Carasent ASA

OSE:CARA

Earnings Call Transcript 2022-Q4

[Daniel Ohman, executive]

Good morning, and welcome to Carasent's fourth quarter presentation. My name is Daniel Ohman, I'm the new CEO of Carasent. And with me, I have Svein Martin Bjornstad, our CFO. Today, I will start by going through some highlights of the fourth quarter, give a business update, and thereafter, Svein Martin will go through the financials more in detail.

Now first of all, I would like to just share a little bit about why I decided to join Carasent and why I believe in Carasent. And if we're looking at the health care systems of the Western world, there is -- the demand is ever growing. So we grow older, there are more and more things that are treatable. And we -- our expectations of health care is increasing all the time. So this means that we have a demand that is increasing quite rapidly all over the Western world. At the same time, every year, less care is provided by each person working in the health care system. So the efficiency is going down quite rapidly. And it's one of few industries where that's happening. Most other industries, you have an increasing efficiency. And this is obviously not sustainable.

And if we look at health care, to provide health care is basically, in many ways, a production process. But in difference -- big difference to other production process is that here, there are still a lot of parts of the process that isn't working well. Looking at a typical health care provider, it's still a lot of paper notes, letters and phone calls. If you look at my former clinics, for example, [ my former group had stamp costs of SEK 10 million ] per year for all the letters we send to people.

And that's not the big problem with it, the big problem is that when people get those letters, they start calling the clinics asking when is my appointment, can I change the appointment, what should I think about, I lost my letter and so on. And this means that roughly 8% to 10% of the people in the clinical or of the staffing clinic are sitting, answering the phones every day, and that's a large part of the staff.

And an even larger problem is that inside the clinics to make everything work, there are a lot of notes and handwritten -- notes and a lot of documentation on paper shaking hands the entire day. Still, most patients come into clinic, be referred to clinic are coming for the way of paper. So there's a lot of easy, simple things that could work so much better with the right digital tools.

In addition, we have many new technologies supporting -- or which will support continued efficiency gains, such as big data, AI and all the things that are possible when we have better APIs. This could be, for example, [ things in triage ] or good decision support systems. For example, to decide which patients to call in for a second visit, you don't need to see -- in many clinics, you don't need to see all patients. You can have systems choosing the right patients for you out of the data that you have in the system. Then you can have the system automatically calling those patients or -- for an appointment through digital channels. So there's really a lot that can be done.

And even if health care is behind other industries, Sweden and the Nordics are in the forefront. And I know from a customer perspective that our solution, Carasent solutions are the best for the [ parent providers ], anyone who's using our solutions today. So this means that with our ecosystem, I believe strongly that Carasent can be a big part of the solutions for our customers in dealing with the loss of efficiency in relation to increased demand. So that's why I chose to go join Carasent to be a part of this.

If you're looking at the fourth quarter, we have a growth of 41%. It's partly organic, and then it's the acquisitions of Medrave, HPI and Confrere. Our organic growth is 16%, which is -- I mean, it's an okay growth in general, but it's a bit behind our potential, and we should do better.

In the quarter, we acquired HPI, which is an exciting acquisition, I believe. They are in a strong position with almost all occupational health providers in Sweden as their customers, and there are many new solutions coming out this year, which will help grow their business and our business. If you look at the performance, it's in line with the revised guidance, and we have a strong balance sheet, enabling us to move and build our ecosystem.

Looking at the last couple of years, after Carasent had only been Webdoc for a very long time, it became Carasent and the last 2 years have grown very, very rapidly. We have done multiple acquisitions. We have started new, large development projects and had very rapid hiring. The basis for this is good and sound. The projects are generally right. So what's been done is good, but the organizations have -- the organization hasn't been able to keep pace, which have hurt our performance and leads to a number of issues which we are working through now to improve our performance.

