ARR growth remains strong, with an FX-adjusted growth of 18% y/y and an annualised q/q growth of 19% - compared to 24% in Q4. Thus, the solid momentum in organic ARR growth continues, driven by deals with Tesco and Scientific Games, for example. Considering the annualised NRR of 113%, most of the growth is derived from current customers. The increased market activity management saw at the end of 2023 continued at the beginning of 2024 with an increased number of requests from customers. The outlook for 2024 remains positive, and we believe Vertiseit can sustain an organic ARR growth level of about ~18% during the current year.

During the quarter, Vertiseit gained a new partner and customer in Dubai, paving the way for further deals in the Dubai market. As Vertiseit continues to grow, we believe adding new partners is crucial to sustain the organic ARR growth rate (which requires higher and higher absolute ARR growth).

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.

Total sales exceeded our forecast of SEK93m and amounted to SEK78 (80), corresponding to 16% growth y/y. While SaaS revenue was somewhat higher than expected, the deviation was mainly due to significantly higher System sales than expected for the second consecutive quarter. According to management, the solid System sales was driven by strong demand in the Nordic region (the only place where Vertiseit is involved in selling Systems).

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 55m and amounted to SEK 63m (57). The gross margin came in three percentage points below our estimates, which was entirely due to the large Systems sales. The gross margin for Systems was impressive at 32%, resulting in a gross profit contribution of SEK12m from Systems. Although the System sales generate some OPEX as well, it is a notable contribution to EBITDA-CAPEX. While Vertiseit’s long-term strategy is focused on SaaS and becoming the leading software platform in its niche, we see no issue with having profitable system sales contributions to cash generation, which helps fuel the SaaS growth strategy.

Overall, OPEX roughly matched our forecast of SEK -41m (-47). The Personnel expenses was somewhat higher than expected, and Vertiseit added a net of five employees during the quarter – our expectations was zero. On the other hand, other external costs were somewhat lower than anticipated. The higher-than-expected net recruitment results in a slight increase in our OPEX forecasts all else equal. We are also encouraged to see that Vertiseit’s OPEX base seems to have reached a more stable state following several quarters of significant fluctuations, hopefully improving the accuracy of our forecasts.

EBIT was SEK16.2m (4.5), and our forecast was SEK9.4m, while EBITDA – CAPEX was SEK 17.6m (4.5) compared to our forecast of SEK 7.9m. The beat was mainly due to strong System sales – with healthy gross margins – and somewhat higher SaaS sales and lower CAPEX. Free cash flow was strong at SEK22m, further improving Vertiseit’s financial position.

By the end of the quarter, Vertiseit’s net debt was SEK94m, which is equal to 1.0x EBITDA 2024e. We consider that a healthy level and expect it to decline over the coming quarters due to solid EBITDA – CAPEX and positive cash flow. From a financial perspective, we believe Vertiseit is ready for further M&A.

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.

Although the NRR decreased and churn increased relative to Q4 – due to seasonality with typically higher churn in Q1 – both churn and NRR improved y/y, resulting in improving R12m figures. The R12m churn and NRR was 4.8% and 111%, respectively. We consider those figures strong for a business like Vertiseit, and while most SaaS companies have not reported Q1 yet, we believe Vertiseit’s numbers will be among the better ones. Our Redeye SaaS Update Q1 2024 will feature a complete comparison of metrics of listed Nordic companies – we expect it to be published in early June.

As stated before, although the SaaS metrics can vary a bit from quarter to quarter, we believe the positive trend – that continued in Q1 on a y/y basis – is encouraging.

We increase our sales forecasts by 5-8% for 2024-2025. Regarding EBITDA – CAPEX, we increase our forecast by 7-28% for 2024-2025. While increased expectations on System sales is a major driver of the upward revisions, we also make a slight increase in our ARR forecasts.

We make the following detailed adjustments:

Note that the significantly higher outcome on EBITDA – CAPEX and EBIT in Q1 substantially impacts the revisions for 2024.

For the end of 2024, we expect an EBITDA margin of 26% in Q3 and 23% in Q4, somewhat below the company’s target of 30%. Nevertheless, considering the positive trend in margins since Q3 2023, Vertisiet has now proven a healthy profitability of around 15% on the EBITDA – CAPEX level. Regarding ARR, we expect SEK ~193m, slightly lower than the target of SEK 200m. However, we do not include any future M&A, which the target allows.

We increase our Base Case to SEK 50 (42) following an increase in forecasts, higher confidence in Vertiseit reaching solid profitability, and a positive impression about the company’s long-term prospects from the Capital Markets Day (CMD). Trading at 15x and 13x EBITDA – CAPEX for 2024e and 2025e, respectively, we believe Vertiseit remains an interesting case – despite the share price increasing by ~60% YTD – combining a large global market, ~18% organic ARR growth, and a strong profitability trend.

Vertiseit is trading below the average and median EV/EBIT for 2024/25e. While Vertiseit has a lower share of SaaS revenue than the average company, it has a strong position within its niche, and the ~19% EBIT margin estimated for 2025e is likely below its potential levels. Thus, we believe Vertiseit constitutes an attractive risk/reward.

