Lemonsoft Oyj

OMXH:LEMON

Earnings Call Transcript 2022-Q3

[Jan-Erik Lindfors, executive]

So ladies and gentlemen, welcome to this Lemonsoft Oyj interim report for the first 9 months of the year, with a focus on Q3. This time around, we'll be talking about our growth and -- continued growth and our improved profitability from the first half of the year. So together with me today -- my name is Jan-Erik Lindfors. I'm the Deputy CEO of Lemonsoft. And together with me today, we have Mari Erkkila, our CFO. We also have Alpo Luostarinen, our Director of M&A and IR. And we'll be walking you through the highlights of our interim report for the first 9 months of the year.

Talking a little bit about the market, about our growth strategy, the stability of our business, which I think is important to reiterate to everybody on the call. And then, of course, also, how are we doing with integration, for example, of our acquisitions. And then Mari will be talking about the numbers. Our net sales growth, our organic growth, and then we'll do Q&A at the end as well.

So without further ado, let's start with the highlights from the third quarter this year. So as you can see, our net sales grew 30.6%. And our adjusted EBIT improved up to 32.7%. Our gross margin is still very stable at 88.3%. And as I said in the beginning, our business is very stable. Our customers now up to 7,600, and that means that we're not dependent on any particular segment or vertical or any particular customer for the stability and growth of our business. We're now 187 people, which is at the end of Q3 the main growth in personnel comes from the acquisitions of Finazilla and Logentia during the last couple of months.

I wouldn't reiterate or like to be, but like to also present the -- how that -- our net sales and how our customer growth has developed during the last couple of quarters. So as you can see on the left-hand side, net sales per quarter steadily growing up until the EUR 5.8 million that we had this last quarter. But then if you look at the rolling 12 months net sales were up EUR 21 million in net sales, which is, of course, a nice piece of growth over the last couple of quarters and years as well.

Number of customers is growing steadily, which is, of course, contributing to our growth. What is important to understand here is that our customer acquisition is done both directly through our own sales and then indirectly through our channel sales. So the channel sales is typically bringing in the lower side of the customers, the smaller customers through the accounting companies, and then the larger customers are handled by our own direct sales teams in the organization. The growth in customers during the last quarter was actually quite a lot through the accounting companies. It also means that the average deal size was a little bit smaller than what we had in the previous part of the year.

Then taking a look at the growth strategy and the market update. And of course, as we all know, there is a challenging macroeconomic situation out there, but we still see good enough demand for our E&P services and our products. And that, how should I say that, we haven't seen any kind of major effect of the macroeconomic situation. But we do have longer sales cycle from -- if you think about complex sales also of ERP solutions, then what we do see is especially in the manufacturing and in the wholesale and retail sector. It takes longer now to get the deal from lead to [ deal ]. Now our sales pipeline still continued to grow during the quarter, and we still have a stable amount of deals to work on. So there is no problem with that one. Channel sales, as I said, new customer acquisition softened slightly, smaller customers, smaller deals across the range. Consulting and services sales are pretty stable. And I'm happy to report that we don't have any more bottlenecks in the order capabilities. So we've been pretty efficient during, I would say, July to end of September in delivering the projects that we have, albeit we also have customers who have postponed their implementations over to next year. And of course, that means that we have now room in the delivery capabilities. So once we get new dealing, we can basically start working on that project immediately.

Finazilla and Logentia were positive additions to our product portfolio. I think -- when I look at those 2 products, they are really suitable both Logentia with cost optimization of transportation costs and Finazilla on the budgeting and reporting and forecasting front. Those products have shorter sales cycles. And of course, that's a great way also for us to get sales growth from that point of view.

But then again, coming back to the market conditions, there is uncertainty in the area. So it's very challenging for our customers. We did see some churn during Q3 as well. There were bankruptcies in the construction sector. There were some single bankruptcies in the manufacturing sector as well. And of course, if the customer goes out of business, that affects us as well.