And if you look at the near term, we have these 3 focuses. And if we start with the business focus, we have the focus on -- we're growing when -- with all the challenges we have from growing instantly, it's easy that you lose focus on what's important in the business. So it -- growing is -- rapidly creates a lot of internal struggles and challenges and that becomes your #1 priority instead of actually focusing on what's important. This is what we're changing now. So we have to make sure that we focus on sales, the customer experience and cost control. And when I say cost control, it doesn't mean that we are aiming to save as much as possible. We are still a growth company. We have very many opportunities. We just have to make sure that each krona spent is spent as wisely as possible, creating as much value as possible and that we keep track of those kronas that are being spent.

The second area are clear lines of responsibility. And we are now in the middle of reorganization -- or reorganizing a large part of the decision lines within Carasent and the management teams. We have to make sure that we have the right people in the right places and clear responsibilities. The guiding principles around these changes is that we want to have short decision lines, clarity on who's responsible for what, and to follow the business logic. For me, it's very important that each person can be held accountable for their part of the business so that the business logic, the financial performance and reporting lines all goes into one. Then we can run a fast-moving, growing business, which makes quick and smart decisions.

Finally, we are performing a strategic review. We have so many different opportunities with our ecosystem. There are many different segments and markets we can move into. Just those segments and markets requires some additional functionality or integration. So when choosing a segment market, we have to do some development or we need to do some other changes in our systems. That takes time and costs. So we have to make sure to choose the right segments and the right opportunities in order to grow quickly and wisely.

This is what we're looking at now. We're going through all the different markets and segments, looking at the sizes, what functionality is needed and how we can move into those segments and how it creates an overall sound picture. This mean that we also -- we look at our financial targets. We believe that we can grow very strongly and have a -- have all these opportunities. We ask them to choose the right ones. But this means that we will also revise our financial targets, and we'll get back to that in the second quarter, where we have finalized the strategic review.

Finally, I also would like to come back also that we have a very strong foundation. From a customer perspective, I know that our solutions are the leading ones in their respective fields. And that means that we have a strong growth potential in most of these solutions. We have in-depth expertise on building solutions for this market. There is no one better positioned for that and with the ecosystem that support each other. We have a very strong development capacity, after all this growth in the last couple of years. And we have a strong pipeline of new projects and products coming online.

I think a very interesting one is -- which I looked at the other day is Ad Voca. And Ad Voca is an online solution for [ our system, Ad Opus, and the way the system have ordered ] Ad Opus. And Ad Opus is an on-prem solution, which means that it's a bit more expensive to run and most customers want cloud native solutions now. What this -- Carasent decided when it came to Ad Opus is it's too expensive to rebuild the entire system and it doesn't make sense. So -- but what we also realized is that 90% of the users only use a minor functionality of Ad Opus.

And then we created a sky entrance for -- our cloud entrance for just those 90% of users. The interesting part is that those 90% use just a small part of the system. So you create a very clean, quick-to-use system. And when I saw it the first time, I felt can an HR system really look like this. But it can. For 90% of the users, it can have this really efficient, quick user interface. So I think that's a very interesting project where the first customers are very happy. The feedback for -- from the first customers using it in this way are very happy.

Further, moving on, we have -- in the basis of Carasent, all products of Carasent, all the acquired clinics and Webdoc, they have successful business models at the heart. There are the right type of culture to run this type of businesses. And I think that's important to mention in times like this, where there have been many start-ups who do not have that culture, and it's very difficult to turn a culture completely around. That's not necessary here. We have had to make -- create some order of the quick changes that happened in the last couple of years, but the basis is sound and the cultures are right.

We also are working in a growing, noncyclical market, as I said previously. And the customers in this market are in great need of digitalization and efficiency. And that's why I believe we saw strong position with our growing ecosystem, and to be that solution for our customers that help them tackle those challenges.

So now I will give the word to Svein Martin.

[Svein Bjornstad, executive]

Thank you.

