Review of Q4 2023

ARR growth remains strong, with an FX-adjusted growth of 17% y/y and an annualized q/q growth of 23.9% - compared to 21% in Q3. Thus, the solid momentum in organic ARR growth continues despite soft macroeconomics, supporting management’s view of customers investing in digitalizing stores as a strategic investment – happening despite weaker macroeconomics. However, management saw increased activity in the market by the end of 2023 and has an optimistic view of 2024. For example, market forecasts expect the digital signage market to return to double-digit growth in 2024. Thus, we believe 2024 will feature market conditions good enough to support Vertiseit in growing its FX-adjusted ARR by ~20% annually. Overall, we are somewhat positively surprised by the outlook as we expected market conditions to be in line with 2023 for 2024.

Also, during 2024, Vertiseit will intensify its ambition to add strong partners in the US market, which if successful can lead to a substantial growth boost. We will likely hear more about that on the upcoming Capital Markets Day – scheduled for a yet undisclosed date during the spring.

Note that the headline ARR of SEK160.8m is negatively affected by FX compared to Q3. While Vertiseit has minor exposure to FX regarding profits – i.e. sales and OPEX match FX-wise – there is a negative revaluation effect from the stronger SEK in Q4.

The ARR and its growth rate is the most important metric to follow in Vertiseit. The ARR is a leading indicator of SaaS revenue growth, the major driver of profit growth in Vertiseit and essential to the investment case. As Vertiseit historically has grown its ARR by acquistions, partly funded by share issues, we believe ARR per Share is the most relevant metric.

TTotal sales exceeded our forecast of SEK 77.8m and amounted to SEK 87,4 (98.9), corresponding to -12% growth y/y. The y/y decline is due to the divestment of MulitQ Transportation (ITS), and investors in Vertiseit should focus on the ARR growth rather than total sales growth. While Consulting and SaaS – due to ITS having somewhat higher SaaS revenue than assumed – were somewhat below our expectations, Systems came in substantially higher than expected. The Systems sales tend to be somewhat volatile, and management saw some catch-up effect from a slower H1 2023. Nevertheless, with a healthy gross margin – for being mainly hardware – of 28%, there is a notable contribution to gross profit.

Vertiseit has three kinds of sales: SaaS, Consulting and Systems. SaaS revenue is 100% recurring revenue from software and related service & maintenance sold as a subscription with high gross margins. Consulting constitutes revneues from consulting or professional service. While the gross margin on paper is high, growing this revenue typically demands additional employees roughly 1:1, resulting in a modest "ture" gross margin. Systems is revenue from hardware, typically screens, sold to new or expanding customers. As Vertiseit's current business model wants partners to provide the hardware, we expect Systems to decline as a percentage of sales.

Gross profit beat our forecast of SEK 54.0m and amounted to SEK 58.4m (56.4). The gross margin came in two percentage points below our estimates, which was entirely due to the large Systems sales. The gross margins in Consulting and SaaS remained solid, slightly above our expectations.

Overall, OPEX came in below our SEK -43.5m forecast and was SEK -41.0m (-45.6). The divestment of MultiQ Transport and the cost-saving program made estimating the underlying OPEX more difficult than usual. Thus, seeing an outcome lower than expected is positive. The Personnel costs especially declined rapidly q/q while Other external costs fell slightly. Considering Vertiseit’s investments in IT, it makes sense to see Personnel expenses falling to a greater extent than Other external costs, including IT costs. Also, as management points out, the new IT systems are set for much higher volumes, with only limited increases in cost. While we were a bit skeptical about the IT investments in H1 2023 due to what looked like delays and high costs, we are encouraged that the investments are starting to pay off.

EBIT was SEK 14.2m (5.8), and our forecast was SEK 5.4m, while EBITDA – CAPEX was SEK 14.4m (5.3) compared to our forecast of SEK 4.1m. The beat was due to strong System sales – with healthy gross margins – and lower OPEX. Although the cash flow was not as strong as in Q3 – mainly due to the cost-saving program hurt costs in Q3 but the cash flow in Q4 – net working capital was roughly flat, and Vertiseit continues its streak of improved profitability.

By the end of the quarter, Vertiseit’s net debt was SEK 114m, which is equal to 2.1X EBITDA 2023e. We consider that a reasonable level expects it to decline over the coming quarters due to solid EBITDA – CAPEX and positive cash flow.

As for any SaaS business capitalizing R&D, EBITDA and EBITDA margin are unsuitable metrics for Vertiseit. This, as EBITDA discards a large portion of the company’s R&D costs totally. R&D is typically a high cost for most SaaS businesses. Instead, EBIT (where the capitalized R&D is amortized over time) or EBITDA – capitalized R&D/EBITDA – capex are better measures of the underlying profitability as it concerns the company’s full R&D spend. However, as Vertiseit has some amortizations related to M&A, the underlying profit generation is somewhere between EBIT and EBITDA. Our perfered metrics is EBITDA - CAPEX, as it regards all R&D as an upfront cost.

With the release of this Q4 report, we have a full year of SaaS metrics for Grassfish and Dise. During 2023, Vertiseit had a churn of 5.5% and an NRR of 109%. We consider those figures strong for a business like Vertiseit, and while some SaaS companies have not reported Q4 yet, we believe Vertiseit’s numbers will be among the better ones. Our Redeye SaaS Update Q4 2023 will feature a complete comparison of metrics of listed Nordic companies – we expect it to be published in mid-March.

While Vertiseit’s R12m numbers are healthy, interestingly, the numbers have been improving gradually throughout 2023. For example, in Q4, on an annualized basis, churn was a mere 2.8%, and the NRR was a solid 114%. According to management, the improvement is mostly due to stronger market conditions. Although the SaaS metrics can vary a bit from quarter to quarter, we believe the positive trend is encouraging.

We increase our sales forecasts by 4-5% for 2024-2025. Regarding EBITDA – CAPEX, we increase our forecast by 3-4% for 2024-2025. Although we only make rather small adjustments, once again, we are more confident in expecting increasing margins in 2024 following the strong outcome H2 2023.

We make the following detailed adjustments:

For the end of 2024, we expect an EBITDA margin of 27% in Q3 and 24% in Q4, somewhat below the company’s target of 30%. Nevertheless, considering the positive trend in Q3 and Q4, our confidence in Vertiseit’s ability to generate healthy margins has increased substantially. Regarding ARR, we expect SEK ~190m, which is slightly lower than the target of SEK 200m. However, we do not include any future M&A, which the target allows for.

We increase our Base Case to SEK 42 (39) following the slight increase in forecasts and higher confidence in Vertiseit reaching solid profitability. Trading at 16x and 11x EBITDA – CAPEX for 2024e and 2025e respectively, we believe Vertiseit remains an interesting case combining a large global market, ~20% organic ARR growth, and a strong profitability trend.

Vertiseit is trading below the average and median for both EV/sales and EV/EBIT for 2024/26e. While Vertseit has a lower share of SaaS revenue than the average company, it has a strong position within its niche, and the 15% EBIT margin estimated for 2024e is likely far below its potential levels (and management’s target of >30% on the EBITDA level post-2024). Thus, we believe Vertiseit constitutes an attractive risk/reward at these levels.