TH1NG Q1 2024: Review

Redeye concludes that TH1NG’s Q1 2024 report exceeded expectations. Q1 is usually slightly weaker, so the estimate beats were surprising. Management also confirmed an exceptional quarter given the seasonality. Net sales saw a solid 56% year-on-year growth and a 15-percentage-point improvement in gross margin quarter-on-quarter, resulting in EBITDA exceeding our estimate by approximately 30%. During the quarter, the sales mix was favourable, with an increase in IoT services positively impacting the gross margin. The solid growth is attributed to increased demand for IoT services, leading to a 125% increase in revenue for IoT services compared to the same quarter of the previous year. However, no breakdown of the specific sales mix of the SEK 4 million that does not relate to the broadband business was provided in the report. Yet, we anticipate that hardware sales contributed less than in Q4 since the gross margin improved quarter-on-quarter, and sales saw only a minor decrease of 6% q/q. All in all, it is a good start to 2024.

Net sales came in at SEK7m, representing a solid y/y growth of 56%, yet a 6% sequential decrease, surpassing our estimate by 27%. This solid growth is attributed to an increased demand for IoT services, resulting in a 125% increase in revenue for IoT services compared to the same quarter of the previous year. Revenues from the broadband services amounted to cSEK3.0m, representing a 40% share of net sales. The gross margin improved significantly by 15pp from last quarter and amounted to 53%, 15pp above our estimate. During the quarter, the sales mix was favourable, with an increase in IoT services positively impacting the gross margin. We acknowledge that the gross margin will likely be volatile from quarter to quarter, depending on the sales mix.

TH1NG reported COGS of SEK3.3m, resulting in a gross margin of 53%, 15pp above our estimate and a 20pp improvement on a q/q basis. OPEX increased by 8% y/y and amounted to SEK7.4m (6.9), 4% below our estimate. Personnel costs were affected by one-time restructuring expenses of SEK0.5m during the quarter. We expect to see about the same amount next quarter due to the divestment of broadband customers

EBIT for the quarter was -SEK5.1m, which is 6% above our estimate. The higher depreciation and amortization (D&A) expenses than expected explain the discrepancy between the estimate beat on EBITDA and the roughly in-line EBIT.

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.

Cash flow from operations totalled -SEK0.3m, while net cash flow stood at SEK1.1m, leaving a cash position of SEK5.0m at the close of the reporting period. Yet, it is important to note that TH1NG took up another convertible loan during the quarter, positively impacting the net cash flow for the period by SEK1.1m.
In Q1, TH1NG announced the sale of its broadband customer base in the corporate segment to Bahnhof for SEK10m. The payment for the sale is split into two payments of SEK5m each, with the first payment disbursed in Q1 (the profit arising from the transfer is reported on the day of the broadband customer acquisition, 1 May 2024) and the second scheduled for Q2. The first payment positively impacted the cash flow under changes in working capital by SEK5m during the quarter.

The board is authorized to issue further convertible loans of up to SEK4.9m. We believe it will be necessary to have a growth capital injection of approximately SEK10m in H2 2024, and our valuation now includes the dilution of such a share issue. However, we also think a directed share issue to the main owners, a combination of a regular and a directed issue, or a convertible loan with less dilution based on historical trends are possible scenarios.

At the end of Q1, TH1NG sold its corporate broadband customers to Bahnhof for SEK10m. This will result in an approximate SEK12m annual sales decrease starting in May 2024. While this may slightly negatively impact EBITDA in 2024, we expect gross margin and OPEX improvements to offset the sales loss by 2025-2026. The payment is split into two SEK5m tranches, with the first paid in Q1 and the second due in Q2.

CEO Klas Westholm is optimistic about the future, highlighting the potential of innovative energy management solutions and the value-added packages TH1NG plans to offer. The company has strong, beneficial partnerships with energy firms and sees substantial demand in the energy and real estate sectors. Initial sales efforts in Finland and Germany will focus on real estate, while Sweden will target the energy and real estate sectors.

Our valuation now includes the dilution from a SEK10m growth capital injection that we believe will be needed during H2. Yet, we also think that a directed share issue to the main owners, a combination of a regular and a directed issue, or a convertible loan with less dilution based on historical trends are also possible. Our new Base and bear cases are SEK2.7(4.0) and SEK0.8(0.4). Our Bull case comes down from SEK9.8 to SEK5.0.

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.