Efecte Oyj

OMXH:EFECTE

Earnings Call Transcript 2022-Q3

[Lari Nikkanen, executive]

Hello, everyone. This Q3 results webcast. My name is Lari Nikkanen and with me today are our CEO, Niilo Fredrikson; and COO, Steffan Schumacher. During this results webcast, we will be making some forward-looking statements and we encourage all participants and investors to review the disclaimer from our presentation materials.

As for today's agenda, we have one full hour for this webcast. We'll start with our CEO, Niilo presenting our Q3 results. After the presentation, we will have the remaining time for our Q&A session. You may present your questions during the presentation by using the webcast portal's Q&A feature, and we'll answer your questions at the end of the presentation. This session will be also recorded, and a recording of the session will be made available on Efecte's investor website.

With that, I'll hand over to Niilo.

[Niilo Fredrikson, executive]

Thank you, Lari. Hello, everyone, and thanks for joining. What an eventful quarter it was again. So many things happened around us, but we focus on what we do best, helping people to digitalize and automate their work.

Our strategy and vision are clear. So we strive to become the undisputed #1 in our space, service management in Europe, and we call it becoming the leading European alternative. And what it means is growing our revenues organically to EUR 35 million by 2025 and eventually to EUR 100 million.

There are 4 strategic cornerstones: growth, product, people and M&A. And the way I thought we'll start today is by looking at how did we execute against those 4 strategic cornerstones.

So starting with growth. It was a very good quarter for growth. So we grew total net sales by 26%, which I believe is one of the highest numbers on record for us. And that included 29% SaaS growth, out of which the vast majority was driven by strong organic growth in SaaS of 25%; and on top of that, a few percentage points impact from the InteliWISE acquisition. International SaaS growth was at a good over 40% level, even though the organic part of that were slightly lower.

In terms of products, we made several announcements, several interesting announcements. I'll talk a bit more about that later at our Digitalize & Automate event. And we progressed well in the identity governance and administration space with adding several new customers, in total, already 15 new IGA customers during the first 3 quarters of the year.

Our team has grown quite a bit. And I'm super happy that we've been able to maintain the culture, we've been able to maintain high employee satisfaction. And as planned already earlier, we have been starting to slow down the recruitment speed a little bit. We're still adding people, but at a slower pace than before. We recruited many people and we also added the InteliWISE team. and now, of course, it's time to make sure that the whole new team is fully productive and working well together.

And M&A, I already touched upon that, has been, of course, super nice to welcome the talented Polish team as part of the Efecte family. And one of the highlights to me personally was that we were able to publish the first joint product together with the InteliWISE team called Efecte Chat for Service Management so fast after the acquisition.

Now next, let's actually continue a little bit on product and some of the announcements, other announcements -- some of the other announcements at Digitalize & Automate. So just for anyone new to the Efecte story, Digitalize & Automate is an annual customer event. We now run for the third time. And we were able to get over 3,000 registered participants from over 50 countries, most of them in Europe. We had a great lineup of speakers, including people like Aleksandra Przegalinska, a world known AI expert; and Fernando Alonso, obviously very well-known racing driver and many, many other great speakers.

And some of the key announcements you can see here. So I already mentioned, Efecte Chat for Service Management. Another big one on the product side was the new Efecte Self-Service, about which we've been talking for a while. And now we were able to tell that it's -- the pilot use with actual customers is starting. And this will be very exciting to follow that. And I think it's a super important part of us delivering a modern user experience for all the Efecte users around there.

We also announced some new partnerships, especially in the identity governance and administration space, namely with Innofactor and [ Syndicate ]. One thing we've seen is that now that we've been successful in selling the IGA solution, clearly, customers have a demand for more professional services. So we are addressing that partially with our own people and then partially through partnerships.

And we've also been expanding our geographical presence. And later on, when Steffan talks about the go-to-market, he'll cover that in more detail.

So as is the tradition, let's also look at the guidance. So as you know, we upgraded the guidance a little bit in the summer, saying that, hey, we'll end up with approximately 25% SaaS growth and adjusted EBITDA margin that's going to be positive. And I'm, of course, super happy that we've been able to meet and exceed the guidance so far in the year with year-to-date SaaS growth of 26% and a 4% adjusted EBITDA margin.

Even after the InteliWISE acquisition, which obviously had some impact on our profitability in terms of transaction costs, et cetera, even after that, we are in a solid financial position. And given the type of economic environment that we are in, it's, of course, a good feeling to be in that position.

We continued what we've done now quite consistently, which is investing in long-term growth. We have wanted to optimize profitability for the short term. But the Efecte story has been about balanced growth. So we have also not sacrificed completely the bottom line to just focus on growth. So it's a balanced growth plan that we are executing.

