Net sales missed our forecast of SEK23.6m by 18% and amounted to SEK19.3m (24.2), corresponding to -20% growth y/y. Solve had a rather solid quarter as sales aligned with Q3 last year. On the other hand, Serve saw its sales decline by about 50% y/y. According to management, the soft development is due to two larger customers terminating their contracts. EBIT (adjusted for SEK 6.1m in restructuring costs) amounted to SEK-1.5m (SEK 0.5m), which resulted in an EBIT margin of -7.8% (2.0%), compared with our forecast of SEK 0.0m and 0.1%, respectively. While the adjusted OPEX roughly matched our forecasts, the lower sales than anticipated resulted in softer EBITDA and EBIT than expected.

Sales-COGS/employees/working day amounted to SEK2 681 (2 694) and was roughly flat y/y. For comparison, most profitable IT consulting firms had around SEK4 500 in this quarter – Q3 is typically lower than average due to vacations. Thus, Xavi probably has too high overhead costs and possibly a low utilization rate. Management’s statements of the company’s capacity to generate revenue being unaffected by the cost cuts (SEK7.7m in yearly csot cuts) Imply the reduction in headcount is mainly related to overhead – suggesting that is the reason behind the soft Sales-COGS/employees/working day. This should result in the Sales-COGS/employees/working day converging towards its profitable peers and taking Xavi Solutions to reasonable profitability.

We leave our Base Case at SEK 0.50 (0.50), as the positive impact from the forecast increases is offset by us raising the WACC following an increased risk-free rate. While Xavi Solutions is valued in line with the median peer for EV/EBIT 2024 and 2025, it trades at a ~50% discount on EV/Sales. Thus, if Xavi Solutions can improve its margins further than the 4-5% we expect in 2024-2025, in line with the peer average of 9%, for example, its EV/EBIT valuation multiple falls significantly.