The total ARR in Q4 2022, which was already known thanks to the monthly ARR reporting, amounted to SEK51.9m compared to SEK50.0m in Q3 2022. This resulted in a 16% annualised q/q growth while it increased 1% m/m, being SEK51.3m by the end of November.

ARR-SaaS (including Hoylu’s construction segment) increased to SEK25.4m compared to SEK25.1m in Q3 — a 5% annualised q/q growth while it remained flat m/m. Hoyu’s other segment, ARR-Mobile products, reached SEK26.5m, corresponding to a 28% annualised q/q growth and grew 2% m/m.

In contrast to the ARR figures, quarterly revenues and expenses were unknown until Hoylu’s released its full Q4 report. The Q4 2022 revenues amounted to SEK13.1m, which was in line with our expectations and grew approximately 51% y/y. The gross profit was 4% below our expectations as the gross margin fell short at 63.8% versus the expected 66.5%.  According to management, this stems from the somewhat ARR mix change seen in the quarter. 

Actual OPEX (development, sales and administrative costs) amounted to a negative of SEK17.0m, deviating 25% from our expectations. However, it includes a provision of SEK4.5m for a potential tax surcharge. As such, when excluding this, the OPEX came in 8% below our expectations. The EBITDA and EBIT (excluding the mentioned tax surcharge) amounted to a negative SEK4.2m and SEK8.2m, respectively, while the cash position amounted to SEK16.9m by the end of the quarter (SEK7.2m in Q3 2022).

According to management, the focus going forward is to continue to grow the ARR with continued cost control. More specifically, the focus will be on its construction vertical, where management sees potential both within new and existing customers with a sales focus on the established US market. Further stated, Hoylu will continue to invest in product development in 2023 and sees that its platform has a clear value-adding also in other industries, which we argue is backed by its well-spread customer base.

We appreciate that the total ARR continues to increase sequentially, resulting in a 4% q/q growth and 16% annualised q/q growth in Q4 2022. However, the ARR growth rate saw a somewhat slowdown compared to the Q1-Q3 2022 levels and was slightly below our expectations in the quarter.

Looking segment-wise, it was primarily ARR-Mobile products that grew stronger than our expectations, while Hoylu’s core segment ARR-SaaS came in below our expectations. As such, we would have preferred to see the opposite, that its core ARR-SaaS primarily drives its ARR growth, which we argue had been a more robust KPI. According to management, the ARR-Mobile product’s growth has mainly been driven by the new pharmaceutical customer (not disclosed) signed in Q2 2022, while the ARR-SaaS has been affected by its somewhat natural churn due to its project-based nature.

Despite the relatively softer growth seen in Q4 2022, particularly within its core ARR-SaaS segment, it is worth mentioning that Hoylu saw solid pre-Q4 2022 ARR growth. For example, Hoylu reached approximately 37% annualised q/q ARR growth in Q3 2022, while its core ARR-SaaS segment grew c58% on an annualised q/q basis. However, it is worth bearing in mind that its quarterly figures can be heavily influenced by one single order, which can substantially impact its growth figures.

Hoylu’s historically relatively stable ARR-mobile products segment has recently grown unexpectedly strong thanks to the mentioned newly signed customer in Q2 2022, which has led to a slight ARR mix change. Consequently, the segment’s lower gross margin than the ARR-SaaS segment has impacted its gross margin, which also was the case in Q4 2022. However, as we expect ARR-SaaS to be Hoylu’s main ARR growth driver ahead, we consider this ARR shift temporary and anticipate gradual gross margin improvements as time passes. 

We are pleased that the total Q4 2022 OPEX continues stabilising at the Q2-Q3 2022 levels of SEK13m, when excluding the mentioned tax surcharge. This is clearly down from its peak of SEK20m in Q1 2022, although it was affected by some one-offs such as trimming the organisation, relocation of staff, closing an office in the US, etc. As such, we argue that its stabilised OPEX state continued cost control while it, in conjunction with continued ARR growth, indicates its business’ scalability. However, while not yet reached a critical mass of revenues to reach break-even, it is worth mentioning that investors need to keep an eye on Hoylu’s future expenses, which is essential in its current unprofitable phase and financial position.

We make minor forecast adjustments following Hoylu’s Q4 2022 report. We decrease the ARR forecast for 2023e and 2024e ARR by c3% while we cut the gross margin somewhat due to the recent slight ARR mix change. However, this is offset by a decreased OPEX forecast of 5-6%, as we believe Hoylu can grow with continued cost control, which leads to minor changes in the bottom-line forecast.

As we expect Hoylu’s ARR-SaaS segment to remain its primary growth driver, we believe this should drive gross margin improvements ahead. However, Hoylu seems to have a certain distance to positive cash flow, with our expectations of reaching profitability on the EBITDA level by 2025e. Given our current estimates and Hoylu’s cash burn and cash position, we believe that external financing challenges could be a continued risk despite the future cash injection from the recently announced rights issue of SEK82.6m, as a large amount will be used to offset convertibles.

Despite our estimate changes mentioned above, our DCF keeps the Base Case of SEK0.10 intact and the Bear and Bull Cases of SEK0.02 and SEKX SEK0.50, respectively.

The relative valuation table below shows that Hoylu is valued lower than the median peer company, which we believe is reasonable for several reasons, such as its low market cap, unprofitability phase, financial position, and the recently announced rights issue etc. However, if Hoylu can increase its growth and approach profitability faster than our current estimates, the share could trade at higher multiples in the future when approaching the median peer valuation.  

(Note that deviations between our figures and Factset’s result from different calculation methods, as we include the total number of shares arising from the future rights issue).