Sales increased by 36% y/y, beating our forecast by 12%. Organic growth was 21%. While the beat and the strong y/y growth was mainly attributable to the high growth in System revenue, growing by 34% organically y/y, the Service revenue also had a solid quarter. Total Service Revenue grew organically by 6% y/y and exceeded our expectations, as Support and Consulting beat our forecasts and Cloud matched it. Regarding Support, the beat is probably partly due to us underestimating the contribution from the recently acquired Sepago.

Adjusted EBITA (adjusted for SEK4.9m related to the acquisition of Sepago) was SEK78.3m (59.8), corresponding to an EBITA margin of 7.1% (7.4), beating our forecast by 25%. Actual EBITA and EPS were roughly 16% better than we expected. The gross margin came in somewhat lower than we expected. However, considering the high System revenue, that is what one should expect. SG&A was slightly higher than we estimated. Increasing material and energy prices had no substantial impact on costs during the quarter.

According to management, the order book remains significantly above normal levels, although declining somewhat sequentially. The supply chain situation improved during the quarter, and we believe the strong System revenue was likely boosted by pent-up demand to some extent. Considering management’s statements, we believe the System revenue will remain strong over the next few quarters.

The recurring revenues (Cloud and Support) grew by 26% y/y, and the organic growth was 6% y/y. While the System revenue had an even higher growth this quarter, we are pleased to see recurring revenues growing both organically and through M&A. As the System revenue is volatile quarterly, we believe having a growing base of recurring revenue is important for Proact's earnings stability and quality. While Proact started reporting the organic growth in recurring revenues recently, the organic growth has picked up from 2-3% in Q3 2021 - Q1 2022 to 6% since Q2 2022 – and improvement relative to early 2021 and 2020 is likely even greater. While the general shift towards cloud, the strong TCV, and solid System revenue lately have positively impacted organic growth, we believe the improvement in organic growth has some implications for the quality of Proact’s services – indicating lower churn and/or higher upsell.

TCV, the intake of new Cloud contracts, increased to SEK158m (75) from SEK 147m in Q2. While this figure tends to be somewhat volatile between quarters, the R12m number is also solid. Although several Cloud-heavy acquisitions, the market moving towards cloud, and a possible catch-up effect following a soft 2020/21 likely had a positive impact, we believe Proact has reached a new higher level regarding TCV. Also, increasing TCV will, all else equal, result in higher Cloud revenue growth going forward.

We raise our sales forecast for 2022e and 2023e by 3% and 1%. Regarding 2022e, the increase is mostly due to the strong System revenue in the quarter and the solid guidance for Q4 2022, considering the above-normal order book and easing supply chain issues. For 2023e, the raise is largely based on higher expectations on Support, as we previously likely underestimated the Support revenue in the newly acquired Sepago.

As we only raise our SG&A forecasts marginally, we increase our EBITA forecasts by 4-6% for 2022e and 2023e. The increase in EPS is lower as we increase our assumptions for financial costs due to increasing interest rates.

We expect slight margin improvements over the coming years driven by an improved sales mix (more Service revenue) and some scalability on SG&A. The almost 8% growth we expect for 2023e is mainly due to already made acquisitions and a solid momentum in cloud revenue, seen in the strong TCV.