MotorK — Refined strategy delivering momentum

MotorK is a SaaS provider for the automotive retail industry in the Europe, Middle East and Africa (EMEA) region, providing digital enablement software and services to 852 franchised dealers and 25 car manufacturers (original equipment manufacturers, OEMs) as at end-H123. Evolving consumer expectations and increased demand for an agile omnichannel (offline/online) car-buying experience are pressuring automotive retailers to adapt their sales strategies to digital models. Per management, MotorK is the only European player that can provide an endtoend stack of products to support the digitisation of the entire car sale process, with SparK providing tools that include website-building, customer and sales data management and advertising, increasing the number of touchpoints and potential lifetime value of a customer. Its modular design allows the seamless integration of new products, as well as efficient upgrades to existing ones to address the future needs of the market. MotorK’s M&A strategy is focused on the opportunity to consolidate the market by acquiring local single-product specialists and expanding more widely across Europe. The group has 11 offices in Italy, Spain, France, Germany, Israel, Portugal, Belgium and the UK.

MotorK’s Q323 results show continued momentum, delivering year-on-year ARR growth of 46% to €35.2m, including 39% organically. We believe performance can be attributed to management’s focus on higher-value enterprise contracts, underpinned by NRR of 149%. Momentum continued across divisions, with the Enterprise division’s strategic pipeline tripling in the quarter to €16.4m and Retail qualified leads surpassing €7m. SaaS revenue progressed to 75% of the total mix, supported by healthy recurring revenue retention rates of 113% NRR and low 5.3% churn in Retail. We have trimmed our ARR forecasts for FY23 and FY24 to reflect the pace of growth in Q323. That said, the company’s guidance and our forecasts still show slightly positive cash EBITDA in FY24, which will be a key milestone for the group. Looking at its balance sheet, we expect net debt of €6.8m at end-FY23 and €12.6m at end-FY24, affected by €6.5m in payments for acquisitions.

We have compared MotorK’s price performance and valuations against European SaaS providers. On enterprise value (EV) multiples, MotorK trades at a significant discount. Were the shares to trade at parity with peers on a blend of EV/sales and EV/EBITDA across FY23e and FY24e, the implied share price would be €6.5, suggesting significant upside potential. Using a 10% WACC and a 3% terminal growth rate, our reverse 10-year DCF analysis requires average revenue growth of 19.3% for FY25–31 and an EBITDA margin of 40% from FY26 to arrive at this value. We believe this is achievable based on the company’s growth trajectory and its strong operating leverage (management has good visibility on its future operating expenses, which mainly comprise staff costs). Additional accretive M&A has the potential to add further upside.

Ongoing macro uncertainty and supply chain disruptions potentially present key challenges for MotorK’s customer base. Further, MotorK’s growth relies on strong execution of its SaaS transition and international expansion, posing integration and execution risks. A changing competitive landscape and consumer preferences, or an inability to replicate its success in other geographies or in its M&A strategy and execution, could affect MotorK’s performance and growth.

MotorK was founded in 2010 and pivoted to a SaaS model in 2013, growing to become a leading SaaS provider for the automotive retail industry in the EMEA region. MotorK’s SparK platform delivers sales and marketing software to 852 franchised dealers and 25 OEMs as of end-H123; its customers deal in new cars and trade-ins. The SparK platform is modular: management has added products consistently over the years, both organically and through M&A, evolving the company from a single-product offering to a full-service platform.

MotorK has more than 450 employees, spread across Europe, with 11 offices in eight countries (Italy, Spain, France, Germany, Israel, Portugal, Belgium and the UK). The company’s scalable business model is enhanced by an effective M&A strategy, which focuses on building market share in both existing and new geographies, as well as enhancing its product suite. Product development is supported by its team of c 100 full time employees based in the company’s R&D centres in Italy and Portugal.

MotorK listed on Euronext Amsterdam in November 2021, raising net proceeds of €70.1m following the issue of 11.5m new shares at €6.50/share. Proceeds are being invested in growth, both through M&A and internal investment in product innovation and sales and marketing.