Looking at some of the SaaS metrics. So lifetime value to customer acquisition cost ratio was like super, super high. May be useful to note that there are a couple of things behind that, one being the large Kela deal being in the numbers. And at the same time, churn levels being super, super low, like 1.6% for the rolling 12-months period, which, as we've said many times before, I don't think long term that we probably stay at that low level. We've consistently been at 5% gross churn or below that kind of ballpark, which I consider a good level for a B2B SaaS business like ours. So kind of longer term, my expectation would be that we stay in that ballpark. And if the churn would go up, of course, it would have some impact on the LTV calculation as well. But I guess the bottom line is exceptionally good numbers here. including, of course, a recurring gross margin, which to me is an important indicator of the inherent profit generating ability of this business in the long term.

The MRR waterfall here, well, again, net retention rate, of course, strong driven by long churn and us being able to continue growth with existing customers. And then in terms of new customer acquisition, we stayed at a good level. And then, of course, there is the additional impact of InteliWISE acquisition adding some MRR as well.

Now with that, let me welcome Steffan to join me here.

[Steffan Schumacher, executive]

Hello, Niilo.

[Niilo Fredrikson, executive]

How are you, Steffan?

[Steffan Schumacher, executive]

I'm doing fine. And the winter is coming, so you come with...

[Niilo Fredrikson, executive]

There we go. It definitely is Efecte beanie season again. I actually came to the office today wearing one. Here in Finland, you know it's snow on the ground and winter definitely already there.

[Steffan Schumacher, executive]

Yes, it's important to keep your head warm so your kind of thoughts are very crisp and sharp.

[Niilo Fredrikson, executive]

That's some great business fundamentals there.

[Steffan Schumacher, executive]

Yes.

[Niilo Fredrikson, executive]

So hey, I mean, let's look at the go-to-market. Obviously, we'll go into the Q&A later, but looking at go-to-market. What are your thoughts on Q3?

[Steffan Schumacher, executive]

Thanks, and definitely, you started the session pretty -- kind of positioned it pretty nicely. So during Q3, we have focused on what we do the best. We focused on our customers, our partners and our employees, and we are in this long-term journey to help our customers to digitalize and automate their work. And I think that's something we focused a lot during Q3. And our SaaS growth was fundamentally at 29%. And out of that 29%, 4 percentage points came through the InteliWISE acquisition. But despite that, I think it was a solid good quarter on SaaS performance. And as I said, there was an impact of this one, I think kind of one larger deal into those numbers.

And if you look at the specific markets, I think Finland, Poland and our new markets really delivered the biggest highlights for Q3. For example, in the U.K., we have worked with a few partners and got a few -- 1 larger deal out of the U.K. And then there is some smaller success, for example, in South Africa, in which we signed a very small -- kind of a smaller new customer, but making progress on multiple fronts there. And definitely, the InteliWISE acquisition gives us the opportunity to go into the Polish market also directly with the Efecte solution. And we have been taking the first steps in Poland, but it will still take a few more months for us to kind of get everything up and running there.

I mean, in the German-speaking Europe, in the DACH region, we saw some delays in customer decision-making during Q3, but we stay confident on our execution and our strategy in the DACH market. And we have a good pipeline there, which we can work on during Q4 and the next year. In Sweden, we announced a new leadership position in Sweden, and we have a plan in place to kind of continue investments and growth in our Swedish market.

I mean, we also announced earlier that we are going to head to Spain as one of direct markets. We have now our first team members on site. And we are working on the go-to-market strategy, activating customers, activating partners. And I think we're going to give you more updates as we kind of progress on that journey. And while the market has been volatile, I think there are a lot of kind of sweet spots and a lot of markets and industries that are very strong. For example, the public sector demand for our solution is strong. and we have increased our efforts in that space.

So overall, I feel really happy about our Q3 performance. I have very much confidence on how we're going to close up the year. And I think that's a quick update on the go-to-market.

[Niilo Fredrikson, executive]

Great. Thank you, fantastic summary. And I'm sure there will be a question or 2 once we get to the Q&A in a minute about some of these topics. So hey, let's leave the go-to-market now for a minute and wrap it up and then move forward to the Q&A.

So I mean, our guidance remains unchanged. Like Steffan said, we are happy where we are after Q3. We are confident also about the rest of the year. And looking at where we are this year and how we are positioned for next year, we also look optimistically into next year. We have a world-class team in place. We operate in a growing market.

I mean, our addressable market is growing still healthy double digits. We set the high ambition to become the European leader in our space. And we have the product that we need optimized for the European mid-market and public sector. And when you look at our track record, you look at the SaaS unit economics, I think it's fair to say that it's a pretty solid story so far. And I personally feel very happy to be part of this team and continue our growth as we build the leading European alternative in service management.

So with that, I think it's time to see if there are any questions that we can address together with Steffan. Lari, well, how is the question pipeline looking like?

[Lari Nikkanen, executive]

Building up.

