XMReality : Redeye Analysis 20210429

	Update
Equity Research	29 April 2021

XMReality

Sector: Software / Augmented Reality

Funding Secured and Ready to Scale

FAIR VALUE RANGE

Redeye maintains its fair value range on the back of a somewhat weaker report than forecast. The case remains intact, however, and we believe the Company boasts good conditions for future growth. XMReality completed a large capital raise during the quarter and will predominantly invest in its go to market. Our Base Case is SEK 10.

Q1 2021: Positive ARR trend

Overall, the report was somewhat below our expectations. We had forecasted a slightly better topline. Even so, Q1 is XMReality's second-strongest quarter to date. However, it is easily overshadowed by Q4 2020, its strongest yet. The Operating Loss came in as expected. We are encouraged to see a solid ARR development, which grew some 96% Y/Y and 11% Q/Q - now amounting to SEK 19.4m.

Funding secured and new customer agreements

During the quarter, XMReality completed a directed share issue of about SEK 56m (before transaction costs). The Company is putting the capital to good use, investing in marketing and sales, aiming to capitalize on the positive market trends. Also, it has entered two exciting customer agreements within its strongest vertical during 2021 - food and beverage. XMReality now serves four of the world's ten largest food and beverage companies: Nestlé, InBev, Heineken and an undisclosed giant.

Significant upside to our Base Case: SEK 10

We maintain our fair value range and Base Case. We adjust our topline sales estimates with a slight downward bias. However, the case remains intact, and we expect the Company to become profitable during 2023. The risk of running into financial distress is now eliminated (for the foreseeable future), which "derisks" the case. The Company has good conditions to scale with its existing customers, in addition to gaining new customers and expanding into adjacent industries and markets. In relation to other SaaS companies, XMReality looks rather undervalued, at least on an EV/Revenue multiple.

BEAR		BASE		BULL
3	10	14

VERSUS OMXS30

REDEYE RATING

4		3
			2
	People	Business		Financials
KEY STATS
Ticker			XMR.ST
Market			First North
Share Price (SEK)	6.3
Market Cap (MSEK)	257
Net Debt (MSEK)	-69

SEKm	2019	2020	Q1	Q2	Q3	Q4	2021E	2022E	2023E
Net Sales	12	21	6	8	7	12	33	56	94
Y/Y	17%	74%	68%	40%	43%	75%	57%	72%	68%		ANALYSTS
EBITDA	-23	-20	-5	-5	-4	-3	-17	-7	19
margin (%)	-131%	-84%	-78%	-65%	-53%	-25%	-50%	-11%	20%		Forbes Goldman
EBIT	-27	-25	-6	-6	-5	-4	-22	-10	15
margin (%)	-155%	-106%	-98%	-78%	-68%	-32%	-62%	-18%	16%		[e-mail]
EV/Sales							5,8	3,4	2,0
EV/EBITDA							neg	neg	10,0
EV/EBIT							neg	neg	12,5

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report

Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. [phone], E-post: [e-mail]

REDEYE Equity Research

XMReality 29 April 2021

Financial performance

We are encouraged to see a positive topline trend in relation to the corresponding period last year. However, it was somewhat below our estimates. We had expected the solid order intake and topline growth in Q4 2020 to set a new precedent. In an interview with the CEO where we discuss the quarter,he explains that the industry is affected by cyclical variations - where Q4 always is strong, both in terms of order intake and topline. Many customers renew licenses and subscriptions in December, in addition to several proof-of-concepts ending around this time as well.

The operating result is entirely in line with our estimates. We are pleased to see XMReality maintain its stringent OPEX control on a Y/Y basis. Early signs, in our opinion, of a scalable business model, with significant operating leverage once the topline takes off.