I took a look at the barometer for the SME sector for Finland yesterday, which was published at the end of September. And it's clear to see that customers are, at the moment, trying to protect their own profitability. The biggest challenge is that they see is -- from the market conditions is the increase in cost from raw materials, from energy prices, et cetera. So that's clearly their biggest challenge. And of course, at the same time, that's an opportunity for us because we can help them be more efficient in what they do, then they will automatically save costs anyway. So the challenging market conditions for our customers is both kind of growth and an opportunity for us if you like that.

And cross-sells and upsells of Finazilla and Logentia products have taken off very well. So I was happy with the sales of Finazilla and Logentia products during the last quarter. We have trained our current sales team to do the cross-sell of the Finazilla product. And I'll get back to Finazilla in the next slide because I want to give a little bit more detail on that one. Really happy how the integration and the cooperation with both acquired companies have gone. I think we have great products. We have great people in those companies and really looking forward to kind of take the next step on the growth journey together with them.

And speaking of Finazilla and how does that complement the offering that we have at the moment. So we acquired Finazilla back in July 2022. And the main thing that it brings to our product portfolio is the forecasting, budgeting and analytics and reporting capabilities, which is really something that our customers have been asking for, for a long time. Being able to take data from 1, 2, 3, 4 different system sources and present that in an insightful way to customers so that they really know what's going on with their businesses is crucial.

And as I said, we've trained our sales team for both solutions. We're working on the technical integration between Lemonsoft and Finazilla. And Finazilla additionally offer something called CFO-as-a-service, which really complements the overall offering from a kind of service perspective. So if you don't have the capability of a CFO or a controller in your business and you need help setting up your financial management processes and your reporting and so forth, then Finazilla can help with that as well.

So I think clear value for customers, increased visibility into their business. And through that, they have -- it's much better to feel in control of your business through good tools and processes than being without them.

A couple of nice key customer references as well, as you can see from the logos below. And really looking forward, as I said, to working with the Finazilla team to scale this product as well in the next couple of months and years.

Right. Alpo, do you want to comment anything on the Finazilla part?

[Alpo Luostarinen, executive]

Yes. Thanks, Jan-Erik. First of all, I'm very happy to see the expertise we have in each product field and teams we have within Lemonsoft now. It's an excellent addition. Good demand for Finazilla's products, especially within the Lemonsoft customer base, that's we've been working on developing the solution fully to support our on-core ERP solution offering. It's interesting to see the next few quarters how we can develop that.

And as for Finazilla's relationship with their customer companies it's very deep. They have a good position with the client individuals and providing deeper insight for us as how we can help their businesses develop. So excellent addition with Finazilla.

And on the other hand Logentia, they have a bit separate value proposition for both Finnish and international companies, very easy to provide value to customers, utilizing logistics services. So reminding that Logentia's customers are a bit bigger than Lemonsoft in size typically. It's a bit separate business. But otherwise, the larger end of Lemonsoft's customers, we can also provide Logentia's offering, so both good additions.

[Jan-Erik Lindfors, executive]

Yes. And maybe to further comment, we already closed the first kind of cross-sell deals for Lemonsoft's customers with the Finazilla product as well. So that's really great to see that it's taking off in a good way.

Good. I think that's about it on the market and that situation. I see questions coming in also from the audience, so we'll be happy to answer that in a little while. I think for now, let's go on the financial part, Mari, so if you want to go over the development of the sales and the costs.

[Mari Erkkila, executive]

Yes. Thank you, Jan-Erik. Let's go through net sales first. The strong growth in net sales is minority-based on SaaS revenue growth. Net sales were EUR 5.8 million, and adjusted EBIT margin was 33.7% (sic) [ 32.7% ] of net sales in the review period. Net sales growth has been 30.8% in the review period, and SaaS has grown by 25.6%. SaaS revenue growth due to new customer acquisition and upsell to current customers as well as acquisition of Finazilla and Logentia, which net sales are not included in the comparison period.

