Penneo A/S

CSE:PENNEO

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Christian Stendevad, executive]

--2024 report. As usual, I have together with me, CFO, Casper Christiansen; and myself here, Christian Stendevad, CEO at Penneo. And please note that statements about future expressed in this Q1 report and also in the presentation reflects Penneo's current expectations of future events and financial results, and the nature of these statements are affected by risk and uncertainty. And therefore, the company's actual results may differ from the expectations expressed in the management report and presentation.So [indiscernible] today is, as usual, a short introduction to Penneo, presentation of our Q1 2024 results, then an outlook for 2024, and then we are open for all questions and answers at the end of the presentation.So let's go into a very short presentation of Penneo. Penneo is in the business of trust. We believe in a world where you can trust the way businesses to do business. And in today's digital role, establishing trust is far more complex due to the absence of physical interaction and the prevalence of digital force. And therefore, Penneo assist to make sure trust between businesses and human remain intact, and that is our customers spend less time on quality assurance, compliance and control, freeing up time for more value-adding tasks. And as we say, without trust, there is no business.And we at Penneo here has a background of remarkable journey since inception here in 2014, so 10 years ago. It was founded by visionary entrepreneurs driven by a single ambition to eliminate the inefficiencies of traditional pen and paper document signing by introducing our digital solutions. Today, Penneo has evolved significantly. We now offer a scalable software platform designed specifically for anti-money laundering or AML regulated business-to-business companies.And our platform empowers these businesses to optimize and automate their critical workflow and testing the increasingly complex compliance requirements that they are facing. But this is just the beginning. Penneo is on a mission to become the leading Digital Signing and Know Your Customer workflow platform for AML regulated business-to-business company across Europe. And our journey continues as we see more committed than ever to innovate and provide value to our customers.Also, a few facts about our business. So we are a business-to-business software-as-a-service company with 110 employees and more than 3,000 customers in Denmark, Norway, Sweden and Belgium. And under one platform, we offer 2 solutions today, the Penneo digital sign and our Penneo Know Your Customer or KYC solution. Trusted by well-leading auditors and accountant, we hold an ISO 27001 and ISO 27701 certification and is on the EU trust business and in 2023, an estimated 77 million sheets of paper sale using Penneo signs which correspond to 1,240 tonnes or up almost 3,000 tonnes of CO2.Let's go into the financial results of Q1. And let's start by giving you an overview of our Q1 performance highlights. So overall, we have seen a strong new business performance. And we have also seen a continued uplift from existing customers due to an increased engagement. So the uplift has been negatively impacted by a few specific temporary customer downgrades and also by adverse currency fluctuation. And then we have seen some churn.So the total ARR amounted to DKK 93 million at the end of Q1 2024 compared to DKK 74.2 million at the end of Q1 2023. So that corresponds to a 23% year-on-year growth. For the quarter, isolated the ARR growth increased by DKK 2 million in Q1 this year compared to DKK 3.3 million in Q1 2023.Looking at the new ARR, that AR increase from Newbiz amounted to DKK 3.5 million compared to DKK 2 million in Q1 2023. We have continued the great momentum from Q4. And normally, Q4 is our high season and Q1 is our low season. And in Q4 2023, we grew DKK 3.8 million and onboarded 216 customers. And here in Q1, we grew DKK 3.5 million and onboard 280 new customers, and of which one of them were a larger ANA in Sweden. So that's almost on the same level, even though the Q1 is normally of low season, so 208 new customers in this quarter should be compared to the 111 in Q1 last year.If we look at the net revenue retention of 107% in Q1 2024 versus 113% in Q1 2023. For the previous 7 quarters, we have been steady on 112%, 113%, 114% on that level. So the 107% is unusual low. Again, this result was impacted by a specific and temporary customer downgrades. By temporary, we mean that we expect to have an uplift later in the year corresponding to these temporary downgrades. We also had a limited impact from price increase compared to last year that is as expected. And what was not necessarily expected, but we had a negative impact from currency fluctuation cost amounting to more than 400,000 [ programs ]. The churn is also part of the net revenue retention was impacted by one larger customer journey.Looking at the EBITDA, that was improved from negative DKK 3.7 million. We had that in Q1 2024, and that is up from minus DKK 6.6 million in Q1 2023, so an improvement on the EBITDA also as expected.If we go into other business highlights. So, we have grown as we just went through our new business, but that is also a continued growth in our foreign markets and the phone market contributed with 73% of new business growth in Q1 2021. And Belgium is a main growth diver with 67 new customers, more than doubling last year's figure of DKK 29 million. We also unveiled a new visual identity for the Penneo brand, which has been rolled out across various touch points in Q2. And this update to our visual identity is a key component of our broader repositioning initiatives that began in the fourth quarter of last year. And our goal is to have a transition from promoting individual point solution with our KYC and trying to promote a comprehensive platform solution, delivering clear benefits to our customers by automating critical business workflows throughout the entire client lifecycle from the customer onboarding to document signing and continual risk assessment.We have also continued our localized go-to-market efforts. This effort spends several departments, including products, which is focused on developing key localized strategic integrations and sales and marketing, which are tailored sales strategy, branding materials and go-to-market approaches to fit local needs. Among the highlights from the first quarter, we have appointed our first Norwegian Sales Director, established new local software integration and hosted and attended several local events and webinars. These initiatives are all designed to bolster our local presence and strengthen our competitive position.Looking at the international expanding and also looking forward for the remainder of the year, we have plans to introduce our KYC solution to the expanding Belgium market and prepare also for our venture into Germany. The demand for KYC services in Belgium is on a rise. And with the few competitors currently in the space, we are well placed to capture significant market share.Looking at our cash position, we had DKK 34 million at the end of Q1 2024. And we continue to expect to reach a position where the ARR exit the overall cost base by the end of 2024, position us to achieve at least a cash neutral or cash positive status on a yearly basis by 2025. And then finally, we are pleased to welcome our newly elected Board of Directors, as we have seen here on the picture, Morten Elk, Eske Gunge, Rikke Stampe Skov, Jostein Vik and Kaper Behrens from left to right.So this was a little introduction on some of the business highlights that we are seeing. So let's go into some of the financial numbers. Casper?

