Carasent ASA

OSE:CARA

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to Carasent Q2 Report for 2023. [Operator Instructions]. Now I will hand the conference over to CEO, Daniel Ohman; and CFO, Svein Martin Bjornstad. Please go ahead.

[Daniel Ohman, executive]

Good morning, everyone, and welcome to our second quarterly results. Looking at the agenda for today, I will start with some highlights from the second quarter, then I will give a brief business and market update, talking about sales, among other things. Then Svein Martin will give a financial review.

Looking at the highlights. In the quarter, we have a growth of 36% year-over-year. The nonorganic part in this quarter is from the acquisitions of HPI and Confrere, which adds revenue. But so far, no EBITDA contribution from there. With HPI, there will be a cost saving, I'll come back to that, and with Confrere, the plan is to move over them to our own technology. But until we do so, we would buy the technology from the former owner, and that's the cost revenue goes hand in hand, so to speak, during that period of time.

The organic growth was at 17% in the quarter. It's mainly consultancy-driven and comes from the new structure organization where all [ passes ] now knows this is my area of responsibility. This is my part of the business, and my job is to grow and develop that business. So we're now out with customers much more. And the first steps of that is that we start working a lot on the backlog, talking with customers, and that gives a lot of consultancy revenues to start with.

During the quarter, we also performed the cost savings program, and it's also completed. I will get back to that. We signed 31 new clinics for Webdoc in the quarter, slightly better than last quarter. And we continue to have a very strong balance sheet, which gives us a lot of flexibility.

Looking at the business market update, we will start by looking a bit on the revenues and the margins. And as you can see, we have had a solid good growth for quite some time. It's both organic and coming from good acquisitions of quality companies. What we also can see from this picture is that the margins have been trending down for quite some time, and it comes from a focus of rapid growth, which used to be the focus.

We're now taking a number of steps to work with this. The first 1 is the cost savings program, which you can see has started to give effect on the EBITDAC level, which improves from the last quarter, and we will continue to see this improve going forward. The EBITDA does not trend upward at the same pace yet. And that comes from a much more focused on OpEx and CapEx. And as I wrote in the report, I see very little difference between OpEx and CapEx in this company because the development we do now on the backlog it's focused on meeting new customers. We don't need to do it to continue to have our present customers or to continue to have our present revenues. It is to win new customers and make them all customers more happy with the experience of our systems. So it doesn't really mean too much. It's EBITDAC, which we focus on internally.

The second step into improving this is to improve efficiency and continue to grow the organization while maintaining costs. And what we do to improve growth is a number of steps. The first one is that we're back. When I joined Carasent, I came from the customer side, as many of you know. All my colleagues on the customer side, on the caregiving side, they were asking where is Carasent? Where is Webdoc today? We don't see them anymore. It seems that they are focused on other things. Now we're back, we're meeting customers a lot. We have these clear responsibilities that each head of its product is out meeting customers, making sure that they are happy. And that will give our customers the confidence that we're there for them, that they can trust us with their most important systems, which are our systems.

We're now working a lot on the backlog, as you can see from the EBITDA margins. The backlog is full of questions from our customers. So working on that will improve what they think is the most important. It will really add to the experience of our systems. And from those systems we have, which are more consultancy-driven, such as [indiscernible], you see it directly translating to higher consultancy revenues.

We worked on deliveries quite a lot, setting new structure, new head of that group. And deliveries is when someone orders our system and Webdoc is the largest one of our systems. The deliveries is when we implement it. And the implementation is extremely important for our customers and experience of the implementation because they do this once maybe every 15, 20 years. They want to have smooth transition. There are high costs associated with the transition for our customers as the business is not running fully during that period of time, and you have a high fixed cost around -- among our customers. So it's very important to have good deliveries, but also good education, they start using these systems in the right way directly. So and I think we've done great strides to improve that. And the last 10 customers, they gave us an average score of 4.5 of a scale of 1 to 5.

We're now testing outreach selling in a number of our solutions. I think it will take some time to find our way of doing it, but we're booking meetings, going out, discussing it, taking cold calls and so on. So it will be very interesting to see how that plays out. I think there's a lot we can do because there are so many customers out there. Think about chain systems, they will be afraid of it, and I think they need a push to move into that direction into more and more [ line ] systems.