XMReality Q1 2021: Estimates versus Actuals
		Actual	Estimated
SEKm	Q1 2020	Q1 2021	Q1 2021	Diff (%)	Diff (abs)
Net Sales	3,5	5,8	7,5	-22%	-1,6
growth	15%	68%	115%
COGS	0,3	0,6	0,7
Gross Profit	4,0	5,8	6,8
margin	93%	91%	91%
OPEX excl. D&A	9,4	10,7	12,0
EBITDA	-5,4	-4,9	-4,7	nm	-0,2
margin	-127%	-78%	-63%
D&A	1,2	1,3	1,1
EBIT	-6,6	-6,2	-5,8	nm	-0,5
margin	-155%	-98%	-77%
Source: XMReality & Redeye Research; estimates are Redeye figures

			Order Intake T12m (SEKm)						Net Sales T12m (SEKm)
												26	28													21	23
										20	21														17
																							15
									15
			11	12	15	14	13	15								10	10	11	12	12	12	12
		10
9										8	9
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1
		2018			2019			2020		2021			2018			2019			2020		2021
Source: XMReality, Redeye Research
				Order Intake (SEKm)								Net Sales (SEKm)
												10,9														7,1
																								5,5			5,8
										6,8			7,1												4,6
								5,9
					5,1			5,7									3,3					3,5
																			3,2
				4,3												2,8	3,0	3,0
																2,7
		3,1														2,2
					2,4					3,0			2,0
2,3	2,2
			1,4
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1
		2018			2019			2020		2021			2018			2019			2020		2021
Source: XMReality, Redeye Research

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REDEYE Equity Research

XMReality 29 April 2021

The ARR trend is indeed positive. It has grown some 96% Y/Y and 11% Q/Q. The maturity of XMReality's market has seen a boost on the back of the pandemic, and we believe the ARR development is a manifestation of the Company's ability to capitalize on the opportunity at hand. Also, the Gross Margin continues to be solid. XMReality has to a large extent transitioned away from selling hardware. Selling (almost entirely) software subscriptions, the Company reports excellent Gross Margins, above 90% in general.

							ARR (SEKm)														Gross Margin
																19,4							93%	93%			94%	93%
														17,6					91%					91%
												15,2					89%
										14,3
																										86%
																			84%
8,0	8,9	9,0	8,1	9,9
	Q1		Q2		Q3		Q4		Q1		Q2		Q3		Q4		Q1		Q1		Q2		Q3		Q4		Q1		Q2		Q3		Q4		Q1
		2019					2020				2021			2019					2020				2021
Source: XMReality, Redeye Research

Operational highlights

XMReality has announced several exciting customer agreements year to date. In particular, we would like to highlight the Company's dominant position within the food and beverage vertical, where both Heineken and an undisclosed global giant reside.

XMReality: Software orders YTD
Date	Customer	ARR (SEKm)
Q1 2021	Panasonic Homes	ND
Q1 2021	Heineken	0,7
Q2 2021	Kongsberg Precision Cutting Systems	ND
Q2 2021	Global food & beverage giant	0,8
Source: XMReality, Redeye Research

Heineken

Heineken is one of the world's largest breweries. The beverage industry is experiencing some distress at this time - it relies on high volumes of beverage being sold at large events and venues, such as concerts and sports events, most of which are canceled. Consequently, Heineken has had to cut 8,000 jobs after Covid hit sales (BBC), ~10% of its total workforce. Even so, Heineken went through with its Remote Guidance strategy, one of the few projects to receive funding during these unprecedented times.

In our opinion, this indicates serious value in XMReality's offering. According to the CEO, it takes about six months to generate a return on investment, and for Heineken to enter an agreement at this time validates this. Heineken and XMReality entered a three-year agreement, initially generating an ARR of about SEK 0.7m. Considering the number of brands and breweries within the Group, we believe there is good potential to scale. Over time, we believe Heineken (and similar customers) could generate an ARR of SEK 3-4m.

Undisclosed food and beverage giant

In Q2, XMReality entered an agreement with yet a global food and beverage giant, undisclosed at this time. The Company is headquartered in Europe, has more than 100,000 employees and is among the top ten largest food and beverage companies in the world in terms of revenue. While the customer will initially generate an ARR of SEK 0.8m, we believe it holds similar potential to Heineken over time.

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REDEYE Equity Research

XMReality 29 April 2021

In other words, XMReality is currently serving four of the ten largest food and beverage companies in the world - very impressive. Nestlé, InBev, Heineken, and an undisclosed. Strong customer testimonials could likely generate additional customers within this space, in addition to organic growth within the existing base. As customers scale their licenses, which most do, the Remote Guidance solution becomes even more sticky.

