Review of Q4 2023

Sales fell by 3% y/y and was 2% below our expectations. Underlying sales was roughly flat because there is one working day less in Q4 2023 compared to Q4 2022. The market stabilization seen in Q3 remained, although still, at a rather low level. While the market situation for most e-commerce players is tough, some players have short-term pessimism but a strong long-term outlook, and with strong owners’ backing, they can invest even in a soft market. In certain segments, which in general have performed weakly, individual e-commerce players have managed to gain market share, leaving room for investments in IT. However, overall, the investments in e-commerce have declined, and as seen throughout 2023, Avensia has successfully increased its focus on new customers – management believes Avensia has gained market share. However, the typically more profitable sales to current customers remained weak.

The COGS was substantially higher than we anticipated, indicating a high use of sub-consultants. At the same time, the utilization rate was within the lower range of normal occupancy, which initially seemed a bit strange. However, Avensia had a mismatch of demand and capacity within its three business areas: Commerce, Information Management, and Customer Experience. There are ongoing initiatives to broaden the competencies of currently underutilized employees.

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.

The number of employees at the end of the quarter decreased to 309 (377), corresponding to a y/y decline of 18%. Sequentially, the number of employees decreased by 20, and our forecast was -5. The natural employee churn, which is at normal levels, combined with very selective replacements, resulted in a lower headcount. From now on, we expect the number of employees to remain roughly unchanged for two reasons. First, the utilization rate is approaching somewhat normal levels. Second, Avensia does not want to slim its organization too much, as it expects the market to return sooner or later.

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.

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.

Overall, OPEX was somewhat lower than our forecast of SEK87m and was SEK84m (116). Other external costs was somewhat below our expectations, while personnel expenses were slightly higher than our forecast. However, as mentioned, COGS was substantially higher than expected, resulting in overall costs exceeding our forecast.

EBIT (adjusted for SEK1.8m in an FX-related revaluation) was SEK4.0m (-9.6), corresponding to an EBIT margin of 3.7% (-8.6). While not reaching our expectations and coming in far below the very solid 9.4% EBIT margin seen in Q3, the EBIT improves significantly relative to the soft Q4 2022. Our forecast was SEK8.7m and 7.9%, and the miss was due to a lower gross profit than anticipated. While overall sales roughly matched our forecast, the in-house sales were lower, and the sub-consultant's contribution was higher. In addition to a higher share of sub-consultants and a higher share of new customers hurting margins, some project deals (with fixed pricing) turned out to have weak profitability. Those deals were signed earlier in 2023 when the market was even tougher and prices possibly too low in retrospect. However, while some similar projects could hurt Q1 2024, Avensia is not currently signing similar projects.

By the end of the quarter, Avensia had a net cash position of SEKc5m.

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

While the H2 2023 margin of 6.6% is rather healthy in our view considering the market environment, considering the substantial increases in forecasts we made after the strong Q3, we cut out forecasts following the Q4 report:

For the long term, we somewhat lowered our EBIT margin expectations to 10-11% (11-12).

We lower our Base Case to SEK12 (13) due to decreased forecasts, which primarily regard the short/mid-term. However, our positive long-term outlook remains, and we believe that Avensia has a solid underlying business.

Avensia is trading at some discount to the peer average and median on 2025e. We believe the market does not agree with our assumption of the EBIT margin reaching ~9% in 2025e – still below potential levels in a solid market. If Avensia achieves this, we expect it to trade at an EV/EBIT multiple, at least in line with the peer average.