Lemonsoft Oyj

OMXH:LEMON

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Jan-Erik Lindfors, executive]

Good afternoon, ladies and gentlemen, and welcome to this interim report for Lemonsoft. Once again, we're here to talk about our report from January to September 2023. And especially focusing then on the Q3 results. So with us today, of course, myself, the CEO of Lemonsoft; Mari Erkkila, our CFO; and Alpo Luostarinen, our Director of M&A and Investor Relations as well. Together with Mari, Alpo will walk you through today's report, and we have a session of Q&A at the end as well. So feel free to ask questions and put them in the chart, so we can discuss them later on. Otherwise, we will be covering as usual, the highlights from the last quarter as well as the market situation as we see it. The most focused actions that we're doing at the moment to improve profitable -- or improve profit and growth. And then we'll walk you through the numbers as well and reiterate our guidance for the full fiscal year. So let's get started. So first of all, I want to comment on Q3 from a kind of quietly positive point of view. I thought we made progress on all the areas where we were working on during the quarter.

So we have certain deals around which we focus on quality, transparency, customer-focused, I think that the work that we did on these areas can also be reflected in our numbers. So we had an increase in net sales of 18.1%. And adjusted EBIT of 35.1%. So I think, once again, we created a profitable growth for our shareholders and our stakeholders. Most of our revenue growth again came through acquisitions. But we did see, of course, that the organic growth of our recurring revenue is positive in the quarter. And we also saw that the share of our transaction business in our total turnover increased with the acquisition of Finvoicer. We had some customer churn. I think what we did see in our numbers was a reflection of the kind of economic cycle where the Finnish economy is we clearly saw that a large part of the churn was driven due to bankruptcies. So let's see how the Finnish economy develops further. At the end of the third quarter, we had 213 employees, an increase from 187 the year before and an approximately 50-50 split now between customer operations and product development. So -- but the large jump then from Q3 '22 to Q3 '23, but of course, driven by the acquisition of Finvoicer mainly. Gross margin is still stable at 87.2%. We had a slight decrease on that one. And then the number of customers took a major jump to 12,500 as well, again, from the second quarter acquisition of Finvoicer.

Then if we look at longer-term trends going back on net sales and rolling 12 months and number of customers. So we can still see a clear positive trend during the last 3 years. Net sales going up from EUR 6.2 million to EUR 6.8 million from Q2 to Q3. Rolling 12 months, we're now at EUR 25.3 million in net sales. And as I said, a large jump in the number of customers that we have the honor of serving. I think, once again, when you look at the strength and the opportunities of Lemonsoft, the wide customer base as well as the large product portfolio that we have to serve all these customers is clearly our opportunity to grow profitably both now and in the future. Then a quick word about our growth strategy and our market update. We, of course, have been talking for the last 2 or 3 years about those main areas where we focus on so product leadership and customer experience. And those 2 are still at the core of our operations. So in order to be competitive in the market, we need to execute on our current product development roadmap as planned. So currently, we are investing in the Kellokortti 2 product, which we will bring out to market during '24. And then on the Lemonsoft ERP software looking on different enhancements for the financial management modules for the manufacturing modules and the logistics modules.

And at the same time, we see a clear demand in the market for more application integration. So customers are trying to extend their current kind of IT landscape with clear quick integration so that they can build business processes where several tools are integrated together and support the work of the employees. Customer experience, on the other hand, of course, it's imperative that we make it as easy to use as easy to take into use and as easy to support our customers as possible. So working on that whole kind of customer life cycle all the way from the sales until the support is really key for us when you talk about account management and customer success. So we've been working very hard on that during the year and even more during the quarter, strengthening our presales and our sales resourcing of that. Now if you look at the market, we have, I think, I would say, a slightly positive trend compared to at least in Q2. We saw that lead generation was steady. Customers are really interested in solutions for operational excellence, improving their bottom line work time management, project management, and so forth. However, if you look at the split in -- or the mix of products, I would say that from a direct sales point of view, new customer sales, customers are still careful with investments in medium and large-scale ERP solutions.

