Netmore Group Q2 2023 - Financial review

Netmore is actively executing its growth-oriented strategic agenda in Europe. With the inclusion of Portugal, Austria, and Norway, the company’s operations now span 11 geographical markets. Additionally, the company expands its market standing through three new commercial deals and strategic collaborations with prominent industry players. Another significant achievement is Netmore’s record-breaking sensor growth, showcasing an impressive increase of 85% q/q and 251% y/y. This is reflected in a substantial 107% growth in MRR for the IoT Networks segment. Considering these developments, it is apparent that Netmore is well-positioned to capitalize on extensive projects within the expanding Internet of Things (IoT) universe.

Netmore achieved net sales of SEK20m, showcasing an impressive 84% y/y growth and a 23% q/q expansion. This performance exceeded our initial projections, which had anticipated sales of SEK18.2m. Once again, the standout contributors to this solid growth were IoT Networks and Property Network. Notably, the IoT segment significantly drove this growth, with revenues of SEK10.4m for the quarter. This represents an impressive 825% y/y and 71% q/q growth. Netmore’s Property Network segment reported a 17% y/y growth, but a slight 5% decline compared to the previous quarter. While rollout has begun, it’s worth noting that the company is currently in a development and planning phase, working with real estate companies that have chosen Netmore’s real-estate digitalization offering.

Recurring revenues accounted for c48% of sales, reaching SEK9.6m (8.6), an increase of 13% y/y but growing flat q/q. (adjusted for divestment of the M2M business, recurring revenue grew 27% y/y). The upswing in recurring revenues results from finalized deals and projects that became operational over the past year. This indicates that the share of recurring revenues will expand along with Netmore’s partners, thus indicating a progressive acceleration in the momentum of Netmore’s operations.

It is important to highlight that a notable portion of the revenues were non-recurring, mirroring a trend observed in the two preceding quarters. We attribute this pattern to the ongoing expansion and rollout of infrastructure. As a result, we anticipate a rise in recurring revenues as sensors are connected, and the infrastructure reaches total operational capacity.

While Netmore’s net sales figures for the quarter aligned with our expectations, the gross margin fell below our anticipated level. The cost of goods sold (COGS) reached SEK14.3m, leading to a gross profit of SEK5.7m. This equates to a gross margin of 29%, which is below the expected 39%. We attribute this discrepancy primarily to the ongoing expansion and rollout of infrastructure in Great Britain.

Total OPEX amounted to SEK20.1m, resulting in an EBIT of -SEK15.8m and an EBIT margin of -79%. This aligns with our forecasted EBIT of -SEK14.8m and EBIT margin of -81%. The negative margin reflects the ongoing expansion in Europe. However, it’s important to note that this situation is temporary. The recurring portion of the revenues is set to grow as the infrastructure is put in place and sensors get connected, resulting in expanding margins.

Netmore reported a burn rate of SEK12m for the quarter. The change in working capital totalling -SEK6.7 was primarily attributed to an increase in receivables. Consequently, the operating cash flow reached -SE18.8m (-15.4). Including the cash flow from investing activities of -SEK1.2m, Netmore’s cash position stood at SEK26.9m at the end of the reporting period. Factoring in Netmore’s credit line of SEK5.8m, Netmore’s total cash and equivalents amounted to SEK33m at the start of Q3 2023.

Considering Netmore’s current burn rate and existing financial reserves, our assessment suggests that the company is positioned to maintain its operational activities until the second half of 2024. Beyond that timeframe, it is apparent that the company would require an infusion of funds to sustain its growth trajectory. The company has acknowledged a potential need for additional capital, with the CEO indicating that they are exploring financing options to support future growth. However, there is potential for enhancement in the company’s cash position if it secures the additional purchase price of approximately cSEK29m from the divestment of the M2M business. This is, however, contingent upon achieving a predefined target linked to the EBITDA of Netmore M2M throughout 2023. The additional purchase price will become payable to Netmore (upon reaching the target) on two occasions: the first in Q1 2024 and the second in Q3 2024.