We are developing our marketing function. It's now a central marketing function where we pull resources from all our products and put them in 1 central marketing department. So that we can have a better breadth of knowledge and experience, and we can also make sure to target marketing for those products we want to push at the moment. So now we're putting a lot of effort into Webdoc.

We have the development of new segments, which was part of our change of strategy where we closed down Webdoc for Norway. And started working on the surgery module and e-referrals in Stockholm. Those segments will drive growth also going forward, but that will take some time before those hit the market.

And then we have general improvements coming from the decentralized structure, pushing everything, for example, within support. Our support has always been something that our customers have really liked, but we're also trying to improve those parts, all parts of all our products. We're pushing forward quite a lot at the moment.

So the combined of all these things that we do, we believe strongly will translate into a higher growth going forward. And when those different steps starts to take hold, it will vary a bit, but the total package aim for a stronger growth going forward.

When it comes to the cost-cutting program, it was initiated and completed in the quarter. We will save approximately NOK 40 million on a yearly basis. It starts taking effect already in this quarter. The last savings will take effect in the end of September. It is within HPI where we have a development sprint that will end then and then we will let go of some consultants. All in all, I think the sales program has played out very well. There's been a large understanding within the company. And also a lot of appreciation around the new structure set with clear responsibilities and clear direction for each part of Carasent, which really makes every situation much easier to know exactly what is my role in this and what we're aiming to do.

So even if -- I mean cost cutting is never really that popular, the results of it, the new structures I think, are highly appreciated in the organization. It has also gone very smoothly. So everyone who's been let go has already left the organization.

The cost cutting has been all over the group, except for Medrave and Metodika, who has good margins and developing very, very well. So it's been within all other parts, including the head office. And what I think is very important is that we're still staffed for a lot of growth. So looking at those margins we looked at earlier, I'm not worried about being able to meet a much higher revenue with roughly the same cost structure. We are really staffed for it, and we're putting a lot of effort into our present products. So this is not a low enough ambition. It's an increase of ambition, but a more efficient organization where we made sure to have the right staff in the right places and really chosen where to do the cost savings. So in order to maximize the organization afterwards.

And I'm very happy with the results. And now the focus will be a lot on growth going forward and development of the products.

With those words, I will hand over to Svein Martin.

[Svein Bjornstad, executive]

Thank you. So looking at highlights for the quarter on the financials, we saw that the metrics improved slightly all over compared to Q1, but not a big difference in total, but we had revenue growth of 36%, which 17% was organic. Organic recurring revenues grew 14% where net retention of 108% in Q2. And there is this new sales of 6%.

Margins continued to be under pressure in the quarter as a result of the high cost base, and that was also that high cost base was the background for the cost saving program that Daniel talked about, and I will go through a bit more into detail on what the effects of that program was in Q2.

ARR was NOK 221 million at the end of the quarter. If you look at how our revenues have developed, we see that we continue to grow. We have a very stable revenue base in terms of that, around 90% of the revenues are recurring in nature with very low churn. So organic growth was 17% as mentioned. It's slightly higher than what it has been the last year, and that was due to high consulting revenues in the quarter as a result of high activity across the group, but also primarily driven by Ad Curis and Metodika which has a consultancy-driven business model as well.

Metodika, customers continue to invest heavily into the Metodika system, and we see that for the enterprise customers and private hospitals, we see potential to continue to grow, particularly in Norway and Denmark.

Organic revenue, recurring revenue growth was quite stable as it has been in the last quarters, and we do these initiatives to increase new sales now in the core markets which we have ambitions to result in recurring revenues.

If we break down the 14%, as I mentioned, we have a net retention of 108%, which is basically due to that our customers continue to grow. We sell add-ons and we have low churn. So that is quite stable and then new customers accounted for 6% in Q2. And here, we believe that there is remaining potential. We have strong market positions for all of our products, but there is still potential to take market share for all of our products as well. And in particular, Webdoc in Sweden, we see a good potential, plus we have 8% market share on this still. And we have initiated all these measures to increase new sales that Daniel mentioned.

