Penneo: Preliminary ARR figures and adjusted EBITDA guidance

Research Update

2023-01-20

07:45

Redeye provides a research update following Penneo’s updated 2022 EBITDA guidance, while preliminary figures indicate an ARR within its guided range. Consequently, we make forecast adjustments to reflect this, leading to a slight upward revision in our valuation.

Jacob Svensson

Fredrik Nilsson

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Adjusted 2022 EBITDA guidance

As part of preparing its end-year financial statements, Penneo adjusted the 2022 EBITDA guidance from a previously negative DKK15-20m to a negative of DKK10-12m. This is due to higher-than-expected revenues in December, stemming from one-time fees (not affecting its ARR), which occur when customers extend their product engagements beyond initial agreements. Moreover, Penneo’s total costs related to payroll in 2022 seem to reach a lower level than anticipated.

Preliminary 2022 ARR figures — in line with guidance

Penneo also revealed preliminary 2022 ARR results that amounted to DKK71m, indicating a 28% y/y growth, slightly above our estimated DKK70m (26% y/y growth). As such, Penneo will reach its 2022 ARR guidance of DKK70-75m. We appreciate that the growth appears to have picked up since a relatively soft Q3. Despite Q4 being a seasonally strong quarter, preliminary figures indicate an impressive q/q ARR growth of DKK6m, corresponding to a 42% annualised q/q growth.

New Base Case of DKK14 (13)

We make minor forecast adjustments, increasing our 2022e ARR to DKK71m (DKK70m) as the preliminary figures suggest. In addition, we increase our revenue forecast while decreasing personnel expenses, resulting in a negative EBITDA of approximately DKK11m in 2022e. Altogether, it gives rise to a new Base Case of DKK14 (13) per share, while our Bear and Bull Cases of DKK4 and DKK28 are intact.

DKKm	2020	2021	2022e	2023e	2024e
Revenues	35.5	54.3	71.2	88.5	107.3
Revenue Growth	28.8%	52.8%	31.1%	24.4%	21.2%
EBITDA	-8.7	-14.1	-11.2	-6.3	2.9
EBIT	-16.2	-22.7	-23.8	-18.5	-10.3
EBIT Margin	-45.7%	-41.9%	-33.5%	-20.9%	-9.6%
Net Income	-12.8	-18.6	-23.8	-18.5	-10.3
EV/Revenue	24.3	8.3	4.1	3.2	2.9
EV/EBIT	-53.1	-19.8	-12.3	-15.5	-30.2

Case

Solid growth indicates potential for high future profitability

Considering Penneo’s Nordic audit dominance and its successful track record of expanding into new markets and verticals exhibiting impressive SaaS metrics, we believe Penneo will continue with rapid annual recurring revenue (ARR) growth. While currently unprofitable and favourable growth, we argue its strong net revenue retention (NRR) and scalability implies future high profitability and solid growth, with continued solid SaaS metrics serving as the main catalysts.

Evidence

Striking SaaS metrics supports our view

Penneo has a solid Nordic position, with 17 of the 20 largest auditors as customers in Denmark and several in Sweden and Norway. Its churn of 2-4% and NRR of 110-130% suggest customer satisfaction with increased usage over time, implying considerable lifetime value. This, combined with new sales growth of ~15-30%, successful geographical expansion with footprints in Finland and Belgium, and vertical expansion with its KYC product, supports continued solid growth and profitable prospects.

Challenge

Expensive geographical expansion

Management has signalled its goal to become the facto standard for auditors in Europe, which will come at the expense of increased costs. Although, we believe Penneo’s solid expansion track record highlights that the reward/probability of such a geographical expansion is worth the costs. In addition, we believe Penneo has a clear expansion strategy, riding on the standardized eIDs and expanding by auditors’ support into digitalized markets having well-developed eIDs, which lowers entry barriers.

Challenge

Competition from international players

Even if Penneo has a strong presence both in the Nordic market and particularly within its audit niche, which increases barriers to entry for competitors, Penneo might lose revenues as the market for digital signing consolidates, where global players want to squeeze out local players. However, Penneo’s low churn and strong NRR imply customer satisfaction and the niche B2B strategy targeting large audit customers increases the switching costs once integrated into its day-to-day business.

Valuation

Low EV/S not reflecting future potential

Based on our DCF model, we see a fair value of DKK14 per share in our Base Case and DKK4 and DKK28 per share in our Bear and Bull Cases, respectively. Considering Penneo’s striking SaaS metrics (among the top percentile in the Nordic SaaS space), with future growth and long-term margin prospects, we do not believe the current EV/S multiple reflects its full potential at current share levels.

Adjusted 2022 EBITDA guidance while preliminary ARR in line

As part of preparing end-year financial statements, Penneo adjusted its 2022 EBITDA guidance from a previously negative DKK15-20m to a negative of DKK10-12m. The change encountered includes the following:

In December, Penneo achieved higher than expected recognised revenues, stemming from one-time fee invoicing, which occurs when customers use Penneo’s products beyond the initial agreement. As such, this did not change the ARR

A change in the method Penneo uses to measure provisions related to the accounts receivables, which has decreased provisions

Penneo’s overall costs related to payroll reached a lower level than anticipated

Penneo also revealed preliminary 2022 ARR results that amounted to DKK71m, indicating a 28% y/y growth, slightly above our estimated DKK70m (26% y/y growth). As such, Penneo will reach its 2022 ARR guidance of DKK70-75m. We appreciate that the growth appears to have picked up since a relatively soft Q3. Despite Q4 being a seasonally strong quarter for Penneo, preliminary figures indicate an impressive q/q ARR growth of DKK6m, corresponding to a 42% annualised q/q growth.