And again, a really good order intake and good demand for our data products and application integrations. So during Q3, Q4, from a market perspective, putting even more focus on good cross-sell, upsell campaigns between our different products to our current customer base. Q3 and Q4 is really important. Market positions are still challenging for our customers. Our -- our data shows an increase in churn because of bankruptcies, as I mentioned in the beginning. And the macroeconomic uncertainty in Finland is clearly there for all to see. I'm not 100% sure how the market will develop. There is still a lot of uncertainty. But looking forward to Q4, I think quietly positive at this point in time. Now talking then about actions and consequences or actions and results from the things that we've been doing for during Q3 to improve growth and profitability. Then I just wanted to give you a couple of operational updates on the initiatives that we're working on. So campaigns, as I said, from a sales and customer care point of view, accelerating both the new sales and then taking care of our current customers in an even better way. Training our sales reps, training our account managers, recruiting in a very kind of focused way so that we can find the right people in the right roles, just to make sure that we really take care of the current customer base that we have, it's our biggest strength at the moment.

Then 1 of the key ingredients also for profitable growth is, of course, pricing and we executed our bundling and packaging update during August, September for the Lemonsoft products. So we didn't get the full effect for the quarter. But basically, we condensed over 150 different licenses into 7 different packages so that it's easier for customers to understand what they're receiving and what they're using and buying. And we applied that to our whole customer base within the Lemonsoft users for new customer acquisitions, this packaging and bundling has been available already since January. Then we started also looking at how do we work within the group in the best possible way with sharing best practices. And we have seen a lot of cross-sell success early, especially between Finvoicer and Lemonsoft products. I think it's important to understand for you that the Finvoicer are kind of product and service portfolio is something that we have really cross-sell possibilities across all Lemonsoft products and also across all Lemonsoft customers because in what life cycle management is still something which is relevant for all our customers. M&A integration, getting as much out of, of course, from a synergy and an efficiency point of view, is being looked at closely.

And as I mentioned already on the previous slide, working with Lemonsoft DLP, browser-base version, the Kellokortti version 2 and the integration platform that we are using is really the kind of key product development investments that we're doing. We also created a -- for those of you who follow LinkedIn, you maybe saw that we published a partnership with French technology. We use their integration platform as a service. We use that to build quick, build and deliver quick integration solutions for customers. And as I mentioned, we've seen a real big upswing in the order intake of this kind of services, and we'll push on this also going forward. And then overall, of course, looking all the time, how can we strengthen our capabilities, where do we need more people, good people? Can we do it through training or through recruitment or through process development. We put a lot of emphasis on that. So as I mentioned, sales and customer care, cyber security, cloud delivery and operations. Those are all areas where we've strengthened the organization basically. And then everything comes back to execution of strategy, right? So we are doing, as I mentioned also before, some tweaks and updates to our growth strategy. Those are on the finishing line. And as I mentioned earlier, I hope to be able to share those outcomes with everybody as soon as we have them ready and approved by the Board.

Good. Then let's go on to the finance side. So Mari, can you please comment on our net sales and our costs, please.

[Mari Erkkila, executive]

Yes. Thank you. Yes, so as net sales and net sales increased due to the acquisition of Duunissa.fi business and Finvoicer Group, whose net sales not included in the incorporation period. Net sales were EUR 6.8 million, and adjusted EBIT margin was 35.1% of net sales in the review period. Net sales growth has been 18.1% in the review period. Transaction income increased, especially due to the acquisition of Finvoicer Group. Organic growth of the revenue period was minus 1% due to the challenging market situation, especially consulting and other income [ remained ] opening at the lower level in the comparison period. Opening growth of the recurring revenue was positive. Yes. Then distribution of expenses. Material and services cost comprised purchase relating to hosting licenses and other external services, which is above gross margin. Gross margin was slightly lower than previous year. Material and services was 12.8% of net sales. Cost base consist primarily of the employee benefit expenses.

During the review period, we've been capitalized development expenses of about EUR 300,000. Other operating expenses have increased slightly as planned. Thank you.

[Jan-Erik Lindfors, executive]

Thank you, Mari. And then just a quick slide, as I mentioned already before. We had Q3 growth in personnel growing significantly to that acquisition of Finvoicer or actually from Q2 already onwards. So we are, of course, in the -- we also had a change negotiations that took place during Q3, but those were minor role changes -- roles that were removed because of publicity and so forth. And so the growth in employees from 187 to 213 is what you see from corresponding quarters. Personal by function, as I mentioned, we're almost 50-50 now, 49% in customer operations, 44% in R&D and then [ 7% ] in other functions, which is basically our administration, finance, management and so forth. And again, as I mentioned previously, we are looking to strengthen our capability across the board. So it's not a day of -- it's a case of being selective, recruiting to the right positions to the right department and finding the right people who could really help drive growth in our profitability. So in those areas where we need help for sure, we will also strengthen.

