XMReality held SEK 56.4m in cash, long-term debt of SEK 1.7m and interest bearing short-term debt of SEK 0.7 as of September 30th 2017, implying net cash about SEK 54m. The operating cash flow during the period January – September 2017 amounted to SEK -12.8m, implying that the company’s current annual burn rate is about SEK 17m. The company has not announced any financial goals other than that the capital raised during the IPO should be sufficient to reach break-even.
XMReality is still in an early stage of business where the company recently performed a change of strategy to become more focused on developing and selling software. The company has increased their net sales during the last two years as an effect of an increased client base running tests of Remote Guidance. It is, however, noticeable that net sales still is on a rather low level as there is no client running the solution on a larger user base. The increased focus on software is visible in lower CoGS during 2017, illustrating that the share of software sales is increasing. XMReality is currently exhibiting negative EBIT as an effect of ramped up development and sales efforts.
The increased number of employees is noticeable in cost of staff which has increased from SEK 3.6m in 2015 to SEK 7.5m in 2016 and has continued to increase throughout 2017. XMReality has furthermore announced
recruitments of a COO and a CTO that will join XMReality during Q4. We find it plausible to assume cost of staff to increase further going forward as the company continues to expand its organization.
XMReality started to capitalize development costs as of 2014 when the company increased its efforts in developing software. The current level of capitalized development costs is about SEK 11m, of which a lion’s share originates from the development of Generation 6. We thus expect D&A to increase following release of the new software version.
Base case
In line with the above, we expect the cost of staff, external costs and D&A to increase during the following years. We see good potential for a large software roll-outs during the coming years which has potential to yield between SEK 10-20m in annual license revenues depending on customers and their intended user base.
Our base case entails the scenario where the company successfully
generates one significant software order during 2018 while simultaneously attracting new customers which will spur revenues from new license agreements.
Good potential for large scale software roll-outs
Our belief is that Siemens Industry Turbomachinery and Bosch Rexroth are good examples of customers that potentially could implement XMReality’s software throughout their service organization. Apart from the evaluations of AR hardware and software Siemens has been running during the recent year, XMReality announced 2nd of October that Siemens has purchased hardware for an amount of SEK 0.5m. We believe that this could be an indicator of that Siemens is preparing for a larger implementation of XMReality’s Remote Guidance solution.
We are further assuming two additional large software orders during 2019, which implies that the company would be able to reach net sales around SEK 44m in 2019. Although our estimates primarily are based on software sales, we still expect sales of hardware to have an impact on net sales the coming years. The increased sales of software will be followed by an increase in gross margins. In our base case, we assume a long-term gross margin about 83%. These assumptions imply that break-even will be reached during the second half of 2019 as revenue (TTM) exceed SEK 40m.
We thus believe that the current level of cash is sufficient to reach break-even.
Regarding our long-term estimates, we assume that XMReality will continue to attract software orders from large field service organizations leading to strong growth after 2020. We are also assuming increasing costs due to increased efforts in expanding the sales organization as well as continued software development. Our forecast period ends in 2025 where we assume XMReality to exhibit revenues about SEK 169m and EBIT around SEK 58m.
Bear case
In our pessimistic bear case, we assume a large software roll-out first during the second half of 2018 and an additional large roll-out during 2019. The difference from the base scenario is that the sales growth is significantly lower due to assumptions of a delayed breakthrough. This is based on assumption of a slower adoption among existing customers as well as a lower inflow of new customers. We are, however, expecting high sales growth during the coming years driven by the launch of the new software update and believe that the company will exhibit revenues around SEK 37.5m in 2020.
Break-even reached during the second half of 2019 in base case
XMReality: Estimates in Base case
(SEKm) 2014 2015 2016 Q1'17 Q2'17 Q3'17 Q4'17E 2017E 2018E 2019E 2020E
Net sales 0.8 3.5 5.2 0.9 1.4 1.6 2.1 6.0 17.0 43.5 73.1
CoGS -0.1 -2.4 -4.3 -0.3 -0.4 -0.7 -0.9 -2.4 -4.0 -8.7 -13.2
Gross margin (%) 82% 32% 17% 62% 71% 56% 57% 61% 76% 80% 82%
Staff costs -2.9 -3.6 -7.5 -2.6 -3.7 -2.9 -4.0 -13.3 -16.9 -21.2 -25.0
External costs -4.4 -3.9 -5.7 -3.2 -4.5 -4.4 -4.5 -16.6 -19.2 -21.6 -25.9
EBITDA -3.9 -4.2 -9.0 -4.0 -5.0 -4.6 -6.3 -20.0 -22.1 -7.0 10.0
We are further assuming slightly lower costs while keeping the long-term gross margin slightly below base case due to a somewhat lower share of software sales. The mentioned assumptions ultimately result in that XMReality will reach break-even on EBITDA level first during 2021.
Our bear case further entails price pressure in the long run, where we assume lower average price per software user. Fewer large scale
implementations of Remote Guidance, lower inflow of customers and price pressure results in an estimate of SEK 120m in revenues by 2025.