[Lari Nikkanen, executive]

Thank you, Niilo. And as per usual, we have a very healthy pipeline of questions. But just as a reminder, you can present your questions by using the webcast portal's Q&A feature.

With that, let's pick up the first question. .

[Niilo Fredrikson, executive]

All right. Fire away.

[Lari Nikkanen, executive]

So Niilo, can you please describe Efecte's recent performance in large European economies like Germany. Are you still winning new customers?

[Niilo Fredrikson, executive]

Thank you, Lari. So the answer is yes, we are performing and winning new customers. Like Steffan mentioned, we have seen, specifically in the DACH region, we have seen a slight difference to the rest of the markets we operate in, in terms of some customers clearly delaying decision-making. I mean, most of them have good reasons, internal reasons, et cetera, but still, the overall picture that we get that, that market is a little bit getting more careful or slowing down compared to before. So there is that. But at the same time, we have a pipeline of cases that we work on. We have a good team in place, and we are continuing to grow in the German market. So yes, that's where we are.

[Lari Nikkanen, executive]

Thanks, Niilo. And maybe as a follow-up question to the previous one, so as you mentioned, in DACH you saw some delays in customer decision-making. Does it mean that some deals in DACH will be moved to Q4? Or is there a bigger delay?

[Niilo Fredrikson, executive]

Well, you know how it works in sales. Obviously, you always work hard to bring the deals in as soon as possible. So my expectation, and I would love to hear also Steffan's point of view on this one. My expectation is that some of those deals we'll bring in, in Q4. And maybe for some, it might be that they are delayed for the longer term.

[Steffan Schumacher, executive]

Yes, exactly like that. I mean, some of the deals that we saw delays, have been closed now during Q4. And now we're still working on a good pipeline. And as Niilo said, I mean, it's our job to ensure those deals get closed.

[Niilo Fredrikson, executive]

Yes, that's how it goes. And maybe just to point out in a way, now that we are talking about some of the signs in the market, and we want to be always transparent sharing what we see out there, the good and the bad. But I want to make sure that it doesn't get overemphasized because, I mean, if you look at the performance so far and you look at our guidance and you look at our confidence for the rest of the year, it's not like we think that suddenly some major things massively changed. Some -- more of these sort of silent or weak signals, we want to stay vigilant and really kind of change all the time with the changing market needs to be able to optimally address the needs of our customer base. And one of those things that applies, I think, would be fair to say in all or at least most of our markets, is that stronger demand -- strong demand from the public sector, and we noticed that. And we've increased our efforts in that space, just as one example, how we at Efecte adapt when the market changes.

[Steffan Schumacher, executive]

Yes. And I think the benefit we have, I mean, we are still just addressing a very small market. I mean, if you look at then our market share in Europe, it's still not like significant. It means there's a huge market for us. And when we play it with our playing cards, being agile, providing the customers throughout the experience with a cost that makes sense, we're going to always have an opportunity to win. And that's, I think, the kind of the great thing being at Efecte. We can really listen to our customers and adjust when needed.

[Niilo Fredrikson, executive]

Absolutely, absolutely. I know it's already a long answer, but I'll still add one more thing. Great question, by the way. So just maybe zooming out a little bit and reflecting on the past years as well. So it's always interesting to see. I mean, the market changes all the time. In 2020, the pandemic hit and we had to adapt to that situation. We changed some things in our go-to-market, et cetera. And we were able to do that successfully. 2021 was again a different year. Now in 2022, all sorts of things happen again in the environment, both geopolitically and from an economic point of view. And it's, of course, just what we do. We look at what happens, and then we adapt to it. And I think we have a great kind of valuation for being able to succeed and grow also in the middle of the changes that we see in the market right now. .

[Lari Nikkanen, executive]

Thank you, Niilo and Steffan, that was an extensive answer. Moving on to the next question. So -- or we have actually a couple of questions on the InteliWISE integration. And maybe as first, can you give a general comment on how do you feel about the integration process? Is it going well?

[Niilo Fredrikson, executive]

Sure. Maybe you start, Steffan. What are you seeing from the field team's point of view?

[Steffan Schumacher, executive]

Yes, it's a good question. And I mean, first of all, I'm so excited to have the InteliWISE team joining us. And hopefully, a lot of you are listening to this webcast as well, so it's great to have you onboard of the team. And I mean when we talk about these integrations, there are always multiple layers, but everything starts with the people. And I think we are now stronger together. So we have a great team in Poland. We have worked a lot together. And one of the testaments maybe is this -- is that we got our first joint product out in just a few months after the official acquisition was done. We announced that product in our Digitalize & Automate event end of September. And we have already kind of signed up first customers during Q3 and now in Q4 on that new solution.

So I think that's just a testament of the kind of for the teams working together. And surely, there's still a lot of more opportunity to go after. And I'm more excited about that opportunity we can now go after, entering the Polish market, driving all of that upsell opportunity of the InteliWISE portfolio, conversation on AI portfolio into our existing customers. And then also, that conversation on AI by itself is one part of our solution portfolio now. So there's a great opportunity to take that portfolio and sell that in the existing markets as well. So there may be a few thoughts.

