Q1 2023 net sales amounted to SEK31.0m (SEK32.6m), corresponding to -5% y/y growth. This was 6% below our expectations of SEK32.9m, while the number of working days in the quarter amounted to 64 (63). Sales-cogs per employee and working day increased by approximately 2% y/y. According to management, the somewhat softer sales in the quarter stem mainly from Xavi Solutions’ Serve segment, where the company has seen a certain slowdown on the customer side from both existing and new customers, mainly affected by economic uncertainty. 

Total OPEX amounted to cSEK22m and decreased 6% y/y, which was 9% lower than our expectations of cSEK24m since both its primary driver, personnel expenses, and other external costs were lower than anticipated. However, personnel expenses per employee and working day increased by 4% y/y.

At the same time, EBIT amounted to SEK1.2m compared to our expectations of SEK1.0m. According to management, optimisation and streamlining need to continue to reach its goals and increase profitability while aiming for future hirings to compensate for the headcount loss in the quarter. However, we argue it is important to consider and be dynamic to the demand in current market conditions. Moreover, we believe it will take some time to recover from the employee churn while it takes time for those to be profitable revenue-generating employees.

Xavi Solutions ended Q1 2023 with 107 employees (122, including sub-consultants), implying a net reduction of 7 employees in the quarter, while the average number of employees was 106 (118, including sub-consultants). Thus, the number of employees at the end of the quarter decreased 12% y/y and 6% sequentially. As the number of employees is the main growth driver for a consultancy business along with the number of working days, we believe the sales deviation from our expectations can mainly be attributed to the loss of 7 headcounts during the quarter. Moreover, as the number of employees at the end of the quarter broadly converged with the average, we believe this indicates an employee loss at the beginning of the quarter, further explaining the somewhat softer sales during the quarter.

Xavi Solutions’ contribution per employee and working day decreased by 3% y/y in Q1 2023. We believe this stemmed mainly from somewhat lower utilisation rates combined with the employee churn in the quarter. As mentioned before, we believe the slightly lower level than peers’ figures is somewhat justified by the Serve segment, which contains a larger share of IT maintenance and support, and thus has lower hourly rates. Although a somewhat lower level is justified compared to relevant peers, we believe there is room for improvement by this level ahead. This could be the case when Xavi Solution reaches more stabilised employee churn and utilisation rates. Moreover, management expects price adjustments within some areas, which we believe can also lead to improvements ahead, even though we note that its public sector exposure sometimes ties the company to framework agreements. At the same time, we expect slightly increased wages from Q2 2023,  as Xavi Solutions has partly collective agreements, while some adjustments have already been made by January.

On the back of Xavi Solutions’ Q1 2023 report, we decrease our 2023e–2024e sales forecasts by 6–4%, mainly affected by the loss of headcount, being its primary sales driver. As mentioned, we believe it will take some time to recover from the employee churn in the quarter, despite management’s indication of aiming for future hirings to compensate for the headcount loss.

Furthermore, we believe the high quarterly employee churn, with expectations of a high future gross intake of employees, will slightly impact Xavi Solutions’ margins, despite the recent streamlining on the other external cost level. We argue it takes time for those to be profitable revenue-generating employees, while it can affect the utilisation rates in the short term. However, the number of employees is naturally its primary cost driver, which prompts slight changes to our absolute EBIT 2023e-2024e forecast as well as our margin assumptions. For further estimate changes, see the tables below.

Given the forecast changes, our DCF suggests a new fair value range, with a Base Case of SEK0.55 (0.60) and Bear and Bull Cases of SEK0.15 (0.20) and SEK1.20 (1.25), respectively.

Following a share performance of -16% YTD, Xavi Solutions is currently trading at an EV/sales of 0.3x based on 2023e, representing a clear discount to relevant peers. However, we argue this discount is justified by factors such as Xavi Solutions’ low market capitalisation and the recent strategic changes that mean it lacks a stable history of growth and profitability. However, if Xavi Solutions can cover up for the recent employee churn with subsequent increased growth and profitability, we believe the upside is significant while narrowing the valuation gap to its peers.