Digital adoption across the automotive retail market in Europe is accelerating as both dealers and OEMs look to manage an increasingly complex car buying process (see Exhibit 1) and grow sales using an expanding amount of data. On one side, many consumers are now seeking an omnichannel experience (eg research online, test drive at a dealer, purchase online), which elevates the required number of interactions between the customer and retailer before a car is sold. On the other side, interconnectivity between cars, dealers and manufacturers is growing and will continue to do so with developments such as Industry 4.0 and 5G, bringing with it a significant number of new opportunities for retailers that have the capabilities to analyse and utilise large volumes of data.

MotorK has evolved its product strategy from being a single product vendor (2013), expanding to offer a suite of products (2016) before launching its SparK platform in 2022.

MotorK has developed the SparK platform to address several key inefficient areas within the sales and marketing functions as well as back-office operations of European automotive retailers. Management’s plan is to add modules over time (via internal product development and acquisition) as it identifies new customer applications. Over the last few years, adding and developing modules has been key to rapidly growing its value proposition and the ACVs of its retail customers. The platform is ‘headless’: customers can gain access to the platform by adopting one module, from which they can then be cross-sold other modules that integrate with each other.

Exhibit 2 shows the functionality offered by the platform and Exhibit 3 shows some of the main third-party integrations, which include dealer management systems (DMS).

The ability to integrate with over 200 different third-party providers of auto-specific software is a key differentiator of the platform in our view. Many of these are disparate systems that are not cloud-enabled, limiting the exchange of data, which can lead to inefficiencies in selling processes. MotorK’s ability to integrate and centralise data onto the SparK platform allows OEMs/dealers to gain a more holistic view of the entire sales ecosystem. The interoperability of all of SparK’s modules helps ensure consistency across sales, marketing and operations without any additional work required by the end-user. Additionally, the end-to-end capabilities of the platform drive the number of potential touchpoints for a customer, which management believes can potentially lead to 20x the lifetime value.

Without a one-stop shop platform like SparK, dealers and OEMs could struggle to navigate the vast landscape of single-product providers to find the most appropriate digital solution for each type of interaction. Management believes that these issues exponentially worsen when retailers try to implement their own multi-product system as they will need to undertake work to integrate each piece of software with the other applications in use. SparK has been designed so that all modules integrate with each other, simplifying the adoption of its technology.

We provide further detail on the most used modules to date:

WebSparK is MotorK’s most established product; it helps franchised dealers and OEMs develop their own websites, providing tools to create a digital showroom for increased digital traffic acquisition and lead generation. Customers are provided with a fully autonomous platform to customise their websites to a high technical and design standard, using the modules’ 138 functionalities specifically designed for the automotive industry. The modules’ search engine optimisation (SEO) capabilities also drive higher quality lead acquisition for the dealer/OEM. The module has been upgraded to offer specific rental business tools and aftersales services. New modules such as TestSparK provide artificial intelligence (AI)-powered tools to test the quality of a customer’s website, preventing unwanted bugs and optimising the user experience.

Management invests significantly in upgrading existing modules and adding new ones to increase the range of options available to its customers. Its development strategy is key to enable retailers to address increasingly complex consumer buying habits and utilise customer data more effectively. We describe below more recent product launches, which include solutions from acquired businesses. These modules represent key upsell opportunities:

Opportunities management has identified as potential growth areas are shown in Exhibit 4.

MotorK employs several levers to optimise growth and diversify its revenue streams, as shown in Exhibit 5.

As described in the previous section, MotorK’s SparK cloud-based platform has been designed to support customers to deploy its modules at scale and adapt them to their business needs. MotorK has evolved the platform using a mix of internal development and bolt-on acquisitions and will continue to invest to develop the platform to meet customer needs. In FY22, the company spent €14.3m on R&D (37% of sales) and in H123 €7.6m (35% of sales), highlighting its commitment to innovation. Part of this R&D spend is being invested in AI to catalyse the efficiency of development and functionality of its products, namely in support and automation. Additionally, in H123, management announced the launch of its European Tech Labs, highlighting its ambition to produce ‘cutting-edge technology research’ for the European automotive industry.

To increase the value of a contract, management employs a land and expand strategy comprised of a mix of cross- and upselling methods. When a customer signs up for a specific application, they gain access to the platform. From there, they can choose to upgrade to higher levels of functionality within the same application and can easily add other modules. A contract’s value can also increase if more seats (users) are added on to the package, as dealers will normally have a fixed monthly fee per seat. Management’s ability to cross-sell is supported by the affordability of SparK for the retailer, where the cost typically makes up 0.1% of a dealer’s revenue on average. Exhibit 6 demonstrates the progress the company has made in terms of retail customers signed up and ACVs.

