The Q4 2022 sales amounted to SEK30.8m and remained flat y/y, which was 3% above our expectations of SEK29.8m. The sales per employee and working day picked up in Q4 and increased by approximately 5% y/y. As such, we think sales held up well despite management's earlier communication of a somewhat more challenging market outlook. According to management, one reason for the outcome is that Xavi Solution has continued to focus on its core customers and industries, such as the public sector, while it has not yet been seen that the market dynamics have changed that significantly.

The gross margin amounted to 80.9%, broadly in line with our expectations of 81.4%. We believe this seems reasonable as Xavi Solutions continues using a relatively stable share of sub-consultants. The total OPEX amounted to cSEK24m, which was 3% higher than our expectations of cSEK23m as the personnel expenses were slightly higher than anticipated. Due to the already communicated write-offs of goodwill (cSEK31m), the EBIT amounted to a negative of SEK30m, while the EBITA adjusted for this amounted to a negative of SEK0.7m, which was broadly in line with our expectations. 

Xavi solutions ended Q4 2022 with 114 employees (129 with sub-consultants), implying a net reduction of six employees in the quarter. Furthermore, the average number of employees in Q4 was 114 (125 with sub-consultants). If Xavi Solutions faces a somewhat more challenging market sentiment ahead, we believe this will be hard to affect internally, which we argue is more of a demand-side problem. However, management has indicated an increased recruitment rate in Q1-Q2 2023, which we expect will drive future sales growth and OPEX increases, while we also believe this could indicate that market conditions are not deteriorating to the same amount as management previously expected.

Regarding Xavi Solutions’ average R12m contribution per employee and working day, it increased by 2% y/y in Q4 2022. When glancing at peers’ figures, Xavi solutions’ average R12m contribution per employee and working day could be seen as relatively soft. However, we believe this is justified to some extent by its Serve segment, which contains a larger share of IT maintenance and support and thus has lower hourly rates. Nevertheless, we believe there is solid room for improvement going forward.

In addition, the average R12m contribution per employee and working day was somewhat counteracted by increased underlying costs. This was also seen in the Q4 2022 OPEX figures, which slightly exceeded our expectations. As such, with expectations of increased headcounts and somewhat wage inflation going forward, we believe this will drive OPEX increases, which is necessary for Xavi Solutions to grow its business. 

We make slight forecast adjustments on the back of Xavi Solutions Q4 2022. We increase our 2023e and 2024e sales assumptions, as figures exceeded our expectations in Q4, combined with expectations of an increased recruitment rate ahead, compared to our previous assumptions. However, this increases our OPEX assumptions for the same period, leading to a slightly lower EBITA margin than previously expected.

Despite the above-mentioned forecast adjustments, our DCF keeps the fair value range intact, with a Base Case of SEK0.60 and Bear and Bull Cases of SEK0.20 and SEK1.25, respectively.

Xavi Solution is currently trading at an EV/sales multiple of approximately 0.3x based on 2023e, representing a clear discount compared to relevant peers. We argue that the discount is motivated by several factors, such as Xavi Solutions’ low market capitalization and recent strategic change, which means it lacks a stable history of growth and profitability. However, if Xavi Solutions can approach its financial targets of stable growth with subsequently increased profitability, we believe the upside is significant when closing in on the median peer valuation.