NFON will release Q3 figures on November 23rd, which are seen to show steady top-line growth paired with sound profitability following the implementation of several cost-saving measures.

Q3 recurring revenues are expected to increase by 5.6% to € 19.4m based on an increased seat base (eNuW: +1.6% qoq to 650k) as well as a pickup in airtime. Overall sales are set to grow 3.5% yoy to € 21.0m, implying a recurring revenue ratio of 93% which allows for good visibility in light of the company’s high customer retention (churn rate < 1% p.m.).

Q2 adj. EBITDA looks set to significantly increase to € 1.5m (Q3’22: € 0.7m), implying a margin of 7.2%. The strong improvement in profitability is mainly attributable to the ongoing implementation of cost-saving measures in connection with reduced marketing as well as personnel expenses.

On this basis, we expect management to confirm its FY guidance of ARR growth in the mid to high single-digit percentage range (eNuW: +5%), an ARR ratio of at least 88% (eNuW: 92.9%) and an adj. EBITDA of € 6-7m (eNuW: € 6.6m). Mind you, the adj. EBITDA guidance was already upgrade with the Q2 numbers (previously > € 4m).

Overall, the company appears to remain on track to grasp the growth potential in the still under penetrated European PBX market. On top of this, NFON is seen to significantly benefit from cross-selling thanks to well perceived premium products like CC Hub, which should allow for a continuous margin expansion going forward. While 2023e will still be a transitional year, the measures implemented by the new CEO Patrik Heider are seen to show full effect in 2024e as we estimate significantly improving profitability as well as a positive FCF generation (eNuW: € 1.7m) for the first time since the IPO.

With than in mind, the current valuation appears undemanding. Shares are trading on depressed levels of 1.2x EV/Sales 2023e (vs 2x historic average).

Reiterate our BUY recommendation with an unchanged PT of € 10.50 based on DCF.