Equity research, Teneo AI: Strong growth outlook remains after a solid Q2

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In Q2 2024, Teneo AI, formerly Artificial Solutions, demonstrated a solid SaaS API call volume growth of 74% YoY to 31.5 M. Total ARR reached SEK 74.3m, marking a 28% increase. The gross margin was slightly below our estimate, and we do not anticipate it expanding at the same pace as before.

Mixed bag financially compared to our estimates

In Q2 2024, net sales reached SEK 19.3m, reflecting a solid 31% growth, though slightly below our estimate of SEK 20m. The primary growth driver was increased volumes from existing customers, as NRR was reported at 134%. Additionally, the gross margin after commissions improved to 79% (77%), which was marginally below our estimate of 81%. Adjusted EBITDA improved significantly, reaching SEK -6.3m (-13.9), compared to our estimate of SEK -7m. Finally, EPS came in at negative SEK 0.06, against our estimate of negative SEK 0.04. Overall, the results for Q2 were mixed relative to our estimates but remained largely in line with expectations.

Teneo stepping on the gas in the UK and the USA

Teneo AI is intensifying its sales efforts in two key markets, the UK and the USA, specifically following the successful directed share issue of SEK 50m before related costs. That has already led to the appointment of two strategic account managers in the USA, with a technical account manager to be added shortly. In spite of the expected short-term negative effects on the cost-basis, we view these initiatives as value-creating activities that will positively impact the company in the mid-to-long term.

New customers and improved accuracy

An increased focus on signing new clients has begun to bear fruit. In the report, three new customers were highlighted: a SaaS agreement with MedHelp Care, which operates one of Sweden’s most visited health platforms; a SaaS partnership with Healthflexx, a health management organisation; and, added shortly after Q2, Valcon, a major consulting firm. Additionally, Teneo launched the Accuracy Booster for Contact Center Voice AI. This NLU solution, tested in partnership with Cyara, reduces voice inaccuracies by 24% and increases contact centre automation by 50%.

Adjustments for fading gross margin expansion and lower multiples

We remain confidently optimistic about the future growth of Teneo AI. Our estimates for net sales remain largely unchanged, with a CAGR, 2023-2026, of 40%. However, as noted in the report and during the conference call, the gross margin expansion is expected to fade in the short term, which has led us to adjust our expectations. Consequently, the timeline for reaching break-even has been pushed further into the future. In the base case, we have revised our fair value per share to SEK 0.82 (1.0), corresponding to an EV/Sales NTM of 5.5x. Valuation multiples for the reference companies have declined holding back our valuation. The full reference group trades at an EV/Sales NTM of 3.9x. The premium is justified by strong growth prospects.

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