Nepa delivered a weak quarter in a very challenging market. Total revenues declined 9% y/y, the gross margin was low (72.7% vs 80% last year), and the cost base is too high – causing a quarterly loss in Q1.

However, looking below the surface, Nepa’s core, its subscription business in Marketing Optimization (MO), delivered a solid +8.5% y/y growth. The weak figure of -1% y/y for Nepa’s full ARR was caused by weakness from the Customer Experience (CX) segment that lost one of its biggest customers.

Regarding the cost base, it is simply too high to sustain profitability in a weak market. Hence, Nepa is taking further actions to cut costs. The company aims for an annual cost base of SEK220m by Q4 2023. While this is a good step, we doubt that it will be enough, and we would have liked to see even more.

On the back of the Q1 report, Redeye lowers its estimates for sales and raises its estimates for costs, resulting in lowering our fair value range. New Base Case is SEK58 (80), Bear Case is SEK26 (38), and Bull Case is SEK100 (130).

We argue that Nepa is trading stupidly cheap. We think so both with regard to the EV/Sales multiple (0.35), the EV/ARR multiple (0.63, despite ARR only making up 55% of sales), and also in relation to its revenue quality. The reason why is the cost base being too high, causing profitability to be dependent on volatile ad-hoc sales. While we argue that the value of Nepa is much higher than today’s market value, it will require solid execution to extract it.