Q2 2023 net sales amounted to 392.7m (382.7m), corresponding to a 2.6% y/y growth and was 2% above our expectations of SEK385.8m. The number of broadband customers via fibre amounted to c456,000 (459,000), implying a net customer intake of zero in the quarter, while the gross margin was 33.7% (35.0%), somewhat below our expectations of 34.2%.

Despite the slightly stronger sales than our expectations, the softer gross margin made the gross profit largely align with our estimate. However, OPEX improvements offset this, leaving EBITDA and EBIT above our expectations. EBITDA and EBIT came in at SEK61.9m (59.2m) and SEK26.1m (21.1m), implying an EBITDA 4% above our expectations, while EBIT came in 11% above. Consequently, the EBITDA margin was 15.8% (15.5%) versus our estimated 15.4%, while the EBIT margin came in at 6.6% (5.5%) compared with our expectation of 6.1%.

According to management, the improved margins y/y stem from the recent increased focus on margins, which is expected to continue having a positive effect, with expectations of an improved EBIT margin by c1pp to Q4 2023. However, the margin-enhancement efforts will probably have a temporary short-term negative impact on customer intake for private fibre services in the coming months. Moreover, management expects increased sales during the remainder of 2023, both within its private and corporate segments.

Q2 2023 net sales amounted to 392.7m (382.7m), corresponding to a 2.6% y/y growth and were 2% above our expectations of SEK385.8m. According to management, the increase in sales, both sequentially and y/y, is mainly a result of recent price hikes within its private segment, while bredband2 has won some new contracts within its corporate segment.

Moreover, management expects increased sales during the remainder of 2023, both within its private and corporate segments, with continued price hikes implemented gradually until September 2023. As such, we believe this can support increased sales ahead.

Notably, the growth peak in Q4 2020-Q4 2021 is mainly acquired, as A3 was consolidated from December 2020.

Total broadband customers via fibre amounted to c456,000 (459,000), implying a net customer intake of zero in the quarter. While a net customer of zero does not sound that impressive at first glance, we find it solid concerning Bredband2’s recent margin-enchanting efforts coupled with recent price hikes, which, all else equal, should give rise to an increased customer churn. In addition, we want to highlight that management has been clear and transparent about the temporarily softer customer intake in the wake of Bredband2’s current margin prioritising phase. As such, we find it natural to expect a somewhat softer net customer intake during the remainder of 2023.

ARPC amounted to cSEK218 per month and increased by approximately 3% y/y. Notably, as Bredband2 discloses its total number of broadband customers via fibre, this includes both private and corporate customers. Nevertheless, we have chosen to use ARPC based on private sales and the total number of customers despite including a share of corporate customers. Although this is not an entirely true definition, we use it here as a benchmark since Bredband2 does not disclose its private customer base separately. Moreover, its private customers are its most substantial customer segment, while we believe its corporate customers account for a minor share of its total customers.

Together with ARPC, net customer intake is the most important metric for Bredband2. Strong net customer intake could imply a low churn or that Bredband2 covers up well with a solid gross customer intake, which we believe is important to gain/retain market share in an industry where scale matters. However, the fibre market is starting to mature, likely resulting in lower net customer intake ahead, leaving ARPC as the primary sales growth driver. Strong ARPC growth implies the average customer uses additional services or that Bredband2 manages to hike prices. While price hikes should negatively influence net customer intake, we believe additional services could raise customers switching costs, which, all else being equal, should reduce customer churn.

As mentioned, the gross margin in Q2 2023 was 33.7% and thus decreased y/y (35.0%) and sequentially from 33.9% in Q1 2023. We believe the gross margin has mainly been affected by network owners’ price hikes. According to management, the most substantial part of that is behind us, while Bredband2 expect further price hikes, which we believe can support the gross margin ahead. However, Bredband2 expects the EBIT margin improvements until Q4 2023 to mainly derive from OPEX improvements. Consequently, we expect relatively stable gross margins in H2 2023, with a slight increase in Q4 as implemented price adjustments have taken full effect.

Notably, Q4 2020 and Q1 2022 figures in the graph above include acquired customers from A3 and TH1NG, which saw more significant increases than the y-axis spans.

Total OPEX amounted to SEK70.5m (74.9m) in the quarter and came in 3% below our forecast of SEK72.4m, decreasing c6% y/y. Accordingly, Bredband2’s total OPEX continue to decrease as a percentage of sales, from 19.2% in Q2 2022 to 17.9% in Q2 2023. We believe this again highlights Bredbands2’s internal efficiency improvements, which we have seen historically.

EBITDA was SEK61.9m (SEK59.2m), corresponding to an EBITDA margin of 15.8% (15.5%), compared with our expectations of SEKK59.5m and 15.4%, respectively. At the same time, EBIT amounted to SEK26.1m (SEK21.1m), which resulted in an EBIT margin of 6.6% (5.5%), compared with our forecast of SEK23.4m and 6.1%.

The improved margins stem from continued margin prioritising and OPEX improvements seen in the quarter, which is expected to continue, as Bredband2 reiterated its aspiration to improve the EBIT margin by c1pp to Q4 2023. As such, the Q2 2023 margin outcome indicated continued execution of this plan, which we appreciate seeing while it bodes well for continued margin improvements ahead.

Following Bredband2’s Q2 2023 report, we make minor 2023e and 2024e forecast changes. We increase our sales forecast by 1%-2% for 2023e–2024e, implying 2.4% (1.1%) and 2.7% (2.3%) y/y growth, respectively. This stems mainly from management’s expected increased sales during the remainder of 2023 and continued price hikes implemented gradually until September 2023, which we believe can support increased sales ahead. Moreover, Bredband2 has stated an increased organic growth focus in H2 2023–H1 2024, leading us to expect slightly stronger growth in the latter part of 2023e and into 2024e.

In addition, we trim our 2023e–2024e gross margin assumptions while we decrease our OPEX forecasts somewhat for the same period on account of ongoing cost improvements seen in Q2 2023, which we expect to continue, backed by management’s statement of continued margin prioritising ahead. Altogether, this gives rise to a 4% increased EBIT forecast for 2023e–2024e. For further estimates, see the tables below.

Following the estimate changes mentioned above, our DCF model yields a new Base Case of SEK2.0 (1.9) per share and Bear and Bull Cases of SEK1.1 (1.0) and SEK2.6 (2.5), respectively. Given a share performance of approximately -1% YTD, Bredband2 is currently trading at an EV/EBIT of approximately 10.7x based on our 2023e and an EV/EBITA of 8.2x.