So if we look at the cost base in Q2 on a cash cost level, including capitalized R&D, the cost base decreased by NOK 4 million compared to Q1. And if we exclude currency effects, the decrease was NOK 6 million. And there is 2 main effects that drove this, and that's the cost savings program and some seasonality effects. So the cost savings program had an estimated savings of NOK 40 million per year or around NOK 10 million per quarter. And the program was initiated in Q2. So the savings did not have full effect in Q2. We said that most of the savings was completed by the end of Q2, but the majority of the savings did not have effect in the quarter.

But most of the savings will be -- have effect in Q3 and all of the savings will have effect in Q4. And the seasonality also has an effect on personnel costs of NOK 2 million to NOK 3 million reduction compared to Q1.

And in terms of margins and cash flow, we saw signs of improvement in Q2. EBITDA margins was relatively flat. While capitalized development decreased by NOK 6 million compared to Q1 and by NOK 5 million compared to Q2 last year. So cash EBITDA improved by NOK 7 million in the quarter compared to Q1, and was down slightly compared to last year. And we will continue to see effects of the cost savings program in the coming quarters as mentioned.

So that was all I had, and we can open up for questions.

[Operator]

[Operator Instructions]

[Svein Bjornstad, executive]

We don't see any questions in the chat. There we have a bunch of questions from Mark at Redeye. And Daniel, you can take the first one. Could you update us on the development of Webdoc X? Anything new that is of interest?

[Daniel Ohman, executive]

Yes. So Webdoc X has been a focus area of ours in the last quarter, where we have done a lot to change organizations. There are new leaders in place also for X. All the new leaders are from internally. So they are well aware of the situation and know the product well. So that's good. And we have also simplified our architecture to make it quicker in development. So moved a little way -- a little bit away from micro services. but maintaining the core of it, but that will increase the development speed. We will also within short start to charge our customer, present customer, and we're looking for new customers. We've also done a lot of work, finally the next pile of customers with physical clinics and also done a lot of research on markets, and we'll get back to you within short on which markets we will prioritize and how. So we've done a lot of work. The development is going faster. We had a really good release of the new architecture and we'll come back within short on how we process the market. So I'm happy about the development within X.

[Svein Bjornstad, executive]

Okay. Next question, 31 signed clinics for Webdoc in Sweden. Could you comment on the types of clinics and the general sales environment out there? And also, how does the clinic intake look for the other subsidiaries?

[Daniel Ohman, executive]

So in Webdoc, 31 new clinics, it's a slightly better than last quarter. It's around where we used to be. We think we can increase quite a lot. I think that many of the measures I went through earlier will take some time to translate into more sales, for example, as we improve deliveries, it will mean that our customers talk better about us and how smooth it is to change system. But for that talk to start happening will take some time, effort that to translate into new sales will take even more time. So I'm very confident we'll push it high over time, exactly how fast, it is more difficult part to say.

The sales environment is I mean, in general, we have a customer base which grows. Health care continues to grow. It's quite independent of any types of changes in society if we continue to grow. So from that point of view, it's very good. Our customers have a bit more challenging period this year. As sellers have increased a lot within health care, also rents and some of our customers do not have any index closes towards their customers. So some of our customers has a bit of a more challenging situation. I think overall, I mean, we will continue to be able to increase growth, but it makes it a bit harder.

When it comes to sales within the other parts of Carasent, it's been quick, I would say, to turn around within most parts. They are a small organization. And when they got clear mandates, clear demands on what to do and also supporting the sales, they have been quicker to go out and meet customers. I think we have excellent discussions within many areas of the business. which I think will translate into more sales. We can also have other parts of Carasent.

[Svein Bjornstad, executive]

Okay. Next question. I can take this one. How much on the consulting revenues are tied to more maintenance work for existing customers, and how much is tied to onboarding new customers?

