MRR growth was solid at 28%, beating our forecast of 24.5%. While the NRR (growth within existing customers) came in as expected, sales from new customers accelerated to 14%, beating our forecast of 10.5%. While the Kela-deal and InteliWISE boosted new sales, 14% is significantly above the c8% seen in most recent quarters. Efecte’s focus on the public sector has offset the slight slowdown in the commercial side, and the 27% SaaS revenue growth (23% organic) is above the levels seen earlier in 2023. For example, the momentum in the UK was solid, with Somerset Cancer Register becoming a public sector reference customer and InteliWISE adding nine new customers in Poland.

Churn remained at a solid level of 2.3% (4.7). However, management expects it to normalize at higher levels in 2023, as management expects larger customers to churn in 2023 relative to 2022. As a reminder, while some customers churn because they are unhappy with the product, we believe most of the churn is related to M&A (target switching to the acquirer’s ESM) and customers discontinuing its operations.

Efecte’s SaaS metrics remain very competitive compared to its Nordic peers. However, as we still await some Q4 reports, we will save the churn and NRR comparisons for our upcoming SaaS Theme Update, which we expect to publish next week.

EBIT was EUR-0.5m (0.0), largely in line with our forecast as well as management’s guidance. From 2023 onwards, we expect the company to scale into solid profitability gradually, in line with management’s 2023 guidance of positive EBITDA.

Although the macroeconomic environment has slowed some customers’ decision-making, Efecte’s offerings focus on efficiency and cost-savings are attractive, especially these days. Considering management’s 2023 guidance of >20% SaaS revenue growth, we believe management expects to show solid growth despite uncertain macroeconomic conditions. Given that Efecte can preserve its solid c114% NRR, which we find likely, even a modest contribution from new sales of at least 6% is enough to reach the target.

While larger relative acquisitions, like InteliWISE, can cause increased employee churn, Efecte’s employee churn remains below 10%, a solid level in the sector. Also, employee satisfaction remains at high levels, with an employee NPS of 59. In conjunction with the Q4 report, Efecte launched a new employee share savings plan offered to c200 employees (basically all employees). We are positive towards the plan as we like to see shareholdings among broad groups of employees, as we believe it aligns their incentives with the company.

During the latter parts of 2022, Efecte added partners in several new countries, especially in eastern Europe. Management states that the focus has changed from finding more partners to ensuring already signed partners succeed. As the partner network covers large parts of Europe (note that Efecte uses partners on markets with field teams as well), we believe it makes sense to shift focus to the existing partners. Out of 40 new customers in 2022, 21 came through partners.

According to the newly released Enterprise Service Management (ESM) market report by Research in Action, Efecte is ranked number 4, up from 6 last year, in the European market. While Efecte can not match the market presence of the massive players, we note that Efecte is ranked number 1 regarding customer satisfaction. This report is mainly influential in the DACH region, where a strong position can help drive awareness and sales.

Following management’s statement, we raise our churn assumptions for 2023 from 3.3% to 4.5%. Also, we increase our long-term churn assumption slightly from 3.3% to 3.5%. On the other hand, we increase our new sales assumptions for two reasons. First, management seems quite confident in the near-term new sales pipeline. Second, with a higher churn, new sales must stay at high levels for Efecte to reach its +20% SaaS revenue growth target for 2023 (assuming roughly constant upselling). Efecte has a track record of beating its targets, so we do not expect the company to miss it this time.

Apart from churn and new sales, we leave our estimates rather unchanged. We raise the EBIT forecast somewhat to align with management guidance of positive EBITDA in 2023, which will be backloaded following the investments in the organization in 2022. Management expects a significantly lower net recruitment in 2023 compared to 2022.

For 2025, we expect sales of EUR35.4m, which aligns with Efecte’s target of EUR35m. Regarding EBITDA margin, we forecast 12.4%, in line with Efecte’s >10% target for 2025. Compared to our last Update in Q3 2022, we have slightly increased the sales and EBITDA margin forecasts.

While the new version of the Redeye Rating changes Efecte’s rating from 4,4,2 to 3,4,3 (People, Business, Financials), the WACC remains at 9.5%. The new version of the Redeye Rating is more demanding and makes it harder to receive a high rating. Thus, it should not be seen as we believe the underlying quality of Efecte has decreased. The increase in Financials rating is a result of Efecte’s improving financial performance, with accelerating growth and neutral cash flows.

We leave our Base Case unchanged at EUR15. We believe Efecte is a low-risk, financed (net cash remains positive despite the acquisition of InteliWISE), and attractively valued growth story. 4Q 2022 marks the 21 consecutive quarter with SaaS revenue growth above 20%. We believe improving margins over the coming years will trigger a higher multiple valuation of Efecte in terms of EV/S.

We believe the combination of a low EV/sales multiple (2.3x 2024E), strong SaaS metrics, and a neutral cash flow make the risk/reward in Efecte attractive. The valuation risk is likely rather limited, and we see no risk for Efecte needing a share issue to fund its daily operations. So, we believe the key question is, can Efecte grow and reach solid profitability? Considering its solid SaaS metrics, we believe it can.