[Niilo Fredrikson, executive]

Yes. No, great points. And I think overall my team and the whole team -- whole InteliWISE team, it's been great to see how they've become part of Efecte and the type of commitment and spirit and skill and talent they bring to our team. So very happy with how it's been going so far. And at the same time, it's still early days. So of course, lots of work left for us to make sure that it becomes a real success story.

[Lari Nikkanen, executive]

Thanks, Niilo and Steffan. Maybe zooming in a bit on the recently launched joint product. So what kind of customers are piloting the unified live chat and chatbot offering? And what are their responses so far?

[Niilo Fredrikson, executive]

So I think we have -- yes, let's start with I believe we have 3, am I right? Three agreed pilot customers. I'm not sure about each of them in which kind of phase of the piloting they are, but we have 3 signed up. And I think one is a university, right? And...

[Steffan Schumacher, executive]

2 private.

[Niilo Fredrikson, executive]

And 2 private sector customers. And I think it's quite early now still for their feedback. But the first comments I have heard have been about positive about the modern UI, point one, and then about the integration into the Efecte user interface being the second point I've heard.

[Steffan Schumacher, executive]

Yes. I mean, the key use case for the customers is for them to automate service requests and conversations from the end users. So for example, me, as an IT end user, I have a challenge, I want to kind of try to solve it. And with the new technology, we can help the end user to solve their problems automatically. And then -- and that kind of sales cost makes the customer environment, the customer more productive, the end user more productive. And then when needed, they can kind of escalate that discussion to a live agent into the Efecte agent view. And then you have basically a seamless experience in which you can help the end user live. And I think that's where -- what a lot of our customers are looking forward. Positive feedback so far. And it's that whole integration, the experience, how it feels and all of that, that brings value. .

[Lari Nikkanen, executive]

Cool. Thanks. As next question, we have a general question on Efecte's M&A strategy. So how is your M&A appetite right now with InteliWISE integration happening? Are you still actively working on M&A pipeline in the short term?

[Niilo Fredrikson, executive]

That's another good one. That's another good one. So InteliWISE was the first acquisition we made. And I think I feel good about us being now at this point after announcing the M&A intent and strategy a year or so ago and now us being at this point that we found a company and the team that we really liked and we were able to execute the transaction which wasn't simple in the sense that they were listed on the NewConnect marketplace in Poland. So there was a little bit of extra work for Lari and many others in the team. So first of all, just wanted to say that I feel good about where we are now in terms of M&A. But at the same time, while it was the first, I don't think it will remain the last. So there will be more. There will be more, for sure.

We always said that we keep the bar high. We don't want to go for M&A just for M&A's sake. There needs to be an element of strengthening our technologies platform, strengthening our team or strengthening our goal to market in a meaningful way. I think we are also realistic about integration is always tough. It requires a lot of management attention, it puts a little bit of stress on the whole organization. So you don't want to do those just because. So in that sense, it's not like we're desperately seeking for the next one, but we are actively working on an M&A pipeline. And then once we find the next suitable target, with whom we come to terms in terms of joining forces, then we are definitely ready to go for the next one. But there is no hurry and we're being very thoughtful about it. .

[Lari Nikkanen, executive]

Thank you, Niilo. Next, we have a question on our SaaS growth. So in your report, you mentioned that organic SaaS growth was supported by the Kela deal deployment advancing and the use of related temporary product subscriptions increasing. Did Kela deal produce any SaaS revenue or some subscriptions already included in Q3 MRR?

[Niilo Fredrikson, executive]

Yes. So answer is yes. There was some SaaS revenue from temporary project time, project-related SaaS subscriptions already during Q4. So it ramped up during Q3. And the expectation we have is that for the most part, that will turn into production subscriptions, meaning that it will be visible also in the MRR for the most part by the end of the year.

[Steffan Schumacher, executive]

So in Q3, there was no MRR related to this customer, right?

[Niilo Fredrikson, executive]

Yes, correct. So there was an impact on SaaS, but it was not yet visible in the MRR because it's not yet a permanent subscription, so to say. It was a project time temporary subscription that we, of course, recognized in the SaaS revenue but didn't want to add to the MRR yet.

[Lari Nikkanen, executive]

Thanks, Niilo, for the clarification. Next, we have a question also on our reporting. So could you please describe the relations between SaaS and services? When customers buy your SaaS product, do they automatically buy services? And may they choose not to buy any services?

[Steffan Schumacher, executive]

I can take that.

[Niilo Fredrikson, executive]

Go ahead.