I would say majority of the consulting revenues are related to Metodika and Ad Curis. And the specific development projects that we do with customers, and that's not maintenance work, but more of developing new functionality. But they have a consultancy-driven business model to a larger extent than Webdoc. And that was a very high activity on that side in the quarter, which is main reason why we grow consulting revenues more than 60% year-on-year. So it was a very active quarter on that side. While onboarding of new customers is driving consulting revenues, follow the more stable trend compared to previous quarters.

[Daniel Ohman, executive]

We could also say that consulting revenues from onboard new customers in Webdoc is not an aim of ours to increase. The aim is to increase their return, revenues. So when we're looking over the price structure and we've done that, where we try to give any rebates, if we give a rebate it's on the onboarding of new customers and the consultancy work.

[Svein Bjornstad, executive]

It's also a focus that the consultant they're onboarding is as good as possible. So even if the customer tries to skimp a bit on that, we make sure that they have a good onboarding anyway. So we have less focus on pushing those type of revenues within Webdoc. We instead try to get more customers and better onboarding for delivery as what I used earlier. So I think that's important now that we do not aim to grow consultancy revenues within Webdoc.

Great. Next question on M&A. Do you have an active pipeline? Do you feel you are capable already for a new M&A at this stage? And how does valuations look like on the private side compared to, for example, 1 or 2 years ago?

[Daniel Ohman, executive]

Yes. So we're still looking at positions. We're doing at a -- I really wanted us to do it at a reasonable pace and to be picky. So when it translates into an actual acquisition, we'll see. It's -- we really want to make good acquisitions and rather do none than doing a better one, of course. I forget when I said that, but it's a tricky business doing acquisitions, we have done a lot that form a place, and it's important to have [ very big ] I think.

But we work on it. We're looking at a number of acquisitions. We have a pipeline. We'll do the acquisitions at a lower pace than we used to do. I think it's important, especially now when we're doing so many changes internally. So what we look at now are the ones that, for 1 reason or the other are for sale at this point in time. At the moment, we're not actively going and meeting the potential targets on our list, but we'll start doing that within quite short.

When it comes to pricing, I think that many of you knows this better than me. But if you're looking at the not profitable targets out there, they've gone down a lot in price. And that's not what we're looking for either. So it's -- that doesn't really help us very much. When it comes to high-quality targets which are profitable and have a good market position. I would say the prices are almost roughly the same as they used to be. You can see it also from the ones who have come public, [indiscernible] for example, was well priced, I would say. So especially given the quality of that company. So it stayed higher than I thought it would. But we will be picky. We will not be in any hurry to do acquisitions, but we are working at it.

[Svein Bjornstad, executive]

Okay. Next question. The new political coalition Region Stockholm has decided to cut down on the private health care in certain specialist area. Could you comment on this? And specifically, how it could potentially impact your churn, if you believe it is a general trend that it will move to other regions and whether it impacts your focus on Region Stockholm in any way, any new?

[Daniel Ohman, executive]

Yes. So Region Stockholm has decided to stop some [ care choice ] structures and also some of the procurement. It's a very minor part of the total in Stockholm. I think it's more of showing that you do something for your voters. I also strongly believe that -- most of that will come out to the private, especially once where we stop the care choices, we come out as tenders instead because we cannot build capacity within the public system, and it will be so much more expensive to do so.

That way it does create turmoil and our customers get focused on other issues, which are to them a very instantaneously and which we need to work with now. I mean, you don't need to change your region now. You need to change it at some point in order to be able to improve your business. But you don't have to do it today. But changes among your customer contracts, you have to deal with today. So it changed our focus a little bit among our customers. But the ones I spoke which has not been extremely concerned. And everyone feels very strongly that the revenues will come back to them later. And the trend upwards, which we have seen for many years, no matter what positions have set or what have happened. Healthcare will continue upwards.

Also when it closed down public access to care, what happens is that more people buy insurance or pay out of pocket, which are, I mean, our premium customers because why really -- in all circumstances, we need to have one of our systems or another private system instead of the Region's own system is that if you have insurance patients or private patients, you are not allowed to use the public system for those patients. So our customers need to have our system or one of our competitors, in addition to public system or they use only our system if you have insurance an out of pocket and very many of the private providers of health care have out-of-pocket and insurance patients.