Forecast adjustments

We make minor forecast adjustments, increasing our 2022e ARR to DKK71m (DKK70m) as its preliminary figures suggest. Due to an aggregated compounding effect of the ARR, this will also impact subsequent periods. In addition, we increase our revenue forecast for 2022e to reflect the higher-than-expected recognised revenue in December stemming from one-time fee invoicing. On the cost side, we make slight OPEX forecast adjustments, such as decreasing the personnel expenses, resulting in a negative EBITDA of approximately DKK11m in 2022e.

Valuation — New Base case of DKK14 (13)

The forecast adjustment gives rise to a new Base Case of DKK14 (13) per share, while our Bear and Bull Cases of DKK4 and DKK28 are intact.

People: 3

Penneo receives a high rating for People, as management, board members and owners have favourable characteristics. We get the impression that the CEO, Christian Stendevad, has the right experience for the position with his deep knowledge of growing and scaling digital companies. The board has relevant and complementary competencies, including entrepreneurial skills and experience within publicly listed companies and SaaS companies, which we like. Furthermore, we find the ownership structure positive with substantial shareholdings among management, resulting in a high score within this category.

Business: 3

Penneo obtains a relatively high rating in Business for several reasons. First, the SaaS business model is scalable with non-cyclical recurring revenue streams, resulting in predictability and low risk. Second, Penneo’s strategic focus on accounting firms results in a unique competitive advantage and the product has a huge value creation for the customers, which the solid growth suggests. And third, several structural trends drive the underlying market, such as increased digitalization, political ambitions to adopt digital legislation, and the striving for a sustainable business.

Financials: 1

Regarding Financials, Penneo gets a lower rating compared to the other categories. The main reason is that Penneo still is unprofitable, as management has prioritized growth over margins. Due to the company’s scalable business, we assume margins will increase gradually, heading for a higher rating in the future.

Income Statement

Income statement
DKKm	2020	2021	2022e	2023e	2024e
Revenues	35.5	54.3	71.2	88.5	107.3
Cost of Revenue	7.0	9.7	12.4	16.8	20.4
Operating Expenses	37.3	58.7	70.0	78.0	84.0
EBITDA	-8.7	-14.1	-11.2	-6.3	2.9
Depreciation	-0.12	-0.19	-0.29	-0.33	-0.35
Amortizations	-2.8	-5.0	-6.4	-7.3	-7.9
EBIT	-16.2	-22.7	-23.8	-18.5	-10.3
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	-1.1	-1.6	0.00	0.00	0.00
Net Financial Items	1.1	1.6	0.00	0.00	0.00
EBT	-17.3	-24.2	-23.8	-18.5	-10.3
Income Tax Expenses	4.5	5.5	0.00	0.00	0.00
Net Income	-12.8	-18.6	-23.8	-18.5	-10.3

Balance Sheet

Balance sheet
Assets
Non-current assets
DKKm	2020	2021	2022e	2023e	2024e
Property, Plant and Equipment (Net)	0.73	1.2	1.1	1.0	0.90
Goodwill	0.00	0.00	0.00	0.00	0.00
Intangible Assets	35.3	45.0	56.6	69.2	82.1
Right-of-Use Assets	15.4	12.9	10.5	10.5	10.5
Other Non-Current Assets	1.3	1.3	1.4	1.4	1.4
Total Non-Current Assets	52.6	60.4	69.7	82.2	94.9
Current assets
DKKm	2020	2021	2022e	2023e	2024e
Inventories	0.00	0.00	0.00	0.00	0.00
Accounts Receivable	8.7	11.9	10.7	13.3	16.1
Other Current Assets	2.8	6.8	10.7	13.3	16.1
Cash Equivalents	31.8	25.4	57.0	64.5	39.8
Total Current Assets	43.3	44.1	78.4	91.1	71.9
Total Assets	95.9	104.5	148.1	173.2	166.9
Equity and Liabilities
Equity
DKKm	2020	2021	2022e	2023e	2024e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	57.6	57.0	103.3	124.7	114.4
Non-current liabilities
DKKm	2020	2021	2022e	2023e	2024e
Long Term Debt	4.7	14.4	11.6	11.6	11.6
Long Term Lease Liabilities	13.6	11.2	9.3	9.3	9.3
Other Long Term Liabilities	3.1	3.2	3.3	3.3	3.3
Total Non-Current Liabilities	21.4	28.8	24.1	24.1	24.1
Current liabilities
DKKm	2020	2021	2022e	2023e	2024e
Short Term Debt	0.37	0.33	2.8	2.8	2.8
Short Term Lease Liabilities	2.0	2.3	2.9	2.9	2.9
Accounts Payable	10.4	11.7	10.0	12.4	15.0
Other Current Liabilities	4.2	4.2	5.0	6.2	7.5
Total Current Liabilities	17.0	18.6	20.6	24.3	28.2
Total Liabilities and Equity	95.9	104.5	148.1	173.2	166.8

Cash Flow

Cash flow
DKKm	2020	2021	2022e	2023e	2024e
Operating Cash Flow	-8.7	-8.1	-17.5	-8.8	0.22
Investing Cash Flow	-13.3	-15.5	-18.7	-20.1	-21.0
Financing Cash Flow	45.8	17.1	58.1	36.3	-4.0

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