Review of Q2 2023

Sales fell by 8% y/y and was 11% below our expectations. The sales to new and current customers was lower than last year, resulting in a lower utilization rate. As seen in recent quarters, weak e-commerce sales have reduced customers’ willingness to invest. However, Avensia believes it has gained market share. Also, the utilization rate improved gradually during the quarter due to a combination of Avensia reducing its capacity and a stabilized market, although still below normal levels in terms of activity.

An IT consultant’s sales are a function of the number of employees and their revenue per working day. In reality, the number of revenue-generating employees, i. e., excluding administrative personnel etc., would be a better measure. However, we cannot access those figures, making the total number of employees a reasonable proxy.

The number of employees at the end of the quarter increased to 354 (330), corresponding to a y/y growth of 7%. Sequentially, the number of employees decreased by 15, and our forecast was -4. The reduction in employees sequentially follows Avensia’s cost savings program as well as natural employee churn being left unreplaced. However, the latest cost savings, announced in late June, of SEK25 and 25 employees (about 2/3 revenue-generating employees) are not affecting this quarter’s number of employees. Thus, we expect -25 in Q3 2023. The cost savings program aims to adjust Avensia’s capacity to ensure healthy utilization rates.

The number of employees at the end of the quarter is a leading indicator for sales growth in the coming quarter. While sales is dependent on other parameters as well, the starting number of employees for the coming quarter is, together with the number of working days, the only relevant figures we know in advance.

The Sales-COGS/employees/working day is a proxy for the revenue generation of one employee during one working day, indicating how advanced services the company provides and how high its utilisation rate is. While sub-consultants and reselling software can alter accuracy in this measure, we try to consider that by subtracting the cost of goods sold, which typically consists mainly of expenses related to sub-consultants and reselling. Also, as we use the total number of employees, the share of administrative personnel can alter the number. A high share of administrative personnel might not be unwanted. For example, when focusing on expansion, the investments in administration are typically front-loaded.

The Contribution/employee/working day is sales-cogs-personnel expenses and indicates the profit contribution for the average employee per working day. We believe it is a proxy of how much revenue consultants generate compared to their seniority and, thus, salary. For example, a high Sales-COGS/employees/working day might not be worth much to shareholders if most are paid as salaries to senior consultants.

Overall, OPEX roughly matched our forecast of SEK107m and was SEK106m (106). Other external costs was lower compared to our expectations. Personnel expenses came in above our forecasts as the cost per employee was slightly higher than we expected due to the restructuring program. Following the two cost savings programs announced in 2023, Avensia costs will decline by SEK70m on a full-year basis, all else equal. We assume the cost base in Q4 2022 equals yearly costs of about SEK450m, which implies about SEK380m in costs in its current operations. For 2024, we expect SEK396m, as we assume some cost increases due to salary inflation, for example

EBIT, adjusted for SEK4.8m in restructuring costs, was SEK-1,8m (0.7), corresponding to an EBIT margin of -1.8% (0.6). Our forecast was SEK5.7m and 4.9%, and the miss was mainly due to softer sales. Despite the negative EBIT, free cash flow was SEK14m, thanks to a strong contribution from net working capital.

By the end of the quarter, Avensia had a net cash position of SEK19m.

As common among IT consultants, Avensia has low CAPEX, and the cash conversion tends to be strong.

We believe 2023 will be a lost year in terms of profit, although we expect positive EBIT during H2. We lowered our sales and predominantly EBIT forecasts, partly due to the soft outcome in Q2.

Regarding 2024, we still expect a significant rebound relative to 2023, although lowering our forecasts somewhat. Considering the reduction of employees, we adjust our sales forecasts accordingly. As mentioned above, we expect a cost reduction of SEK55m y/y on a full-year basis. Avensia implicitly guides for SEK70m in reduced cost, all else equal, but we expect some cost inflation simultaneously. Overall, we lower our EBIT forecast for 2024 by 19% due to lower sales and a slightly lower margin assumption.

For the long run, we still expect Avensia to reach EBIT margins of ~10%. However, we expect it will take somewhat longer to get there.

We reduced our Base Case somewhat to SEK13 (14) following the decreased forecasts. However, we believe the case, where we expect Avensia to regain its status as a profitable consulting firm, is intact.

Avensia is trading at some discount to the peer average and median on 2025e. We believe the market does not agree with our assumption of the EBIT margin reaching 10% in 2025e. If Avensia achieves this, we expect it to trade at an EV/EBIT multiple, at least in line with the peer average. Also, most IT consulting firms have seen their valuation multiples declining lately, likely due to fears of a weakening economy.