[Steffan Schumacher, executive]

So in a way, really good question. So if you look at the life cycle of an Efecte customer, so when we do a new customer, when we sign up a new customer, there's always some professional services work required for the implementation of the Efecte solution. And that depends on the customer. Some customers are okay to go with our prepackaged, ready-made processes and then the implementation time is less.

But then some of the customers want to go and they want to customize and adapt the processes to their own needs and then it might be a bit of more professional services. And then after this initial implementation, there's going to be professional services to support the customer during the customer lifetime. So that's a one option. Efecte does it. But there's also the kind of option for us -- for Efecte not to deliver professional services. And that's when we talk about our partners. So we have a lot of opportunities, which our partners work on, and we, as Efecte do the subscription of the software and then our partners do all of the implementation work. So that's maybe those 2 options. .

[Lari Nikkanen, executive]

Thanks, Steffan. Then we have a question on public sector demand. So as mentioned in the report, you say that demand in the public sector is strong. Are you here talking about Finland? Or have you been able to break into DACH public sector customers?

[Niilo Fredrikson, executive]

So maybe I'll start with a brief comment, and Steffan, you can give a little bit more flavor on top of that. So we have public sector customers also outside Finland, and we have been actually quite successful also outside Finland with public sector customers, including Sweden and Germany. So that's maybe the first part of the answer, just to lay a foundation. And in terms of the recent changes in the market and how we go kind of after, then maybe you want to build on that?

[Steffan Schumacher, executive]

Yes. So when we talk about public sector demand and you look at our solution portfolio, so we sell the ITSM solution, we sell the enterprise service management solution. We have our IGA solution for identity governance and access. And now as the new piece, we have the conversation on AI piece. And it seems that the combination of these solutions is currently something that a lot of the public sector is looking for. All of the public sector players, they want to digitalize, they want to automate, they want to become more productive in providing services to citizens to different places. And I think we have a unique positioning there because of the -- a lot of the kind of key value propositions, we have. We have the agility to kind of meet the demands of the public sector. We have a solution that meets their budget requirements. And thirdly, which is an important part, is that we can provide the effective solution with the cloud that -- on customers' own terms. So I think all of these coming together make the value proposition really strong.

[Niilo Fredrikson, executive]

Yes, the cloud on your own terms concept is definitely one which has helped us in recent times. I mean, it's not all of the customers, it's not all of the public sector customers. But some customers in critical industries across public sector, defense, financial services definitely put a value on our ability to provide cloud on their own terms, to give them a full cloud SaaS experience but for them being able to decide where their data and applications reside.

[Lari Nikkanen, executive]

Thanks. Next, we have a question on Efecte's IGA customers. So you mentioned in the report that you have been able to acquire your 15 IGA customers. What type of customers are these? Are they existing ITSM/ESM customers or net new customers?

[Steffan Schumacher, executive]

Both. I tried once in my life to answer short. Both.

[Lari Nikkanen, executive]

Thank you. And as a follow-up question, can you estimate the mix between these types of customers?

[Steffan Schumacher, executive]

I don't have that on the top of my head.

[Niilo Fredrikson, executive]

Yes, me neither. But it's -- I mean, it's not massively skewed towards -- I mean, it's not 99% and 1% either or so. It's a balanced mix.

[Steffan Schumacher, executive]

I would say it's a balanced mix, balanced mix. It's both private-public, new-existing. There's a big demand for that solution right now. .

[Lari Nikkanen, executive]

Thanks, Steffan and Niilo. Next question, you mentioned in the report increasing sales efforts towards public sector. How easy is it for you to change your sales focus between markets and customer segments?

[Niilo Fredrikson, executive]

Maybe that's again one for you to address.

[Steffan Schumacher, executive]

Yes. In a way, public sector is special, in a way. If you look at the public sector tendering process, so it's governed by local laws. In Finland, you have the local procurement flow that manages kind of -- defines the way public sector procures in Finland. You have the same in Sweden, in Germany. And definitely then as you go into -- if you go after those tenders, you need to have a very specific approach to every single market. A lot of these are tender-driven. So you have a lot of questions. You need to fulfill requirements of the customer, and then basically you submit the offer or the tender. And then after a while, the customer decides. Sometimes you win, sometimes you lose.

And that's how it works. And then -- if you look at how do we adjust the go-to-market, I think each of these public tender is -- they have a lot of similarities, and then each of them has a bit of unique points. So every time we go into the tendering process, 80% of the things we are ready. And there's a small piece which we then need to work on that is customer-specific. So I mean, overall, I don't see any big hurdles in that or in a way that it will take more resources from us or anything like that. It's just like -- it's a different procurement process.

[Niilo Fredrikson, executive]

Yes. And it's a good question of resource allocation. So we have a good field sales team in place and the marketing team in place. And it's a question about kind of time allocation and how much we emphasize different markets, different market segments. And as said, now we've shifted a little bit, nothing dramatic, but definitely recognize the opportunity in public sector and trying to make sure that we capture that and are able to help those customers.

