Redeye’s comment on the latest order. Valuation has taken big steps down along with the rest of the market, so I’ll have to keep a closer eye on it again 
Seamless Distribution Systems: Worth the wait – SEK10m agreement from a new Saudi customer
Redeye reiterates its fair value range and Base Case (SEK52) following a major agreement from a new customer: a leading Saudi telecom group. The deal is initially worth SEK10m but leads to meaningful upsell opportunities and increases SDS’s foothold in Saudi Arabia, the largest market in the Middle East.
SDS received a SEK10m order through its partner Strategy& (a global strategy consulting firm and a part of the PwC network) to support a Saudi Arabia-based telecom operator group with its 5G buildout. The agreement regards SDS’s Smart Capex solution, essentially software for optimizing network investment planning for 5G and fibre. SDS expects most of the SEK10m to be recognized as revenues in Q3 2022 and states that this agreement could generate annual recurring revenues of the same size, should the customer continue using this product and renew its licenses. Management states to us that a typical lifetime for this product is about five to seven years (based on similar deployments).
Delayed orders have materialized
Sales in H1 2022 amounted to SEK132m (~SEK22m from Riaktr), growing 1% YoY but -11% organically (excluding Riaktr). SDS missed our sales expectations significantly (>10%) in Q1 and Q2 due to an underwhelming order intake. In Q1 2022, SDS stated that it was in negotiations regarding two large orders that were delayed. The first materialized in Q2 2022 and referred to an order for a Voucher Management System from a Dubai-based customer worth SEK8m. The second materialized today. This reflects well on management and its execution abilities.
Positives: significant order from a new customer, large market, and strong value proposition
There is a lot to like about this agreement: (1) SDS received its first order from this Saudi telecom group, which in itself is a meaningful catalyst. Should the deployment be successful, we think SDS is well-positioned to upsell additional solutions, including Smart Sales & Distribution and its RVM suite. (2) The company is establishing a significant foothold in Saudi Arabia, the largest market in the Middle East. Zain Saudi Arabia is a long-term customer of the group. With today’s announcement, SDS has business relations with two leading telecom groups in Saudi Arabia. (3) Smart Capex (developed initially by Riaktr) is a somewhat unproven solution. It generated sales of SEK9.3m in 2021 but has not led to any meaningful commercial breakthroughs until now. This agreement reflects well on Smart Capex’s value proposition and could act as a catalyst for additional deals.
Restored confidence in management and outlook
SDS’s share has been punished by weak earnings reports in Q1 and Q2 2022, trading down >50% YTD. Lack of organic growth, high management turnover, and uncertainty around the commercialization of Riaktr’s products have contributed to this negative sentiment. In our opinion, today’s agreement is essential as it restores confidence in management and the organic growth outlook. We set high expectations for H2 2022. While SDS is currently trading around our Bear Case, we reiterate our fair value range and Base Case of SEK52.