Exhibit 7 illustrates how management believes selling SparK as a single platform with a wide range of modules can drive significantly higher ACV among its medium-sized retail clients.

OEMs supply cars to franchised dealers. MotorK sells to both franchised dealers (bottom up) and OEMs (top down), which allows for the OEM’s network of dealers to also get access to the software. MotorK describes contracts with OEMs as enterprise contracts. The company has grown the number of enterprise contracts from 11 at the end of FY19 to 25 at the end of H123.

A MotorK OEM contract can be signed on a global, regional or national basis, depending on the OEM’s dealer relationships. This means that MotorK may have several enterprise contracts per OEM. However, we note that although OEMs form most of MotorK’s enterprise contracts, some dealer contracts may also be classified as enterprise if large enough.

The number of franchised dealers an OEM sells to is known as the number of ‘rooftops’, which drives the size of a contract (for example, WebSparK is sold on a per rooftop basis and LeadSparK on a per seat basis). OEMs may own several brands, such as Toyota/Lexus or Jaguar/Land Rover in Italy, which can amplify the size of the contract. OEM contract sizes are larger than they are for dealers (ranging from the low €100,000s to the low euro millions) but are much more variable as the number of rooftops they sell to can change substantially from contract to contract.

Using a top-down approach can be an effective entry strategy into new geographies. Just one OEM deal can lead to hundreds of franchised dealers using SparK, bringing myriad cross- and upselling opportunities with it.

We note the significant potential for MotorK’s Q122 deal with Skoda, which makes MotorK Skoda Auto’s global certified website provider and gives the company a global reach of c 1,000 potential rooftops (see ‘Opportunities in a large, fragmented market’ for an analysis of market size).

In April 2022, the company announced a deal between the acquired Fidcar and Stellantis’s European retail business, Stellantis & You, Sales and Services (SYSS). After one SYSS dealership undertook a proof of concept of Fidcar’s predictive after-sales marketing software, SYSS signed a deal to roll the software out across all European dealerships.

In December 2022, the company became a certified website and CRM provider for Nissan across its French, Benelux and German networks, expanding the European opportunity in the Enterprise division.

MotorK’s strategic shift towards more enterprise-focused revenue growth has been the primary driver of ARR organic growth, which increased 39% y-o-y in Q323 with several more contracts signed but not yet delivered. Notably, the group’s strategic pipeline of enterprise opportunities grew nearly threefold over the quarter to €16.4m at end-September, underlining strong momentum going into Q4 and beyond. Additionally, NRR in the Enterprise division was significantly higher at 149% compared to 113% in Retail, which could have been highly beneficial to revenue given the larger contract sizes.

MotorK uses M&A primarily to capture market share, but also occasionally to expand its product range. M&A is a core part of MotorK’s growth strategy – for each country in which it operates or wants to operate, the company makes a buy-or-build decision. It estimates that the payback period is broadly similar for organic versus acquired customers, but to build critical mass quickly it often prefers to make acquisitions.

The European automotive software market is highly fragmented, with disparate systems making it hard for retailers and OEMs to optimise their data. By consolidating the market, MotorK can offer customers a more comprehensive suite of digital tools and itself benefit from economies of scale.

The €70m net IPO proceeds received in November 2021 provided MotorK with the firepower to accelerate its M&A strategy. The company completed two acquisitions in Q421, three in FY22 and one in H123 for a total initial consideration of c €22m in cash and stock (Exhibit 8).

MotorK typically looks for targets that are profitable, with a single product, but low growth due to lack of funds to scale. It uses these acquisitions as a way to enter a new region or to consolidate its position in an existing region. The company is focused on growing in regions in which it already operates, for example expanding into more of the DACH area (WebMobil24 deal completed in H222), as well as entering neighbouring regions such as Benelux (Carflow deal completed in H122). However, management may also look to develop its European coverage outside of these regions, with the Nordics and Central Eastern Europe highlighted as examples. Exhibit 9 summarises the deal rationale for the acquisitions made between 2021 and 2023.

To reduce the integration burden on a particular country, management intends to work its way around the map, looping back to a country after it has had sufficient time to integrate previous acquisitions. Of recent acquisitions, the company completed the integration of Dapda in H123 and is now focused on the integration of webmobil24 to drive its German operations.

