Data Sovereignty And Agentic AI Headwinds Will Eventually Support A Modest Recovery

Catalysts

About Exasol

Exasol provides high performance database software that supports analytics workloads and emerging AI driven use cases for enterprise customers.

What are the underlying business or industry changes driving this perspective?

• Although Exasol is positioning around data sovereignty as more European enterprises question reliance on U.S. hyperscalers, many larger customers continue to consolidate on broad platforms like Databricks. This can limit Exasol's share of data infrastructure budgets and cap recurring revenue growth.
• While growing interest in Agentic AI is increasing the volume and complexity of data queries, large customers are currently postponing infrastructure and license expansions due to higher hardware prices. This can restrict upsell potential and hold back ARR and earnings.
• Although Exasol Personal and Exasol Personal local are designed to seed wider developer adoption and future enterprise upgrades, current usage of around 100 active local users and no direct revenue yet means this funnel may take time to translate into meaningful new customer ARR and profit contribution.
• While Exasol is engaged in AI and sovereignty related projects with pharmaceutical and public sector clients, initial deal sizes in the low to mid six digit range and postponed expansion deals mean the contribution to total ARR and net margins could remain modest if follow on use cases scale more slowly than planned.
• Although partnerships with MariaDB, adesso and STACKIT are aligned with demand for governed AI and regional cloud solutions, delays in technical ramp up and commercialization, including the need to reduce the previously booked €750,000 ARR from MariaDB, can weigh on reported ARR, revenue visibility and EBITDA in the near term.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Exasol compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Exasol's revenue will grow by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.2% today to 9.5% in 3 years time.
• The bearish analysts expect earnings to reach €4.2 million (and earnings per share of €0.15) by about August 2029, up from €3.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €5.9 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.4x on those 2029 earnings, up from 17.0x today. This future PE is greater than the current PE for the DE Software industry at 17.9x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Exasol is reporting largely flat ARR at €37.9 million and is guiding for ARR that could move in a range from a 2% decline to a 2% increase, which points to limited top line momentum at a time when data and AI workloads are expanding in the wider market and could weigh on long term revenue and earnings growth.
• Several larger customers are consolidating onto broad platforms such as Databricks and are postponing infrastructure and license expansions because of higher hardware and Exasol license costs. This may constrain upsell opportunities in core on premise installations and hold back ARR and net margins.
• The long term thesis around Agentic AI and data sovereignty is still early in commercial terms, with initial AI related deals in the low to mid six digit range and new Exasol Personal users at around 100 active local users and no direct revenue yet. As a result, there is a risk that these trends take longer than expected to convert into meaningful ARR and earnings contribution.
• Partnership execution is slower than planned, with the MariaDB collaboration requiring a reduction of previously booked €750,000 ARR and only a small number of POCs so far. At the same time, adesso and STACKIT are currently contributing smaller deal sizes, which could limit partnership driven ARR, revenue visibility and EBITDA.
• Exasol is facing structurally higher hardware prices that affect both customers and its own infrastructure, while many large customers are focusing on limiting data growth to avoid new investments. This could cap the benefit from secular data growth and AI adoption and pressure revenue growth, gross margins and EBITDA over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Exasol is €3.2, which represents up to two standard deviations below the consensus price target of €4.25. This valuation is based on what can be assumed as the expectations of Exasol's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €5.3, and the most bearish reporting a price target of just €3.2.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €44.3 million, earnings will come to €4.2 million, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 6.6%.
• Given the current share price of €1.91, the analyst price target of €3.2 is 40.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.