Review of Q2 2024

ARR growth remains accelerated somewhat q/q to a strong FX-adjusted 21% both y/y and in annualised q/q numbers – compared to an annualised q/q growth of 19% in Q1 and 24% in Q4. Thus, Vertiseit continues to achieve organic ARR growth around the 20% level, which is matched or exceeded by only a few profitable listed Nordic SaaS companies.

Growth was especially strong outside of the traditional core market, the Nordics and DACH – namely North America, the UK and the Middle East. For example, the roll-out with Scientific Games is gaining momentum in the US market, and Grassfish has arranged several customer events with US partners. Also, partners are taking a greater responsibility in all geographies. In addition, Vertiseit continues to expand into new markets with its existing customers.

Management sees a stable market at a solid level and expects those market conditions to persist. Furthermore, the pipeline looks healthy, and the number of procurements has increased y/y. Thus, we believe the current market conditions are solid enough for Vertiseit to retain its ~18% annual 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 roughly matched our forecast of SEK85m and amounted to SEK86 (84), corresponding to 3% growth y/y - negatively affected by the divestment of MultiQ Denmark. Consulting was lower, while both SaaS and Systems somewhat exceeded our expectations. After several quarters of strong system sales, Q2 returned to the SEK30m level, which is what we expected. However, quarterly System sales tend to be volatile. Consulting was roughly flat y/y and declined q/q. However, management believes the lower number is not because of weaker market conditions. Instead, the consulting team has focused on sales initiatives and pilots – which do not generate any revenue today – to boost ARR growth going forward. Interestingly, management points out that sales would have been higher with a higher capacity within consulting as the demand was solid.

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 59m and amounted to SEK 61m (56). The beat was due to a strong gross margin in System sales of 31%, resulting in a gross profit contribution of SEK10m 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  was somewhat higher than our SEK -42m forecast and amounted to SEK-44m (-50). The Personnel expenses was somewhat higher than expected, and Vertiseit added a net of three employees during the quarter – our expectation was four. The difference was due to somewhat higher costs per employee. On the other hand, other external costs were somewhat lower than anticipated. While coming in somewhat above our expectations, we are encouraged to see Vertiseit’s OPEX base being more stable – in line with what we assumed.

EBITDA – CAPEX (Cash EBITDA) was SEK13.3m (1.0), corresponding to an EBITDA – CAPEX margin of 15.4% (1.1). Our forecast was SEK10.9m, and the deviation was due to a somewhat higher gross profit. Our definition includes capex in tangible fixed assets, unlike Vertiseit’s. However, the difference is minor in most SaaS companies as well as in Vertiseit this quarter. Nevertheless, to align with Vertiseit’s report, we will change our definition before the next report. Also, Vertiseit’s definition is more commonly used among SaaS businesses, but we did go for a slightly more conservative definition.

Free cash flow was strong at SEK13.3m, partly thanks to a positive contribution from NWC, which, for the first time since Q1 2022, turned negative. However, we expect today’s Vertiseit to operate with a slightly positive NWC over time. Combined with the share issue bringing SEK83m after transaction costs, Vertiseit is now net cash positive at SEK1.3m. Thus, Vertisiet has a strong financial position and is, from a financial perspective, ready for further acquisitions. Considering the company’s current profitability, it should be able to borrow at reasonably attractive rates to finance any potential acquisitions.

Management seems to have a rather extensive pipeline of potential acquisitions, including Nordic, North American, and South European companies. It also points out that the company is ready for bigger acquisitions again, and the pipeline includes companies of all sizes.

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 churn increased relative to Q1, both churn and NRR improved y/y, resulting in improving R12m figures. The R12m churn and NRR were 4.4% and 113%, respectively. Both are solid numbers, placing Vertiseit among the top 25% in the listed Nordic SaaS space (compared to Q1 figures, as very few have published Q2 reports yet). As usual, our Redeye SaaS Update Q2 2024 will feature a complete comparison of metrics of listed Nordic companies – we expect it to be published in early September.

As stated before, although the SaaS metrics can vary a bit from quarter to quarter, we believe the positive trend – that continued in Q2 on a y/y basis – is encouraging.

We leave our sales forecasts largely unchanged with a 0-1% increase for 2024-2025. Regarding EBITDA – CAPEX, we increase our forecast by 4% for 2024-2025.

We make the following detailed adjustments:

For the end of 2024, we expect an EBITDA margin of 25% in Q3 and 21% in Q4, somewhat below the company’s target of 30%. (That is a slight decrease compared to our last Update, as we have lowered our capitalisation forecast. However, the more important EBITDA – CAPEX is increased somewhat). 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 ~195m, 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 53 (50) following increased forecasts and one more quarter of solid profitability and ARR growth. Trading at 19x and 16x EBITDA – CAPEX for 2024e and 2025e, respectively, we believe Vertiseit remains an interesting case – although the upside potential in valuation multiple expansion is not as great as it was and despite the share price increasing by ~110% YTD – combining a large global market, ~18% organic ARR growth, and a strong profitability trend.

Vertiseit trades 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 ~17% EBIT margin estimated for 2025e is likely below its potential levels. Thus, we believe Vertiseit constitutes an attractive risk/reward.