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Research: TMT
As anticipated, now that the German whistleblower protection laws are in place, EQS is recruiting substantial numbers of new customers and is set for a strong fourth quarter, with good momentum into FY24. Once these new customers convert, they become a pipeline of warm leads for other EQS products and services, including more recent additions such as those for ESG monitoring and reporting. Q323 revenues were up 14% on the prior year and newly won annual recurring revenue (ARR), which precedes reported revenue, was up 50%. The rating remains well below that of peers and the value indicated by a discounted cash flow (DCF).
EQS Group |
New customer numbers ramp up |
Q3 trading update |
Software |
13 November 2023 |
Share price performance
Business description
Next events
Analyst
EQS Group Group is a research client of Edison Investment Research Limited |
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As anticipated, now that the German whistleblower protection laws are in place, EQS is recruiting substantial numbers of new customers and is set for a strong fourth quarter, with good momentum into FY24. Once these new customers convert, they become a pipeline of warm leads for other EQS products and services, including more recent additions such as those for ESG monitoring and reporting. Q323 revenues were up 14% on the prior year and newly won annual recurring revenue (ARR), which precedes reported revenue, was up 50%. The rating remains well below that of peers and the value indicated by a discounted cash flow (DCF).
Year end |
Revenue |
EBITDA |
PBT* |
EPS* |
EV/EBITDA |
P/E |
12/21 |
50.2 |
1.7 |
(5.4) |
(0.65) |
144.5 |
N/A |
12/22 |
61.4 |
4.6 |
(3.1) |
(0.20) |
55.1 |
N/A |
12/23e |
72.5 |
10.0 |
1.5 |
0.10 |
25.2 |
223.8 |
12/24e |
90.0 |
17.3 |
9.4 |
0.63 |
14.6 |
35.9 |
12/25e |
106.5 |
22.1 |
14.4 |
0.97 |
11.4 |
23.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Building momentum
EQS increased the number of its SaaS customers by 170% to 665 over Q3 as some of the pent-up demand for digital whistleblowing software systems flowed through following the transposition into law of the regulations in Germany on 1 July. Of the 1,331 new SaaS whistleblowing customers recruited over 9M23, 665 came on board in Q3. There is still a long way to go in building the understanding of the requirements to implement across organisations (not just corporate, but also public sector, charities, etc), so we anticipate demand continuing to be strong through FY24 and into FY25, for which we now publish our estimates for the first time. Our FY23 and FY24 figures are broadly unchanged, bar a better free cash flow performance, which reduces our year-end net debt forecast to €22.4m, from €27.3m, with management reporting a figure of €24.3m at end-September.
Margins expanding on market-leading position
With the increasing volumes, overhead recovery is improving. The Q323 EBITDA margin was 13.8%; 11.4% for 9M23. Our modelling suggests a Q424 EBITDA margin of 19.2% – a level that we regard as sustainable while the whistleblowing momentum continues, not just in Germany but across other EU jurisdictions. While figures are hard to come by, management asserts market leadership in Germany.
Valuation: Discount to peers and DCF
EQS is edging closer to an earnings-based valuation and parity with peers on FY24e EV/revenue would imply a share price of €31.69, down from €34.45 in August, as peers’ ratings have retrenched. This is a little below the €36.36 (August 2023: €36.18) indicated by our DCF at a WACC of 9% and terminal growth of 2%, with both valuations clearly well ahead of the current share price.
Key growth indicators show extent of progress
The quarterly figures show the start of the flow through from digital whistleblowing, boosting the revenues within the Compliance segment and starting to be reflected in the new ARR figure, up 37% on 9M22. With the increase in operating expenses limited to 7%, much of this additional revenue is flowing through to EBITDA, lifting the EBITDA margin in Q323 to 13.4%.
Booked ARRs are a lead indicator for the actual revenues, so support the top-line momentum into FY24. New customers are either recruited directly or via a partner network, with EQS concentrating its in-house efforts on targeting organisations with over 500 employees, as these will represent the most promising leads for further up- and cross-selling once the initial wave of recruitment has passed.