Input from the outlook. Then the outlook for 2023, we updated our profit forecast on the first of June due to the latest acquisition. We reiterate the same net sales growth on 15% to 20% level compared to 2022 and then adjusted EBIT of 25% to 30% of net sales as well. We will continue to grow and deliver operational excellence to our customers. We have a large customer base, a large product portfolio. I think still the strength is if the market is weak, for example, in construction, we can always sell our solutions to other industry segments to other customers, whether it's a horizontal solution such as financial management in both life cycle management or a vertical solution into industrial manufacturing or wholesale and retail logistics, et cetera. Those are the areas where we're strong. Those are the areas where we aim to expand and also leverage going forward. However, we still see that the economic situation in Finland is challenging for our customer. So it's too early to tell where the market is going at the moment. Of course, as everybody else, we are hoping for a quick turn around would also enable us to capitalize on increased sales, helping our customers also. Then the investor calendar update for 2024 will come later in the year. Alpo is working on that one. And then if there's any questions or comments for us now after the main part of the webcast, and Mari, myself and Alpo will be happy to answer questions. Time for questions.

[Alpo Luostarinen, executive]

Good. We actually have a few questions. Let's start with the sales part. We announced the bundling and price increases, and we proceed with the question whether we've seen increased churn or negative feedback from customers? Or what was the feedback from customers overall.

[Jan-Erik Lindfors, executive]

Actually, there's been only a few customers having objections towards the bundling and the pricing. I think I've been kind of positively surprised. I've had not 1 single customer reach out to me directly being negative about the change. I think that the fact that we can show them that right now in your packages, in your bundles, you have so much functionality included, and this is the new price. And it's clearly easy for us to motivate what we've done this change, then it's also easy for customers to understand that.

So no effect on churn at the moment and only some individual cases where customers have not been happy about the change.

[Alpo Luostarinen, executive]

Yes. And as usual, we don't publish churn figures during the year and just at the statement later on. Another question on sales, and we've noted that our consultancy and other revenue sales has been a bit soft. Does that reflect in new sales later on? Or how do we see the situation there?

[Jan-Erik Lindfors, executive]

I mean it reflects in new sales from earlier on, right? So that's basically the rule [ course ] because we had longer sales cycles for new customer acquisition during the first half. That reflects, of course, in consulting and services revenues later on. Now looking back at the first half, I mean, sales picked up quite well, May, June, and we have a number of projects again, now ongoing. And as I said, we have a nice order intake also for our integration business. So I'm quite positive about the development of the consulting and services as well.

[Alpo Luostarinen, executive]

Good. And have we seen any tightening competition or price pressure from our competitors in the weakening market environment?

[Jan-Erik Lindfors, executive]

No, I mean, I don't get the feedback very often that we would lose on price. If we lose cases, it's typically on a certain kind of functionality that we then don't have in the product or that we somehow fail in the sales process so that our sales organization for some reason, it's not good enough. I think the price value combination that we provide is excellent. And I think if you look at our medium-sized ERP implementation that we are for sure at the top when you compare total cost of ownership of 5 to 7 years.

[Alpo Luostarinen, executive]

Yes. And going a bit forward to the Finvoicer acquisition, it changed a bit our split in revenue and we have much higher transaction revenues. The question from our audience is, what are the most important items contributing to the high transaction volumes? And do we anticipate weakening in this category due to worsening economic conditions?

[Jan-Erik Lindfors, executive]

Yes. I think first of all, of course, when you look at the transaction business overall, then it's clear that if weakening market conditions will always result in a certain softening of orders being sent, invoices being sent and [ basics ] being sent. So that's clear. And then there's a certain cyclicality also when you look at that kind of business. But then if you apply Finvoicer to us, what it brings is actually the possibility to send or monetize the same transaction several times over. So you have the invoice going out, you have a reminder going out, you have a possible debt collection going out, et cetera, et cetera. So that kind of business is actually very profitable from a kind of transaction point of view. But of course, it needs volume also to grow. But Finvoicer has been developing nicely, both from a growth and profitability standpoint over Q3. And I think, as I said, the portfolio of services that they have is good. It's available to us in the right space of time. And so I think we should just leverage that.

[Alpo Luostarinen, executive]

Yes. What about the invoice financing business? How does that look like in the current market?

