Lemonsoft Oyj

OMXH:LEMON

Earnings Call Transcript 2022-Q1

[Jan-Erik Lindfors, executive]

So first of all, a very warm welcome to this first quarter interim presentation from Lemonsoft. My name is Jan-Erik Lindfors; and I'm the Deputy CEO of Lemonsoft responsible for our customer operations and growth acceleration. With me today is our CFO, Mari Erkkila; and also our Director for M&A and the Investor Relations, Alpo Luostarinen.And together, I will walk you through the key takeaways from the first quarter in 2022. We'll talk a little bit about our growth strategy again and reiterate the most important points. We'll give a little bit of a market update, talk about our product launches and roadmap, some things on M&A, and then we'll go through the numbers for the first quarter as well. And if I understand correctly, then you guys have the opportunities also to send in questions in writing for us. And so we will take those -- we'll take those questions at the end of the presentation when we have -- we'll walk you through the material.So kicking off then with the key takeaways from the first quarter in '22, I would say that as a team, our strong growth -- our strong sales growth continued. We had a lot of focus on new customer acquisition during the first quarter. And if you look at the state of our business, how that is reflected in the numbers, then our net sales growth remained strong at 29.9%. As said, it's driven by new customer acquisition, also the impact of the Metsys and PlanMill acquisitions done last year and the asset purchase of Talosofta.The main driver for this growth was through our SaaS business, which was steady 39.3%. And our gross margin remained at a good level at 88.9%. EBIT-wise or adjusted EBIT-wise we're at 26% -- 26.5% of net sales. That's in line with our expectations, a little bit increasing from Q4 profitability. And as we talked in the last time we met in the presentation, in this kind of scenario, that's affected by our upfront recruitment that we've done during Q4 and part of it continuing also into Q1. Now the number of employees at the end of the first quarter this year is then at 158. And our key numbers you can see in the table on the right-hand side. So basically, reflecting back on the quarter, continuing to execute on our growth strategy in the way we plan.Now if you look at that from a strategy and market point of view, as you know, we have two focus areas in our growth strategy. And the first one is product leadership, which really means that we aim to have the broadest portfolio in the market, serving those five key segments, those verticals where we have special competence and tools to offer to all our customers. The product portfolio roadmap is on track, and I'll go a little bit deeper into product launches and roadmap later on. But we release continuously new functionality from our R&D department, contributing of course also to the growth in its own way.One thing I'd like to highlight from a strategic perspective also and the product perspective is the launch of LemonSmart, a product that we made for the accounting segment or sell through the accounting segment through small micro companies automating finance operations for those kind of customers. On the customer experience side, we continue to focus on our direct sales, both serving our current customer base as well as acquiring new customers. We see good levels of activity in the market, especially in the manufacturing industry and the wholesale retail segments. And our channel sales is focused on the accounting segment. So helping to grow that in line with our strategy, we see that that's a really key piece in the puzzle for us to be able to continue to grow.And also, our transaction business grew. So 12% growth in the first quarter on our LemonHub business and that's good to see. That means that people are sending out electronic invoices and salary slips and so on. So it's a good sign for us. Following up Q1, I would say that we saw strong market demand at the start of the year, but a little bit of macroeconomic uncertainty increasing, especially in the last month since the start of the Ukraine war. Leading indicators are still good. I mean, we generated a very strong sales pipeline for ourselves. So we have the highest lead generation numbers that we've seen. And especially, as I said, the manufacturing industry and the wholesale and retail segments are having high demand. We're seeing a little bit lower demand in our construction and professional services.We made good progress in new customer acquisition. We have multiple deals that we've won with good finish and international brands for enterprise resource planning solutions, and that's really good to see. Also, our consulting and services sales was at a record high level for quarter one. But that also means that we have some pressure on delivery capacity and capability, and I'll talk more about that as well. Cross-sell and upsell activities are putting in, of course, where we're leveraging the acquisitions that we've made. And we've seen some notable expansions during Q1 for these products as well. And then there's a historical milestone that I'd like to -- basically 10 million delivered e-invoices through our LemonHub service that we reached in Q1. Had a really good milestone that [Indiscernible] the volumes also that we process in our service.Now I spoke a little bit about the macroeconomic uncertainty and we saw that -- we didn't see that reflected in January and February, but we saw a little bit in margins as we saw a small drop in leads. And we also saw customers who, due to the uncertainty of the situation, either postponed some deals or postponed some implementations to happen after the summer. Also, if you look at the forecast from the Finnish Economic Institute, ETLA, it's a little bit lower growth in the economy during the year. However, there's a positive indication then that investment should still grow by 3.5% during the year, which is a lot more than in '21. So overall, I will sum this up by saying that we're continuing to [ committedly ] execute on our growth strategy, being the product leaders, supplying the best customer experience, and through that, creating the growth that we want to see from the market.Then a couple of words about our product launches and roadmap. As you guys know, we serve five different segments. And for each of these segments, we have dedicated activities going on from a product development and launch perspective. So in Industrial Manufacturing, notable activities that we're running is improving the functionality from manufacturing companies, bringing easier [ carbon ] planning and manufacturing planning to the market.In the Wholesale & Retail segment, we are focusing on making the Metsys product a SaaS product, really something that you can scale and take to market for the majority of our logistics customers. Talosofta the major brand in our Construction portfolio. We're working on the next version of Talosofta. And then PlanMill is the spearhead product for Professional Services where we serve the IT consulting industry with project planning, customer relationship management and the ERP functionality.And then last but not least, I really want to emphasize the good accounting segment that we have, which is both a sales channel and a customer segment for us. And the major part of our product development effort this year is spent on the LemonSmart product that we brought to market during the first quarter, ramping up through our accounting channel and then expecting to see impact then from the second half of the year. So that's a little about the key takeaways from the first quarter, the market and then as well what's happening on the product front.Next I'll hand over to Alpo for a little bit of input on the M&A landscape.