Source: Statista

Going forward

Of course, we expect that XMReality will seek to strengthen its position within the food and beverage, and packaging industries, its two strongest to date. However, there are several interesting verticals where the Company could expand. Two examples are facility management, which has gained significant traction in the UK, and medtech. Medtech, and in particular medical equipment, share several similarities with the packaging industry. Advanced equipment and a demanding industry, with significant quality standards, make it susceptible to Remote Guidance use.

Financial position

The Company undertook a directed share issue during the quarter, raising SEK 56.3m (before transaction costs) to a subscription price of SEK 8.25 per share. The principal investors were Investment Aktiebolaget Spiltan and Adrigo Small & Midcap, in addition to ~30 family offices and private investors.

XMReality has no debt, and its cash position amounts to SEK 69m at the end of Q1. The cash flow before financing activities on a T12m basis is approx. SEK -23m. There is plenty of runway, in other words, and we forecast XMReality will become profitable without raising additional capital.

The capital is being put to good use, according to the CEO. The funds will predominantly add resources to the marketing and sales division. Also, some will be used to improve security standards somewhat, and perhaps additional support.

4

REDEYE Equity Research

XMReality 29 April 2021

Financial Estimates

We decrease our topline sales estimates somewhat. However, the case remains more or less unchanged. We continue to forecast sustained operating profitability during 2023E.

Income Statement	2019	2020	Q1	Q2	Q3	Q4	2021E	2022E	2023E
Net Sales	12	21	6	8	7	12	33	56	94
Revenues	18	23	6	8	7	13	35	58	96
Y/Y Growth (%)	6%	31%	49%	35%	39%	68%	50%	68%	66%
Cost of Revenues	1	2	1	1	1	1	3	5	7
Gross Profit	16	21	6	8	6	12	31	53	89
Gross Profit Margin (%)	93%	91%	91%	91%	91%	91%	91%	92%	93%
Personnel Expenses	19	20	5	6	5	8	24	32	40
External Expenses	20	20	5	7	5	7	24	28	30
Other Op. Expense / (Income)	0	1	-	-	-	-	-	-	-
EBITDA	(23)	(20)	(5)	(5)	(4)	(3)	(17)	(7)	19
EBITDA Margin (%)	(131%)	(84%)	(78%)	(65%)	(53%)	(25%)	(50%)	(11%)	20%
Depreciation	0	1	0	0	0	0	0	0	0
Amortization	4	4	1	1	1	1	4	4	4
EBIT	(27)	(25)	(6)	(6)	(5)	(4)	(22)	(10)	15
EBIT Margin (%)	(155%)	(106%)	(98%)	(78%)	(68%)	(32%)	(62%)	(18%)	16%
Net Financial Expenses	0	0	0	-	-	-	0	0	0
EBT	(27)	(25)	(6)	(6)	(5)	(4)	(22)	(10)	15
Income Tax Expenses	-	-	-	-	-	-	-	-	3
Effective Tax Rate (%)	0%	0%	0%	0%	0%	0%	0%	0%	20%
Net Income	(27)	(25)	(6)	(6)	(5)	(4)	(22)	(10)	12
Net Income Margin (%)	(155%)	(107%)	(99%)	(78%)	(68%)	(32%)	(62%)	(18%)	13%

Valuation

Redeye maintains and reiterates its fair value range of SEK 3-14, with Base Case at 10. Our key valuation assumptions can be summarized as:

• With 80+ paying customers, including large companies such as ABB, we believe that there is room for substantial growth in the future.
• ARR for some of these customers could amount to SEK 5m annually.
• We expect sales growth to begin to take off 2021 and onwards, driven by a maturing market. This process has accelerated substantially due to the Corona crisis.
• The scalable business model, based mostly on software, yields high gross margins of +90%.
• Breakeven is reached in 2023.
• EBIT-marginpeaks at 23%
• Terminal growth rate is 2%.
• Terminal EBIT-margin is 18%.
• We use a WACC of 12%.

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