Aiforia H2 on Thursday: Growth base is expanded

Translation: Original comment published in Finnish on 3/5/2024 at 6:41 am EET

Aiforia, a software company automating pathology with AI, will publish its H2 report on Thursday at around 9 am EET. We expect the company’s revenue to continue to grow strongly as deployment to new customers in clinical segments progresses. Growth investments continue to keep the result at a clear loss, but we expect the earnings trend to be reversed and the loss to decrease from the comparison period. In addition to the growth figures, we focus on the progress of clinical customer deployment, order book development and comments on the 2024 outlook. We do not believe that the company will provide guidance due to the low predictability of the business, even if it would be a clear signal of the company’s confidence in its own growth.

Progressing ramp-up of first large clinical customers behind the growth

We expect Aiforia's H2 revenue to increase by 50% to 1.55 MEUR. We believe the main driver of growth are the company's first large clinical customers (Mayo Clinic and Veneto in H2). Several of these clients have potential for several million euros of annual revenue on their own. The speed of deployment, therefore, has a significant impact on the revenue of the next few year halves, and major forecast errors cannot be excluded. Compared to Aiforia's targets (~2030 revenue >100 MEUR), the reported figures will in any case still be very low. We believe it is essential for the company's story in the short term that it is successful in large customer deployment and in growing customer relationships. The EUR 250,000 Catania agreement supports the order book and we expect the order backlog has continued on a slight upward path (H1’23: 2.4 MEUR).

Growth investments continued to push the result into a clear loss, but we expect the trend to reverse

We expect Aiforia’s H2 EBITDA to slightly increase from the comparison period to -4.5 MEUR (H2’22: -5.5 MEUR) and EBIT to -6.2 MEUR (pro forma 2022: -6.9 MEUR). The result is in the red because the company has made significant front-loaded investments in growth to implement its strategy, particularly in the form of sales, deployments and product development recruitment. We predict that the largest size leap is over in the organization and expect that the earnings trend will gradually turn to a rise with revenue growth. Aiforia has also carried out cost savings measures to support profitability (clearer impacts in 2024). Strong growth is critical to the company's value creation, so profitability is not a concern as long as it is matched by strong growth. We suspect that the company will need additional funding in 2024 (about 20 MEUR), but as the need is limited considering the good performance and limited market value (about 90 MEUR) funding is raised from a good position. If the growth we expect is successful, the company’s free cash flow will turn positive in 2026-2027. The company will naturally not distribute dividends.

The key point of the report is once again an updated visibility to accelerating growth

We feel Aiforia’s investment story is very promising, although due to the company's early commercial development phase visibility into the success and intensity of growth is still very limited. Guidance would be a strong signal of the company’s confidence in its growth. However, we do not expect the company to provide guidance, as the visibility to the growth rate is likely to be blurry even within the company due to the early development phase and individual customer relationships fluctuating revenue clearly. At the same time, several new clinical segment clients (Mayo Clinic, NHS, Veneto and Catania Hospital districts) are slowly beginning to expand the company’s growth base. In addition to growth figures, we focus on the update on the progress of the growth strategy: progress of clinical customer deployment, order book development, comments on the 2024 outlook, and development of the cost structure. The company’s valuation (2023e-2024e EV/S ~34-22x) continues to include strong confidence in this growth materializing.