Overall, we argue that Hoylu’s Q2 2023 report was somewhat stronger than we expected regarding the ARR outcome, while operating expenses aligned with our expectations, which made the bottom line somewhat less negative than anticipated. Total ARR in Q2 2023 amounted to SEK56.2m compared with SEK52.1m in Q1 2023, which resulted in 7.9% q/q growth and 35.4% on an annualised q/q basis. This was 2% above our expectations of SEK55.2m. 

Net sales amounted to SEK14.2m (13.1m), corresponding to an 8.4% y/y growth and were 5% above our expectations of SEK 13.6m. With a gross margin of 66.7% (67.3%) compared to our expectations of 65.8% and 62.9% in Q1 2023, the gross profit came in 5% above expectations. We argue the sequentially improved gross margin from Q1 2023 can be attributed to the sales mix in the quarter. 

Actual OPEX (development, sales and administrative costs) amounted to a negative SEK13.0m (-13.0m), which largely aligned with our expectation of negative SEK13.1m and remained flat y/y. Consequently, EBITDA and EBIT amounted to negatives SEK3.5m and SEK7.3m, respectively, slightly less negative than our expectations, while the cash position in the quarter amounted to SEK15.7m compared with SEK6.3m in Q1 2023. The improved cash position in the quarter stems from the recently completed rights issue.

According to management, Hoylu has recently seen greater traction within its core construction business, which we appreciate. We note that this is also evident by its construction segment’s performance in Q2 2023, with an ARR growth of SEK3.1m q/q, implying a c35% growth. As such, Hoylu remains optimistic about the continued growth potential in this segment in H2 2023, despite the currently somewhat more challenging market conditions.

Q2 2023 ARR amounted to SEK56.2m compared with SEK52.1m in Q1 2023, which resulted in 7.9% q/q growth and 35.4% on an annualised q/q basis. The ARR was driven by, as mentioned, increased traction within its construction segment (included in its ARR-SaaS segment), along with higher-than-expected growth within its other segment, ARR-Mobile products. However, it is worth mentioning that Hoylu’s ARR growth can exhibit relatively large fluctuations q/q due to when orders occur.

The ARR and its growth rate are among the most important metrics to follow in Hoylu. ARR is a leading indicator of SaaS revenue growth, the main driver of profit growth, and is thus essential to the investment case and Hoylu’s road to stable profitability.

Hoylu’s ARR-SaaS segment, which includes its agile and construction segment, amounted to SEK27.5m in Q2 2023 and saw c10% q/q growth and c44% annualised q/q growth. At the same time, Hoylu’s other segment, ARR-Mobile products, reached SEK28.7m compared with SEK27.0m in Q1 2023, corresponding to 6% q/q growth and c28% annualised q/q growth.

We appreciate seeing the Hoylus core ARR-SaaS segment gaining momentum. Moreover, we want to highlight that the construction segment grew even more substantially, with a growth of c35% q/q (ARR growth of SEK3.1m), which implies that the agile segment saw a slightly decreased ARR q/q. However, we believe that Hoylu’s construction segment is the most important for investors to keep track of, as management has stated it as its core business area. According to management, the growth within construction derives from both new and existing customers, while the aim ahead is to increase the average sales per project. As such, Hoylu remains optimistic about continued growth potential within this area in H2 2023, despite the current market conditions.

Regarding the dARR (i.e. the absolute delta in ARR), the dARR-SaaS amounted to SEK2.4m in Q2 2023 q/q, while the dARR-Mobile products amounted to SEK1.7m. Since Q1 2021, Hoylu’s ARR-SaaS segment has been its primary ARR growth driver, except for Q2 2022 and Q4 2022–Q1 2023. As such, we appreciated that Hoylu turned the trend in favour of its core ARR-SaaS segment again this quarter.

Notably, Hoylu’s ARR-Mobile products segment was driven by a substantial order from a pharmaceutical company in Q2 2022, not disclosed by name, which made the dARR-Mobile products amount to SEK7.0m q/q. However, we see its ARR-SaaS segment as the primary growth driver ahead, while we expect relatively moderate growth within its ARR-Mobile products.

