EQS Group — Whistleblowing deadline fast approaching

Total revenue was up 22% in the half to €22.5m, with the acquisitions of Got Ethics and C2S2 contributing €1.4m from January 2021. Compliance products and services were the main revenue drivers in the first half, growing 33% y-o-y to €12.6m and benefiting from continued growth momentum from the European Single Electronic Format (ESEF) regulation. Revenues in its IR segment increased by 10% to €9.9m, driven by the final migration of existing customers to the new IR COCKPIT platform and an uplift in IPO activity during the half. These drivers indicate a shift in product mix, where in the prior year its IR segment benefited from one-off factors related to COVID-19, which have significantly reduced in H121. The shift in product mix should provide more sustainable momentum through IR COCKPIT and greater profitability due to the higher margins of products relating to IPOs.

Operating expenses in H121 rose by 37% to €22.9m, highlighting the impact of the 38% increase in personnel expenses to €14.3m due to average employee numbers rising by 100 to 457 during the period. Operating expenses also included substantial one-off costs, including whistleblowing marketing spend of €1.9m and €400k on acquisition-related costs. Acquisition-related costs are expected to decline substantially in Q321 and not reoccur in 2022. Due to the rise in operating expenses in the period, EBITDA declined by 56% to €1.3m; excluding the increase in marketing spend, EBITDA rose by 9% to €3.3m.

Looking at the balance sheet, the acquisitions of Got Ethics and C2S2 (consolidated in January 2021) were supported by a €13.6m equity raise and new debt raising, as discussed in our update note published on 14 April. As a result, the group reported a net debt position of €5.4m (including lease liabilities of €5.4m) at end June 2021 versus a net cash position of €1.2m at end FY20. This excludes the June €22.4m capital increase and new €50m debt associated with the acquisition of Business Keeper. These will all be incorporated in the Q3 accounts.

EU regulation detailing secure procedures for corporate whistleblowing, known as the European Whistleblowing Directive, is expected to further accelerate top-line growth in H221. As discussed in our most recent outlook note, EQS must establish a strong market position before the end of 2021 – the integration deadline for companies with more than 250 employees. To fully capitalise on the time-pressured opportunity, management has chosen to establish its market position inorganically through its acquisitions of Got Ethics and Business Keeper. EQS has now bolstered its position and is Europe’s largest supplier of digital whistleblowing solutions, which should help accelerate customer acquisition among companies which are looking for a supplier with strong European credentials. Its US peers, Navex Global and OneTrust, are unlikely to have the same level of understanding of the varying approaches to regulation in different European markets.

EQS intends to fully integrate Business Keeper’s BKMS Compliance System into its own Compliance COCKPIT, as it is tailored towards larger companies with more complex whistleblowing procedures. Given that the December 2021 deadline is specifically for companies with more than 250 employees, the consolidation of Business Keeper on 14 July should have an immediate positive impact. However, it has already had an effect on new SaaS customers, which grew from 266 at end May to 445 by end July.

Management’s goal is to sell its whistleblowing solutions to 5,000 companies, c 20% of the 25,000 companies eligible for digital whistleblowing in Europe, by the end of the year. Of these 5,000 companies, EQS believes it can upsell to 20% to become full subscribers of its COCKPIT platform, as it is far easier to upsell to existing clients than onboard new ones.

Companies with between 50 and 250 employees have a further two years to implement the directive, adding another 250k companies to the pool of potential clients for EQS’s compliance COCKPIT platform. That said, management will have to invest in its Compliance COCKPIT technologies, as the BKMS system is designed for larger companies with more complex whistleblowing procedures.

Following the Business Keeper acquisition, management has raised its guidance for both FY21 and FY25.

For FY21, new annual recurring revenue (ARR) is now expected to be €9m versus guidance of €6m in FY20. We believe this is achievable given that €4.3m was reported in the first half, which excludes the full impact of the European Whistleblowing Directive or the consolidation of Business Keeper, both of which should also help management reach its target of 30–40% revenue growth in FY21. EQS also anticipates that the Business Keeper acquisition generates 750 sales opportunities, 250 of which it expects to close in H221. Subsequently, guidance for new SaaS customers has been increased from a range of 1,500–2,000 to 1,750–2,250. Management is forecasting an FY21 EBITDA range of €2–3m versus €1–2m previously, underpinned by its revenue expectations, the H121 EBITDA result of €1.3m and the anticipated reduction in one-off operating expenses in the second half.

Management’s guidance is in line with our forecasts for FY21, which show revenue growth of 31% to €49.4m and EBITDA of €2.8m, equating to a margin of 5.8%. We believe that revenue should build in FY22 to €70m (+40%) given the scalability of its whistleblowing strategy. That said, countries will have until the end of 2023 to incorporate the directive into law, so there is uncertainty about the timing of sales in the short term. To adapt, EQS is focusing its sales efforts on companies that have an intrinsic motivation to implement a whistleblowing strategy, instead of those that are only likely to implement compliance systems once the regulation comes into force.

Its growing SaaS-based revenues should help keep operating costs relatively low, so we forecast FY22 EBITDA of €7.5m with a margin of 10.7%. Margins should continue to expand past FY22, and we think management’s target of 30% by FY25 on EBITDA of €39m is achievable.

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For FY25, management is aiming for an increase in revenues of between €125–135m, driven primarily by its compliance segment. EQS expects that Business Keeper will contribute €20–25m to FY25 revenue and a further €5–10m will be added by synergies between EQS and Business Keeper.

Its Investor Relations segment is also expected to achieve a double-digit CAGR between FY20 and FY25, ahead of management’s estimated growth rates for the market of 2–4%. This belief is underpinned by the investments made to improve EQS’s IR COCKPIT platform compared to the market, where growth will be limited by ongoing consolidation.

As mentioned above, the group swung from a net cash position of €1.2m at end December 2020 to net debt of €5.4m at end June 2021, reflecting the acquisitions of Got Ethics and C2S2 in January. A capital increase of €13.6m took place in February.

On 11 June, EQS signed a purchase agreement to buy Business Keeper for €95m, to be paid in two tranches within 12 months, funded by cash, debt and equity. In June, a capital increase of €22.42m was completed and a €50m loan was taken out from Commerzbank Munich. Along with the Business Keeper business, these will be fully consolidated in the Q3 accounts, from 14 July.

While this increases near-term debt – we estimate end-FY21 net debt of €59.8m (at a net debt/equity ratio of c 90%) – we believe the acquisition of Business Keeper is a significant time-crucial market opportunity. The acceleration we expect in terms of market share, revenue and EBITDA growth leads us to forecast a return to net profit in 2023. We forecast a still comfortable EBITDA/net interest coverage in FY22 of 4.1X (including lease liabilities and payments).