Organic growth was 10.3% in the review period. Net sales were slightly slower than expected in the review period. Organic growth was lower than expected for business acquired before 2022.

And then distribution of expenses. Materials and services cost comprised purchase relating to hosting licenses and other external services, which is above gross margin. Cost [ base was just ] primarily of personnel expenses. All R&D development costs have booked on profit and loss statement. Personnel expenses increasing total acquisition of Finazilla and Logentia. Other operating expenses is in line with plan. Thank you.

[Jan-Erik Lindfors, executive]

Thank you, Mari. And then if we go through then, as I said, from the start of the year, we've been also increasing our staff and our personnel. We're now up to 187 mainly through acquisitions. So if you look at the way that our recruitments have been done, the majority of the personnel additions have been through the acquisitions of Logentia and Finazilla.

We have though invested also in our sales team. So basically, our customer success managers have been added to the team since the start of summer, and we are still looking to grow that team because, of course, we understand that we need to take care of our customer base as a whole. And then if we see a slight slowdown, for example, new customer sales, then it's even more important to make sure that we have customer success managers in place taking care of our current customers in the different focus verticals that now serve. So there's been an investment on the recruitment side of this one.

And as you can see, we're still -- the main part of our staff is still in R&D roles working on product management, product development, quality assurance, et cetera. And then the rest in customer service sales or other functions. And I still think that we have room to invest on the customer success side, also on the sales side, making sure that we have enough capable people taking care of the leads and taking care of our customers. So looking forward to see how that develops then during Q4 and, of course, during next year as well.

Good. Then the outlook for '22. We will keep our forecast unchanged. We, of course, did an update on the 8th of July when we did the acquisition of Finazilla. So our net sales growth is still in the region of 30% to 36% compared to 2021. And then from a profitability point of view, our adjusted EBIT on the scale of 28% to 33% of net sales as well. If you look at the long-term situation, we're still extremely well placed to grow. The Finnish ERP market is still lowly penetrated, if you think about it from an ERP point of view. So those segments, those verticals where customers are taking into use their first ERP or where there is still a lot of pressure, for example, to modernize, still very attractive to us.

As said, our product portfolio is broad enough and our customer base is broad enough to kind of withstand also a challenging situation. But then the positive development, of course, of digitalization as a whole will not stop. So even though there is maybe challenging times for our customers in terms of the macroeconomic situation, that's still a driver for us to be able to sell and deliver, right? So I think what we need to see is this market situation as something that we need to kind of grab by the neck and simply use to serve customers better as well as take market share, that would be my kind of personal ambition from a sales point of view for us over the next coming quarters and months.

All right. I think that was the official part of the program. I see we have some questions coming in here, for example. So Alpo would you like to moderate please and pick out what we should look at.

[Alpo Luostarinen, executive]

Yes, definitely. Thanks, Jan-Erik. First of all, we've received a few questions on organic growth. So probably we want to be on that. Trying to understand what hurts organic growth, is the first question.

We added 300 new customers in Q3, but the average revenue per customer was a bit lower than expected, what are the causes of lower ARPT. Want to begin on that one, Jan-Erik.

[Jan-Erik Lindfors, executive]

Yes. As I said, I mean, the smaller deal sizes, of course, also converts into smaller or less than expected. So if you look at where our new customer acquisition comes from, it's from our direct sales and it's from our indirect sales. And if you look at the relative share of customers or the share of customers acquired, a lot of it came through the accounting channel. And a lot of those were small customers may be taking into use, for example, our [indiscernible] with the product. So a lot of new customers, but a lot of smaller contracts we signed.

[Alpo Luostarinen, executive]

Yes. And one thing to note in the 300 new customers we gained, roughly half of those are through Finazilla, so not all from our existing channels. And continuing on organic growth, we mentioned that organic growth was slower than expected for businesses acquired before '22, and what we mean by that, maybe I can take that one.