Exhibit 1: Growth in key figures
€000s |
Q123 |
Q223 |
Q323 |
9M23 y-o-y change (%) |
Total revenue |
15,972 |
17,875 |
16,762 |
+15 |
Compliance |
||||
Cloud-products |
8,291 |
8,929 |
9,260 |
+19 |
Cloud-services |
2,785 |
3,905 |
2,810 |
+17 |
Investor Relations |
||||
Cloud-products |
2,664 |
2,706 |
2,710 |
+8 |
Cloud-services |
2,231 |
2,339 |
2,140 |
-5 |
New annual recurring revenue |
1,860 |
2,730 |
2,990 |
+37 |
Operating expenses |
(15,200) |
(16,453) |
(15,370) |
+7 |
EBITDA |
1,302 |
1,912 |
2,242 |
+115 |
Margin |
8.2% |
10.7% |
13.4% |
|
EBIT |
(702) |
(77) |
302 |
|
Group earnings |
(1,231) |
(304) |
(210) |
|
Operating cash flow |
3,697 |
1,757 |
2,498 |
+85 |
Equity ratio (%) |
59 |
59 |
60 |
|
SaaS customers |
5,257 |
5,688 |
6,305 |
+32 |
Source: EQS Group accounts, Edison Investment Research
Cash flow benefiting
The larger revision to our numbers is on free cash flow, where conversion has been better than we expected. We previously anticipated that the group would finish the current year with net debt of €27.3m. At the end of September, EQS had net debt of €24.3m (or €21.4m excluding lease liabilities), so we were clearly being over cautious. Our revised estimate is for end-FY23 net debt of €22.4m, coming back to €13.9m by end-FY24.
Medium-term targets of €130m, EBITDA margin of 30%
Management’s target of revenues of €130m, split 78% Compliance, 22% IR, is unchanged, with some flex as to whether this is achieved in FY26 or FY27. This was discussed in more detail in our August Outlook note.
Our new FY25 figures show good progress towards these goals, with revenues of €106.5m and an EBITDA margin of 20.8%, which may be less ambitious than management’s internal targets. There is plenty still to go for with the digital whistleblowing opportunity as it rolls out across Europe, and beyond that, there are substantial opportunities in the ESG monitoring, recording and reporting fields, which can be delivered through the existing COCKPIT platform.
Exhibit 2: Financial summary
€'000s |
2020 |
2021 |
2022 |
2023e |
2024e |
2025e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||||
Revenue |
|
|
37,636 |
50,223 |
61,430 |
72,500 |
90,000 |
106,500 |
Cost of Sales |
0 |
0 |
0 |
0 |
0 |
0 |
||
Gross Profit |
37,636 |
50,223 |
61,430 |
72,500 |
90,000 |
106,500 |
||
EBITDA |
|
|
4,760 |
1,742 |
4,567 |
10,000 |
17,300 |
22,100 |
Operating profit (before amort. and excepts.) |
|
|
819 |
(3,975) |
(1,327) |
4,031 |
11,281 |
16,031 |
Amortisation of acquired intangibles |
(656) |
(1,532) |
(2,257) |
(2,257) |
(2,257) |
(2,257) |
||
Exceptionals |
0 |
110 |
0 |
0 |
0 |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
0 |
0 |
||
Reported operating profit |
163 |
(5,397) |
(3,584) |
1,774 |
9,024 |
13,774 |
||
Net Interest |
(396) |
(1,461) |
(1,761) |
(2,520) |
(1,869) |
(1,583) |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
1 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
423 |
(5,436) |
(3,087) |
1,511 |
9,412 |
14,448 |
Profit Before Tax (reported) |
|
|
(233) |
(6,858) |
(5,344) |
(746) |
7,155 |
12,191 |
Reported tax |
(599) |
229 |
2,013 |
246 |
(2,361) |
(4,023) |
||
Profit After Tax (norm) |
296 |
(5,254) |
(1,924) |
1,012 |
6,306 |
9,680 |
||
Profit After Tax (reported) |
(832) |
(6,629) |
(3,332) |
(500) |
4,794 |
8,168 |
||
Minority interests |
(34) |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
296 |
(5,254) |
(1,924) |
1,012 |
6,306 |
9,680 |
||
Net income (reported) |
(866) |
(6,629) |
(3,332) |
(500) |
4,794 |
8,168 |
||
Average Number of Shares Outstanding (m) |
7.2 |
8.1 |
9.7 |
10.0 |
10.0 |
10.0 |
||
EPS - normalised (€) |
|
|
0.04 |
(0.65) |
(0.20) |
0.10 |
0.63 |
0.97 |
EPS - normalised fully diluted (c) |