[Alpo Luostarinen, executive]

Thanks, Jan-Erik. So my name is Alpo Luostarinen. I'm M&A Director at Lemonsoft. And let's -- I'll talk you through a few details on our M&A track.So we are continuing to explore several interesting opportunities in various areas. If we look at a few of the different fields that we are in, as Jan-Erik mentioned, the accounting sector is very important to us and we see a trend towards accounting firms utilizing software to enable them to focus more on advising their customers. And thus, we try to help them to develop their business. The reporting and BI side as well as the transaction businesses that we are both active in at the moment, we are considering opportunities to develop new solutions ourselves or to acquire businesses in both of those fields.If you look at the vertical side, some of the specific industry sectors that we are active in, especially industrial manufacturing sector is interesting and good business for us. The sector, in general, is struggling to maintain its profitability. And it's a bit further along in digitalization compared to some other sectors we are active in. And we see that the digitalization, there's continuing interest towards software solutions to automate processes in that sector, and that's why we see that we've been successful there.Looking at the construction side, there are of course, raw material deliveries have been struggling. There's been cost pressure on projects and it's made it difficult to manage projects in time and in budget. The sector is still under digitalized. And we are planning to help the sector to digitalize further of course. We've made previously several acquisitions -- two acquisitions in the field. And we are adjusting our offering currently to provide an optimal fit. Thus, it might not be relevant for us currently to make any further acquisitions in that field.Again, in wholesale and retail, especially the logistics side, the current geopolitical situation is making it difficult for companies to execute their logistics operations and there's also cost pressure coming up in the field. And we see that this increases the interest towards software solutions to make it more and more efficient to manage their logistics operations.And finally, the professional services side, PSA. We have divided the professional services sector in the six different areas. For example, IT, consulting, legal services and so on. They are quite different from each other and we consider actually interesting targets in basically all of those fields, but they are quite different in terms of what kind of trends there are. So interesting to see. And hopefully, we'll be able to disclose some new information later on.

[Mari Erkkila, executive]

Let's go then, figures. My name is Mari Erkkila, and I am CFO in Lemonsoft. First, net sales. The strong growth in net sales is majority based on SaaS revenue growth. Net sales growth has been 30% in the review period and SaaS has grown by 39% in the same period. SaaS revenue growth due to new customer acquisition and upsell to current customers as well as previous year acquisition of PlanMill and Talosofta. The net sales of PlanMill and Talosofta were not included in the comparison period's net sales.Organic growth was 9.1% in the revenue period. The comparison period included exceptionally high license sales, which shows as lower organic growth of the revenue period. As a principle, we don't offer license sales as an option for new customers, but in special cases, for example, for customers with public subsidiaries. Without license sales, organic growth of revenue period would be 11.2%.

[Jan-Erik Lindfors, executive]

Thanks, Mari. And I would like to kind of comment also on the last bullet point on the slide there. So when you look at the amount of these and offers and close deals that we acquired during the first quarter, then that's -- as I said earlier, that also brings pressure on our implementation and delivery capability. So we have some bottlenecks during Q1 in implementation, but we are of course taking actions to improve that situation and make sure that we get all the implementations delivered for customers as soon as possible. So basically ensuring that we have the right people in our consulting department, ensuring that we have the capacities divided according to the right priority, et cetera. So this is something that we continuously monitor week-to-week, how we're doing on the delivery front. Situation is improving.