So basically, companies that we acquired in '21, basically Talosofta and PlanMill, those hit the organic growth figure in Q3 '22. So those are -- have a bit slower growth rate than the latest acquisitions and they keep the organic growth a bit at the moment.

And continuing on sales and any update from Lemonsoft. It was supposed to boost organic growth already in Q3, what seems that, that has not been the case? Jan-Erik, you want comment on that?

[Jan-Erik Lindfors, executive]

Yes, that's correct. So a little bit slower uptake on that side, and that's based on our -- of course, our cooperation on the accounting companies key to that one, but not as quick uptake of Lemonsoft as we had expected.

[Alpo Luostarinen, executive]

Yes. And any changes on the way our sales pipeline accrues? Are we happy with the development of sales pipeline in Q3?

[Jan-Erik Lindfors, executive]

Yes, good question. No changes to the way our sales pipeline accrues. So we, of course, work every week to have good visibility on where our pipeline is and which deals we are going to close this week, this month. Value of the pipeline is still on track. As I said, leads have been coming in during Q3 at almost the same rate as in Q2 and Q1. So -- but the one thing that we noticed it takes longer to get from first discussion to last discussion over the last couple of months than it did before.

And then, yes, changes in the -- no, so happy with the development of sales pipeline. And of course, always, we want to have more leads, but we've invested quite a lot in marketing activities during the fall. We've done radio campaigns. We've done current customer campaigns. We've been also doing a couple of exhibitions and fairs on the construction side and on the subcontractor side during autumn. So quite a lot of activity on the sales and marketing side there.

[Alpo Luostarinen, executive]

And one thing we discussed earlier about current customers versus new customers, but where is our emphasis between those?

[Jan-Erik Lindfors, executive]

Yes. We need to get to the organic growth level and growth levels that we want to do. We need to succeed on both new customer acquisition as well as current customer sales, right? So we are still executing sales activities and acquiring new customers. We also invested, as I said, resources and taking care of current customers and making sure that they get the best out of what they bought so that we can then do additional upsell, cross-sell, more licenses, more seats and so forth. So both of those areas need to work together hand in hand.

[Alpo Luostarinen, executive]

Exactly. And we mentioned in the first half of the year that we suffered from bottlenecks in implantation. Is there still pressure for our consultants in that end?

[Jan-Erik Lindfors, executive]

We have a lot of work, but we don't have the same kind of buildup and the bottleneck that we had in Q1, Q2, for example. So we've been able to finish quite a lot of projects during Q3, but also, as I said, some customers have moved their implementations over to 2023, which means that there's been capacity freed up. And so we're able to take on new business and do new projects at the moment.

[Alpo Luostarinen, executive]

Good. And I think looking backwards, that was for sales and then looking at the bankruptcies in construction and manufacturing, what was our churn in Q3? And do we have any visibility on the amount of bankruptcies in Q4?

[Jan-Erik Lindfors, executive]

I mean I can only see from what I see from our numbers and from our customers. I haven't taken a look at the overall kind of market situation and the market is that an end segment situation. But we did see a couple of bankruptcies in the construction sector during Q3 that affected churn. We also saw some single bankruptcies in the manufacturing sector that, of course, also affect churn. It doesn't affect churn immediately. Because even though a company goes into bankruptcy, they still need to have the systems available and so forth. But the effect of that churn will be seen on them going forward. But as a whole, of course, when you look at the SME business and particular verticals, I think there's quite a lot of pressure on our customers.

[Alpo Luostarinen, executive]

Yes. As for the churn figure, we don't report that on a quarterly basis. But Mari, do you want to comment on a general level, where it lied in Q3. Were there any changes?

[Mari Erkkila, executive]

Yes. Thank you. Of course, it is a little bit bigger because the situation is what it is, but still, it's nothing very big growth in there. So it's very good level.

