While the company has not been on the radar of most investors due to rather underwhelming operating performances in recent years, efficiency measures, which have been imposed lately as well as the reorganization of the top- and C-level management are starting to bear fruit, thus making NFON a clear BUY with 92% upside.

Between 2018 and 2022, the German market leader of integrated business communication was not able to translate its strong technological edge into a profitable business. While in the first years after the IPO, profitability was subordinated to market share gains and sales growth (24% CAGR ’17-’20), operational inefficiencies paired with supply bottlenecks (hardware) as well as an inflated cost base on the marketing and personnel level prevented expanding margins since.  

However, not only since the arrival of Patrik Heider as new CEO in May ’23 things have changed and NFON is on track to become profitable on the EBIT line and deliver positive FCF for the first time in 2024e on a FY basis. This is mainly due to: (1) A structurally growing and historically underpenetrated market: NFON finds itself amid a dynamic European market cloud-PBX, which is set for double-digit growth rates in the mid-term (13% CAGR ’22- ‘26e). Especially the final fading out of ISDN by telecom carriers (end of ’22) should be seen as an inflection point as businesses are forced to switch to VoIP based solutions such as multi-tenant cloud-PBX. Hence, the generell market penetration is seen to sharply increase, especially in historically underpenetrated markets like Germany (H1 '23: 14% penetration; 2027e: 43%). (2) Efficiency measures bearing fruit: Since H2 ’22, NFON implemented strict cost saving/efficiency measures, which are already visible in the personnel expense ratio (-4.6pp yoy at 9M’23) as well as with other OpEx (-9.2pp yoy, especially related to marketing).  

Against this backdrop, NFON should be on track to further improve EBIT margins (>8%), ROICs (>11%) and FCF generation (>€ 3m) going forward.

Despite operational and structural tailwinds which are set to support mid-term sales and margin expansion, valuation continues to look attractive. After shares declined 11% YTD, NFON is now trading on a mere 1.1x EV/Sales, marking a significant discount compared to the historical average of 2.3x. We thus confirm our BUY recommendation with an increased PT of € 11.70 based on DCF.