We believe transitioning the acquired customer base on to the SparK platform provides the greatest growth opportunity in the short to medium term, increasing the number of dealers it can potentially upsell to from 852 to 5,200 following the GestionaleAuto.com acquisition. The integration of Dapda customers is a key example, where ACV increased from €6.1k on acquisition to €11.9k for those customers who adopted several MotorK products, and to €28.9k for those adopting the full SparK platform offering, shown in Exhibit 10.

Management is now primarily focusing on replicating this success with Webmobil24 to drive its German operations, where growth has been slower than management’s expectations. Management noted that companies are slower to adopt new technology in Germany compared to the other countries in which it is present, and with a smaller market position in Germany, the company has to work harder to gain customer trust. There is also a significant opportunity to do this among its other acquired companies, particularly its latest acquisition of GestionaleAuto.com. In its presentation, management noted that a high share of GestionaleAuto.com’s customers already used MotorK’s products, which should make upselling easier.

The company has a strong pipeline of M&A opportunities. As at end H123, the group reported that it had 39 short- to mid-term opportunities, with most based in the UK (20). Exhibit 11 illustrates the main geographical areas of focus, where M&A could be used to catalyse growth and market share in these regions. As highlighted previously, Webmobile24 is expected to drive growth in its German operations and the exhibit below highlights the potential to consolidate fragmented markets in Eastern Europe and the Nordics, both of which have highly attractive market dynamics.

As shown by Exhibit 12, much of this pipeline follows the same strategic rationale as previous M&A. However, we note there are three targets labelled ‘transformational’, with those companies generating over €50m annually – substantially higher than the €3m generated Dapda or Carflow (previous targets with the highest revenues). The completion of one of these acquisitions could be a key milestone for the group as it looks to cement its European leadership. We note the full benefits from acquired companies typically take 24 months to materialise.

We forecast net debt of €6.8m at end-FY23 and €12.6m at end-FY24. Management expects a €3.2m deferred consideration payment in 2024 relating to the GestionaleAuto.com acquisition. On 28 October, the company secured a €5m facility agreement with Atempo Growth to support its M&A pipeline as well as additional R&D investment. The facility has a 48-month maturity and an initial interest-only period of 12 months.

That said, given the size of its M&A pipeline, it is likely that the company would have to raise additional capital to execute further acquisitions in the short term.

Automotive retail is rapidly evolving, driven by digitisation, shifting consumer expectations and the global presence of leading car brands. Leading manufacturers are expanding investments in the space and are establishing digital roll-out plans, like BMW aiming to create digital twins of all its factories by 2023 and Mercedes-Benz introducing its manufacturing-related data platform, MO360, used in more than 30 factories around the world today.

The market for car sales is split into two: new and used cars. The sale of new cars relies on a close-knit relationship between OEMs (eg PSA, Toyota, VW) and franchised dealers. OEMs manufacture one or more car brands and use franchised dealers in different regions to either sell them or provide customers a location to browse and test drive cars.

Used cars are mainly sold using part-exchange schemes with franchised or independent dealers (customers can trade in an old car as part of the payment for a new or second-hand car). There is also a growing number of online marketplaces for used cars, such as Cazoo, Carvana and Vroom, although we believe they make up less than 1% of used car sales. Many of these online marketplaces have come under fire in the press, primarily relating to the lack of quality control before cars are sold, and are also struggling to sell cars profitably. MotorK does not face the same business risk as it sells software to reputable OEMs and dealers in the new car market.

The new car market is shifting towards an agency model, where the OEM sells directly to the customer and the dealer acts as an agent. Dealers are becoming more of a physical touchpoint where customers can test drive, negotiate prices and pick up the car after the purchase has been made from the OEM. Giving the OEM control of the car selling process reduces price competition among same-brand dealers and alleviates margin pressures. The move towards an agency model requires OEMs and dealers to make a significant investment in technology to facilitate an effective flow in sales data (MotorK prospectus, Capgemini). As highlighted in Exhibit 13, SparK is designed to add value to several points in the agency model.

