Kontigo Care’s Q2’23 report was slightly weaker than expected. The prevailing market conditions continue to present challenges, characterised by prolonged decision-making cycles and constrained budgets within municipalities. Kontigo is actively targeting new customers and collaboration partners to replace the loss of licenses during Q2. Furthermore, this quarter’s comparison faced challenges due to the exceptional performance of Q2 in 2022, which remains a high-water mark in sales. On the bright side are high business activity, the successful completion of clinical studies for mobile phone-based drug monitoring, and the forthcoming effects of price increases.

Net sales for the quarter came in at SEK7.3m (7.3m), flat y/y and up 3% q/q. Our net sales projection had a negative deviation of 2% compared to the actual figures.

The company signed four new frame agreements with municipalities during the quarter, and one additional contract was signed after the end of the period. The total number of municipality contracts now stands at 166, corresponding to c57% of the municipalities in Sweden. The company lost 63 licenses during the quarter. Consequently, the base of active licenses decreased from 956 to 893. The drop of 63 licences is reflective of the challenging macroeconomic climate, resulting in reorganisation and cost-saving measures among customers. Sweden was responsible for all lost licenses, with two terminated collaborations representing 90% of the decline.
MRR (Monthly Recurring Revenue) decreased slightly, from cSEK2.5mSEK at the end of the last quarter to SEK2.4m by the end of Q2’23. The decrease is a natural result of the decline in licenses described above.

Operating expenses (ex. D&A) amounted to SEK9.5m (7.4). The negative net result of cSEK0.5m was impacted by one-time costs amounting to SEK0.8m related to the mandatory adaptation to the regulatory framework in MDR requirements. One-time costs for the transition to MDR are expected for the remainder of 2023, but they are anticipated to decelerate from the first quarter of 2024.

Kontigo Care uses capitalisation – i.e., it records an asset (in this case, development costs) on the balance sheet instead of immediately expensing this on the income statement. In Q1, Kontigo Care capitalised SEK2.9m for development (mainly derived from the drug monitoring project), while D&A amounted to cSEK1m (amortisation amounted to SEK0.7m).  

Cash flow from operating activities was cSEK1.1m, and cash flow after investments was negative cSEK 2.3m:by the end of the quarter, cash and cash equivalents amounted to cSEK6.3m. The company expects costs related to the drug project and clinical study to reach SEK12m–16m, with its cash flows financing a large part of this. During Q1’23, two loans were obtained from financial institutions totalling SEK7.0m. However, the company might need further capital injections depending on the outcome of the studies and strategic direction.

The overall outlook is cautiously optimistic. The development of Kontigo’s new AI-based service, enabling eye-based drug detection, is progressing rapidly. Two clinical studies were conducted during Q2’23 in Leiden, Netherlands, and in the Region of Uppsala. These studies are set to conclude officially in August, with final results expected in September. Following this, the company anticipates deciding on a commercial launch. The possibility of adding this functionality to Previct will be of great importance for future expansion and growth, according to the company.

Ulf Kindefält states in his CEO letter that several clients in Finland have contacted him directly and want to continue offering Previct to their patients. The company hopes to present a solution for customers and clients who use Previct daily in Finland during the fall.

The company signed four new frame agreements with municipalities during the quarter, and one additional contract was signed after the end of the period. Adjusted for two cancellations, the total number of municipality contracts now stands at 166, corresponding to c57% of the municipalities in Sweden. The company further expects to sign additional agreements during the fall. As we advance, these agreements should result in more licenses and the stabilisation of MRR.

Kontigo Care raised its prices in March, which will gradually impact as subscription periods expire and new prices become effective. The final impact of the price increase on net revenue and results can be assessed at the end of 2023.

We have already revised our financial forecast to account for the delayed internationalisation process and the decline in revenues from Finland from 2023 onwards. Consequently, we only make minor adjustments, primarily affecting our ’23 estimates. We have decreased net sales by 5% and nudged OPEX slightly. EBIT’23e comes down from SEK1m to -SEK2.

We value Kontigo Care using a DCF valuation based on certain long-term sales growth and margin assumptions. In addition to this, we apply a relative peer valuation. Our fair value range is SEK1.5–18, with a Base case of SEK9.5 per share. Our base case is derived from the financial forecasts in the table above and the long-term assumptions outlined in the table below.

The market valuation of Kontigo Care is lower than that of its peers (Nordic SaaS companies) on forward-looking EV/EBIT multiples. We use FactSet consensus estimates for the peers and our estimates for Kontigo Care specifically. The 2024 EV/EBIT for Kontigo Care stands at 8x compared to the peer group’s median of 19x, a c60% discount to its peers. We believe Kontigo Care should trade at a discount because its market cap is lower than its peers, and its expected sales growth is slower in 2023. However, we believe the discount applied to Kontigo Care in ’23e-’25e is too large.