Review of Q4 2023

Total sales matched our forecast of SEK210.2m and amounted to SEK210.5m (200.7), corresponding to 5% growth y/y. While the organic growth was -0.7% y/y, gross profit increased about 5% organically y/y (COGS was down SEK6m y/y following fewer sub-consultants and reselling of hardware/software). Also, sales-cogs per employee and working day increased by 4% y/y (the number of working days was 63 compared to 64 in Q4 2022). Thus, the underlying growth numbers remain positive, which we find impressive in the current market.

The situation is seen throughout 2023, with lower demand from some sectors, including consumer discretionary, housing, and construction, while most sectors see normal markets remain. Management points out that CombinedX’s focus on specialist companies working with one or a few software platforms is an advantage, especially in more challenging economic environments. This is as customers tend to prioritise business-critical software over resource-consulting. The solid numbers seen in Q4 and all of 2023 support the statement.

Management expects the market environment seen in 2023 to remain into 2024. While few Nordic IT Consulting firms have released their Q4s yet, CombinedX’s view aligns with what we have heard from its peers so far.

An IT consultant’s sales are a function of the number of employees and their revenue per working day. In reality, the number of revenue-generating employees, i. e., excluding administrative personnel etc., would be a better measure. However, we cannot access those figures, making the total number of employees a reasonable proxy.

While the end-of-quarter number of employees was slightly lower than anticipated, management states that it had hoped to reach at least 500 employees at the end of 2023. CombinedX has no central recruitment directives, and some subsidiaries have been cautious in recruiting due to uncertain market conditions. Perhaps too careful in retrospect. However, we expect CombinedX to reach 500 employees in Q1 2024.

The number of employees at the end of the quarter is a leading indicator for sales growth in the coming quarter. While sales is dependent on other parameters as well, the starting number of employees for the coming quarter is, together with the number of working days, the only relevant figures we know in advance.

The difference between the average number of employees and the number of employees at the end of the quarter can give us a clue about the employee churn. For example, during Q2-Q3 2022, CombinedX started and ended the quarter with more employees than the quarter’s average, i.e., a U-shaped employee curve. That indicates a high employee churn over those quarters. In Q4 2022, the average number of employees started to coverage towards the number of employees at the end of the quarter, implying a reduced employee churn.

Employee churn is typically costly for any company. However, as IT consultants’ sales generation depends on their employees in a nearly 1:1 ratio, we believe low employee churn is even more important in IT consultant firms.

The Sales-COGS/employees/working day is a proxy for the revenue generation of one employee during one working day, indicating how advanced services the company provides and how high its utilisation rate is. While sub-consultants and reselling software and hardware can alter accuracy in this measure, we try to consider that by subtracting the cost of goods sold, which typically consists mainly of expenses related to sub-consultants and reselling. Also, as we use the total number of employees, the share of administrative personnel can alter the number. A high share of administrative personnel might not be unwanted. For example, when focusing on expansion, the investments in administration are typically front-loaded.

The Contribution/employee/working day is sales-cogs-personnel expenses and indicates the profit contribution for the average employee per working day. We believe it is a proxy of how much revenue consultants generate compared to their seniority and, thus, salary. For example, a high Sales-COGS/employees/working day might not be worth much to shareholders if most are paid as salaries to senior consultants.

CombinedX’s numbers are among the top in the Nordic IT Consulting space. Most companies have not reported their Q4s yet, so we use R12m Q3 2023 numbers. However, considering the y/y improvement in CombinedX’s numbers, we believe it will sustain or slightly improve its relative position.

Overall, OPEX was slightly lower than our forecast of SEK148m and amounted to SEK142m (132). Both Other external costs and Personnel expenses were lower than anticipated. Other external costs was significantly lower than in Q4 2022, and management states increased focus on efficiency and operational excellence as one reason for the lower costs. However, while lowering our forecasts for Other external costs somewhat, we expect some fluctuations between quarters.

EBIT was SEK25.6m, corresponding to an EBIT margin of 12.2% (10.3). Our forecast was SEK22.0m and 10.5%, and the higher outcome was due to matching sales and lower OPEX. EBIT was 16% above our expectations. While few Nordic IT Consultants have reported their Q4s yet, we expect 12.2% to be strong in comparison. Free cash flow (excluding M&A) was strong and amounted to SEK25.1m (14.4), including SEK-10m from changes in net working capital.

As expected, from an IT consulting business, the cash generation is solid, and by the end of Q4 2023, CombinedX had a net cash position of SEK73m, excluding leasing. The financial position leaves room for SEK2 in dividend per share (SEK34m) and potential acquisitions.

As common among IT consultants, CombinedX has low CAPEX, and the cash conversion tends to be strong.

For 2024 and 2025, we raise our sales forecasts by 1% due to us expecting slightly higher net recruitment in the light of management’s statements. Regarding EBIT, we increased 2024 and 2025 by 4-6% due to the slightly higher sales and us reducing our assumptions for Other external costs.

We expect an EBIT margin of 10.8% and 11.3%, respectively, up from 10.4% in 2023. We assume 7% and 5% respectively in sales growth. Although we expect further acquisitions, we have not included any in our current forecasts.

Based on increased forecasts, we increased our Base Case to SEK61 (57).

CombinedX is trading at a significant discount to the peer average and median. While the company has a shorter track record, which should motivate some discount, given our positive outlook on CombinedX operations and the strong 2023, we believe the gap will narrow.