Aiforia H1'24 preview: Fruit of sales efforts visible in growing top line

Translation: Original comment published in Finnish on 8/26/2024 at 7:19 am EEST.

Aiforia, the software company automating pathology with AI, will publish its H1 report on Thursday at around 9 am EEST. The company's revenue has grown strongly in the first half of the year, driven by ongoing rollouts and a number of customer wins. Growth investments have kept the result still well in the red, but we expect the loss to have narrowed further year-on-year, as it did at the end of last year. In addition to the growth figures, we also look for comments in the report on the progress of clinical customer roll-outs and the expansion of software usage, as well as the development of the order book and the sales outlook. 

Progressing ramp-up of key clinical customers behind the growth

We estimate Aiforia's H1 revenue to have grown by 110% from the comparison period to 2.02 MEUR. We believe that the main growth drivers were the company's large clinical customer relationships (Mayo Clinic, The Veneto Health Authority and NHS). In total, to our knowledge, Aiforia has already won close to 10 significant (clinical or intended for clinical use) customers, almost all of which have the potential to generate annual revenue of more than 1 MEUR (in some cases >10 MEUR/customer). The speed of deployment, therefore, has a significant impact on the company’s near-term revenue, 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. The order book has also continued its upward trend (H2'23: 2.4 MEUR), driven by customer wins, although we estimate this to be a minority of the company's revenue growth outlook.

Growth investments have kept profitability in the red, but the trend is improving

We estimate Aiforia’s H1’24 EBITDA to have slightly improved from the comparison period to -3.5 MEUR (H1’23: -5.0 MEUR) and EBIT to -5.6 MEUR (H1’23: -6.4 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 estimate 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. Strong growth is critical to the company's value creation, so as long as growth continues, we are not yet concerned about losses. In the spring, the company raised additional funding of around 10 MEUR, which at best will be enough to get the company through the loss-making development phase. If the growth we expect is successful, the company’s free cash flow will turn positive in 2027.

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

We feel that Aiforia's investment story is very promising, although due to the company's early commercial development phase, visibility on the success and intensity of growth is still limited. However, several customer wins in the clinical segment (e.g., Mayo Clinic/USA, NHS/UK, Veneto and Catania Health Authorities/Italy, Paris Health Authority, Fimlab/Finland, Castilla y León Health Authority/Spain) have already broadened the company's growth base. Our 2024 revenue forecast (4.3 MEUR before the H1 report) and a clear majority of our 2025 forecast can, in our view, be achieved with the customers the company already has. In addition to the growth figures, we focus on the update on the progress of the growth strategy: the progress of clinical customer deployment, the development of the order book and sales pipeline, and the development of the cost structure. The company's valuation (2024e-2025e EV/S ~27-15x) still implies a strong confidence in growth, but given the company's track record and customer wins, we believe there are also clear reasons to believe it.