Car sales globally saw a sharp decline in 2020 from 2019 highs following the onset of the pandemic and the recovery since has been slow due to persistent supply chain disruptions, primarily caused by COVID-19 related factors and the Ukraine/Russia war. As shown by Exhibit 14, sales growth is forecast to rise more rapidly in 2023, despite persistently weak macroeconomic conditions. We believe this rise reflects the easing of global pressures within semiconductor supply chains, alongside growing consumer demand for electric vehicles. Government green initiatives, like the UK and the EU’s 2035 ban on petrol and diesel cars, are helping drive the transition to electric, and new electric car sales are likely to accelerate further as deadlines approach.

Current market consensus for our basket of listed US and European dealer groups reflects the forecast rise in global car sales, with FY23 top-line growth of 8% y-o-y on average. However, consensus also indicates that many of the dealers expect to see margin compression this year, with operating margins falling by 50bp on average across the group. Like other sectors, the market is being affected by rising labour costs and other inflationary pressures. Additionally, the investments required in showroom infrastructure for the transition to electric, as well as the growth in lower margin used car sales, is squeezing margins. We believe the adoption of digital solutions will be key to strengthening the operating leverage of many of these dealer groups, as well as to drive further monetisation, for example in after-sales services. These trends only serve to benefit MotorK.

OEMs are also presented with a significant capex challenge arising from the latest automotive trends such as electrification, autonomous cars and software on wheels. The rate of adaptation is being driven by consumer preferences and tightening regulation, including the aforementioned ban on petrol and diesel cars. Management notes that Toyota has spent a total €29bn on R&D to adapt to these trends, highlighting the large enterprise push towards technological advancement.

The technology landscape is changing as both DMS and other automotive software providers are recognising the importance of a more integrated approach, with a shift from a product-driven to a customer-centric approach. This provides a good backdrop for consolidation in a market that is still highly fragmented, with many companies providing only single-solution products.

Within the automotive market, there are several trends that are changing the types of cars sold and the way that consumers use and buy cars:

A rapidly changing market backdrop driven by these trends is creating a complex operating environment for OEMs and dealers, requiring them to be agile in their use of technology. MotorK monitors these trends and, where relevant, factors them into its product roadmap to make it easier for OEMs and dealers to adapt their digital infrastructures.

Management believes that it has a c 1% share of its current €4bn addressable market of automotive OEMs, franchised and independent dealers in EU5,2 which is broadly in line with the share represented by our FY23 ARR target of €37.2m. While MotorK focuses its operations in the EU5, it also services dealers outside of these countries if they make up parts of dealer groups or OEMs. The agility of the SparK platform could allow MotorK to move easily into the far larger (€6bn) market of all European automotive OEMs and dealers for all vehicle types, if management chooses to do so, as shown in Exhibits 15 and 16. However, the company believes these are harder to penetrate as they lag the digital capabilities of the OEMs and franchised dealers in its current addressable market.

MotorK faces competition from companies specialising in subsets of its broad service suite, with the company’s product innovation and diversification reducing direct competition.

We believe its most significant rival across Europe is Automotive Transformation Group (ATG), formed following the merger of GForces and Autofutura under Inflexion Private Equity. ATG runs over US$4.25bn of transactions on its platform annually, indicating the value of M&A for achieving operational scale. Other significant direct players in Europe include Nextlane, previously imaweb, which generated revenue of over €100m in 2022. The company operates a similar business model to MotorK, integrating DMSs to OEMs and third-parties through an end-to-end vehicle lifecycle platform. Nextlane also offers CRM services (CRM360) and online marketing tools (Carswip), but does not seem to have the same extensive end-to-end capabilities as MotorK.

At a country level, there are several more localised players like MotorDesk (UK), Dealerdesk (Germany), bee2link (France), iVendi (UK) and GardX Engage (UK), which present in-country competition but could also be consolidation targets as the market evolves.

Competition could increase from other types of European software service providers if they choose to expand into the automotive retail market. For example, giosg provides web services across a range of verticals. In Exhibit 17 we have also included DMS providers that provide similar functionalities to StockSparK and LeadSparK, such as Pinewood Technologies and Incadea, but note that these have limited benefit if a franchised dealer uses more than one DMS.

Exhibit 17 shows what management believes to be MotorK’s European competitive landscape, illustrating it is the only large player that can offer an end-to-end platform. However, there are several other large DMS providers, mainly in North America, such as CDK Global, Cox Automotive, Reynolds & Reynolds, Tekion and PBS.