[Casper Christiansen, executive]

Thank you, Christian. Thank you for letting me take some few minutes of your day. I have prepared 7 slides, and most of them is focusing on our SaaS measurement. This chart shows all our historical cohorts since we started back in [ 2023 ]. All the current year represents a group of customers into the year, they became customers. And what you can see here is that almost all our groups of customers, our cohorts are growing positively year-over-year-over-year. It's the true facts when we're talking about 3 years.In the quarters, we have seasonality. So you can see that some of our growth is not growing and some are growing. This time, one of our cohort is not growing. And as you can read in the report, we have one specific client journey, and that corresponds to the 2022 cohorts. So that's the reason for that cohort going down from DKK 9 million to DKK 8 million this time. But overall, it doesn't change the picture that it makes sense for us to invest into getting new customers onboard since we manage to uplift and uplift and uplift, after they have become onboarded and happy customers.This chart shows a 12-month period, ARR development. And it's divided by how are we performing when it comes to the current customer base in terms of outlist and churn? And how is it going when it comes to getting new customers on board. Before I dive into that, I'll just shortly highlight that when we start this period, we had an ARR of DKK 74.2 million. And when we are going out of Q1, this quarter, we have an ARR of DKK 91.3 million, and that's equal to a yearly growth in ARR and 23%.Approximately 12% of that ARR is coming from KYC. That's our newest product. So normally, we expect that to go up throughout such a 12-month period. But as we have stated in the report, one of our KYC clients is a part of the 1.3% during this time. So overall, we have a churn of 5%. If I compare it to other SaaS business, it is pretty low and strong churn, but it's also true that it is in the high end in terms of Penneo churn. Normally, we report like 2%, 3%, 4% and this time, it's 5%. And it normally says that below 5%, it's pretty strong and solid. So we keep that.And some of that, we have a 12-month period uplift on current customer base of 13%. That corresponds to approximately DKK 9.6 million, bringing our ARR from this DKK 94.2 million to DKK 79.7 million, meaning that we have a net revenue retention at 107%. Yes. And on top of that, we have added the 16% in new ARR.This page has chosen to bring since we normally focus a lot of how much can we expand outside of Denmark and we also do it still. So I'm pretty happy to see that 73% of our new ARR is originated outside of Denmark, meaning from foreign markets. It is nice to see that when we are growing and getting new customers onboard. And as Christian said, our new business is running very well, especially here in Q1, strong low season. So now we are up at 30% of our total ARR originated from outside of Denmark to 1 year back, it was 28%. So of course, I'm happy to see that the foreign market is growing more than the domestic market. And the growth rate is up at 35% when you're looking at markets outside of Denmark. And that's even despite we have a negative currency fluctuation in Q1 of DKK 0.4 million.Looking at the pie chart, on the right side of the slide that you can see the Belgium market now takes up 35.5% of our foreign ARR. And it is critical that the team in Belgium are running the business so well. So I'm proud when I talk to that. I can see he's also on this call that they are doing a great job. And of course, as Christian said, we are trying to cover some of the great things from there and now have a local team in the region. I will come back to that when we're talking about EBITDA.Next slide here, focusing on our quarter-to-quarter development in terms of SaaS matrix. So how many new customers are we getting onboard. Normally in Q1, it is a low season in terms of Newbiz. So, now we have managed to get 206 new customers and you compare that to 111 customers Q1 last year. It's an increase of 85%, I think is pretty cool. And at the same time, it's slightly lower per customer, but it's not that lower. So the total amount of new customers, the new ARR we bringing to the business is substantial whether at this quarter.And since we managed to get a lot of new customers onboard, the average price, the customer acquisition cost per new customer is also pretty low. Normally in Q1 and Q3, we have a high tax since we have almost the same cost for getting total cost to getting customers since, but the outcome is lower in the low season. So since we have now a strong low season, we also have a low customer acquisition cost, meaning that the relationship between CAC and new ARR per customer is better now. It was 25-month payback time Q1 last year, now it's down to 15 a month. And since our customers is upfront, invoiced by 12 months, then when you send the second revenue after 12 months, then