Q2 2023 net sales amounted to SEK14.2m (13.1m), corresponding to an 8.4% y/y. The sales came in somewhat higher than expected due to a slightly higher ARR than anticipated, coupled with some non-ARR sales during the quarter.

The gross margin amounted to 66.7% in Q2 2023, compared with 67.3% in Q2 2022 and 62.9% in Q1 2023. As Hoylu has moved away from its Hoylu-Wall offering in the most recent time and has focused entirely on its SaaS business, the gross margin outcome nowadays is mainly a result of the ARR mix. The ARR-SaaS/ARR-Mobile product split in Q2 2023 was 49%/51%. However, as we expect the ARR-SaaS segment to be Hoylu’s primary growth driver, we anticipate a larger share of the ARR-SaaS segment ahead and, thus, gross margin improvements.

Q2 2023 OPEX amounted to SEK13.0m and thus remained flat y/y. As such, Hoylu saw a continued OPEX stabilisation of around SEK13m in the quarter, which has been the case since Q2 2022 when excluding the tax provision for a potential tax surcharge in Q4 2022. According to management, one explanation for the continued cost stabilisation is a more effective sale process to bring in new leads. We appreciate the continued cost control, especially given the accelerated ARR growth. We argue this indicates the scalability of the business model, as it seems that ARR growth can occur at minimal cost increases.

EBITDA and EBIT amounted to negatives SEK3.5m and SEK7.3m in Q2 2023, respectively, slightly less negative than our expectations. This stemmed from slightly higher sales, ARR and gross margin, while OPEX aligned with our expectations. Furthermore, the cash position in Q2 2023 amounted to SEK15.7m compared with SEK6.3m in Q1 2023. The improved cash position in the quarter stems from the recently completed rights issue that brought in net proceeds of approximately SEK88.6m. However, cSEK72.9m of the proceeds were used to offset convertibles.

We make minor forecast adjustments following Hoylu’s Q2 2023 report. We increase our ARR forecasts by 2% for 2023e–2024e while we raise our gross margin assumptions marginally. However, as we expect Hoylu’s ARR-SaaS segment to remain its primary growth driver, we see gross margin improvements ahead. In addition, we keep our 2023e–2024e OPEX forecasts largely unchanged, as Hoylu saw continued cost stabilisation in Q2 2023. All in all, this leads to a slightly increased EBIT forecast for the period.

However, given our current forecast, we expect Hoylu to reach profitability on the EBITDA level by 2025e and on the EBIT level by 2026e, which means positive cash flows first in a few years. As such, we believe external financing challenges could be a continued risk before the company reaches stable profitability, considering our current estimates, Hoylu’s cash burn and current cash position. We thus anticipate a future share issue in our model, which we discuss further in the valuation section below.

Given Hoylu’s current cash burn and cash position, along with our current estimates, we expect the cash injection from the recent rights issue, after Hoylu offsets its convertibles notes, to be sufficient until sometime in Q4 2023–Q2 2024. As such, we argue external financing challenges will remain a risk, as we expect Hoylu to be dependent on bringing in further external capital before it reaches stable profitability, which may come at the expense of a dilution effect. Consequently, we count on an equity raise in our DCF model, as we believe Hoylu will need roughly SEK15m–20m before achieving positive cash flow.

Notably, we have previously accounted for future external financing in our valuation of Hoylu. However, we have chosen to express it here more transparently while we update the conditions for a potential share issue. We want to underline that these are our own assumptions and may thus deviate largely from the reality and the actual outcome. However, since the share issue assumptions are tied to the share price at that date, we will evaluate those assumptions continuously. To express the sensitivity of these assumptions, we have chosen to visualise potential outcomes in the table below, including different subscription prices, the amount raised and the potential dilution effect.

Considering our forecast changes mentioned previously, our DCF model gives rise to a new Base Case of SEK1.8 (1.7), while our Bear and Bull Cases of SEK0.5 and SEK7.5 is unchanged.