Total revenue was SEK71m, +2% y/y, and 13% above our estimates of SEK63m. Stronger ad-hoc sales explain the whole deviation. The more qualitative part of ad-hoc revenues (to existing subscription clients) outperformed our estimates the most.

EBIT adjusted for one-off restructuring costs was SEK0.6m - SEK3.3m better than expected, or 5.2 percentage points better. Capitalized development expenses were also below estimates, implying that the underlying beat on cash flow was even stronger.

Subscription revenues came in roughly in line with the last quarter – and in line with our estimates. Recurring revenues amounted to SEK45m (+10% y/y) and accounted for 63% of sales in the quarter.

During Q3, Nepa experienced an uplift in churn. The company explained that clients have, to a higher extent, paused their subscriptions or reducing the scope of them. However, it should be noted that the churn was caused by clients pausing rather than switching to a competitor. Churn was particularly higher for smaller clients, whereas larger clients remained loyal despite tougher economic conditions. This caused a sequential drop in ARR of 1.1% (SEK172.4).

Nepa states that it is working to extend its cancellation notice period for clients from its previous one-to-three months to twelve months and above.

Just more than one year ago, Nepa started, for the first time ever, to initiate outbound sales efforts. This has, as is typically the case, so far only implied extra expenses for Nepa whereas topline so far has not been positively impacted. However, the interim CEO stated in the conference call that while sales cycles have been long due to the economic climate, the sales pipeline should soon start convert into new subscription contracts.

In its sales efforts, Nepa has targeted large multinational companies, which offer substantial potential in boosting the average revenue per client (ARPC). Rather than going for clients with a base in Sweden, Nepa is focusing on more global clients that can be handled from distance, which implies that there is no immediate need for a new office in that market. Sales efforts towards UK clients (where Nepa already has an office) are developing quite well with some new clients signed and additional clients soon likely to follow.

While the sales efforts now appear to start bearing fruit, Nepa stated that it will need to invest in more experienced sales personnel.

In the quarter, Nepa launched a new add-on product to its Brand Tracker, the “AI Trend Boost”. This product uses machine learning to draw conclusions in a way that would otherwise have required a data set five times as big. Except for needing less data per insight, this enables new use cases where the data available has previously been too scarce.

Nepa states that the AI Trend Boost is an excellent product to offer to all existing clients. The company commented that the initial response from clients has been very strong, and that it expects the product to boost sales in the coming quarters. Considering that the product does not require additional data, it means extra software revenue without the need for extra data costs. This implies that a substantial revenue contribution from this product will boost the gross margin.

The following interesting image was presented in the conference call by Nepa, providing an overview of its product roadmap and what the various features aim to accomplish:

Currently, almost all Nepa’s ARR comes from its Brand Tracker. Within Marketing Optimization, Nepa also offers “marketing mix modeling”, or MMM, as an ad-hoc product. The company is now planning to enable this product as a subscription product – and is currently conducting pilots with clients with promising results. Nepa expects a full rollout of this product in Q2 or early Q3 next year.

Nepa recently analyzed its outcomes on RfPs (request for proposal). As a direct consequence, the company has restructured its way of selling and packaging its products. Before, Nepa used to offer a rather complex product with the option for clients to ask for substantial customization – which entailed more resources needed for client implementation and a higher selling price.

This customization was appreciated by some clients, but it also created confusion about what Nepa stands for and its main value proposition for others, including the own marketing department. In several cases, it also made Nepa’s solution appear expensive, causing a loss of that tender.

Nepa has now started to offer a clearer and more streamlined product – rather than a customized solution. The product should be standardized and cover 90% of the clients’ needs. This means that it becomes cheaper for clients, fewer employees needed for onboarding, and clearer for Nepa’s marketing department in how to position Nepa.

Ad-hoc revenues amounted to SEK26m (-10% y/y) and accounted for 37% of sales in the quarter. Ad-hoc from clients amounted to SEK15.3m, +59% y/y and 59% above our estimates. Ad-hoc sales to non-subscription clients amounted to SEK10.6m, -45% y/y and 20% above our estimates. As such, it was the more qualitative part of ad-hoc revenues (to existing subscription clients) that outperformed our estimates the most.

Nepa mentions the UK as an important reason for the somewhat stronger figure. Historically, very large ad-hoc projects have been conducted by UK clients, and they typically come back to redo the project every two to three years. These clients were, however, on pause during H1 but are now showing good progress.

Looking at the +59% y/y growth, the performance from this part appears impressive. However, it is worth noting that the increase came from low numbers. As such, it could be looked at as ‘normalized’ rather than ‘heightened’. Nevertheless, the increase originated from sales focus on larger clients since the start of the year.

The company also stated that the increase came from a combination of increased semi-recurring revenues and pure one-off revenues.

Nepa has in the past quarters experienced a tougher market climate for certain high-margin ad hoc projects, predominantly in the UK. The company now believes the market bottomed out during Q3 and that improvements are on their way. Some improvements were seen already late in the quarter, resulting in several project wins yet to be realized (in Q4, we believe).

OPEX excl. one-off restructuring costs amounted to SEK47.7m and CAPEX to SEK4.3m, implying a total cost base of SEK51.8m.

More importantly, the average number of employees decreased sequentially from 303 to 281 – however, the number of employees at the end of Q3 was as low as c270, according to Nepa. This number peaked in Q4 2022 of 325 and has now thus been reduced by at least 17% (the peak was likely a bit higher than the average in Q4’22).

Additional cost savings continued after the quarter. Nepa is now finding more effective ways of working, and is becoming better at moving internal resources between markets to improve utilization rate of its consultants.

Nepa has most of its employees in Stockholm but some in India. The company started this summer to move more work to teams in India. Nepa wants to have high value-add consultants in Stockholm and moving much of the rest to India. The target is thus to get the same work performed but at a lower cost. Nepa states that it is now set to beat the previously targeted cost base for other external costs and personnel costs of SEK220 million in 2024. The SEK220m cost base appeared like the run rate going into Q4, whereas the full cost savings will be seen in Q1’24.

Adjusting for the extra dividend paid during Q3 (SEK5.2m, or SEK0.67 per share), cash flow was positive SEK2m, partly resulting from improved net working capital. By the end of Q3, net cash amounted to SEK42m or SEK5.3 per share.

At the end of Q3, Nepa started experiencing a better market climate for ad-hoc sales to non-subscribers, resulting in some deals yet to be realized as revenues. Nepa further states that the market likely bottomed out in Q3, implying improvements ahead.

The full effect of the cost-savings program is not yet visible in the cost base, and we expect a lower cost base in Q4, and that full effect is expected from the start of Q1.

The interim CEO stated that it is ‘pretty much there’ in terms of being a slim and trim organization. Next year will be more focus on revenue and profitable growth.