Bull case
Our optimistic bull case reflects the scenario where XMReality receives two large orders of software licenses during 2018 while the inflow of new customers remain strong. We believe that two larger software orders and new customers running software on a slightly lower user base could lead to revenues about 24 MSEK for the full-year 2018 given that the larger software orders are received during the beginning of the year.
We are further expecting several large scale software implementations among customers during 2019 and 2020 which implies a substantial sales growth during 2018-2020. Our bull case further entails slightly higher gross margins than our base case which is driven by larger software orders. We are, however, also assuming that XMReality succeed in generating several significant orders which put pressure on average license prices.
We are also assuming that the company is more aggressive regarding the expansion of the organization which leads to slightly higher costs of staff and external costs compared to our previous cases. The above assumptions result in the assumption that break-even will be reached during the mid of 2019. We are from that point expecting continued strong sales growth until 2025, where we estimate revenues about 218 MSEK.
XMReality: Estimates in Bear case
(SEKm) 2014 2015 2016 Q1'17 Q2'17 Q3'17 Q4'17E 2017E 2018E 2019E 2020E
Net sales 0.8 3.5 5.2 0.9 1.4 1.6 1.9 5.8 10.3 22.0 37.4
CoGS -0.1 -2.4 -4.3 -0.3 -0.4 -0.7 -0.9 -2.4 -2.6 -5.5 -8.6
Gross margin (%) 82% 32% 17% 62% 71% 56% 51% 59% 75% 75% 77%
Staff costs -2.9 -3.6 -7.5 -2.6 -3.7 -2.9 -3.8 -13.1 -16.1 -20.1 -22.5
External costs -4.4 -3.9 -5.7 -3.2 -4.5 -4.4 -4.3 -16.4 -18.2 -20.5 -23.0
EBITDA -3.9 -4.2 -9.0 -4.0 -5.0 -4.6 -6.1 -19.8 -25.6 -23.1 -15.7
D&A 0.0 0.0 -1.0 -0.2 -0.2 -0.5 -0.8 -1.6 -3.3 -2.7 -2.2
EBIT -3.9 -4.2 -10.0 -4.1 -5.2 -5.1 -6.9 -21.4 -28.9 -25.8 -17.8
Growth (%) - 333% 46% - 53% 17% 13% 12% 78% 114% 70%
EBIT Margin (%) -483% -119% -194% -454% -373% -315% -372% -369% -280% -117% -48%
Source: Redeye Research
XMReality: Estimates in Bull case
(SEKm) 2014 2015 2016 Q1'17 Q2'17 Q3'17 Q4'17E 2017E 2018E 2019E 2020E
Net sales 0.8 3.5 5.2 0.9 1.4 1.6 2.4 6.3 23.7 59.5 104.1
CoGS -0.1 -2.4 -4.3 -0.3 -0.4 -0.7 -0.8 -2.2 -5.2 -11.9 -16.7
Gross margin (%) 82% 32% 17% 62% 71% 56% 68% 65% 78% 80% 84%
Staff costs -2.9 -3.6 -7.5 -2.6 -3.7 -2.9 -4.2 -13.5 -17.7 -23.3 -29.1
External costs -4.4 -3.9 -5.7 -3.2 -4.5 -4.4 -4.7 -16.9 -20.2 -23.8 -29.7
EBITDA -3.9 -4.2 -9.0 -4.0 -5.0 -4.6 -6.3 -20.0 -18.4 1.6 29.7
The table above illustrates the variance in estimates between our different scenarios. As previously mentioned, all cases incorporates the case where XMReality receives at least one large software order during 2018. We are, however, assuming larger and additional software orders in our base and bull case compared to the bear scenario. We are further assuming a
stronger inflow of new clients in the base and bull cases, which will generate higher sales growth during the subsequent years.
There is also a significant difference in estimated margins, where we assume a larger share of software sales in the base and bull cases leading to higher EBIT-margins compared to the bear case. We assume that
XMReality, in 2020, will achieve an EBIT-margin of 11% in our base case and 26% in bull case, whereas the bear case reflects the scenario where the company still is exhibiting negative EBIT.
XMReality: Estimates summary
Net sales (SEKm) 2018E 2020E 2025E
Bear 10 37 120
Base 17 73 169
Bull 24 104 218
EBIT-margin (%)
Bear -280% -48% 26%
Base -149% 11% 34%
Bull -92% 26% 41%
Source: Redeye Research
Valuation
We have used a discount rate (WACC) of 14.5% valuation purposes. The discount rate we use is based on a number of different parameters that together form Redeye’s rating model. The underlying factors aim at capturing the company-specific risk and take into account everything from management and owners to market position and the balance sheet.
Our valuation is based on three scenarios: a most likely base case, a pessimistic bear case and a positive bull case. The bear case represent the lower end and the bull case represent the upper end of the valuation range.