[Mari Erkkila, executive]

Thank you, Jan-Erik. And then distribution of expenses. Material and services cost comprised purchase relating to hosting licenses and other external services, which is approved gross margin. Material and services cost is only about 11% of the net sales. Cost base consist primarily of personnel expenses, all R&D development costs have booked on profit and loss statement. Recruitments made in the second half of 2021 and during the review period will weaken relative profitability in the first half of this year compared to the second half.And then Jan-Erik.

[Jan-Erik Lindfors, executive]

So the last year, as I said, was significant for Lemonsoft. Not only did we go public, not only did we grow, not only did we make acquisitions and so forth, we also spent a lot of time in developing the organization going through the way we work, documenting our processes, making sure that we have all the capabilities needed to basically work efficiently. And then, of course, filling out the organization with roles that we needed over time.And Q4, as I said, we did over the second half of '21, we took in a lot of people. This 10 months' lockdown during the last couple of months, and we don't foresee the amount of people growing very much anymore during the year. We need to focus on getting the most out of the people that we've already got in and make sure that the onboarding process is efficient, as I said, and continuously develop our capabilities and our business processes to make sure that we are as efficient as possible.Number of employees is up to 158. And if you look at that split [Indiscernible] is still more or less the same. We have the majority of our personnel in R&D and then the rest is split between customer services and other functions as well. So I would say, a historic year for Lemonsoft behind us, and of course, now our first quarter as a public company as well reporting the results. So looking to work together with our new colleagues during the year of '22 to make Lemonsoft as efficient as possible.Then if you look at the outlook for '22, we're keeping that unchanged. So no current changes to the forecast for '22. So we're still looking at the 23% to 28% growth compared to '21 net sales and then profitability at 30% to 35% level adjusted EBIT of net sales. And the growth drivers are still there. We have a strong and stable customer base with low churn. Our product development is progressing nicely across all the five focus segments that we serve. And then of course, new customer acquisition, as mentioned, has been well as well. And the underlying trend of digitalization, ERP penetration is something that we expect to continue.I mean, businesses have to be more efficient than they were yesterday. They have to invest in their processes. And even though the macroeconomic climate is uncertain, we just have to live with that. But I think that is not going to go away over the next couple of months anyway. So that's basically the guidance for '22, it's unchanged. And then that's basically our main message for today. Keeping the sales growth growing, keeping the costs under control, and then through that, getting to the growth and profitability targets that we have for the year.The next slide is more or less informational, but the upcoming events for '22 is the half year report will be released on Friday between 22nd of July. And then the last interim report is then Friday the 28th of October '22. And always, in all issues or questions regarding investor relations or information, feel free to contact Alpo or myself or Mari, but primarily, Alpo in terms of getting information or visit our investor website at investors.lemonsoft.fi where we keep all the latest information as well.So that was that for the kind of official side. And I think we could then go over to questions, Alpo. Do you have them -- we can take them from the list.

[Alpo Luostarinen, executive]

Definitely. I think we could start with sort of a bigger overview on the macroeconomic situation and the Ukraine-Russia situation. How do you see, Jan-Erik, that this has affected our business?

[Jan-Erik Lindfors, executive]

Well, as mentioned, we didn't see any major effect in January and February. We did see a little bit less leads coming in, in March. We also saw customers postponing hiring decisions, as well as implementation schedules in March. It's too early to say if that's a trend or not, I can't say. But for sure, something that we noticed in March.

[Alpo Luostarinen, executive]

The inflation is something that the investors are really interested in. So how have we managed our sort of price increases and what's the pressure from the market towards us?

[Jan-Erik Lindfors, executive]

We have been very moderate for our price increases for 2022. I mean, I think we saw this -- the inflation trend already last year. We were doing planning for '22. And we decided that the moderate price increases were the way to go. I mean, our customers are in the fields of manufacturing, construction, logistics, et cetera. A lot of their costs have gone up during the last couple of months and quite dramatically. So I think our customers are seeing the effects of that, but -- and we will plan to kind of do our best to be moderate in our price increases as well.

[Alpo Luostarinen, executive]

One specific question we received about the price increases. Can you give a rough estimate on how that affects or has affected the Q1 revenue?