[Jan-Erik Lindfors, executive]

That market is, of course, something new for us that came with Finvoicer, but we have -- we saw, for example, during August and September were record months in terms of invoice financing.

[Alpo Luostarinen, executive]

Good. And what about the Finvoicer offering? Does that fit well with our other customer basis?

[Jan-Erik Lindfors, executive]

Yes, I think the Finvoicer offering is actually available to all of our customers. So whether you're a small customer looking just to send 1 simple invoice then you use the help of the last [indiscernible] -- if you're a somewhat bigger kind of B2B service and do you want to make your invoicing and you're factoring kind of electronic and automatic that you simply use the integration between the Lemonsoft and the Finvoicer products and activate that. So yes, I don't see -- and also, of course, the services that Finvoicer provide is now also available to our accounting partners. So we're not a competing business with our accounting partners. We're simply providing them with a service that they can sell on to their customers as well.

[Alpo Luostarinen, executive]

I think that's enough for Finvoicer. And then finally, a few words about software integrations. What's the current status with our current software suite integrations. Well, let's start with that one.

[Jan-Erik Lindfors, executive]

So to be sure that I understand the question correctly, is the question about how are our own products integrated or how do we integrate our customers' systems with each other?

[Alpo Luostarinen, executive]

Let's start with the internal integrations and then go on to external ones.

[Jan-Erik Lindfors, executive]

Sure. So the starting point is always, of course, that any product that we have in our portfolio has a rest API, which we can use for integrating the various systems in the product portfolio together. So Lemonsoft ERP has a standard rest API. That API is the use, for example, to transfer data over to the Finazilla product for budgeting and forecasting purposes. The other way around, for example, bundle customers were using the [ planned ] software to do the invoicing. Those invoices are sent over, for example, to the Lemonsoft ERP using the API as well. And so they come into accounting and bookkeeping at that point. So basically, the principle is always to kind of create a tighter integration as we can between our different product family so that we can do cross-sell, upsell and customers can get more out of it. Yes, so is possible.

[Alpo Luostarinen, executive]

Yes. We've said before that we are working on Finazilla and now Finvoicer integration is tightly into Lemonsoft. When do you expect those to be sort of ready?

[Jan-Erik Lindfors, executive]

We start the marketing of the [indiscernible] between Lemonsoft and Finvoicer already during the month of November. So I would kind of encourage people to keep their eyes up after that marketing campaign. And then from the start of the year or we already have from between Lemonsoft and Finazilla integrations available for customers in the market. So we have a number of customers that use Lemonsoft as their ERP and then Finazilla as their budgeting and forecasting system and they're linked together.

[Alpo Luostarinen, executive]

Good. And then towards external integrations, we said in the report that we have quite a good pipeline of customer integrations or requests from customers for integrations. Can you discuss a bit how that plays out?

[Jan-Erik Lindfors, executive]

Yes -- of course. So it's, of course, clear that customers don't only have software from Lemonsoft or Lemonsoft product families, right? So sometimes, we need to integrate the products that we supply with products of other vendors. And typically, we do that now with -- based on the French partnership with integration Platform-as-a-Service, where we have a complete team that we call data and digital products, and they have the responsibility then of implementing those integrations towards the customers' various systems. I can mention 1 case that we sold into the mining consulting industry here in August, September. So the core product was our ERP and then that was connected then to 8 different systems that the customer is using in his own IT architecture to do different things. So they were HR systems, [ baro ] systems, financial systems, and it was a [ by ] Nordic or a Nordic customer with operations in 3 countries -- so depending on which process and which countries and the integration is always different. And because we have the partnership with friends and our own capability to implement, we can do those in a very quick and cost-efficient way.

[Alpo Luostarinen, executive]

Good. And we've capitalized a bit of investments, CapEx investments in software this year. How do you expect that to develop in '24?

[Jan-Erik Lindfors, executive]

Yes, we still need to invest in the Kellokortti 2 product and in the Lemonsoft ERP product during '24 as well. So I would expect to see the same or maybe a little bit less capitalization for '24.

[Alpo Luostarinen, executive]

All right. Excellent. I think we've gone through all the questions from our audience, and thank you very much, Jan-Erik.

[Jan-Erik Lindfors, executive]

Thank you. And as usual, looking forward to Q4 and then the full year results, and let's push the gas.

[Alpo Luostarinen, executive]

Thank you.

[Mari Erkkila, executive]

Thank you.