In Q4 2022, Netmore achieved net sales of SEK17m, growing 49% y/y and 44% q/q. The company’s IoT Network Services and Property Network Services were the primary drivers of the solid growth, surpassing our estimated sales of SEK13.2m. However, it's worth noting that a substantial portion of the revenue was non-recurring, which could explain the deviation from our projections. A similar trend was observed in the previous quarter. Open Access 5G continues to decline and was on an absolute level in line with our projections. Recurring revenues, accounted for c58% of sales, reaching SEK9.9m, a 9% increase y/y and +1% increase q/q. The gross profit amounted to SEK9.4m, which translates to a gross margin of 55%, exceeding our expectations of around 45%.

Netmore exceeded our expectations for the second consecutive quarter with a gross profit of SEK 9.4m, translating to a gross margin of 55%. Over time, we expect the gross margin to reach 70%.

OPEX amounted to -SEK23.6 resulting in an EBIT of SEK-18.1m and an EBIT margin of -107%.  In contrast, we forecasted an EBIT of -SEK15.5m and EBIT margin of -117%. The company had one-time costs of SEK3.9m in the quarter which could help explain this deviation. We believe that Netmore is showing a good cost control, supported by its ability to manage its growth rate while expanding its margins.

In terms of cashflow, Netmore reported -SEK14.4m from operating activities and -SEK1.6m from investments, resulting in a cash position of SEK41.3m at year-end. Netmore will see its cash position further improve in Q1 2023, with the divestment of its M2M business expected to generate SEK19.6m, and potentially an additional purchase price of up to SEK29m at a later stage. The company's low debt and solid growth rate, coupled with its efficient cost control, position it for continued growth. Overall, we consider Netmore's financial position to be strong and we look forward to following the company on its growth journey.

Netmore is pursuing its strategic plan for growth in the European market. The company aims to strengthen its position by forging partnerships with key players in the industry and, will now roll out its infrastructure in France.

While Netmore's Open access 5G business has not launched any new pilots this quarter, the company is seeing significant growth in other areas. Its IoT network continues to add more sensors, with the segment showing impressive y/y growth of 633%, and 126% q/q. This is driven by the strong growth in connected sensors, with Netmore now providing connectivity to over 78,000 sensors as of year-end, – a growth of 158% y/y and 24% q/q. Furthermore, this segment has experienced growth in all geographical areas Netmore operates, with tracking, energy optimization, and water measuring serving as key drivers.

The property business experienced substantial growth during the quarter, with both sequential and yearly growths of 23% and 30%, respectively. In October 2022, Netmore entered into an exclusive three-year agreement with a Swedish property developer to provide communication services to approximately 4,000 households and some commercial premises. The first properties are expected to be connected in the second half of 2023. The estimated value of the agreement is SEK65m, which we consider significant given that the total revenue for the Property segment in 2022 was SEK30m. However, the actual value could vary based on several factors, such as the developer’s expansion plans and Netmore’s penetration rate at each property.  

Netmore is taking a significant step in expanding its European LoRaWAN network with the launch of infrastructure roll-out in France. The company has initiated commercial market exploration to establish strategic partnerships in the French market, with infrastructure rollout expected to begin in Q1 2023. Furthermore, Netmore will immediately offer LoRaWAN coverage for large-scale projects in the utility and IoT sector. It’s our understanding that this expansion is driven by the need for connectivity which is a long-term project. The company has already established a successful market presence in Sweden, Denmark, UK, the Netherlands, and Spain. By collaborating with platform developers, device manufacturers, and other strategic partners, Netmore has positioned itself to provide its IoT solutions. Its successful market presence in other European countries and recent procurement wins in the UK also indicate a solid track record and future growth potential.

Its successful market presence in other European countries and recent procurement wins in the UK also indicate a solid track record and future growth potential. This is further supported by expansion of its LoRaWAN network in France.

On 26 January, Netmore announced it has agreed to sell its M2M business to Melita Ltd . The subsidiary was launched in 2019 as part of Netmore's strategy to target the rapidly growing European market for SIM card based IoT connectivity. At the time of the announcement, the subsidiary had over 300 customers in over 30 countries. The initial cash purchase price is around SEK19.6m, with a conditional cash purchase price of up to SEK29m based on Netmore M2M's EBITDA in 2023 and 2024. In 2022, the M2M business generated revenues of approximately SEK3.5m, which represents about 7% of Netmore's net sales.

The press release also highlights that the sale of Netmore's M2M business is a strategic decision that allows the company to focus on its fastest growing area - IoT/LoRaWAN – and its expansion in France.

Polar Structure currently holds a significant share of Netmore, with 81% of the shares and 87% of the votes. If they acquire over 90% of the shares, as per the Swedish Companies Act, they will initiate a compulsory redemption process for the remaining shares, which could lead to the delisting of Netmore's shares from Nasdaq First North.

We believe that Polar Structure is likely to exceed the 90% threshold soon, either through the purchase of additional shares on the market or another bid. This presents two significant risks for minority shareholders. Firstly, the limited number of outstanding shares may result in volatile trading. Secondly, the compulsory redemption process, if triggered, may occur at a price lower than the current market value. We believe these risks should be taken into account when considering an investment in Netmore.

As a result of Netmore's divestment of its subsidiary, we have removed the M2M business from our future projections, while we only make minor adjustments to the Property and IoT segments. Additionally, we expect EBITDA margin to improve due to the company's excellent cost control. We anticipate an accelerated sales growth with a projected 2021-2025 CAGR of 56%. By 2025, sales are expected to reach SEK230m and more than SEK320m by 2026. Despite these changes, the overall impact on the valuation range and base case is minimal. Thus, we maintain our valuation range and base case.

We derive our fair value range from a fundamental DCF framework for three scenarios, base case (most likely), bear case (pessimistic), and bull case (optimistic), using a WACC of 12% across all scenarios. Our fair value range is SEK0.8–4.8, and our base case is SEK2.3. The fair value range is wide, owing to the unpredictable nature of Netmore’s long-term growth and profitability; this depends on the product mix and international expansion plans, to name some. We forecast long-term gross margins above 60% and a terminal EBIT margin of >20%. Sales growth and signs of near-term scalability are key metrics, and so we will keep a sharp eye on margins and likely adjust for these going forward.