[Jan-Erik Lindfors, executive]

Not materially from that point of view. We did I think for our customers a generic kind of index price rise of 2.2%. So that was what the general price increase. And that was not across the board, not for every customer, not for every product, but those that we felt we had the opportunity to do something. We also have had products and services where we did not do any price increases simply because we felt it was inappropriate.

[Alpo Luostarinen, executive]

And then going a bit further into what we said about our revenue or net sales development, we received a question about the license sales. So basically, what would the organic growth in Q1 be without the comparison period license sales? Can you, Mari, give a rough estimate on that?

[Mari Erkkila, executive]

Yes. If we take out total license sales this period and the previous period and the license -- with organic growth of revenue per growth be 11.2%, if we take out license sales.

[Alpo Luostarinen, executive]

All right. And moving towards personnel and recruitment, we have received quite a few questions on that. Basically, the first question that we recruited a lot at the end of last year and in the beginning of the year, continue to invest in it. And then is that going to continue along the year and up to the end of the year?

[Jan-Erik Lindfors, executive]

Not at the same pace that we did last year and the latest a couple of months back. So if you look at it from an efficiency perspective, the most important thing is to get the best out of our current personnel. And then we might have some specific needs that we go and cater to in the market. If we find, then of course, we can recruit. But we want to make sure that we can grow our revenues and keep our fixed cost base stable. That contributes also to getting to our EBITDA for that.

[Alpo Luostarinen, executive]

And then about the personnel costs in more detail. With our personnel costs have increased about 50% and the amount of personnel about 30%, so what's the situation on that? Are we focusing on higher salary recruitments? Are we seeing wage inflation and so on? And what kind of recruitments? And perhaps this could also relate to the M&A acquisitions with what's the effect on wages?

[Jan-Erik Lindfors, executive]

Yeah, good question. I don't think we are consciously focusing on higher salary recruitments. I think that's basically a consequence of the type of actions being done during the acquisitions. Of course, it's part of that, but also we've strengthened in a number of positions in our product management. Those are typically other skilled people. We've also recruited into product development and so forth. So there's no conscious kind of decision to up our salaries and recruitment. But of course, the market is the market and we have a limit that we stick to. And then if -- that's reality in the recruitment situation. But as I said, no conscious decision to focus on higher salary.

[Alpo Luostarinen, executive]

And Mari, perhaps from a sort of accounting point of view, how do you see the biggest influencers to...

[Mari Erkkila, executive]

We have also done -- salary increases have been done during the review period. So this -- also little bit salaries has grow up, but no, nothing big.

[Alpo Luostarinen, executive]

And perhaps the amount of sort of higher end recruitments that we did last year for the IPO have affected somewhat. And then finally, perhaps the acquisitions we've made have had some impact. But yeah, very good.Then coming back to the sort of organic growth, one question about the customer. Is customer acquisition process -- progress is -- well, what's the main challenge with organic growth and what actions need to be taken and how we see at the end of the year? We've discussed this a lot already, but let's summarize this again, Jan-Erik.

[Jan-Erik Lindfors, executive]

So if you sum it up from a -- or if you recap the main points, then making sure that we get our implementations that are now ongoing, done with the best quality as soon as possible so that those recurring revenues start coming in from those new customer cases. Second phase is, of course, making sure that also our transaction business continues to grow and that we keep serving our current customer base well so that we get cross-sales, upsales and leverage the acquisitions that we've done during the last year.As I said, we've seen some nice expansions in some of those products that we acquired during the year, but also, we have nice cross-sell capabilities because we've integrated, for example, PlanMill into the financial modules of Lemonsoft. We integrated and made sure that we can actually give our sales team the possibility to compete with the kind of balanced portfolio on that point.

[Alpo Luostarinen, executive]

And final question on the profitability. We've said on our profit forecast that the end of the year will be more profitable. Can you give any indication on what the first half and the second half will look like?

[Mari Erkkila, executive]

Our adjusted EBIT margin was at an expected level in this first quarter and it was 26.5%, but we believe that whole year is likely our outlook is. So that's the situation.

[Jan-Erik Lindfors, executive]

Q3 is typically strong for us anyway. So that's something to keep in mind.

[Alpo Luostarinen, executive]

Very good. Thanks a lot Jan-Erik and Mari. I think we've wrapped it up for now and we'll come back to you. And hopefully, we'll get a lot more to tell to the market later on.

[Jan-Erik Lindfors, executive]

Very good. Thank you to everybody who participated. Great to see you all, and let's stay in touch. Thank you.

[Alpo Luostarinen, executive]

Thank you.