|
|
4.12 |
(64.53) |
(19.76) |
10.10 |
62.91 |
96.57 |
EPS - basic reported (€) |
|
|
(0.12) |
(0.81) |
(0.34) |
(0.05) |
0.48 |
0.81 |
Dividend per share (c) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
6.4 |
33.4 |
22.3 |
18.0 |
24.1 |
18.3 |
||
EBITDA Margin (%) |
12.6 |
3.5 |
7.4 |
13.8 |
19.2 |
20.8 |
||
Normalised Operating Margin (%) |
2.2 |
(7.9) |
(2.2) |
5.6 |
12.5 |
15.1 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
39,007 |
168,468 |
170,440 |
168,630 |
167,959 |
162,614 |
Intangible Assets |
31,016 |
160,386 |
158,081 |
154,403 |
153,982 |
149,759 |
||
Tangible Assets |
7,216 |
7,351 |
5,011 |
6,878 |
6,628 |
6,503 |
||
Investments & other |
775 |
731 |
7,349 |
7,349 |
7,349 |
6,352 |
||
Current Assets |
|
|
17,086 |
18,369 |
18,932 |
21,029 |
26,006 |
34,375 |
Stocks |
0 |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
3,923 |
7,018 |
6,075 |
6,793 |
7,989 |
10,723 |
||
Cash & cash equivalents |
12,074 |
8,653 |
10,654 |
12,033 |
15,814 |
21,449 |
||
Other |
1,089 |
2,697 |
2,203 |
2,203 |
2,203 |
2,203 |
||
Current Liabilities |
|
|
(12,381) |
(89,171) |
(27,066) |
(30,628) |
(30,820) |
(26,787) |
Creditors |
(2,747) |
(3,197) |
(2,709) |
(3,487) |
(3,490) |
(4,272) |
||
Tax and social security |
(56) |
(214) |
(1,350) |
(1,593) |
(1,978) |
(2,340) |
||
Short term borrowings (includes lease debt) |
(3,278) |
(73,095) |
(8,198) |
(8,198) |
(8,198) |
(8,198) |
||
Other |
(6,300) |
(12,665) |
(14,809) |
(17,350) |
(17,155) |
(11,977) |
||
Long Term Liabilities |
|
|
(10,768) |
(27,426) |
(50,096) |
(45,441) |
(40,691) |
(35,941) |
Long term borrowings (includes lease debt) |
(7,641) |
(9,927) |
(30,890) |
(26,235) |
(21,485) |
(16,735) |
||
Other long term liabilities |
(3,127) |
(17,499) |
(19,206) |
(19,206) |
(19,206) |
(19,206) |
||
Net Assets |
|
|
32,943 |
70,240 |
112,210 |
113,590 |
122,454 |
134,261 |
Minority interests |
0 |
0 |
1 |
1 |
1 |
1 |
||
Shareholders' equity |
|
|
32,943 |
70,240 |
112,210 |
113,590 |
122,454 |
134,261 |
|
||||||||
CASH FLOW |
||||||||
Operating Cash Flow |
3,765 |
(2,296) |
2,786 |
5,707 |
11,051 |
14,475 |
||
Working capital |
1,294 |
(1,149) |
3,952 |
60 |
(1,193) |
(1,952) |
||
Exceptional & other |
1,037 |
5,711 |
699 |
4,900 |
6,208 |
7,301 |
||
Tax |
(154) |
(229) |
(2,013) |
246 |
(2,361) |
(4,023) |
||
Net Operating Cash Flow |
|
|
5,942 |
2,037 |
5,425 |
10,913 |
13,704 |
15,801 |
Capex |
(2,008) |
(3,149) |
(2,813) |
(2,300) |
(3,250) |
(3,775) |
||
Acquisitions/disposals |
0 |
(96,428) |
(14) |
21 |
0 |
0 |
||
Net interest |
(157) |
(1,636) |
(1,666) |
(2,520) |
(1,869) |
(1,583) |
||
Equity financing |
9,124 |
43,929 |
44,833 |
(28) |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
414 |
(2,772) |
(2,327) |
0 |
0 |
0 |
||
Net Cash Flow |
13,315 |
(58,019) |
43,438 |
6,086 |
8,585 |
10,442 |
||
Opening net debt/(cash) |
|
|
13,472 |
(1,153) |
74,372 |
28,434 |
22,400 |
13,869 |
FX |
(199) |
126 |
50 |
0 |
0 |
0 |
||
Other non-cash movements |
1,509 |
(17,631) |
2,450 |
(52) |
(54) |
(58) |
||
Closing net debt/(cash) |
|
|
(1,153) |
74,372 |
28,434 |
22,400 |
13,869 |
3,484 |
|
|
Research: Financials
Molten Ventures released its H124 trading update (to end-September 2023), with management expecting its NAV per share at c 735p, a c 5.7% decline from the end-March 2023 level as a result of a 3.6% negative fair value movement (excluding fx) across its portfolio. That said, management highlighted that the valuation environment is stabilising and that Molten’s portfolio performance remains resilient, with a good balance between growth (even if at a slower pace) and capital efficiency (with very limited exceptions). Molten’s shares currently trade at a 66% discount to NAV.