So that those areas grow is good for us. And it might be a bit of a wet blanket for a while, but the overall trend is in the same direction and the customers are there. So it's not too big of a concern.

[Svein Bjornstad, executive]

Next question, any news on the Capital Markets Day?

[Daniel Ohman, executive]

Yes. So I really want to have that in the second quarter. We had to postpone it -- and we're working on the content of it. We'd rather have a really complete Capital Markets Day. So where we will also answer questions related to which markets Webdoc X, what to do with our cash exactly and so on, what are our financial targets. And there's been a lot of work on internal issues that we have been focusing on first to make sure that we get everything in order. Now we're working on, as I said earlier, [ X-max ] going, what to do with the cash structure, how well should it look? And so on. When we've done that, we'll have the Capital Markets Day. It will be during the autumn, and we'll come back with an exact date.

[Svein Bjornstad, executive]

Great. Next question from Sebastian. How long do you think you will it take before you reach breakeven on cash EBITDA level?

I can start, but we haven't provided any guidance on that. But what we can say is that we after the cost savings now, as mentioned, have good capacity in the organization to keep the cost level quite intact for some time, so we aim to grow into our cost base.

Next question from Nick. Can you please guide a little bit on what you see as the most important growth area in the near future and in the longer horizon?

[Daniel Ohman, executive]

Yes. In the near future, when it comes to Webdoc, I believe it's word of mouth that we are improving things. It will take longer to play out in more sales, the same with new development, new segments and so on. What I believe in more short term is the outreach selling, where we really try to meet customers. We have new structure in sales where it's seller, not only is responsible for present customers, but also for the potential customers. We have a list of all potential customers, which we have gathered, which means that we know exactly who should want our system and that our sales that we can go out and meet them. It's new for the organization to do that. So also that will take some time, but I think that's what will improve the most in short term.

When it comes to the other parts of Carasent, I think it's moving faster because it's small organizations. They have fewer potential customers. They know exactly who they are, and they can -- they have been able to go out and have met this directly, there were less upstart. So I think, for example, Metodika and Ad Curis, both are in excellent position to do that and are doing that and have really good discussions with customers.

[Svein Bjornstad, executive]

All right. Next from [ Michael Silverstein ]. Can you share details about the sales force? Are you foreseeing any hires in that part of the group to fuel growth? Or do you already have all the people you need?

[Daniel Ohman, executive]

So we have hired especially within the Norwegian organization, they have never been any sales force within the Norwegian organizations. Now we have a very experienced strong seller there. We have done some changes within the Swedish sales organization and within Webdoc. But that's most as to how we all organized, not a number of people. We do not see the need to increase the number of salespeople. We see the need to change how we work. And what we will need to add, we think, quite short is more content within digital marketing, one way or another. There we have done too little and we're not really up and running yet. So that will be a little increase in cost there.

I remember -- the last question also, I forgot to answer it more long term. So more long term, I really believe very strongly in that they see that our products get better and better. And we're doing a lot with the backlog now. We're adding new segments. We add new functionality, we are adding patient engagement tools. We're investing a lot in all of our products. So I really mean when we say that we have not cut to the bone at all. We are aiming to grow the business. We're focusing on long-term growth. So we're doing a lot of development. Some of it is OpEx because it's improvements that are instantaneously and which we do not charge our customers for, but the aim of those projects is to increase growth. We don't need to do it to keep present customers.

We're also doing a lot of new development. We have new segments within Webdoc that will come out, lot of the new functionality coming up within Webdoc during the autumn. We're doing a lot of investment in Ad Voca, that is sort of the patient engagement at Ad Curis and Ad Opus. Metodika is doing more development than ever. It's paid by their customers in those cases, so that's good, but it improves their system also. So long term, it's the overall effect, which I really think will push us forward.

Even if our products are between 8% to 40% of the potential markets where there's a little room to grow, it's not huge societies. So the word of mouth spreads a lot. It's how all these products have sold. Historically, it's how our competitors sell -- so to improve that they feel we're back, they feel they can trust us, that our solutions are improving all the time. It's what really will drive sales going forward long term, I think, combined with other things we're doing.

