Topic: USU Software is going to release its 2023 annual report on March 28^th, which is seen to show further sequential improvements during Q4, partly driven by a recovery of the license sales as well as continuously growing SaaS sales.

Q4 sales are seen coming in at € 34.9m, implying a muted 4.0% yoy but showing further sequential improvements with 6.3% qoq. This should be driven among others by a recovery of the license revenues, which we expect to come in at € 3.1m thus accounting for almost half of the FY license sales (eNuW: € 6.5m) but still 30% down yoy. Mind you, that license revenues deteriorated in the first 9M of ’23 following prolonged sales cycles. Besides this, SaaS sales look set to show further strong growth of 20% yoy to € 4.6m. Overall, FY ’23 sales are seen at € 133m, hence meeting the lower end of the company’s guidance (€ 132-139m).

While growth remains muted, Q4 adj. EBITDA is expected at € 4.3m, indicating an improved margin of 12.4% vs Q3 (+3.9pp qoq). Again, the main driver behind this is seen to be the sequential increase in license sales, which usually show higher initial margins compared to subscription-based SaaS revenues. Yet, FY adj. EBITDA is anticipated to amount to € 13.1m, thus reaching the lower end of the guidance (€ 13-15m) but also implying a margin decline by 3.4pp to 9.9%.

2024 another transition year. While sequential improvements should continue throughout 2024e, we still expect profitability to be slightly below the levels of ’21 & ’22 with an adj. EBITDA margin of 12.5%. This is mainly due to the ongoing SaaS transformation, where management aims for a >75% share of new customer business by FY ’26 and hence a consequent decline in license sales. While this will have an adverse short-term effect on profitability, margins are seen to strongly expand in mid-term (eNuW: 17.1% by FY ‘26e), as the annual subscription payments of the SaaS contracts should equal perpetual license sales including maintenance after c. 3 years.

Although another transition year is likely laying ahead, current valuation appears undemanding at 13x EV/EBIT ‘24e (vs historic avg. of 20x). Reiterate BUY with an unchanged PT of € 30 based on DCF.