Review of Q4 2023

MRR was EUR1 490k (1 270k), up from EUR1 417k in the last quarter, corresponding to a y/y growth of 17%. The outcome was 2% lower than our forecast. New sales were softer than the solid numbers seen in 2023 and amounted to 8% - our forecast was 10%. The NRR of 110% was slightly stronger than our estimate of 108.5%. While the 4.5% Churn matched our forecast, Upsell to current customers was 14.3%, slightly above the 13.0% we expected. The soft macroeconomic environment, where customers are cautious about adding additional employees, hurts Uplift. We believe the improvement is mainly driven by customers adding new features and functionality at a healthy level.

As mentioned in our recent Updates, management points out that while lower and sometimes negative net recruitment among customers hurts upsell, upsell from customers adding new functionality tends to perform well during economic downturns. A likely reason is customers are looking deeper into platforms they already have to improve efficiency at a limited cost. Considering the flexibility of the Efecte platform, the company saw many customers adding new functionality during the COVID-19 pandemic, and we believe a similar scenario is likely in the current conditions. However, the net effect of the softer market on upselling might be somewhat negative.

Finally, soft macroeconomics has a notable impact on New sales. However, in Q4, Efecte secured another notable public tender victory at BG Kliniken in Germany – extending its public footprint beyond Finland and Sweden. While currently not as digitalised as the Finnish and Swedish public sectors, the German public sector is a big opportunity for Efecte.

The MRR and its growth rate are important metrics to follow in Efecte. The MRR is a leading indicator of SaaS revenue growth. While Efecte has a substantial share of Service revenue, SaaS is the most important revenue type in Efecte, with ~80% gross margins.

Churn is the share of SaaS revenue lost from customers cancelling their subscriptions. While the churn levels vary substantially depending on vertical and customer size, due to bankruptcy rates, lower churn is better and typically indicates satisfied customers. Generally, for a company targeting larger B2B customers, like Efecte, we believe 5% or below is a healthy level. While the churn likely includes some unsatisfied customers, we believe most of Efecte’s churn is caused by M&A and bankruptcies.

Uplift or upsell is the growth from current customers, i.e., those who were also customers last year. In general, a high uplift indicates satisfied customers (unsatisfied customers are unlikely to expand). However, uplifts vary depending on customer segment and the packaging of the software, land and expand strategies targeting enterprise customers should have higher uplift, for example. Efecte mainly gains its uplift from additional seats (customers growing) and expansion of scope (customers adding more solutions such as IGA or ESM to ITSM).

New sales is the growth from new customers who have become customers of Efecte during the last 12 months.

Total sales matched our forecast and amounted to EUR6.5m (5.9), corresponding to 10% growth y/y. SaaS and Service revenue matched our expectations. While growth in Finland was solid, international SaaS growth was slower than usual at 16%. Historically, international SaaS growth has been substantially higher than domestic SaaS growth. Management points out two main reasons for the slower international growth. First, Efecte has not yet been able to recognize SaaS revenue from some international public sector deals due to the structure of the tenders – thus, it is only an issue in the short term. Second, the initiatives in Spain, Efecte’s most recent direct market, have not performed in line with the plan.

SaaS sales is recurring revenue from Efecte’s software platform subscriptions and has a gross margin of about 80%. ARR is a leading indicator of future SaaS growth.

Services sales is non-recurring revenue from Efecte’s in-house implementation team, coming from customers using Efecte’s in-house team when implementing or expanding Efecte’s software platform.

Maintenance sales is recurring revenue related to maintenance of software sold as on-premise licenses. As Efecte more or less sell all of its software as SaaS, we expect the Maintenance sales to decline over time.

 Licenses sales are non-recurring revenue from on-premise software licenses. As mentioned above, as Efecte more or less sells all of its software as SaaS, we expect sales from Licenses to be ~zero.

Overall, OPEX (adjusted for M&A and restructuring costs) came below our forecast of EUR-5.3m and was EUR-5.0m (-5.3). The number of employees was two more than we forecasted while the cost per employee was somewhat lower. Efecte does not split personnel expenses and other external costs in its Business Reviews (Q1 and Q3), so we calculate all OPEX per employee.

The gross margin on recurring revenue declined to 77% (80). However, the decline was due to InteliWise being included in the numbers. The like-for-like number was roughly unchanged at ~80%.

Adjusted EBITDA was EUR0.5m (-0.0), corresponding to an adjusted EBITDA margin of 8% (-1). Our forecast was EUR0.3m and 4.4%, and the beat was due to lower OPEX. The more conservative metric, adjusted EBITDA – CAPEX, was EUR0.2m. Thus, Efecte continues its trend of improving margins – in line with its plans – and in addition to scalability as revenues grow withOPEX remaining roughly flat, Efecte has improved its efficiency in its service offering.

By the end of the quarter, Efecte’s net debt was EUR-0.5m.

As for any SaaS business capitalizing R&D, EBITDA and EBITDA margin are unsuitable metrics for Efecte. 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. Our perfered metrics is EBITDA - CAPEX, as it regards all R&D as an upfront cost.

In mid-January Matrix42 announced a takeover offer on Efecte, offering EUR15 in cash per share. EUR15 constitutes a 91% premium to yesterday’s closing price. Considering the premium of ~90%, above the ~70% average for Nordic SaaS takeovers the last year, and our Base Case being EUR14, we believe EUR15 is a fair price.

As highlighted in our last update, Efecte shared the number one spot with Matrix42 in Research In Action’s latest market analysis regarding IT and Enterprise Service Management pureplay solutions. Thus, we believe being bought by Matrix42 very well aligns with becoming the leading European Service Management software provider.

As we believe the rationale for the takeover is solid for the vast majority of stakeholders combined with the wide acceptance among shareholders, we believe the takeover bid is very likely to be successful.

We lower our sales forecasts for 2024-25 by 1-3% while reducing our EBITDA forecast by 34-49%. However, the revisions on EBITDA in absolute numbers are quite small. While the lower sales forecasts largely are a result of the somewhat lower MRR than expected in the quarter, we make the following adjustments:

Regarding 2024, Efecte guides for a SaaS revenue growth of above 15%, total sales of EUR25-30m, and 3-9% in EBITDA margin. Those numbers were somewhat lower than our previous forecasts of 18% SaaS growth, 9% EBITDA margin, and EUR27.5m in sales.

Relative to Efecte’s long-term targets (which are left unchanged) of EUR35min sales and a double-digit EBITDA margin in 2025, we forecast EUR31.0m and 12.1%.

We increased our Base Case to EUR15 (14) to align with the takeover offer from Matrix42. While we would happily like to continue covering Efecte’s journey as a listed company, we believe the offer at EUR15 per share is a fair price (our unrevised Base Case was EUR14) and aligns with Efecte’s vision. Together with Matrix42, Efecte takes a huge step towards becoming the leading European service management software provider.