they are cash positive.Yes. And I have talked about the net revenue retention. So just to highlight here that in Q1, specifically in Q1, not looking at the 12 months period. But in Q1, we had an uplift of 0.0, and we have, of course, have churn. So the average revenue per account is decreasing, and this is the first time since we became listed that we need to report that this number is decreasing. We are lucky to say that we expect it to be a temporary situation. So when we report on Q2, we expect that number to grow again.Trailing 12 months. Since we are in our business, I think it's also important to measure on a 12-month period to compare, how is it actually going, when you're talking about ARR. So, if we replace Q1 this year with the Q1 last year, we see that we now have a new record high number of new customers getting in compared to the end of Q4 last quarter. It's approximately on the same level. The CAC is lower. That means we are expensing more or less the same total amount in the last 12 months on CAC [indiscernible], but the outcome is better. So that's critical that our new best is actually running pretty well.And our EBITDA, if you just look at the top here, you can see that if you measure in a quarter, our revenue is increasing by 17%. I have just said that ARR is increasing 23%. So why is that not equal to each other. That's because, Q1 is a low season for us, so also the old customers not invoiced in Q1. So you can say a different percentage. So I have actually seen how much in a 12-month period are we growing this time and compare that to the period 12 months back. And that the growth rate is 21%. So it's more equal to the growth in ARR.Gross margin is slightly down from 84% to 82% this quarter, but at the financial year 2024, I still expect the gross profit margin to be approximately the same level as this year, meaning 86%-ish, that's at least what I expect. And other external expense, we have increased that by 16%. It's due to a higher investment into external consultants, meaning in, for instance, Norway we are hiring local people and their high like console even that they are seen as a impart in Penneo. You're also investing to marketing and travel customers. We are trying to get more out being international instead of doing anything out Penneo.And on the other hand, we have managed to decrease the hardware and software, and that's also because we are not -- as you can see in the report high as many new people to the team. So it's not needed to invest that heavily in hardware and software. And then we also see a slight decrease in provisions for debtors. And then coming to the staff cost. On this chart, you think that we have decreased investment into the team because we have lower staff costs in Q1. It's slightly true, but it's also not true. Actually, we are investing exactly the same amount this quarter like Q1 last year. But since we are focusing on developing new software, we are also capitalizing a higher percentage to the balance sheet instead of putting into the P&L. So that's the reason for this amount decrease here.But when you look at the number, then I think we are investing, just to say approximately the same amount as Q1 last year. And that brings us in total to an improved EBITDA up from DKK 6.6 million negative to DKK 2.7 billion negative. And it's following the plan, as Christian said, here in the end of this year, we have a guidance and customers come back to that around a positive EBITDA. So that's a natural part of being on that path, investing less compared to the growth in revenue.The last slide from my hand is a slide where I'm trying to give you an overview of the outcome and the investment outcome ARR growth. That's what's coming out of doing investments. Now, we are at DKK 17.1 million in ARR growth in the last 12 months. And we still are maintaining a positive liquidity from the operation. And I'm pretty glad that I can say that now I know the internal numbers and the budget, and it is slightly better than I had hoped for even that it's decreasing. One of the reason is that, we have postponed some taxation through the employees, that's a part of the governance postponing this payment. So we are paying back and paying employee taxes 2x this quarter. So I'm glad to see that is positive DKK 5.9 million.Besides that, we are still investing into product development, as I also said, under the EBITDA slide. And we are willing to continue investing into product development. But what we also said is that, when we are going out of this year into next year, next year, we should be in a position where the cash flow from the operation is paying for the cash flow invested into product development. And that's what we mean when you say cash natural at least. It's not equal to every quarter will be cash positive or natural, because we have fluctuations. But when you see the financial year next year, it'd be true according to our expectation.That's what all I has. So now I'll hand over the mic to you, Christian.