Base scenario
The valuation in our base scenario is a result of the estimates presented in forecasts section. We believe that there is good potential for high sales growth during the coming years arising from several large scale
implementations of the Remote Guidance solution within existing client organizations. This is reflected in our sales growth assumptions of 83%
(CAGR) between 2017 and 2020 and a CAGR of 13% between 2021 and 2026.
We believe there is great potential for high margins given the scalability in the offering. As noticeable in the table below, we expect to see higher margins first after 2020, where we assume an average EBIT-margin of 32%
between 2021 and 2026.
The above assumptions ultimately result in an estimated fair value of SEK 14.5 per share, indicating a potential upside about 40% from the current share price.
Bear scenario
Our bear case incorporates the scenario where XMReality receives fewer large software orders during 2018-2020 as well as a lower inflow of new clients which leads to a lower sales growth between 2017 and 2020 compared to our base case.
XMReality: Base case assumptions
Assumptions: 2017-2020 2021-2026 DCF-value
CAGR Sales 83.3% 13% WACC 14.5%
EBIT-margin (avg.) -142.1% 32% PV of FCF 49
ROE (avg.) -35% 34% PV of Terminal Value 108
Terminal EV 157
Sales growth 2.0% Net cash 54
EBIT-margin 34.3% DCF-value 211
Fair value per share 14.5 Current share price 10.4
Potential/Risk 39%
Source: Redeye Research
Fair value of SEK 14.5 per share in our base case
The assumptions of lower sales growth is illustrated in the table below, where we estimate XMReality’s revenues to grow at a CAGR of 60% during 2017-2020. As mentioned in the estimates section, our bear case reflects the scenario where break-even is delayed until 2021. More conservative sales assumptions will ultimately affect the estimated EBIT-margin, which is assumed to average 21% during 2021-2026. The terminal value is based on the assumption of a terminal EBIT-margin of 26%.
Our somewhat negative bear scenario assumptions ultimately results in an estimated fair value of SEK 6.5 per share.
Bull scenario
Regarding our optimistic bull scenario, we assume that XMReality will receive two large software orders during 2018 and two additional large Remote Guidance orders during 2019, which implies an assumption of high sales growth during 2017-2020. We are further assuming a strong inflow of new clients following a successful launch of the new software update.
We are furthermore assuming that XMReality will continue to exhibit strong growth after 2021, illustrated by our sales growth assumption
(CAGR) of 11% until 2026. Assumptions of substantially higher sales growth leads to a noticeable difference in EBIT-margins compared to previous cases. In this case, we assume an average EBIT-margin of 39% during 2021-2026 and a terminal EBIT-margin of 41%.
XMReality: Bear case assumptions
Assumptions: 2017-2020 2021-2026 DCF-value
CAGR Sales 60.3% 18% WACC 14.5%
EBIT-margin (avg.) -201.5% 21% PV of FCF -19
ROE (avg.) 97% -51% PV of Terminal Value 60
Terminal EV 41
Sales growth 2.0% Net cash 54
EBIT-margin 26.1% DCF-value 95
Fair value per share 6.5 Current share price 10.4
Potential/Risk -37%
Source: Redeye Research
XMReality: Bull case assumptions
Assumptions: 2017-2020 2021-2026 DCF-value
CAGR Sales 96.8% 11% WACC 14.5%
EBIT-margin (avg.) -122.8% 39% PV of FCF 113
ROE (avg.) -22% 31% PV of Terminal Value 167
Terminal EV 280
Sales growth 2.0% Net cash 54
EBIT-margin 41.1% DCF-value 334
Fair value per share 23 Current share price 10.4
Potential/Risk 120%
Source: Redeye Research
Fair value of SEK 6.5 per share in bear case
Assumptions of higher growth and increased profitability results in a fair value of SEK 23 per share, indicating a potential upside about 120%
from the current share price.
Our DCF-valuation thereby results in a fair value range of SEK 6.5 – 23 per share, with SEK 14.5 per share in base case.
Catalysts
We see several potential catalysts that could close the gap between our estimated fair value and current share price.
Large scale software roll-out
We see great potential in a large roll-out of XMReality’s Remote Guidance solution throughout a large client’s service organization after running tests for a long period. Apart from yielding recurring revenues and high margins, it would indicate that the industry truly is ready to adopt the solution and run it on a larger scale.
New technology partner(s)
We believe that new technological partners in hardware developers such as Microsoft or RealWear would strengthen XMReality’s case. Such a
partnership would increase the potential user base and further strengthen XMReality’s positioning as a leading provider of industrial AR-solutions.
New channel partner(s)
There is further potential for a new channel partner(s) that incorporate XMReality’s solution in their offering toward clients. We, however, believe this to be more relevant as the company has shown larger volumes of software sales.
XMReality: Fair value range
Source: Redeye Research
0 5 10 15 20 25 30
0 Bear-case: 6.55 10 Base-case: 14.515 20Bull-case: 2325 30 Last price: 10.4
SEK 23 per share in bull case