Review of Q3 2023

ARR (previously called CARR, see below) was SEK61.3m, corresponding to an 82% growth y/y. While the absolute number was somewhat below our forecast of SEK64.9m, the growth rate was slightly higher than the 78% we expected. The strange difference is because we estimated last year’s ARR too high. As mentioned in our last Update, one should not draw any major conclusions from the deviation from our forecast in this quarter, as our access to data regarding BrightBid was limited. Nevertheless, we can conclude that the ARR growth remains high. Note that BidBrain has been merged into BrightBid, and the ARR and number of customers now regard the new, merged company, BrightBid.

To better align its ARR to the underlying development of the business, Speqta uses the definition of what it previously called CARR – the recurring revenue from signed customers over the next 12 months. Considering it is much more stable than the monthly recurring revenue times 12, which is the most common alternative, in a business like Speqta, we believe it is a reasonable change. However, it means the recurring revenue relative to ARR will be lower than the typical average of incoming and outgoing ARR divided by four.

The number of customers increased by 90 q/q to 494. Although it includes some Bidbrain customers (likely about 40), it is a solid number for the seasonally softer Q3. According to management, the number of implementations has been relatively high recently.

Sales beat our forecast of SEK 10.0m significantly and amounted to SEK 17.3m, mostly because we underestimated the amount of non-recurring revenue in BrightBid – related to implementations. Also, the non-recurring revenue includes Shopello, which will be discontinued gradually, and other small revenue streams with limited gross margins. While the number of implementations was rather high in the quarter, non-recurring revenue is typically not a good indicator of it.

Nevertheless, the important recurring revenue beat our forecast as well, amounting to SEK 12.9m, corresponding to a y/y growth of 181% - although BidBrain had a minor positive impact, the increase is mostly organic.

While the OPEX figures were affected by one-offs related to the acquisition of BrightBid, adjusted EBITDA – CAPEX was SEK -15.8m, about SEK4m lower than expected. However, as mentioned in our last Update, our estimates of BrightBid’s cost base were very uncertain.

We note that the personnel cost per employee is relatively high in Speqta. We believe there are several reasons behind this. First, AI R&D personnel tend to be expensive. Second, the sales force has a high share of variable salaries, resulting in high costs as BrightBid grows quickly. Although management sees potential for synergies, we believe the large potential synergies are related to sales resources and cross-selling. Also, as Speqta is a fast-growing business, there is likely a need to expand the headcount gradually, leaving room for relocating potentially overlapping positions.

Net cash amounted to SEK42m by the end of the quarter, and BrightBid contributed about SEK 5m – compared to our guess of SEK 25m. While management expects to “go towards profitability during 2024” within its current funds, we assume Speqta will need an additional SEK 25m in H2 2024. However, as small changes in growth rates and OPEX can have large implications in a fast-growing company like Speqta, we would not rule out that the current funds will be enough.

BrightBid is launching a bridge between Amazon and Google Shopping, combining data from both sources into BrightBid. As Amazon and Google are dominant players in this field, we believe the product has substantial potential. Also, we are positive about constant product development in a SaaS business, such as this example, which we believe is crucial to long-term growth.

We recommend watching Speqta’s Q3 2023 Live Q for more information on the product features.

As BrightBid and Bidbrain are now merged into one company providing solutions for text ads, such as Google Ads and Bing, and Google Shopping, Speqta reports consolidated numbers. Thus, we have merged our separate forecasts into one as well.

We expect the strong ARR and sales momentum to continue in BrightBid. The company has a strong track record of high growth, is active in a structurally growing market, and has a small footprint in its international markets.

We assume an average organic growth rate of 40% 2024-2026, resulting in an ARR of SEK 186m at the end of 2026, compared to the current SEK 61m. While the absolute number is somewhat lower than our previous forecast, the growth rate is equal because we estimate last year’s ARR too high.

Note that, as mentioned earlier, what we and Speqta now call ARR equals what we called CARR in the last Update. Thus, ARR in our last Update is not comparable to ARR in this Update. For comparability, we estimated ARR to be 83% of last quarter’s CARR on average in our last Update. Thus, with the current definition, ARR should be about 20-25% higher than ARR with the previous definition, used in Speqta’s Q2 report and in our last Update. The numbers in the Estimate revisions table are adjusted to the current ARR definition and thus comparable.

While both recurring and especially non-recurring sales were higher than we anticipated, OPEX was even higher, resulting in lowered EBITDA – CAPEX and EBIT forecasts.

We expect Speqta to reach EBITDA break-even in 2025 and EBITDA – CAPEX break-even in 2026. It is likely somewhat more defensive than management’s “go towards profitability during 2024”. However, small changes in sales growth rates and OPEX have a rather substantial impact on the timing for profitability. Also, thanks to a negative net working capital, we expect Speqta to be cash flow positive before being EBITDA - CAPEX positive.

We lower our Base Case to SEK 15 (19) for three reasons. First, we increased our risk-free rate from 2.5% to 3%. Second, we lower our earnings forecasts. Third, considering that BrightBid had a lower cash position than our previous assumption, we now expect a minor share issue to get Speqta to profitability.

We assume Speqta needs an additional SEK 25m in H2 2024 before reaching profitability. We apply a 40% discount to our pre-share issue Base Case of SEK 16.2m, assuming a share issue at a price of SEK 9.7, resulting in a modest dilution of about 10%.

Note that Speqta has a temporary respite for tax payment from Skatteverket of SEK 22.1m, which is likely to be able to extend until H2 2025. We do assume Speqta will be able to solve that by adding debt, as it is close to profitability in 2025 in our Base Case forecasts.

While SEK15 implies a ~3.5x sales 2024e valuation multiple (in line with the average but above the median), today’s Speqta combines the fast-growing BrightBid, deserving a rather higher multiple and Bidbrain, which is more or less pre-revenue. Thus, an insignificant part of the business is still in an early phase, where EV/S has low relevance. Also, according to our forecast, Speqta is among the fastest-growing companies in the listed Nordic SaaS space. Unlike the other companies where analysts expect very high growth, BrightBid is currently running at even higher growth rates.