And maybe one more thing on public sector. I don't think we mentioned this, but just a small interesting detail in terms of outside Finland. So we also made the U.K. government G-Cloud.

[Steffan Schumacher, executive]

That's a good point. Yes, that's a really good point. And I -- actually, I had it on my Post-It to talk about it and talked about the go-to-market. But that was one significant thing. So we applied and worked with the U.K. government, and they have this kind of G-Cloud certification. And basically, we are now certified -- or I don't know if it's the right word, but we can sell directly now to the U.K. government without public tendering. So that was a significant kind of achievement, and that's going to help us as we go into the U.K. market.

[Niilo Fredrikson, executive]

Great.

[Steffan Schumacher, executive]

Thanks, Niilo. It's good to have a backup memory.

[Niilo Fredrikson, executive]

One effect, right? .

[Steffan Schumacher, executive]

Yes.

[Lari Nikkanen, executive]

Thanks, Niilo, and Steffan. Next, we have a question on Efecte's sales pipeline. So as you are shifting focus towards public sector, are there many Kela-sized deals in your sales pipeline currently from the public sector or otherwise?

[Steffan Schumacher, executive]

I mean we have not committed the sales pipeline so far. And I mean, I have nothing to share there. We -- I mean, in our team, we try to maximize our sales pipeline. We want that to be as big as possible and we take every single deal that we can get into the pipeline, and then we work really hard to get them closed.

[Niilo Fredrikson, executive]

Yes, absolutely. And of course, it goes without saying that -- I mean, if you look at the Efecte customer base, the Kela type of deals and magnitude deals, that's definitely not the rule, that's more the exception. So they're kind of bread and butter where our growth is coming from is way smaller, way smaller deals and new customers. And I think one of the fundamental strengths of Efecte has been the ability then to grow. I mean, there is new -- let's say, there is a new customer coming in with a few thousand MRR. And then over time, it starts growing, they take effect into using more use cases in more departments and the MRR starts growing. And that's how we end up with that strong net retention rate. And of course, it's nice every now and then to get some of these larger deals. And of course, we keep going after those also in the future, but that's kind of how the whole equation looks like. .

[Lari Nikkanen, executive]

Thanks, Niilo. Next, we have actually a personal question to Steffan. So Steffan, what are your key things to focus for a successful Q4?

[Steffan Schumacher, executive]

Very personal question. Hey, how many weeks do we have left for the quarter? Six weeks. It's 5 weeks to Christmas and then everyone is going to be off. And we are midway the quarter, and I'm still smiling. So I think what's important at this stage of the quarter is that, I mean, in any sales organization, you have -- basically, you know what you need to get done. We have the deals in the pipeline. We -- and in a way, we need to work with our customers to control the -- our selling process, and the customer needs to kind of help us to understand their buying process. And I think to come back to the question, it's focus. We know what to get done. And now we need to get it done. And I feel confident about our capability to deliver what we have promised to all of you.

[Niilo Fredrikson, executive]

Yes, yes. And then I think it was kind of part of what you said, but maybe for the audience, just to make it clear that when we think about closing Q4, it includes both things on the sales front but also things in terms of delivery.

[Steffan Schumacher, executive]

Yes, you're right.

[Niilo Fredrikson, executive]

Making sure that customers who have signed up previously or during the quarter, that we help them to go into production and kind of realize the value of their purchase. And that's another kind of fundamental piece of helping our customers digitalize and automate their work. So step 1, let's agree on then getting on the Efecte train, sign the contract and get the train ticket. But then their step 2 is make sure that they get moving and their users get their hands on the new Efecte environment. And that's how they realize then the value out of their Efecte investment.

[Steffan Schumacher, executive]

Yes, really good point there because, I mean, in the end, the customers do realize the value of the Efecte platform only when they get to use it. And I think we have -- I mean, even in Q4, we are still going to have a lot of big go-lives with our customers. Everything is well prepared, and we are executing on both fronts. -- helping our customers realize the value and then ensuring there's enough work for us to do also in Q1 to realize even more customer value.

[Lari Nikkanen, executive]

Thanks. Next, shifting a bit focus on the market environment. So how do you see the rising inflation affecting your growth plans? Can you carry out the increase in costs to your customers?

[Niilo Fredrikson, executive]

Yes. So just to start with looking at our pricing principles and pricing approach. We will always wanted to be fair and reasonable. But at the same time, of course, we are here to run a business. So even before the current situation, we have implemented reasonable price increases. And now in the environment that we are in, we continue to do that. But we do it in what we believe is a fair and transparent way. So not kind of in a way -- in the wrong way, taking advantage of the situation either. There are also those kind of companies who sort of use the moment for some maybe outsized increases, but also we don't want to be in the bucket of companies who are not able to do fair increases to account for the increased cost in operational expenses across the board, which definitely we are seeing. So we are doing price increases. And now, Lari I think I forgot if there was another part of the question than the kind of pricing question.

