Net sales amounted to SEK64m in Q3 2023, 8% below our expectations, preliminary due to lower new sales in SDS and a weaker quarter for SDD. On a positive note, recurring revenues increased q/q for the third time, beating our estimates by 6%. EBITDA amounted to SEK12.7m, corresponding to a 19.8% margin, compared to our estimate of SEK21m. The deviation is primarily due to the lower sales and higher Opex than expected. Overall, SDS delivered a relatively soft quarter where the top-line, margins, and cash flow came in below our expectations. However, we estimate an uptick in sales in Q4 and expect the company to return to healthy margins.

While the Q3 figures fell below our expectations, SDS is actively substituting low-margin sales from SDD with recurring revenues. Moreover, following discussions with the management team, we have observed their dedicated efforts toward enhancing margins for new orders, an achievable task given SDS’ critical software. Although the immediate growth outlook may appear subdued, the ongoing shift towards recurring revenues and improved margins is anticipated to drive bottom-line growth in 2024e-2025e.

Following the report, we have made downward adjustments for 2023e while leaving our estimates for 2024e-2025e roughly unchanged. Due to higher interest rates, we have increased the risk-free rate from 2.5% to 3% and our WACC from 12.5% to 13%. We have also taken down our long-term growth and margin assumptions somewhat, impacting our fair value range and base case negatively. Our new base case stands at SEK19 (SEK25) and fair value range is SEK9-36 (SEK16-47).