In conclusion, Penneo’s ARR came in as expected in Q4 2022, while the EBITDA was slightly above our estimate. The ARR amounted to DKK71m, corresponding to c42% q/q annualised growth, which aligned with preliminary results announced ahead of the report.  As such, Penneo’s ARR ended at the lower range of its full-year 2022 guidance of DKK70m-75m with a 28% y/y growth. The net revenue retention (NRR) was 113% y/y with a churn of 4%, while the ARR growth stemming from new customers was 15% y/y.

Revenues amounted to DKK25.4m, above our expectations of DKK24.5m (c4% deviation) with a gross margin of 86%, as expected. The higher-than-expected revenues compared to the ARR stemmed from a larger share of on-time fees, which occurs when customers extend their product engagements beyond the initial agreement. As such, if all revenues were derived from a fully subscription-based model, the ARR and revenues would be similar. However, since 2019 and onwards, Penneo onboards all new customers with an entirely subscription-based model.

The actual OPEX (other external costs and personnel expenses) was c4% higher than our expectations as the other external costs differed negatively by c8% while the personnel expenses deviated positively by c8%. Altogether, it resulted in an EBITDA of DKK3.2m in Q4 2022, compared to our estimate of DKK3.1m. As such, the 2022 EBITDA amounted to a negative DKK11m and ended up in the mid of the DKK10m-12m guidance.

In connection with the Q4 report closing of its books for 2022, Penneo revealed its 2023 ARR and EBITDA guidance as follows:

As such, we believe Penneo intends to keep investing in 2023 to maintain solid ARR growth. According to management, they see continued solid growth prospects in 2023 despite recent indications of a somewhat more cautious buying behaviour among customers. Thus, with current market uncertainties, the ARR guidance was set wider than previously.

Following a relatively soft Q3 2022, being a seasonally softer quarter, Penneo realised a quarterly ARR growth of DKK6m In Q4 2022 (c9% q/q growth), corresponding to a 42% annualised q/q growth. We appreciate that the growth picked up, although Q4 is a seasonally strong quarter. Consequently, Penneo reached its 2022 ARR guidance and saw a solid ARR growth of 28% y/y.

The yearly NRR in 2022 was 113%, somewhat below the historical average, with a churn of 4%. At the same time, the new ARR stood for 15% of the total ARR growth y/y, which also seems a bit softer compared to historical levels. With a churn relatively stable over time, the NRR outcome is mainly due to lower engagement among new and existing customers. Management expects continued conservative buying patterns among existing and new customers in 2023 while the long-term prospects are stated intact. Consequently, Penneo remains confident in the current growth strategy and expects to continue to invest and scale up the organisation ahead.

However, Penneo expects a slightly higher churn level in 2023, yet still below its 5% benchmark, while expecting a continued uplift from existing customers due to increased engagement with Penneo Sign as well as continued cross-selling of its KYC solution. Moreover, Penneo will make price adjustments to reflect the recently increased inflation, which is expected to positively affect the upselling in 2023.

The customer intake in Q4 2022 saw an absolute increase of 125, similar to the Q4 2021 levels of 123 new customers. As we have mentioned before, we argue it is more important to get Tier 1 customers (audit and accounting customers) with the most substantial LTV instead of focusing on the absolute increase of customers. However, management expects a larger number of customers in 2023 compared to 2022 due to strengthened outbound sales with reps who focus solely on sales prospecting. This will contribute positively to the ARR growth despite a smaller average deal size per new customer due to the current market conditions.

The customer acquisition cost (CAC) in Q4 2022 amounted to cDKK33k, nearly the same levels as in Q4 2021, while the average ARR in the first year for new customers decreased approximately 15% y/y, resulting in a CAC/payback of around 25 months. Notable, we include direct cost when calculating the CAC/payback, which Penneo does not, which can explain differences.