[Christian Stendevad, executive]

Thank you so much. And then just for the outlook for 2024. So with our ARR guidance, we continue to assume an ARR at a level of DKK 105 million to DKK 110 million, so corresponding to a growth of 18% to 25%. And that based on the assumption and they are unchanged since our annual report. So just to make a summary, the continued market conditions that we both have seen in throughout 2023, that that will continue into 2024, but also a continued strategic direction that we will continue to invest in our Penneo platform just like you just said, also maturing our organization and promoting operational excellence supporting continued geographical expansion of Document Sign and KYC and also continued improving our demand generation capabilities.So as we just saw in 2023, we made investments in our sales and demand generation capabilities and that expected to result in a larger number of new customers added compared to previous year, and we expected to that trend to continue into '24. And that's exactly also what we have seen in Q1 and [indiscernible] Q4, we saw it in Q1. And this higher level compared to last year, we will expect to continue to see, even though that might be that the percentage of growth is not as high.For example, if I look at Q1 here compared to Q1 last year, the percentage, of course, if that continue going up, maybe not, but it's just on a new level. And then continuously low churn and continued uplift. So we do expect a continued uplift from our customer base based on increased usage of Penneo platform of Document Sign and KYC and also revenue from cross-selling Penneo KYC to sign customers and vice versa. And also, we do not anticipate a net positive impact on our ARR uplift from our annual pricing adjustment, simply given the fact that the overall inflation rate has returned to a low level. So that's what has been built into it. This is unchanged from our annual report.EBITDA guidance, here we continue to assume an EBITDA at a level of DKK 5 million to DKK 10 million positive, where we last year had a negative DKK 8.7 million at the end of the year, so going from the negative to this plus DKK 5 million to DKK 10 million. And we do expect to invest available cash and product development, as you just also mentioned, is a big part of that. And then we expect the positive contribution from operations. And we will continue ensuring that we have a clear path for cash position where we're at the end of 2012 and looking ahead that we expect to be in a position where our ARR exceeds our overall cost base position where we have a cash in neutral stages yearly by 2025. So that's also unchanged compared to our annual report.So that ends up our presentation of our Q1 report. So let's go to the last one, and that is a question and answers. So let's open up.

[Mikkel Kousgaard Rasmussen, analyst]

Yes, thank you, Casper and Christian for great presentation. Mikkel from ABG here. I just have a couple of questions. The first one is related to the ARR uplift. To my understanding, it's wonderful reasons of securities, which are negatively affecting you, but also the downgrade from some existing customers. I was just wondering, is this a quality issue or simply just something that affected these customers and not the others?

[Christian Stendevad, executive]

Yes, so good question. So the temporary downgrade that you're referring to there, since there are some specific cases, there are 2 reasons and some specific cases where the product adoptions were delayed and leading us to extend the contract to compensate. So the contracts start then later on that have an impact on the uplift temporary and then it will go up again. Additional, we also had for some specific customers. We had some capacity issues with our KYC product. And that has also prompted us to give and offer them some compensation regarding that. These issues that we have seen from a capacity point of view are fixed.

[Mikkel Kousgaard Rasmussen, analyst]

Okay, sure. Then the second question is related to the churn, which is somewhat higher this quarter due to large customer churning. Is there any read to future churn? I mean, you're pretty confident that it will be below 5%. But could you elaborate a bit more on the reason this customer churning or?

[Christian Stendevad, executive]

What I can say about this specific customer churning that had an impact because you're right, it is higher, especially for our Q1 period. And it was a unique case from the very beginning because the company used Penneo as a supplement to their homegrown solution. And ultimately, this setup did not work for them. So therefore, they churned. So it's a separate situation compared to our normal usage of our solutions.

