Overall, we argue that Hoylu’s Q3 2023 report was largely aligned with our expectations. Most importantly, Hoylu delivered ARR growth of 26% y/y or 46% annualized q/q, driven by solid development in the construction segment despite challenging industry conditions. We are encouraged by the solid growth rate stemming from the construction sector (111% y/y) despite the overall challenging industry conditions. Partly, we believe that it is explained by Hoylu’s possibilities to grow on existing (and large) construction clients which focuses on effectiveness.

Net sales amounted to SEK15m (12m), corresponding to a 23% y/y growth, and were in line with our estimate. ARR-SaaS (which includes Hoylu’s construction segment) amounted to SEK31.3m compared with SEK27.5m in Q2 2023, corresponding to c67% annualized q/q growth. This was in line with our forecast of SEK31m. ARR-Mobile products reached SEK30.5m versus SEK29m in Q2 2023, corresponding to c27.5% annualized q/q growth and 5% above our expectations of SEK29m.

The gross margin came in at 67% (66%), one pp. below our expectations of 68%. Actual OPEX (development, sales, and administrative costs) amounted to a negative SEK13m (-13.0m), in line with our expectation of negative SEK12.8m. All in all, EBITDA and EBIT amounted to negatives of SEK3m and SEK7m, respectively – slightly below our expectations. Furthermore, the cash position at the end of the quarter was SEK9.1m, compared with SEK15.7m in Q2 2023, we expect an additional need for a capital injection of around SEK20m.

Looking ahead, Hoylu remains optimistic about the growth potential in its construction segment in H2 2023, despite the current somewhat more challenging market conditions.

Q3 2023 ARR amounted to SEK61.8m compared with SEK56.2m in Q2 2023, which resulted in 46% q/q on an annualized basis. The ARR was driven by, as mentioned, increased traction within its construction segment (included in its ARR-SaaS segment), along with higher-than-expected growth within its other segment, ARR-Mobile products. However, it is worth mentioning that Hoylu’s ARR growth can exhibit relatively large fluctuations q/q due to when orders occur.

The ARR and its growth rate are among the most important metrics to follow in Hoylu. ARR is a leading indicator of SaaS revenue growth, the main driver of profit growth, and is thus essential to the investment case and Hoylu’s road to stable profitability.

Hoylu’s ARR-SaaS segment, which includes its agile and construction segment, amounted to SEK31.3m in Q3 2023 and recognized c67% annualized q/q growth. At the same time, Hoylu’s other segment, ARR-Mobile products, reached SEK30.5m compared with SEK28.7m in Q2 2023, corresponding to c28% annualized q/q growth.

We appreciate seeing the Hoylus core ARR-SaaS segment gaining momentum. We believe that Hoylu’s construction segment is the most important for investors to keep track of, as management has stated it as its core business area. For the construction segment, we want to highlight that it grew substantially, posting a growth of c111% y/y.

According to management, the growth within construction derives from both new and existing customers, while the aim ahead is to increase the average sales per project. As such, Hoylu remains optimistic about continued growth potential within this area in H2 2023, despite the current market conditions. Within the construction segment, we understand that the penetration rate on current customers is low, as an example Hoylu has several large construction companies using its platform in one to ten of its projects, with a potential of expanding its usage tenfold. We believe this offers attractive growth prospects at lower CAC, as the customer already is onboard.

Regarding the dARR (i.e. the absolute delta in ARR), the dARR-SaaS amounted to SEK3.6m in Q3 2023 q/q, while the dARR-Mobile products amounted to SEK0.4m. Since Q1 2021. Notably, Hoylu signed a deal for its team collaboration platform with the US Navy in late September. The order value, including software and services revenues, amounts to SEK2.2m for the initial year. The Navy will use Hoylu’s platform for tasks like day-to-day scrums, sprint management, programme evaluation, and monitoring. We argue that an order from such a well-known customer, which we expect to have very high requirements, validates Hoylu’s reputation as a secure platform and thus serves as a quality stamp.

At the same time, we see that this order confirms the value of Hoylu’s platform, further showcasing its suitability for complex project management across several industries. Moreover, we believe that once Hoylu has managed to sell its platform to a new customer, there is potential for the order to be expanded in the future. Going forward, we see its ARR-SaaS segment as the primary growth driver, while we expect relatively moderate growth within its ARR-Mobile products.

