Equity research Teneo AI, Q3 2024: Excellent growth driven by increased volumes

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Teneo AI has once again delivered strong topline performance. The key metric, SaaS API call volumes, grew by 81% Y-o-Y to 41.0 million. Net sales and EBITDA, adjusted for one-off items, slightly exceeded expectations. 

A quarter above our expectations

In Q3 2024, net sales reached SEK 21.2m, reflecting a solid 29% growth above our estimate of SEK 20m. The primary growth driver was once again increased volumes from existing customers, with SaaS API Call growth at 81% Y-o-Y and NRR reported at 127%. Additionally, the gross margin after commissions improved to 79% (63%), which aligned with our estimate. Adjusted EBITDA improved significantly, reaching SEK -5.9m (-16.4) compared to our estimate of SEK -7m. Finally, EPS came in at negative SEK 0.07, against our estimate of negative SEK 0.04. Overall, the results for Q3 were impressive, highlighting the scalability of the business model and the quality of the Teneo solution.

Realigned sales strategy targeting bigger potential customers

At the beginning of the year, sales efforts shifted toward acquiring new clients, yielding three new accounts. However, the segment that was being targeted, namely potential customers with smaller volumes and initial interest in chatbots, was under significant competition. A slew of thin-layered LLM models made it difficult for potential customers to gauge which solution met their needs most accurately. Thus, by the end of Q2, the strategy has been altered. Instead, sales efforts are targeting bigger enterprises with millions of phone calls, in other words, potential customers with a clear need for automation already, rather than being a problem to solve in the future.

New KPIs slated for Q4 in order to reflect new strategy

Partly due to what was mentioned in the previous paragraph, new KPIs will be reported starting in Q4. Namely, the KPIs will track the number of target accounts and potential consolidating partners in the qualified pipeline stage. Given the new strategy, these figures will be more relevant, as the sales cycle will be longer with larger customers, the upside, naturally, being bigger rewards. As clarified in the report, each new customer provides nominal revenue until API call volumes grow, with large customers expected to reach SEK 1 million in monthly revenue within 18 months.

Strong growth leads to a higher target price

The report highlighted that the SaaS business model is becoming more significant. Recurring revenues from SaaS customers totalled SEK 13.6 million in Q3, representing 63% of all recurring revenues. Given the acceleration observed in this quarter, we adjust our fair share price to SEK 1.0 (0.82), rising to SEK 1.3 (1.04) in the bull case and down to 0.6 (0.42) in the bear case. The base case valuation represents an EV/Sales NTM of 5.7x, compared to the reference group currently trading at 3.5x.

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