With Penneo’s expansion and growth strategy, we expected continued long-term increased CAC due to higher costs for acquiring customers in the foreign markets, while Penneo aims to target larger customers, backed by management indications. However, with Penneo’s B2B targeting larger customers and thus having a relatively low churn, we argue that a somewhat higher CAC/payback can be justified. In addition, it is worth mentioning that the CAC/payback metric is affected by Penneo’s Q4 seasonality, as seen in the graph above, and should therefore be evaluated under a more long-term perspective.

Penneo managed to grow the ARR in the domestic market (Denmark) by 24% y/y in Q4 2022, representing 72% (75%) of the total ARR. At the same time, ARR from foreign markets grew 43% y/y with an expanding share, representing 28% (25%) of the total ARR in Q4 2022. Looking into the ARR from foreign markets in 2022, Norway was the largest market (59%), followed by Sweden (24%).

We argue this highlights the continued success of Penneo’s international expansion. According to management, Penneo continues to execute the geographical expansion, currently seen in Belgium, which has started to generate considerable ARR since its establishment. In addition, management aims to enter at least one new market in Europe in 2023, considering markets like the Netherlands, France, Germany and Austria. However, since it takes time to gain traction and adapt to local legislation, Penneo only assumes a small share of new ARR from new markets in its 2023 guidance.

In connection with its Q2 2022 report, Penneo revealed its preparation for acceptance in the European Commission trust list, which has been worked on since H1 2021. The intention was to upgrade its Sign platform from offering Advanced Electronic Signatures (AES) to Qualified Electronic Signatures (QES), the highest level in the eIDAS regulation — which now has been approved by the Agency for Digital Government in Denmark (Digitaliseringsstyrelsen). 

As such, Penneo is a Qualified Trust Service Provider (QTSP) offering QES, which fuels the upscaling markets outside Scandinavia. This gives a competitive edge in audit and accounting and AML-governed industries in the EU, as many require QES for its documents to be legally valid. According to management, the approval will improve Penneo’s overall value proposition and ability to serve larger companies across borders, while notes it is more relevant in EU countries outside Scandinavia. For example, QES is necessary for employment contracts in Belgium, while being important in Germany to accept digitally signed documents. 

We believe the approval could accelerate market entries and increase Penneo Sign’s reach. Furthermore, we believe the approval of delivering the highest levels of compliance serves as a quality stamp while strengthening Penneo’s brand.

Overall, we take a stance on Penneo’s Q4 figures and the full-year 2023 ARR and EBITDA guidance and make forecast adjustments. We increase our 2023e-2024e ARR forecast by 1%-2%, now expecting an ARR of DKK90m in 2023e, which implies approximately a 27% y/y growth and can be compared to Penneo’s guidance of DKK87m-95m, corresponding to a 23%-34% y/y growth. This is because we expect somewhat lower NRR levels while management has stated a more cautious buying behaviour of its customers, which we assume will continue in 2023. However, we are aware that future KYC deals may significantly impact Penneo’s ARR outcome due to its binary nature.

Furthermore, we decrease our 2023e EBITDA to a negative of cDKK10m, compared to Penneo’s guidance of a negative of DKK10m-15m, as we still expect Penneo to make significant growth investments in 2023e to be able to reach solid ARR growth. For further forecast adjustments, see the table below.

As a result of our 2023e and 2024e estimate changes mentioned above, our DCF gives rise to a new Base Case of DKK13 (14), while our Bear and Bull Cases of DKK4 and DKK28 are intact.

Compared to other relevant Nordic SaaS peers, Penneo is currently trading at a slight premium regarding the median EV/S. However, we believe Penneo has some appealing characteristics that could motivate it. First, Penneo has a large share of pure SaaS, unlike some of its peers mentioned here. Second, Penneo targets larger customers and focuses entirely on B2B, which entails solid churn levels with a proven NRR track record, while the focus on auditors and other heavily regulated sectors gives rise to switching costs and stickiness. Third, Penneo has taken a clear market position in the Nordics (especially in Denmark), which are some of the most digitalised countries in Europe, while having already successfully expanded into several other markets outside the Nordics.