[Mikkel Kousgaard Rasmussen, analyst]

Okay. Perfect. And my last question before I jump back in the queue is related to hiring. The headcount is down significantly Q-on-Q. I was just wondering, if you could put some words on the dynamics here. Is it natural attrition? Or have you been required to lay off people? Just trying to understand, if there will be any severance costs or anything.

[Christian Stendevad, executive]

This is related to when we look at Q1, then we had in Q4, we said goodbye to some and then we have some natural attrition also. So that combined. And the result of that, we can see that here in Q1.

[Mikkel Kousgaard Rasmussen, analyst]

Okay. And just a follow-up on that. Any outlook in terms of hires going forward? Will it stabilize now?

[Christian Stendevad, executive]

Yes, we expect that to stay stabilize. And what that means is say we always look carefully at hiring both for new hires, but also rehire somebody is leaving us, should we rehire or not. So we are very carefully looking at all our investments. But in general, we expect it to be approximately at this level.

[Unknown Analyst]

Perfect. Thank you, Casper and Christian. Anders from Stokk.io, and I will be asking of the shareholders here. The first question is just a clarification question. You're right in the report that you will introduce KYC in Belgium in second half of the year. Does this mean so far, it has only been the signed solution that has been in focus in Belgium?

[Christian Stendevad, executive]

Correct, until now and also all the numbers that you are seeing are selling our signed solution to the Berlin customer. And then we expect them to release our KYC into the localized version of it for the Belgium market, so we can do a cross-sell that allows new sales of KYC in the second half.

[Unknown Analyst]

Perfect. And then the next question here, in Q1, you got a lot more new customers than last year. Do you see this trend in customer acquisition continue into Q2?

[Casper Christiansen, executive]

Yes. So in general, what we compare to in all the quarters that we had in 2023, we expect on a general level that we have more customers coming in based on our improved capability of getting them in. So what we now saw in Q4 and also in Q1. But that's not the same, but now we have 200 and then in Q2, there will be 400 and 600, but it's simply on a higher level than we have seen in 2023 at the beginning.

[Christian Stendevad, executive]

I don't know if there's further questions from anyone. You're welcome to ask your question.

[Unknown Analyst]

Good morning. Could you elaborate a little bit on your strategy to enter Germany and also on the general market dynamic in this market? And why you feel confident it can grow in the market.

[Christian Stendevad, executive]

Yes, absolutely. So what we see in Germany is the same needs that we are now seeing both in the Nordics for many years and also now in Belgium that there is a similar need for the whole digitalization and also for the KYC to be compliant with the AML. And even though, they might be behind from a digitalization point of view and the whole support of solution. What we experienced right now based on our dialogues and we have very close dialogues with the pilot customers is that they are now coming on the same journey because they have the same pains that we see in the other markets.So we do expect that we will also be able to close the first customers in Germany, even though from an ARR point of view, they will not have an impact more or less this year, but it will help us. And the way we do it is as we start with pilot customers, so we do the finalization of our solution together with them. So the solution already is in Germany but there are always some local integrations and configurations that need to be done. So we are preparing that. And that's what we are working on right now. And when we know that, that is working, then we do the final release of the solution to the market and then expand from there. So we believe simply based on of the maturity that they are now and also the size of the market that, that can have a great potential for us. So we are in the early stages.

[Unknown Analyst]

Yes. Thank you for taking my question. Just one on the average revenue per account. When we look at it, it has been stabilizing for the last 4 quarters around DKK 30 million after many quarters of growth. How do we have to look at it? Is it a level now that you have reached that might be stable in the time? Or there is still some room to keep improving this level?

[Christian Stendevad, executive]

Yes. So when we look at -- now we're also showing the numbers. So everybody can see it. Yes, it is true that we have the average ARR has been quite stable. And we believe that there will be more or less the level. It can also be slightly higher. You can see some changes. So in Q3 last year was 18% and in Q1 here is almost 17%. So it would be more or less on that level. What can impact is if we are winning large ordering accounting company, then that can impact some of these. But the level is more or less like maybe slightly increasing.Any more questions? Not at the moment. Then I would just say thank you so much for all of you for participating and also for asking questions and your interest in our financial numbers and our business. But with that, I would like to say goodbye to all of you and then we will stop the recording. Thank you.