[Lari Nikkanen, executive]

Inflation overall, I guess.

[Niilo Fredrikson, executive]

Yes, inflation overall, so, yes, I don't know if you have any comment. But I mean, we are seeing -- obviously, we are not operating in a vacuum. So milk costs more than before. And many things, we are seeing a slight price increase and in some things even a bigger price increase. So our ability then to carry over that into our top line and our pricing is, of course, important.

[Lari Nikkanen, executive]

Thanks, Niilo. And as a follow-up question, how do you see the gross margin development for next years given the inflation environment?

[Niilo Fredrikson, executive]

Yes. Well, we are not going to start to give guidance on gross margin. What I say is that we always thought that kind of that 80% ballpark for recurring gross margin is, in a way, a sign of a healthy SaaS business whether that recurring gross margin then is slightly below or slightly above, I don't think that is a kind of -- I don't think that makes a massive difference. Of course, we are trying to keep it as high as possible, whether there will be an impact from the current situation, probably depends a little bit on our ability to execute everything. But definitely, we are not planning to sacrifice that or get to completely much lower levels in there, but some natural fluctuation might happen.

[Steffan Schumacher, executive]

Maybe another perspective on that. So in a way, we do manage it carefully. It's a combination of our SaaS revenue growth and then the cost that we put in to deliver that SaaS revenue. So we are running analytics and models on how the customer base is increasing and how fast we need to kind of increase those support functionalities. And then it's increasing, but it's also kind of inherently looking at productivity opportunities inside Efecte. Like we talked about digitalizing and automating. I think so we are no way other than any other company. So there's an opportunity for us also to digitalize and automate. And I think that's -- it's a combination of those we are working on. But basically, we are working -- I mean, we are managing it carefully. We have a process to look at it and do our best every single day to provide good customer service at the same time as looking at the cost we have to deliver it.

[Niilo Fredrikson, executive]

Yes. Good addition, thanks.

[Lari Nikkanen, executive]

Thanks. Next, we have a question on recruitment. So as you said in your report, you slowed down your recruitment in Q3. Was this a result of the market uncertainty? Or was the plan already in place when you made your strategy update earlier this year?

[Niilo Fredrikson, executive]

Yes. Well, if you look at what we've been saying in previous reports, I believe, at least in the half year report in the summer, we mentioned that our plan is to slow down the recruiting towards the end of the year. So in that sense, it was definitely a planned move. And yes, I don't see anything dramatic there. If you count the new people that we recruited both organically this year and then you count in the InteliWISE team, it's -- I don't even know the exact number we are talking about, like probably 60, 70, something in that ballpark kind of new people. And given our -- we are not that big of a team. It's a huge increase percentage-wise. So definitely, it makes sense -- even from that point of view, it does make sense for us to know just make sure that we consolidate it a little bit and get everybody up to speed to full productivity and through that are able to realize the gains from this very talented and now grown team.

[Lari Nikkanen, executive]

Thanks, Niilo. And maybe as a follow-up. After you have been able to consolidate the newly recruited employees, is your plan to repeat similar growth investments in 2023? Or should we expect recruitment pace to remain a bit slower?

[Niilo Fredrikson, executive]

Well, I refer to our guidance, right? So we've said that we aim at growing our business to be EUR 35 million or more by 2025 and, at the same time, reach a double-digit EBITDA margin. So that's kind of the financial frame inside which we, as management, operate. And that's, in a way, sets the context for these decisions then, whether in an individual quarter or year, if we hire more people or less people and how we manage all the other costs and top line items, that's all being done, of course, with this target in mind. And it depends, of course, on the demand in the market, for example, in terms of professional services, how much we need to grow our own professional services, how much the partners are able to take care of that, how we see the productivity developing in our go-to-market in terms of the sales and marketing and how we're able to produce the type of product outcomes in our R&D operation. I mean, we have a really good plan, ambitious plan in place also in that area. So as a combination of all of these and inside that frame that our guidance for '25 provides, that's how we make those decisions.

[Lari Nikkanen, executive]

Thanks, Niilo. Next, we have a question on sales. So how do you see your sales employee turnover compared to other sales organizations. What keeps your salespeople in the company? And why do they leave, if they leave?

[Niilo Fredrikson, executive]

Steffan, why are you still here?

[Steffan Schumacher, executive]

Good question. I mean, it's great to deliver 29% SaaS growth in Q3. I think that makes you happy.

[Niilo Fredrikson, executive]

That was well done.

[Steffan Schumacher, executive]

Yes. And it's not me, I mean, it's the whole Efecte team here. We are working together on this. I mean, it's a good question. I mean, if you look at overall Efecte turnover, employee turnover, we've been extremely happy and we are extremely grateful. We have a talented team that wants to be part of the Efecte the journey and our mission to become the leading European alternative in service management space. And I think that's kind of a big strong statement of vision. And we have a lot of people that they feel they want to be with that story with Efecte. So a big thank you for the team.