In conclusion, Netmore’s Q2 2023 performance demonstrated strong growth, with the IoT Network Services and Property Network Services leading the way. While the non-recurring revenue share is noteworthy, we remain optimistic that recurring revenues will accelerate as the infrastructure is set in place and sensors connect, resulting in margin expansion

Netmore has partnered strategically with Eidsiva, a Norwegian energy and telecommunications operator. This collaborative partnership involves Netmore supplying LoRaWAN server technology while Eidsiva manages infrastructure planning and rollout. This collaboration broadens Netmore’s services for pan-European customers to implement IoT solutions in Norway through commercial agreements with Netmore.

Similarly, Netmore has joined forces with Austrian LoRaWAN specialist SENS to introduce LoRaWAN operations in Austria. This collaboration allows Austrian clients to access SENS’s services and Netmore’s pan-European LoRaWAN network. Initially, approximately 24,000 connected devices will be added to SENS’s platform. Under this partnership, Netmore oversees network infrastructure and its expansion for substantial IoT projects within Austria, while SENS handles the commercial aspects specific to the Austrian market.

Furthermore, Netmore’s subsidiary, European Connectivity Networks, has forged a collaboration with Lorin, a local LoRaWAN operator in Portugal, to establish a presence in the Portuguese market. This strategic move reinforces Netmore Group’s standing within the European IoT connectivity realm and bolsters its position, particularly in utilities, energy monitoring, and tracking solutions. Through the partnership, Netmore aims to expedite the deployment of advanced IoT solutions in Portugal, addressing the slower pace of digitalization in these segments.

Overall, these expansions underscore Netmore’s accelerated growth trajectory across Europe.

Netmore has rapidly deployed sensors, leading to 211,452 connected sensors in the second quarter of 2023. This signifies an impressive sequential growth of 85% and 251% y/y. This is reflected in a substantial 107% growth in MRR for the IoT Networks segment. This substantial growth can be attributed to the increased digitalization within the utility sector. Additionally, the company reports that the IoT network segment has grown across all geographical regions where Netmore operates.

The company has successfully secured agreements with the real-estate companies Diös and Malmegårds. For Diös, Netmore will facilitate LoRaWAN connectivity across 330 properties. Subsequently, a series of digitization solutions will be introduced, primarily centred around energy optimization. This will encompass intelligent monitoring and regulation of temperature and humidity.

In the case of Malmegårds, Netmore’s involvement includes deploying LoRaWAN connections to approximately 1,000 apartments. The purpose is to monitor temperature and air quality, replacing Malmegårds’ previous sensor-based solution encompassing the same number of sensors.

Following Polar Intelligent Solutions’ acquisition of several assets from a French company, Netmore entered into a strategic agreement with IoT Networks France, a subsidiary of Polar Intelligent Solutions. This collaboration entails responsibility for various services, including network management, monitoring, expansion planning, maintenance, and customer support. Anticipated revenues from this agreement for Netmore amount to around SEK23m during the initial phase of the contract. However, it is important to note that the finalization of this acquisition hinges on regulatory approval and the successful integration of technical components. These processes are projected to conclude in the third quarter of 2023.

Adding to these progressions, Netmore extended its operations to Poland and achieved a significant breakthrough deal during the quarter. This involved securing a contract to establish connectivity for 76,000 smart water meters in Southwest England. These developments were previously detailed in our Q1 2023 company update.

As a result of Netmore’s Q2 2023 report, we have only made minor adjustments to our sales and cost-base projections. We anticipate accelerated sales growth with a projected 2021-2025 CAGR of 58%. By 2025, sales are expected to reach SEK260m, See below for our updated forecast:

We derive our fair value range from a fundamental DCF framework for three scenarios: base case (most likely), bear case (pessimistic), and bull case (optimistic), using a WACC of 13% across all scenarios. Our fair value range is SEK0.8–4.8, and our base case is SEK2.3. The fair value range is wide, owing to the unpredictable nature of Netmore’s long-term growth and profitability; this depends on the product mix and international expansion plans. We forecast long-term gross margins above 60% and a terminal EBIT margin of >20%. Sales growth and signs of near-term scalability are key metrics, so we will keep a sharp eye on margins and adjust these going forward.