Q3 2023 net sales amounted to SEK15.1m (12.2m), corresponding to an increase of 23.3% y/y. The sales came in line with our expectations driven by sales from both ARR-SaaS och ARR-Mobile.

The gross margin amounted to 66.6% in Q3 2023, in line with Q2 2023, and slightly below our expectations as we had expected a smaller share of sales to the mobile segment. As Hoylu has moved away from its Hoylu-Wall offering in the most recent time and has focused entirely on its SaaS business, the gross margin outcome nowadays is mainly a result of the ARR mix. The ARR-SaaS/ARR-Mobile product split in Q3 2023 was 50.6%/49.4%. However, as we expect the ARR-SaaS segment to be Hoylu’s primary growth driver, we anticipate a larger share of the ARR-SaaS segment ahead and, thus, gross margin improvements.

Q3 2023 OPEX amounted to SEK13.0m and thus remained flat y/y. As such, Hoylu saw a continued OPEX stabilization of around SEK13m in the quarter, which has been the case since Q2 2022 when excluding the tax provision for a potential tax surcharge in Q4 2022. According to management, one explanation for the continued cost stabilization is a more effective sale process to bring in new leads. We appreciate the continued cost control, especially given the accelerated ARR growth. We argue this indicates the scalability of the business model, as it seems that ARR growth can occur at low incremental costs. The company hired three new employees during the quarter so we expect some increase going forward.

EBITDA and EBIT amounted to negatives SEK3m and SEK7m in Q3 2023, respectively, slightly more negative than our expectations but negligible in nominal amounts. This stemmed from slightly higher sales, ARR, and gross margin, while OPEX aligned with our expectations. The cash position in Q3 2023 amounted to SEK9.1m compared with SEK15.7m in Q2 2023 and we expect an additional need for a capital injection of around SEK20m.

We make minor forecast adjustments following Hoylu’s Q3 2023 report. We increase our ARR forecasts by 3% for 2023e–2024e while we lower our gross margin assumptions marginally driven by slightly higher costs. However, as we expect Hoylu’s ARR-SaaS segment to remain its primary growth driver, we see gross margin improvements ahead. The higher ARR still leads to increased gross profit expectations of 1-3% for 2023e–2024e. In addition, we raise our 2023e–2024e OPEX forecasts by 1-3% driven by a few more employees. All in all, this leads to a slightly decreased EBIT forecast for the period which mainly is derived by Q3 actuals rather than Q4 revisions.

However, given our current forecast, we expect Hoylu to reach a breakeven result on the EBITDA level by 2024e while positive in 2025 at first. As such, we believe external financing challenges could be a continued risk before the company reaches stable profitability, considering our current estimates, Hoylu’s cash burn, and current cash position. We thus anticipate a future share issue in our model, which we discuss further in the valuation section below.

Given Hoylu’s current cash burn and cash position, along with our current estimates, we expect the cash injection from the recent rights issue, after Hoylu offsets its convertibles notes, to be sufficient until sometime in Q4 2023–Q2 2024. As such, we argue external financing challenges will remain a risk, as we expect Hoylu to be dependent on bringing in further external capital before it reaches stable profitability, which may come at the expense of a dilution effect. Consequently, we count on an equity raise in our DCF model, as we believe Hoylu will need roughly SEK20m before achieving positive cash flow.

Notably, we have previously accounted for future external financing in our valuation of Hoylu. However, we have chosen to express it here more transparently while we update the conditions for a potential share issue. We want to underline that these are our own assumptions and may thus deviate largely from the reality and the actual outcome. However, since the share issue assumptions are tied to the share price at that date, we will evaluate those assumptions continuously. To express the sensitivity of these assumptions, we have chosen to visualize potential outcomes in the table below, including different subscription prices, the amount raised, and the potential dilution effect.

Our changes in the financial forecast do not entail any change to our base case valuation. In our model, we have increased Redeye's general risk rate to 3% during the quarter, but this effect is offset by higher growth rates for the coming years as well as the time value. Considering our forecast changes mentioned previously, we argue for a Base Case of SEK1.8, with a Bear respectively Bull Cases of SEK0.5 and SEK7.5.