[Alpo Luostarinen, executive]

Yes. So fairly stable churn thus far. And looking a bit forward, what kind of visibility we have for '23 as for price hikes, new sales campaigns to boost sales pipeline and reach new customers? Jan-Erik, do you want to comment on that?

[Jan-Erik Lindfors, executive]

Yes, of course. So when you look at 2023, we basically forecast 12 months ahead and try to have as good of a crystal ball as we can in terms of the segments that we work with and how many deals we can complete per segment per month to understand how that -- the year pans out. So that's an ongoing process that we always do. So we don't do budgeting from September to December in '23 -- or '22 and say, okay, this is it for '23. That's an ongoing process, continuously for us.

When it comes to price increases, we have already told customers of a moderate price increase of 3.2% that we sent out in September, that will take effect from the 1st of January. And we are looking at ways of delivering more value to customers by packaging our products in a slightly different way for '23 that will also have an effect on pricing as well.

Sales campaigns, of course, we do that all the time. That's also ongoing continuously. And as I said, we are -- we've been running different campaigns for especially new customer sales during the autumn. For new customer acquisitions, I think it's more of a continuation of executing well on the lead pipeline. We're generating our leads through inbound and outbound marketing, validating those leads and being even crisper with our value proposition and the way that customers can benefit from using us, it's important.

We're working with our sales team on something that we call sales academy basically through all the 3 stages in the sales process from lead regeneration to the actual demonstration and sales to the actual closing as a continuous improvement project and expecting to see good effects from that.

[Alpo Luostarinen, executive]

Thanks. And we've talked about a few projects that have been prolonged, moved forward and some projects moving on to '23. What are the sizes of these projects, are these larger or normal size of business?

[Jan-Erik Lindfors, executive]

They would be normal size and a little bit on the larger size from that point of view. So typically, small projects those are easy, quick to deliver. But it's really more about what does the customer see in his environment. Does he have the resources to actually take it into use? Has he done all the work on his side and so forth. It's not been so much on our side, more on the customers saying, okay, I'm so busy. All I need to do -- I need to handle the basics. So we have small projects being postponed. We have mid-sized being postponed and also 1 or 2 larger-sized deals.

[Alpo Luostarinen, executive]

Good. We've talked about -- a lot about sales and churn and customer relationships, but going a bit forward into personnel, we've seen some turnover within personnel, some kind of -- what kind of salary inflation are we looking at?

[Jan-Erik Lindfors, executive]

Look, I think everybody at the moment is looking at their own situation and trying to figure out how can they afford the electricity bill, right? And then the logical kind of conclusion is, can I talk to my employer about the salary raise? So we do anticipate some salary inflation for Q4 and '23 -- at least for '23.

[Alpo Luostarinen, executive]

Good. All right. I think we've covered all the questions that we have received, and we'll be doing a bit further -- looking a bit further into our business in Q4 and in more detail, but thanks from my side, Jan-Erik and Mari.

[Jan-Erik Lindfors, executive]

Thank you, guys. So I really appreciate that you guys took the time to be with us today, and good questions.

[Alpo Luostarinen, executive]

Jan-Erik, we just got one final question. Attrition. Attrition rate, what such that and what's the employee turnover? How we see that?

[Jan-Erik Lindfors, executive]

What would be a -- did we have that at 14%, Mari? I'm 100% not sure, 14%, I think, was the attrition rate.

[Alpo Luostarinen, executive]

Yes. On an annual basis, I suppose.

[Jan-Erik Lindfors, executive]

Yes. Yes.

[Alpo Luostarinen, executive]

Good. All right. Thanks, Jan-Erik.

[Jan-Erik Lindfors, executive]

Thank you so much, and have a good day. See you later.

[Alpo Luostarinen, executive]

Thank you.

[Mari Erkkila, executive]

Thank you.