Yesterday, NFON released its Q3 report, which clearly reflects the increasingly challenging environment in the European ICT market, visible in soft top-line momentum and margin pressure. In detail:
Q3 sales were held broadly stable year-on-year at € 21.8m (+0.3% yoy; eNuW: € 22.9m), demonstrating resilience despite a softer demand environment and extended sales cycles. Importantly, churn remained low and steady at 0.5% p.m., underscoring the strength of the customer base. While the seat count decreased by 2.6% yoy to 648k, this was largely shaped by the challenging macro backdrop rather than underlying customer dynamics. ARPU edged up to € 9.92, supported in part by the Q2 price adjustments. Recurring revenues reached € 20.5m, representing a robust 94.1% share and providing continued solid revenue visibility as the company advances its AI-driven strategic transition.
As a result of the muted sales development and increased AI investments, bottom-line margins came in slightly weaker yoy. Although we saw a further improvement in gross margin thanks to the price increases (+0.9pp yoy to 86.5%), adj. EBITDA came in weaker at € 3.0m (-16% yoy; eNuW: € 3.5m) and a 12.7% margin (-1.7pp yoy) as the increased cost base outweighed efficiency gains (i.e. DTS harmonization). On a positive note, FCF improved to € 1.3m compared to the first half of the year (H1: € 0.7m) thanks to WC normalization.
Against this backdrop, management decided to revise the FY25 guidance downwards and is now targeting sales to grow by 1.0-2.5% yoy (eNuW new: +1%) and an adj. EBITDA in the range of € 11.5-12.5m (eNuW new: € 11.6m), which is conservatively implying a similar soft development in Q4. Importantly, mid-term targets were confirmed with double-digit growth and >15% adj. EBITDA margins by FY27.
In our view, the new leadership team has set the right strategic priorities - including a clear AI road map (e.g., Nia FrontDesk), but tightened pricing measures and stronger partner enablement - the translation into operational momentum remains limited for now. While botario adds meaningful AI capabilities and supports NFON's positioning in more complex use cases, its contribution remains too small at this stage to offset the broader weakness in the core PBX base.
Yet, we still regard the strategic direction as sound, even as the operational turnaround is progressing slower than anticipated. With execution now becoming more consistent, we see potential for gradual improvement once market conditions stabilise and AI monetisation gains traction.
Given the continued attractive valuation (6.7x EV/Adj. EBITDA FY25e), we confirm our BUY rating with a new PT of € 11.10 (old: € 12.10) based on DCF.
ISIN: DE000A0N4N52