ZetaDisplay : Redeye research note efter delårsrapporten januari till mars 2021

ZetaDisplay Q1'21 Review: Prepared for recovery in H2 2021

Redeye Research Note

2021-04-28

Redeye retains its positive view on ZetaDisplay following its Q1 report, where management sticks to its positive outlook for the second half of 2021. While the ARR came in somewhat short of our forecasts, solid cost control resulted in an EBITDA beat.We make minor revisions to our forecasts and leave our Base case intact.

• 2021E and 2022E EBITDA cut by ~3%
• Base case unchanged at SEK 26
• Trading at 14x EBIT 2022E

ZetaDisplay continued to show solid cost control, and earnings exceeded our

forecasts substantially. While the pandemic, unsurprisingly, still is a major hurdle

for the digital signage industry, management and we expect a rebound in H2 2021.

Adjusted for M&A, ARR declined QoQ, and while there is a mitigating explanation,

ARR growth is still arguably the most important metric in ZetaDisplay, according to

us. However, with demand likely picking up within a few quarters, our outlook

remains positive.

Q1 2021

Despite sales coming in below our forecast, the gross profit and EBITDA beat our forecasts thanks to a favorable sales mix and solid cost control. It was mainly the typically volatile Hardware and Other that missed our forecast and considering thetough market conditions; we see no reason to be worried.

ARR increased to SEK 173.5m from SEK 160.3m in Q4 2020. As Nordland contributed with SEK 16.0m, the organic QoQ ARR growth was negative. However, that was due to a single customer moving from a subscription-based support agreement to ad hoc-support, resulting in a reclassification of SaaS revenue to Hardware and Other. According to management, this is an exception to an otherwisestrong trend towards subscription and SaaS, which considering current market trends seems reasonable.

Besides the solid sales mix with a large share of SaaS resulting in a high gross margin, management states that last year's reorganization has increased the internal efficiency supporting the improved EBITDA. Even though last year's EBITDA was negatively affected by restructuring costs, the underlying EBITDA is inline with last year despite much tougher market conditions, which we find robust.

ZetaDisplay has achieved net profits close to zero throughout the pandemic, which considering the harsh market conditions, and the company's leverage is impressive.Thus, ZetaDisplay has managed to navigate through the Corona pandemic without basically losing any money.

Management expects a gradual improvement in demand and believes that new sales will recover during the second half of 2021. ZetaDisplay currently has several active dialogs regarding international deals, that if won, should contribute to sales growthin 2022. The assumed rebound during H2 2021, management expects to be driven by increased activity among the current customer base.

Financial forecasts

We keep our forecasts largely intact, but the lower ARR outcome relative to our estimate results in slightly lowered SaaS and EBITDA forecasts. In line with our

previous forecasts and management's statements, we expect a rebound in demand in H2 2021 and 2022.

We believe ZetaDisplay is staffed to handle larger volumes as demand picks up, resulting in increasing margins. According to management, the reorganized ZetaDisplay can handle implementations more efficiently, supporting our assumptions of margin increases coming along with a rebound in sales.

Relative to ZetaDisplay's targets for 2022, our forecasts are both defensive and optimistic. Regarding SaaS revenue, our forecast of SEK 207m is somewhat above the target of SEK 200m. However, our EBIT forecast of SEK 68m is significantly lower than the target of SEK 100m. On the other hand, ZetaDisplay's targets include acquisitions, while our forecasts do not.

Fredrik Nilsson

Equity Analyst