In the first quarter of 2023, Netmore recorded impressive net sales of SEK16.3m, representing a y/y growth of 48%, which was in line with our estimated sales of SEK16.0m. This achievement was primarily driven by the company's IoT Network Services and Property Network Services. It is noteworthy, however, that a significant portion of the revenues was non-recurring, a trend that was also observed in the preceding quarter. We attribute this to the ongoing expansion and roll-out of infrastructure.  Thus, we anticipate an increase in recurring revenues as sensors get connected and the infrastructure becomes fully operational.

Recurring revenues accounted for approximately 59% (78%) of sales, reaching SEK9.6m, representing a q/q increase of 9% (adjusted for the divestment of the M2M business). This trend is indicative of the steady progress of the rollout, aimed towards achieving sustainable recurring revenue streams.

While Netmore's sales for the quarter was in line with our expectations, the gross margin fell short of our projected figure, with gross profit amounting to SEK5.3m, translating to a gross margin of 33%, lower than our expected 55%. We assess that this shortfall is largely owing to the ongoing expansion and roll-out of infrastructure, and we anticipate that the gross margin will improve over time, potentially reaching around 70%.

OPEX amounted to SEK19.1m, resulting in an EBIT of -SEK16.3m and an EBIT margin of -100% (adjusted for the proceeds related to the M2M divestment). This contrasts with our forecasted EBIT of -SEK11m and EBIT margin of -68%. The deviation from our estimates is largely due to the increase in COGS, reflecting the ongoing expansion in Europe. However, we believe that this is temporary, and the recurring portion of the revenues will pick up speed as the infrastructure is set in place and sensors get connected, likely leading to margin expansion.

On 26 January, Netmore announced the sale of its M2M business to Melita Ltd. 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 accounted for approximately 7% of Netmore's net sales, generating revenues of cSEK3.5m. The funds from the initial purchase price from the divestment were transferred to the company, with a strengthening of its financial position as a result.

Regarding cash flow, Netmore reported a negative operating cash flow of -SEK13.3m (-13.6) and a positive investing cash flow of SEK18.2m, resulting in a cash position of SEK46.8m at the end of the reporting period. The cash flow from investing activities is attributed to Netmore receiving the initial purchase price from the divestment of the M2M business. The company’s cash position can further improve if it receives the potential additional purchase price of up to SEK29m. Furthermore, Netmore's low debt, solid growth rate, and efficient cost control position it for continued growth and profitability, and we consider its financial position to carry be strong, with cash and equivalents amounting to SEK52m at the start of Q2 2023.

In conclusion, Netmore's Q1 2023 performance demonstrated strong growth, with the IoT Network Services and Property Network Services leading the way. While the non-recurring nature of the revenue is noteworthy, we remain optimistic that recurring revenues will increase in the future as the infrastructure is established and sensors get connected with margin expansion as a result.

During the first quarter of 2023 Netmore, with an increased war chest, continued its geographical expansion into Poland and France, signed a deal with Kumbro stadsnät and received a record-breaking order in England. With its many new partnerships and accelerating order intakes, it is clear that Netmore currently is in a phase of rapid expansion and growth as evidenced by having expanded its operations to seven countries, with the most recent entries being in the Polish and French markets.

The company has been adding sensors at an accelerated rate, resulting in a total of 114,429 connected sensors in the first quarter of 2023, representing a sequential growth of 46%. Compared to the same period last year, this represents a remarkable increase of 217%. The impressive growth can be attributed to Netmore's strong position in the growing European market, where it provides connectivity for large-scale IoT projects, as evidenced by its strong partnerships and the recently received orders, particularly the breakthrough order from its partnership with Diehl Metering in England, indicating a doubling of the connected sensors compared to the total figure in the previous quarter. Additionally, the company reports that the IoT network segment has experienced growth in all geographic areas where Netmore operates, with water measuring in Great Britain serving as a key driver.

Netmore's Property Network Services segment reported a 15% y/y growth, but a slight 6% decline compared to the previous quarter. However, it’s worth noting that the company is currently in a development and planning phase, working with real estate companies that have chosen Netmore's real estate digitization offering.

On 28 Mars, Netmore announced that the company ECN, which is jointly owned by Netmore and Polar Structure, is partnering with Polish LoRaWAN player Netemera to establish large-scale LoRaWAN in Poland. The new joint venture will offer coverage in strategically important areas and will primarily focus on commercializing solutions for water, gas, district heating, and tracking. Netmore will also provide "coverage on demand" for IoT projects in areas lacking coverage. Management states that the Polish market presents favorable conditions for growth, with increasing digitization and high demand for IoT connectivity in sectors such as water, gas, and district heating. Furthermore, this expansion may also provide access for Netmore's existing customers and partners into the Polish market. Netmore and European Connectivity Networks have initiated an extensive expansion of LoRaWAN in Europe in 2022, continuing in 2023. It now offers LoRaWAN in eight countries, Great Britain, France, Spain, Sweden, Ireland, the Netherlands, Denmark, and Poland. In addition, Netmore has initiated commercial market exploration to establish strategic partnerships in the French market, with infrastructure rollout commencing during the reporting period in line with management’s previous expectations.

Netmore Group, in partnership with Diehl Metering, has secured a contract to provide connectivity to 76,000 smart water meters in Southwest England. The contract is part of Southwest Water's Green Recovery Initiative and has a duration of five years. Netmore will be responsible for building and managing the LoRaWAN network, which will enable data collection about water consumption in households and commercial properties. The data will be used to help users control their consumption and identify costly water leaks. Netmore will generate recurring revenue from each connected meter throughout the contract period and may continue to accrue additional income if the contract is extended, as the meters have a longer estimated lifetime. The company stated that the rollout of the network infrastructure will commence immediately. Considering that Netmore provided connectivity to 78,000 sensors in Q4, this deal is huge, as it will almost double the connected sensors.

Netmore's expansion in Europe is ongoing, and the company has now established a presence in the Polish market. The company's successful market presence in other European countries, along with recent procurement wins and record-breaking order intake in England, is a testament to its solid track record and indicates the company’s ambition and ability to continue its growth and expansion going forward. Thus, we are optimistic about Netmore's future growth prospects and look forward to monitoring the company's progress.

In our previous update, we mentioned that Polar Structure owns 87% of Netmore’s shares and that it will likely reach the 90% hurdle in the near term. Since then, the Ownership data has not changed much. However, we still see two risks for existing minority shareholders and potential investors to consider. First, the free float is extremely low, which bodes for volatile trading (especially in this uncertain macro environment). Second, a compulsory redemption (once Polar Structure reaches the hurdle rate) could happen at a lower price than the latest market value.

As a result of Netmore’s Q1 2023 report, we have only made minor adjustments to our sales estimates and cost base. We anticipate accelerated sales growth with a projected 2021-2025 CAGR of 59%. By 2025, sales are expected to reach SEK240m and more than SEK350m by 2026. Despite these changes, the overall impact on the valuation is minimal. Thus we maintain our fair value 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 13% 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, so we will keep a sharp eye on margins and will adjust these going forward.