Total revenue was SEK68m, -7.1% y/y, and -6% below our estimates of SEK72m. The decline was partly due to the communicated shutdown of Nepa APAC. ARR grew 2% Q/Q to SEK167.3m, but was down -0.7% Y/Y.

Net sales from Recurring clients were SEK42m, slightly below our estimate of SEK45m. Nepa had high churn during Q4 - but still received revenue during Q4. In Q1, however, there was a loss of revenue from the customers during Q4. As such, we should have foreseen the Q/Q decline. In contrast, ARR grew +2% Q/Q, which was strong and bodes well for stronger quarters ahead.

The gross margin of 75% came in better than our estimate of 74%. The beat partly originated from a favourable product mix (higher share of ad-hoc). However, Nepa has also renegotiated some contracts with its data suppliers. Hence, we believe the improvement is lasting.

EBITDAC adjusted for SEK1.3m restructuring costs was SEK1.3 m, compared to our estimate of SEK1.6m. Due to considerably less capitalized expenses than last year, we strongly argue that EBITDAC is considerably better than EBIT in showing the underlying profitability.

Subscription revenues were down 1.6% y/y to SEK44.8 m compared to our estimate of SEK45.4m and accounted for 63% (57%) of sales in the quarter. Nepa had high churn during Q4 (6% q/q) - but still received revenue during Q4. In Q1, the churned clients did not generate revenue. As such, we should have foreseen the q/q decline.

Apart from that, a weaker consumer causing cautious spending and longer sales cycles also explain the general soft growth. According to management, there might be a gradual improvement at the end of the year, but there is still a lot of uncertainty about when and at what pace clients will start to invest again. Nevertheless, churn was once again at healthy levels and amounted to only 0.2% q/q.

Ad-hoc revenues amounted to SEK25.4m (-15% y/y) and accounted for 37% (43%) of sales in the quarter. Ad-hoc from clients amounted to SEK13.9m, -18% y/y, in line with our estimates. Ad-hoc sales to non-subscription clients amounted to SEK11.5m, -11% y/y and 7% below our estimates. As mentioned before, clients are still cautious. The main reason is that internal cost savings programs and reorganizations are pushing forward new investments for the time being. That said, Nepa APAC (closed down in Q4) explains the whole decline of ad-hoc from non-clients.

During Q4, Nepa experienced an uplift in churn and reached an alarming 6% q/q. The trend was reversed in this quarter, and the churn was 0.2% - also lower than the historical average of around 1.1%. Anders Dahl, the new CEO, believed the churn would continue to post large swings between quarters as some clients tend to quit and start new projects more frequently. The ARR increased 2% sequentially in the quarter, reaching SEK167.2m.

The total cost base amounted to SEK50.7m (SEK49.4m excl. restructuring costs), of which OPEX SEK48.2m and CAPEX SEK2.5m. This should be compared to a total cost base of SEK63.8m in Q4 2022.

The average number of employees decreased sequentially from 273 to 242, a 22% y/y decrease. The personnel cost was SEK40.9m in the quarter, -19% y/y decline. Despite these reductions, management emphasized its commitment to maintaining the quality of product delivery going forward. In Q4 2022, Nepa had 325 FTE, so in five quarters, it reduced its workforce by 83 people, or -26%. As highlighted by management, resource allocation will be agnostic and dynamic depending on the projects, tailored to fit each project accordingly. Nepa is now finding more effective ways of working and improving its ability to move internal resources between markets to enhance the utilization rate of its consultants. This will be crucial in being able to scale profitably when growth returns.

Nepa enters 2024 with a slim organization focusing on organic profitable growth, with the possibility of smaller acquisitions and focusing on go-to-market activities. According to the CEO, acquisitions are in an early stage as the new board of directors has only been in place for a few weeks. However, the new board has deep knowledge of acquisitions and will support management in a number of ways going forward. In the conf call, Anders Dahl did not want to pinpoint any particular business or what geographies Nepa is looking for. The focus in the near term is to populate the new sales organization with the new Chief Revenue Officer, Sara Davidsson Nyman, who will start the new role mid-May.

The underlying market is still under pressure due to geopolitical uncertainty and interest rate cuts pushed into the future - naturally dampening demand. If the rate cuts start in H2, advertising demand should pick up at the end of the year. We believe Nepa is in a very good position with its cost base well under control, so it should, even in a slower market, generate a decent operating margin of c10% in the future. However, due to the soft quarterly growth and increased uncertainty, we are trimming our growth forecast by 4% for 2024 and 5% in the following years.

We also adjust the capitalization downward, affecting the operating profit by 50% in 2024 and 10% to 30% in subsequent years. A better cost structure lowers OPEX by c2%-5%, which will mitigate some of the operating margin effects. It should be noted that our EBITDAC estimates are actually raised in the same period.

With CAPEX now considerably lower than amortization, EBITDA-CAPEX, or EBITDAC is more aligned with the underlying cash generation of the company. We estimate the EBITDAC margin will sit at 6% in 2024e and improve gradually towards 11% 2027e.