NaaS Drives Into Third Quarter With First-Ever Quarterly Non-IFRS Profit

Key Takeaways:

• NaaS Technology reported its first non-IFRS quarterly profit in the three months to September, as well as a record-high gross margin
• As China’s leading provider of services to EV charging station operators, NaaS has wound down its low margin offline business to focus on higher-margin platform-based management services

By Doug Young

For years Chinese companies operated on the view that bigger was better, no matter what the cost. Subsidies were a big part of that equation in the race for market share, and so was a focus on business that could generate big revenues, even if it meant selling at a loss.

That view is starting to shift as investors demand profits from companies – a new reality that was a primary driver leading EV charging services company NaaS Technology Inc. NAAS to overhaul its business model to focus on its most profitable products and customers. That drive is yielding strong results this year, as NaaS last Wednesday reported its first-ever non-IFRS quarterly profit and its lowest-ever IFRS net loss.

The latest results also included a record-high gross margin for the company as it shifted focus to its asset-light business of supplying management services to operators of electric vehicle (EV) chargers. That meant giving up its other main business of helping customers design new charging infrastructure, which generated much larger revenues from the sale of infrastructure design but came with very low profit margins.

Following that shift, NaaS’ gross margin shot up to an all-time high of 57% in the third quarter from 38% in the previous quarter and just 29% a year earlier. At the same time, the company reported a non-IFRS quarterly profit of 21.2 million yuan ($2.9 million), which excludes certain non-operational costs like stock-based employee compensation. NaaS, whose backers include Bain Capital, continued to lose money on a net basis. But even so, its 7.7 million yuan net loss for the quarter was down sharply from a 367 million yuan loss a year earlier.

“We have been deliberately transitioning away from lower-margin, capital-intensive energy solutions projects to concentrate on our core charging services business, which offers higher growth potential and profitability,” CFO Steven Sim said on the company’s earnings call to discuss the results. “As a result, there was a substantial improvement in our gross profit margin, which reached a historical high.”

NaaS shares edged down 1.5% in Wednesday trade on Nasdaq after the results were published. The stock began trading on the Nasdaq in June 2022, following a reverse merger with an existing listed company that also counted Bain as a major shareholder. The stock rallied 17% in the week before the announcement, though it is still down for the year as it charts its new direction.

From the broadest perspective, NaaS is focusing on its charging services, which is an asset-light business that helps customers maximize performance of their charging stations and enables EV car owners hassle-free and convenient charging services. Its proprietary technology system is its NaaS Energy Fintech system, introduced last year, which uses advanced AI algorithms to “intelligently manage site selection for charging stations, revenue assessments, operational scheduling, maintenance and more,” according to the company.

Changing Revenue Mix

The shift has brought some growing pains to NaaS in terms of overall revenue as it put more focus on income that could actually generate the most profits. The company’s total revenue fell to 44.4 million yuan during the third quarter from 98.9 million a year earlier. But the drop was solely due to its exit from the asset-heavy infrastructure business, whose contribution tumbled to just 600,000 yuan in the latest reporting period after it made up the lion’s share of total revenue a year earlier.

The wind-down of the energy solutions business left NaaS with charging services as its main revenue stream. Revenue from that business actually rose 36% year-on-year to 42.4 million yuan, accounting for 95% of the company’s total.

While revenue from that business was up, it’s also notable that the charging volume and number of transactions handled over NaaS’ platform both dropped during the quarter from year-ago levels. That reflects another trend for the company, namely its phasing out of subsidies since that start of this year. Such subsidies could quickly boost a company’s user count and transaction volumes, but at a high cost as they often contributed to massive losses.

Reflecting the progress in its drive to end subsidies, NaaS said its charging service orders with a positive net take rate (NTR), a measure of profitability, rose to 73% in the third quarter from 70% in the previous quarter. Its sales and marketing expenses, which include such subsidies, also fell 81% year-on-year to 29.7 million yuan in the latest quarter.

NaaS is increasingly turning to partnerships with major players to boost its network. On that front, it announced its recent signing of new partnerships with a regional EV charging station operator in Fujian as well as with FAW-Volkswagen and IM Motors, an electric vehicle (EV) joint venture whose partners include leading car maker SAIC and e-commerce giant Alibaba.

NaaS is still a work in progress, though much of its overhaul now appears to be in the past with its new foundation focused on charging services in a China market that now accounts for more than half of global new energy vehicle (NEV) sales. That transformation may explain the company’s relatively low price-to-sales (P/S) ratio of just 0.28. By comparison, ChargePoint CHPT and Blink Charging BLNK trade at higher ratios of just over 1.

Whether NaaS can catch up with those rivals will largely depend on how quickly it can show that its latest path is the right one in a fast-evolving global NEV market. A return to accelerating revenue growth would be a good start, which looks possible next year as the company turns its attention to revving up its new business formula.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.