European online car dealers, such as Cazoo, Vroom and Carvana, are not included as these are exchanges rather than providers of software products. Many of these develop their own proprietary technology, which, unlike MotorK, they do not share with other retailers as they believe it gives them a competitive advantage. Additionally, the operating models and the way cars are sold are markedly different in the second-hand market compared to the new car market.

MotorK has a one-tier board structure consisting of the chairman, CEO and three non-executive directors. CEO Marco Marlia co-founded the group in 2010. He is a serial entrepreneur experienced in running digital companies and is the group’s second largest shareholder with a 13.6% holding. Executive Chairman Amir Rosentuler joined MotorK in 2020 and has over 25 years of executive management and entrepreneurial experience in leading technology companies. The non-executive directors are Laurel Bowden, who represents 19.5% shareholder 83North, Måns Hultman, who represents 7.5% shareholder Zobito, and Mauro Pretolani.

The board is supported by a highly experienced executive management team (selected biographies on page 24), as highlighted by Exhibit 18.

MotorK sells to both OEMs and franchised dealers; contract sizes and sales cycles vary greatly between the two:

Both new and renewed contracts are typically signed on a two-year basis. Most costs are incurred at the start of the contract (eg installation, sales, etc) and do not repeat when a contract is renewed.

Three types of revenue are reported: SaaS platform (consisting of SaaS recurring subscription fees and one-off implementation fees), digital marketing and other (which includes training and consulting). In addition, MotorK discloses ARR, which is defined as the yearly subscription value of the customer base at the end of the reporting period, to provide better clarity on the underlying contract base. The difference between ARR and recurring revenue comes from the IFRS 15 impact: while many SaaS companies recognise the revenue from their subscription contracts over the life of the contract, MotorK recognises the full value of its subscription contracts upfront (this is true for new, upsell and renewal contracts). Once MotorK has completed the set-up of the software for the customer, and the software is fully available for use, the company is deemed to have satisfied its performance obligation (this accounting is described in detail in the appendix in our initiation note). Management believes that ARR provides a more accurate representation of the group’s contract base, as the use of IFRS 15 accounting for its SaaS-based products can amplify performance trends depending on the timing and duration of contracts. In the FY22 trading update, the company introduced a committed ARR metric, illustrating the ARR from contracts that have been signed but not yet implemented and billed.

Management’s most recent update to guidance, published in H123, shows a more conservative FY23 cash EBITDA forecast, indicating a loss of €10–13m versus a loss of €6–8m first given alongside its FY22 results. Cash EBITDA is a proxy for free cash flow, calculated as adjusted EBITDA less the change in contract assets and R&D capitalisation. Given the cost optimisation programme announced in H123 (explained further on page 19), we believe the downgrade is due to the company’s more conservative revenue expectation.

The company maintains its view that it will turn cash EBITDA positive in FY24, with Exhibit 19 illustrating the expected trajectory to reach this goal. Our updated forecasts are in line with management’s revised guidance.

In the table below we summarise MotorK’s historic performance and our forecasts for FY23–24.

We base our revenue forecasts on our ARR expectations, adjusted for IFRS 15 accounting. The chart below shows the progression of ARR since Q321. In Q323, ARR increased by 46% y-o-y (of which 39% organic) and 4% q-o-q. The company reported committed ARR of €35.2m at the end of Q323, accounting for 66% of the growth needed to reach our updated €37.2m ARR forecast for the year.

The Enterprise division, MotorK’s primary organic growth driver, continues to drive momentum following the 100% increase in ARR reported in H123. While the company did not provide a figure in its Q3 update, we believe momentum is underpinned by its reported 149% NRR and threefold increase in its near-term strategic pipeline over the quarter to €16.4m. The group’s platform strategy underpins its ability to up-sell and cross-sell among its retail customer base, leading to robust NRR of 113% in retail, low churn of 5.3% and 14% y-o-y progression in ACV to €18.8k. Lead indicators are also positive in the Retail division with over €7.2m of qualified leads in its near-term pipeline.

The 25% y-o-y increase in Q323 reported revenue of €31.1m reflects this positive movement in ARR. The revenue mix also continues to improve, with SaaS recurring revenue reaching €23.2m, expanding 7pp y-o-y as a share of total revenue to 75%.