Prior to the Q1 report and CMD, Vertiseit announced new financial targets for 2025-2032. The current financial goals remain in force until the end of 2024. The new goals are summarised below:

Regarding the SEK1bn in ARR in 2032, our forecast is SEK487m – compared to SEK463m in our last Update. However, the target includes future M&A, which our forecast does not. As the target allows for significant M&A, the impact on shareholders of reaching the goal is uncertain. Nevertheless, the target clearly states that Vertiseit aims to become a large and leading player in its niche.

The 35% EBITDA – CAPEX target is ambitious yet realistic in our view. It would put Vertiseit at the top of Nordic-listed SaaS businesses profitability-wise – only beaten by Fortnox’s 41% in Q4 2023. We believe the EBITDA – CAPEX target aligns with the ARR target and the ambition to become the global number one platform in its niche, as such a high margin is typically only achieved by niche leaders. Our 2032 EBITDA – CAPEX margin forecast is 27.8% - compared to 24.5% in our last Update. Also, we are encouraged to see Vertiseit having a target on the EBITDA – CAPEX level, which we believe is the best earnings metric for SaaS companies (see our SaaS Theme Updates for motivation) – more conservative than EBITDA and close to EBIT in the long run.

Regarding the >20% ARR growth target, our forecast is 13% CAGR 2024-2032 – compared to 12% in our last Update. However, our forecast does not include M&A.

The 25% EBITDA – CAPEX CAGR target is per share, which we appreciate as it accounts for the potential dilution from M&A. We forecast an EBITDA – CAPEX CAGR of 16% 2024-2032 – compared to 17% in our last Update – and as we do not include future M&A in our forecasts, those figures are comparable. While It might seem counterintuitive that we increase both our sales CAGR and EBITDA – CAPEX margin for 2032 while lowering the EBITDA – CAPEX CAGR, the reason is that we increase our 2024 EBITDA – CAPEX by 28% – resulting in a much higher base to grow from.

Considering that Vertiseit steadily has delivered NRRs of about 105% (R12m is 111%), we believe >100% NRR is a reasonable, almost defensive target.

While Digital Signage software back in the day was used mainly to arrange playlists, it is now more and more integrated into other software, such as CRM (for customer data), PIM (for product data), and DAM (for media), as well as weather services and other data feeds. With access to relevant data from the above sources, the IXM platform can ensure the right content is presented at the right time, improving the effectiveness of the digital in-store experience. We believe this is an important differentiator compared to simpler solutions and strengthens IXM software’s position in the digital ecosystem for companies meeting customers in-store.

An interesting part of the Capital Markets Day was the announcement of the IXM Grid project. In short, the project aims to unify the underlying technological architecture, powering both Grassfish and Dise. A unified headless back-end and playout will allow more effective resource utilisation as developers don’t need to build, maintain, and update two different technological architectures. Instead, The Company can focus on leveraging its capabilities to create more market-specific products to enhance customer value rather than putting resources into maintaining technology that no customer sees.

We view the IXM Grid initiative as clearly positive in two primary ways. Firstly, it allows The Company to move faster in developing new products that clearly impact the value proposition offered to customers.

Secondly, and what we view as the most interesting aspect of the project, is that it would vastly improve the efficiency of integrating future acquisitions and yield technological synergies. For example, the acquired platform can also utilise APIs and integrations with external software already built into Vertiseit’s existing infrastructure. The picture below provides a good explanation of the project.

Furthermore, we think the IXM Grid initiative is a testament to Vertiseit’s ambition. Not just consolidate the market with multiple entities working separately but building a well-oiled software company aiming to acquire customer bases and integrate them into the same technological architecture without changing the interface for the end customer. By integrating future acquisitions hard in terms of administration and, in this case, technology, we believe the scalability inherent to the company’s business model and acquisition strategy is enforced.

Like most software, customers are often unwilling to change their digital in-store solutions due to significant switching costs. Hence, acquiring a customer base can be a more efficient way of growing than trying to win customers who are already satisfied with their current digital in-store software provider. However, this does not come without challenges, and ending up with +5 different software that does the same thing typically limits scalability and innovation. Thus, with the IXM Grid, we believe Vertiseit aims to remove one of the main problems with acquiring software platforms targeting the same markets. However, even with the IXM Grid, acquired customers’ back-ends need to be migrated at some point. Nevertheless, we believe most customers will be more willing to accept a migration if they can keep their front end.

The CMD featured a presentation by the CEO of the Swiss Dise partner JLS. JLS is a Dise exclusive partner operating in the Swiss market. JLS is a full-service integrator aiming to “connect brands with people” and does not see itself as a tech company or a digital agency.

Considering Dise’s focus on being an easy-to-use, out-of-the-box platform, we are impressed by the sophisticated solutions JLS has built for its customers, such as UBS and Swisscom (which owns JLS). While the solutions feature hardware and non-Dise software, we are encouraged to see Dise being a crucial part of such solutions. The presentation features a demo of a solution for UBS.

Also, by combining its in-house expertise and system development capabilities with Dise, JLS creates a comprehensive in-store solution called myjls experience platform. Overall, our view of the capabilities of Dise has improved somewhat as we have seen JLS’s solutions.