And overall, our turnover has been at Efecte level, very reasonable. And if you look -- if you then drill down to the sales employees, it's no other than any other company. There needs to be -- the workplace they're working, it needs to be a place where you get challenges where you get opportunities. I mean, you need to have clarity on what is expected from you. And then when you have that clarity and you deliver results, I mean, that then kind of creates more energy into the sales team. And we have been lucky to have a lot of success in our sales teams. And a lot of people that have been there for a long time, they know their customers very well. And we have a team that's focusing on new customer acquisition, and they are very active and doing a good job there. So I mean, we have lost maybe 1 person also in the past half year on our sales team. So...

[Niilo Fredrikson, executive]

Yes, it's been [pretty line]. Of course, I mean, the old saying goes that people join good companies and leave bad bosses. And I think, Steffan, you've done an amazing job with the whole field team there, and I think that's a huge, huge impact. And just to give one concrete example, I think in the German team, which is already almost 20 people, there is another Steffan, like our country manager, Stephan Scheer now been there for many years. And I think he built a really nice team and culture. And I don't think they lost a single person, not in sales or anywhere else in the last year. So just as an example of that low attrition.

[Steffan Schumacher, executive]

I mean, we have -- I mean, while we are on the topic, I'm going to share one more example. So in many customers, we have people that have worked with the customer longer than the customer's own employees have been there. So we have customers where we have sales -- have had salespeople for 6, 7 years. And I think that builds up that consistency and customer understanding. And I think that is really important.

[Niilo Fredrikson, executive]

And it's -- by the way, it's quite exceptional. If you think about kind of sales turnover, typically -- it's typically a bit faster. So good point. .

[Lari Nikkanen, executive]

Thanks, Niilo and Steffan. And as our time reserved for this Q&A is coming slowly to the end, one final question for Niilo and Steffan. So how would you summarize your own feelings about Efecte's Q3 performance? Were you happy? And were there any surprises?

[Steffan Schumacher, executive]

I mean, it's always -- while I would have a tendency to go and cheer here and so forth, but in a way, it's always a mixed bag. There are a lot of things that we did extremely well. We were able to deliver the commitment we made for the company, for all of the investors, all of our employees. We worked very, very hard with our customers. Our churn numbers improved, our MRR numbers improved. We made a lot of progress on multiple fronts. But on the other hand, I always tend to say that the biggest room in the house is the room of...

[Niilo Fredrikson, executive]

Improvement.

[Steffan Schumacher, executive]

Improvement, exactly. So in a way, on the other hand, there are so many things we can be better on. There are so many customer engagements we could have done better. There are so many other things we could have done better. And there -- I mean, there are things where we could have reacted faster. So in a way, I feel balanced. There are things we did well. We should be really, really proud of as a team, and that's a great thing. But on the other hand, there's also a lot of things that we could have done better. So in a way, I feel confident, but I know that we have a lot of work ahead of us.

[Niilo Fredrikson, executive]

Yes, that's an excellent balanced perspective on it. And maybe I'll just add in a way the strategic perspective. So we are in the process of building the leading European alternative in service management, becoming the undisputed leader in this space in Europe. And that's a high ambition. It's a bold ambition, and with that come also bold financial goals like getting to that EUR 35 million by '25 and then eventually building a EUR 100 million business. And we have a strategy in place, kind of our road map of how to get there based on these 4 key pieces of growth, product, people and M&A.

And now looking at any individual quarter, I'd like to reflect back on our strategy. Did we make progress with our strategy? Did we get closer to our vision? And kind of putting those kind of lenses on, I think Q3 was definitely a success. We are closer to our vision, and we were able to execute well in all 4 pieces of our strategy. And of course, it goes without saying, what Steffan highlighted, that it's not to say that we wouldn't look in the mirror each day and ask, hey, how can we do things better and what could we have done better? But kind of zooming out, looking at the big picture, I don't think there is any other way to characterize Q3 than saying that it was a very successful quarter for Efecte.

[Lari Nikkanen, executive]

Thanks, Niilo and Steffan. With that, as our time is -- time reserved for this webcast is running out, we want to thank you, everyone, for excellent questions and for listening in.

[Steffan Schumacher, executive]

Thank you. And there was a personal question, what you focus on. So I'm not now going to go there, focus on the Q4.

[Niilo Fredrikson, executive]

Yes, no, that's great then. I think we all are in hey! It's kind of the last time this year that we're going to be on this earnings call. So a really big thank you to all of you for being onboard the Efecte journey. It's fantastic to have you as part of the story. All the best for the rest of the year and look forward to meeting all of you then in the new year as we're going to talk about the full year results.

[Steffan Schumacher, executive]

Happy holiday season as well, and keep warm.