TH1NG Q4 2023: Review

Redeye concludes that the figures in the Q4 2023 report from TH1NG align with the previously disclosed preliminary figures. As predicted from the preliminary figures, the gross margin was weaker, and the cost base was higher than our estimates. Consequently, the EBITDA fell slightly below our estimate by SEK0.5m despite net sales exceeding our expectations by around 20%. The robust growth (40% year-on-year) is attributed to both hardware (sensors) and consultancy sales (IoT solutions). However, the primary growth driver was hardware sales, which caused the gross margin to decrease significantly from 48% in Q3 2023 to 33% in Q4 2023. TH1NG revealed insights into the sales mix for the first time, with broadband services accounting for approximately 40% of net sales. Furthermore, IIOOTE’s share of reported revenues for Q4 2023 stood at 3.9%. Overall, TH1NG’s Q4 2024 report reflects continued strong business momentum, albeit with significant growth achieved at the cost of the gross margin. However, it is worth noting that hardware sales (sensors) serve as the cornerstone for increasing recurring revenues.

Net Sales came in at SEK7.5m, representing a y/y and a q/q growth of c40% and c20% above our estimate. This solid growth is attributed to both hardware (sensors) and consultancy sales (IoT solutions). Additionally, the acquisition of IIOOTE has contributed to this uptick. The integration of IIOOTE acquisitions was completed on 15 September 2023. Hence, Q4 2023 marks the initial full quarter with IIOOTE fully integrated. IIOOTE’s portion of reported revenues for Q4 2023 stood at 3.9%. The company notes an increased demand for IoT solutions, particularly from the real estate and energy sectors. Revenues from the broadband services amounted to SEK3.0m, representing a 40% share of net sales. For 2023, net sales amounted to SEK27m, representing a c30% growth compared to 2022.

TH1NG reported COGS of SEK5.0m, resulting in a gross margin of 33%, 11pp below our estimate and a decrease of 5pp on a y/y basis. OPEX increased by 10% y/y and amounted to SEK7.7m (7.0), which is 13% above our estimate of projected SEK6.8m. We estimate the elevated cost base (OPEX) in Q4 2023 to be a new base level due to the integration of IIOOTE. EBITDA came in at -SEK3.6m, corresponding to an EBITDA margin of -48%. The EBITDA result is SEK.05m below our estimate, and the main reasons for the deviation are lower gross margin and higher OPEX.

The total EBIT and EBIT margin for the quarter was -SEK5.5m and -73% (-107%) respectively. While this figure was softer than our initial EBIT estimate of -SEK4.6m, the reported EBIT margin was on par with our estimate. For the full year of 2023, EBIT was negative at SEK19.5m.

TH1NG reported a cash flow from operations of -SEK3.9m, with a net cash flow of SEK0.5m in Q4’23. This resulted in a cash position of SEK4.5m at the end of the reporting period. Yet, it is important to note that TH1NG took up a convertible loan during Q4’23, which positively impacted the net cash flow for the period by SEK6.0m. Considering the cash position at the end of Q4, the recent announcement of a SEK1.1 million convertible note issuance is reassuring. Additionally, the board is authorised to issue further convertible loans of up to SEK4.9m. We believe this will be necessary during H1 2024, and additional growth capital needs depend on tie-ups in the working capital. Therefore, we anticipate the board will likely be granted extended rights to issue further convertibles during 2024.

TH1NG announced a new convertible note issue of SEK1.1m Friday afternoon, directed to two external parties. The convertible debenture is issued under the same terms and conditions as the first convertible debenture, totalling SEK6m, issued to Skellefteå Kraft AB in November 2023. The convertible note bears an interest rate of 13% until 1 December 2025, with a conversion option on the maturity date. Conversion to shares can take place from 10 November 2025 to 28 November 2025. The conversion price is set at 80% of the average price between 27 October 2025 and 7 November 2025, but not less than SEK0.63 per share. The interest is payable quarterly.

According to the press release, the loan is taken to strengthen the company’s balance sheet and provide funds for the planned expansion with an increased market presence. Even though the conversion rate discount and interest rate are high, we view the financing as favourable considering the market climate and the capital raised.

During the fourth quarter of 2023, TH1NG announced the expansion of its distribution network through Tele2, providing support for the planned rollout in 2024. Additionally, TH1NG recently revealed a partnership with Valokuitunen, a Finnish fibre operator and service provider. Valokuitunen gains an exclusive 18-month right to resell TH1NG’s proptech IoT solutions to the real estate sector in Finland. Currently, Valokuitunen boasts approximately 200,000 fiber customers. We understand these solutions are pre-packaged by TH1NG for direct resale via Valokuitunen. In our view, this agreement offers a low-risk entry into the Finnish market.

The CEO, Klas Westholm, is optimistic about the future in his CEO letter, both in the short and long term, and it also seems that the market has matured and recognised the benefits of IoT. TH1NG is currently in ongoing discussions with additional stakeholders to deliver both its IoT platform, IoT Open, and vertical IoT solutions. Currently, TH1NG provide services in over 50 municipalities

Following TH1NG’s Q4 2023 report, we have made adjustments to our near-term forecast, with a 5% decrease of the top-line for 2024e, mainly affecting H2. Additionally, we have trimmed our gross profit assumptions for 24’-2025e by 31% and 18%, respectively. We still estimate that TH1NG will achieve positive EBIT in 2026. TH1NG aims to achieve positive (we assume operating cashflow) cash flow by the end of 2024.

We are not factoring in any potential dilution resulting from the two convertible note issues at this point. This decision is based on the uncertainty of whether the loan will be converted into shares or not. The board is authorised to issue further convertible loans of up to SEK4.9m. We believe this will be necessary during H1 2024, and additional growth capital needs depend on tie-ups in the working capital. Therefore, we anticipate the board will likely be granted extended rights to issue further convertibles during 2024. Our Base and bear case are intact at SEK4.0 and SEK0.5, respectively. Our Bull case comes down from SEK13.2 to SEK9.8.