[Svein Bjornstad, executive]

Next question from Emilie at DNB. Any comments on the cash position and capital allocation? Do you still have any potential acquisition targets? I think we addressed that already in the question.

Next question from Richard. Sequential ARR growth was NOK 2 million. Are there any effects from transactional revenues, positive or negative? And are most new orders deployed by June 30, and this ARR growth expected to improve going forward?

On the first question, there is an effect from transactional revenues and ARR is negative compared to Q1. So transactional revenues are typically slower in June compared to March, basically. Most new orders are deployed. I would say it's on a normal rate at the end of a quarter. There is, of course, some customers that are signed that are not deployed, but that will -- it will always be like that. And this ARR growth is expected to improve going forward. We can't provide any guidance on that. We aim to come out with goals on the Capital Markets Day, but we are doing all these initiatives that we talked about to grow our recurring revenues.

Next question, Emilie at DNB. Can you comment on guidance for 2023 in terms of growth and profitability? No, I don't think we can at this point.

[Daniel Ohman, executive]

We'll come back to that on Capital Markets Day. We want to have -- be able to give you solid guidance going forward. And it's really been focusing internally a lot on setting on structures. Now we're looking at exactly where to go with X, how do our acquisitions pipeline look which we'll aim at first, how we'll prioritize different questions. So first being the internal things that needs to be rectified. Now we're moving more to the long-term strategy. And from there, we will have the guidance, which we'll give at Capital Markets Day.

[Svein Bjornstad, executive]

Great. Final question from Sebastian, Any updates on the situation in [indiscernible]?

[Daniel Ohman, executive]

Yes. I think these are moving in the right direction from our point of view. Things like Millennium is still very slow to be rolled out. There is a lot of issues. There are more and more parts exempt from it. We have a lot of discussions with the Regions, with [ Cerner ] we're talking with customers. We're doing some also legal work. Our position is that it's actually legal for the region to push a certain system on a caregiver. It's not black and white, but it's quite strong. So especially a system like Millennium, which will not be able to live up to GDPR requirements when you have multiple caregivers working in the same installation.

So we're pushing those issues quite a lot and making Region aware of that they will be pushing a system, which we don't believe they are allowed to push on the caregivers and which will also make their caregivers, not fulfill the requirements of the law. And we're doing other things too also.

I think no matter what, our customers still need to use our system. So if you're looking at the different scenarios, 1 scenario to note is that we are extremely successful and none are pushed into Millennium. I think that is not -- maybe not the most likely that what we aim for. The second level is that you will have to use our system for all private insurance patients, which is quite a lot today in Sweden. That means that you have to run 2 systems within 1 clinic. It's not at all ideal. And then our aim is that you will use Webdoc for all our customers and then transfer information into Millennium from Webdoc. That is what we're trying to do also, e-referrals in Stockholm. That's why that project is extra important because that's how we see it working also within [indiscernible] and Regions [ corner ] it is some customers.

So because your HR system is where you plan all your work. So it's like having 2 different calendars in 1 -- within 1 business. It's really difficult to use [indiscernible] systems. And you need to use 1 system for all private pay and insurance patients, which is not Millennium. Also from patients coming from other regions, you're not supposed to put into Millennium either, which you have a lot of patients traveling across regions, especially to product providers. So if it would go further, and that's why also I don't think we got full especially for specialist care. Some of my former clinics would have to have 3 different systems. So they would have to have 1 for [indiscernible], 1 for [indiscernible] patients and 1 for all other patients. So all my former clinics in Gothenburg, 3, 4 of them. They all had customers from both [indiscernible] and from the rest of Sweden and from insurance and from private pay. And it's just not doable.

So I think that also that common sense will trend. But I think also we can get quite far in pushing the Region not to push out the system. Together with our customers, of course, who are really supporting this.

[Svein Bjornstad, executive]

All right. That was all the questions. Do you want to wrap up, Daniel?

[Daniel Ohman, executive]

Okay. We would really like to thank everyone for listening today and all the questions. It's really interesting to have them. Just let us know if there's any questions at any time. We're always available. And in the meantime, have an excellent summer.

Thank you.