We forecast ARR of €37.2m by end-FY23, increasing to €49.6m by end-FY24. We have moderately reduced our forecasts to reflect ARR progress in Q323, with the slight reduction in ARR the main reason for our lowered revenue and profit outlook.

Within revenue, we forecast SaaS growth of 44% y-o-y to €46m in 2023, with recurring revenue expanding to 78% of the total. Momentum could continue into 2024, where we forecast 35% SaaS growth to €54.6m and recurring revenue reaching 86% of the mix. We expect the company’s focus on SaaS to result in flat or declining digital marketing and other revenue, as shown in Exhibit 20.

In its H123 results, MotorK announced a programme to optimise costs and realise synergies from its recent acquisitions. Efforts include consolidating suppliers, phasing out R&D spending on legacy acquired technologies, eliminating retention costs after earnout periods, and rationalising headcount. The total estimated cost of this programme is €2.0m, of which €1.6m was incurred in H123. The programme is expected to generate €2.7m in annual run-rate savings starting in 2024. We have incorporated operating leverage from these efforts in our profit projections.

MotorK typically capitalises a portion of its development costs. In FY22, it capitalised 61% of its €14.3m R&D expenditure (23% of revenue). In H123, it capitalised 62% of the €7.6m in R&D costs (22% of revenue). We forecast capitalised R&D decreasing from 19% of revenue in 2023 to 16% in 2024, with the company targeting 10% by 2026. Excluding R&D, capital expenditures are relatively low, at 1% of revenue in FY22 and 0.4% in H123.

The company has c €12m bank debt on its balance sheet, consisting of a €7.2m floating rate loan from Illimity Bank, where interest payments are hedged to mitigate fluctuations in the base rate, and its recent €5m facility agreement with Atempo Growth, where we have assumed some additional interest cost in FY23 with a full annual impact in FY24.

In our working capital projections, we account for increasing contract assets. While revenue for two-year contracts is typically recognised upfront in year one, the cash for year two is only received in the second year. This results in forecast negative working capital impacts of €7.5m in FY23 and €8.4m FY24.

Given these dynamics around working capital and capitalised R&D, we expect net debt of €6.8m at end-FY23 and €12.6m at end-FY24; this takes into account payments for the GetionaleAuto.com acquisition of €3.3m in FY23 (initial consideration) and a €3.2m in FY24 (deferred consideration).

In H123, MotorK also completed a €3m share buyback programme (1.8m ordinary shares at an average €1.63/share which were subsequently cancelled). This was aimed at sustaining its long-term incentive plan and supporting the share price and shareholder value, including for employees. In June 2023 MotorK announced a reserved capital increase to Lucerne Capital (an existing MotorK shareholder), issuing 1.3m shares at €2.29 per share.

Below we show MotorK’s share price performance and valuation against European SaaS providers.

On an EV basis, MotorK trades at a significant discount to the peer group, despite a strong year to date stock performance, forecast revenue growth ahead of the group over the next two years and EBITDA margins growing rapidly over the same period. Were the shares to trade at parity with peers on a blend of EV/sales and EV/EBITDA across FY23e and FY24e (applying peer multiples to our estimates), the implied share price would be €6.5, suggesting there is significant upside potential. We expect this discount to reduce as management delivers on its ARR and EBITDA margin targets.

The ‘Rule of 40’ refers to a rule of thumb used when assessing SaaS companies. This says that if the total of revenue growth and profitability exceeds 40% in a given year, the company is performing well. The phrase was coined by venture capitalists investing in SaaS start-ups to assess the balance between growth and profitability. In the early phases, growth could be well over 40% but the company could be loss-making, as funds are invested in growing the customer base as fast as possible. As revenue growth moderates, investment in sales and marketing and R&D can be slowed, allowing for higher profitability (say 20% revenue growth and 20% margins), still satisfying the Rule of 40. In the table below, MotorK performs well on this metric and is ahead of the peer group average.

We have performed a reverse 10-year DCF, as a sense check on the value produced by the peer comparison. We use a WACC of 10% and a terminal growth rate of 3%. Assuming average revenue growth of 19.3% from FY25 to FY31 (declining from 21% to 17.5% over the period), an EBITDA margin of 35% in FY25, and a 40% margin from FY26 to FY31, gives a DCF-implied share price of €6.5. In our view, this looks achievable given the trends in the group’s current performance.

Our forecasts and MotorK’s share price will be sensitive to the following factors: