responding to a breach may require significant investments in security upgrades, forensic investigations, and potential compensation for affected clients. In the worst case, a severe cyber incident could result in service disruptions, contract terminations, or legal penalties, all of which could harm cBrain’s long-term financial performance.

Reasons to invest

The transition from custom-built IT systems to standardized government software, known as Commercial Off-The-Shelf (COTS) software, is happening faster than expected, creating a significant opportunity for cBrain. Traditionally, government IT has been dominated by large suppliers offering complex, custom-built solutions that require extensive consulting services, leading to long implementation times, high costs, and frequent project failures. However, there is a growing demand for faster, more efficient digital transformation, driven by a shortage of skilled IT professionals and the need for more cost-effective solutions. Governments are increasingly recognizing the benefits of standardized software, which allows them to implement digital solutions more quickly and at lower costs compared to traditional custom-built systems. cBrain’s F2 platform is well-positioned to capitalize on this shift, offering a proven, scalable solution that has already been widely adopted by Danish government institutions. The company recently implemented F2 for two new Danish ministries within just three weeks, a process that would typically take years with a custom-built approach. This rapid deployment highlights the efficiency and reliability of standardized government software and demonstrates why more public institutions are moving toward this model. As governments worldwide accelerate their investments in digital transformation, the shift to COTS software is expected to reduce reliance on IT consulting firms and increase demand for pre-built, configurable platforms like F2. This trend benefits cBrain by expanding its market opportunity and strengthening its competitive position. With a strong first-mover advantage and an established government customer base, cBrain is well-positioned to capitalize on the growing adoption of standardized government software solutions.

International expansion is a key reason to invest in cBrain, as the company is positioning itself to become a global leader in the emerging COTS-for-government industry. While cBrain has built a strong market position in Denmark, where its F2 platform is widely used by government institutions, its long-term growth potential lies in expanding beyond its domestic market. With international revenue already accounting for over one-third of total sales, cBrain is intensifying its efforts to increase exports and enter larger markets. To achieve this, cBrain is directing more resources toward international business development, including forming strategic partnerships and securing large-scale government contracts abroad. The company has built a pipeline of potential customers significantly larger than its Danish client base, with ongoing projects in Germany, the US, the UAE, India, Kenya, and Romania. These markets have significantly larger public sector IT budgets than Denmark, meaning successful contract wins could drive substantial revenue growth. A key part of cBrain’s international strategy is the "Steppingstones" initiative, which focuses on securing larger contracts and increasing the average contract value. This initiative is designed to accelerate annual revenue growth and shift the company’s revenue base toward international markets. Management has stated that within a few years, international sales are expected to exceed domestic revenue, reflecting the strong demand for standardized government software globally. cBrain’s solid financial position allows it to pursue global opportunities without compromising profitability, making it well-positioned to execute its growth strategy. As more government agencies recognize the efficiency and cost benefits of COTS software, cBrain’s ability to secure large international contracts will be a major driver of long-term value. If successful, this expansion could significantly grow the company’s market share, enhance brand recognition on a global scale, and solidify its position as a leader in government digitization.

Investing in the F2 system, particularly F2 Climate Software and the F2-for-Partners concept, is a key reason to consider cBrain as an investment. These initiatives support the company’s growth while generating stable subscription revenue. F2 Climate Software helps governments implement climate policies more efficiently. Many governments have ambitious environmental goals, but outdated systems and slow bureaucratic processes often cause delays. By using F2 Climate Software, government agencies can speed up approvals, manage grants, and track progress on climate initiatives. This allows policies to be implemented much faster, making it an attractive solution for countries looking to meet their climate commitments. A clear example is how the Danish Environmental Protection Agency used F2 Climate Software to launch a €300 million farmland restoration program. While such initiatives often take years to roll out, the agency was able to start executing the program within three months. The same technology was later used in Guyana to help protect endangered species, demonstrating that cBrain’s climate software can be adapted to different government needs worldwide. Since climate initiatives are largely government-driven and backed by significant funding, demand for ready-to-use digital tools in this space is expected to grow. The F2-for-Partners concept further expands cBrain’s reach by making its software more accessible while allowing the company to grow without significantly increasing its workforce. Traditionally, governments have relied on large IT consulting firms that charge high fees to build custom systems, which often take too long, cost too much, and fail to deliver the expected results. Instead of following this outdated model, cBrain allows governments - or the consulting firms they already work with - to configure and implement F2 software themselves. This approach simplifies adoption, helping more public institutions modernize their IT systems at a lower cost and with less complexity. It also provides cBrain with recurring subscription revenue, as governments and consulting firms continue to use and expand the platform over time. By making F2 a preferred tool for government digital transformation, cBrain strengthens its market position and makes it harder for competitors to replace it.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,31, which is from 2024. I have selected a projected future EPS growth rate of 15%.  Finbox expects EPS to grow by 27,7% over the next five years, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on cBrain's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be DKK 99,30. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy cBrain at a price of DKK 49,65 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 65, and capital expenditures were 25. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 18 in our calculations. The tax provision was 21. We have 19,6 outstanding shares. Hence, the calculation will be as follows: (65 – 18 + 21) / 19,6 x 10 = DKK 34,69 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With cBrain's Free Cash Flow Per Share at DKK 4,39 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is DKK 69,30.

Conclusion

I believe cBrain is an intriguing company with strong management. Its ability to simplify digital transformation for governments provides a competitive moat. The company has consistently delivered a high ROIC over the past five years, with three of those years exceeding 20%. It has also achieved its highest free cash flow ever, and given its asset-light business model, high-margin recurring revenue, and low capital expenditure requirements, I expect it to continue generating strong free cash flow. Competition is a risk for cBrain as more IT providers develop standardized, off-the-shelf platforms for government institutions, reducing its first-mover advantage. Larger competitors with strong government relationships and financial resources could pressure cBrain on pricing, erode its market share, and make it harder to maintain high margins and customer retention. Failing to build an F2 ecosystem also poses a risk, as it would limit the company's ability to scale efficiently and expand internationally. Without a strong network of partners to promote and implement F2, cBrain would remain too reliant on direct sales and government contracts, slowing adoption and making it harder to compete. Cyber attacks are another risk, as cBrain’s software is used for critical government operations, making it a potential target for data breaches and service disruptions. A successful attack could damage its reputation, lead to regulatory scrutiny, and result in financial losses. On the opportunity side, the transition from custom-built IT systems to standardized government software is accelerating, creating a major tailwind for cBrain. As governments seek faster, more cost-effective digital solutions, demand for pre-built platforms like F2 is increasing. International expansion is another key growth driver, with cBrain actively securing large-scale projects in high-budget markets. Successful contract wins could significantly boost revenue and strengthen its market position worldwide. Investing in the F2 system, particularly F2 Climate Software and the F2-for-Partners concept, positions cBrain for long-term growth by expanding its market reach and generating stable subscription revenue. I believe cBrain is a great company with significant growth potential, and buying shares at DKK 99, which aligns with the intrinsic value based on the Margin of Safety price, could be a strong long-term investment. I may even consider buying a small position at a higher price, as EPS is expected to grow more than 15% over the next five years.

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