So taking a look at some of the financial highlights from the quarter. As Daniel mentioned, we grew 41% in the quarter, driven by the 3 acquisitions mentioned and also organic growth of 16%. And recurring revenues grew 15%, and that's mainly driven by the existing customer base, where we had net retention rates of 109% quarter-over-quarter. And adjusted EBITDA margins was 15%, and we had an ARR of NOK 202 million as per December.

And looking at the quarter in a historical context, we see that revenues continue to grow. We have a history now that's been characterized by rapid and consistent growth over many, many quarters. We also have had a history of scaling margins, which has trended negatively during 2022, mainly due to the factors that Daniel mentioned and the heavy -- extensive recruitment program, which we'll talk a little bit more about later.

If we look at the breakdown of growth per product, we saw that Webdoc EHR license revenues grew 21% when we adjust for some revenue mix shifts from add-ons to license and the currency. And that basically shows that even though the new sales has been slower and -- than historically, the growth is at a good pace. So the foundation for and potential going forward is there still.

The other EHR revenues had a slight positive growth. This is Ad Curis, Ad Opus from Avans Soma acquisition and Metodika, where we had a decent growth for the health care rehabilitation product, Ad Curis, and the other 2 products was relatively flat year-over-year. And the platform services category grew fast, but mainly due to acquisitions where we have included both Medrave, Confrere and HPI. On the organic side, it was relatively flat, and that's partly due to these vaccination effects that we have talked about previously, where the Q4 '21 figures was boosted by the variable add-ons such as SMS related to vaccination activity.

If we break down the growth of recurring revenues, we see that, as mentioned, a majority of the growth is coming from existing customers. This is both related to upsells and underlying growth and price increases, but -- and also that we have a very low churn. We have had the historical churn for many years of around 1% to 2%, and that is continuing.

Where there is potential is on the new customer side. We had a growth of 5% in Q4 year-over-year. This is affected by the lower activity in core markets. But as Daniel mentioned, our market position is intact and there is potential to increase this figure.

Looking at the margin development, we have grown fast, rapidly, both through expansion projects and acquisitions. The -- this has caused some growth pains as Daniel mentioned, and also impacted margins during the year. We -- also, the acquisitions were completed as -- had a dilutive impact on margins currently, but has potential to change.

We have onboarded many employees during 2022 and also during Q4. And many of these sites onboarding in Q4 were started during the quarter. So our run rate cost base is not fully reflected in the figures, but we now have slowed down the recruitment pace and focused on driving efficiencies going forward. And our -- the nature of our cost base is highly scalable. So when we now put the structures in place, we have a strong potential for long-term, scalable growth as the revenue starts growing.

And we are doing -- still doing heavy investments into new expansion initiatives. We have a strong balance sheet that enables us to do this. We are -- particularly, the 2 projects, Webdoc X and Webdoc Norway is isolated here into the category new initiatives. And we see that these projects is requiring heavy investments at the moment and basically are not generating any revenues, so affecting cash flow significantly. But the investments related to our existing products and existing markets are trending more in line with revenues. And this expansion project has a potential to drive the long-term growth for our company.

If we take a look back on the guidance that we updated in Q3, performance in the quarter was in line with this. Revenues was slightly above, which was driven by -- mainly by nonrecurring revenues, such as consulting projects that we were able to complete in Q4, which was positive. And also margins was ended at 24.5%, excluding the acquisitions. That was not included in the guidance, which was also in line with the 25% revised guidance.

So with that, we can open up for questions.

[Svein Bjornstad, executive]

I think there has been one question posted and there's typically a bit of lag, but we can start with this one. Considering how much is invested in new development projects and considering that they still don't generate any revenues, how do you track the success of this? What KPIs do you use? And how are they being managed?

[Daniel Ohman, executive]

So I think that the part of them not being used is the important part of what -- in this question. So it's extremely important to get customers on to what you're doing in order to have them tested in the real world. We have a lot of expertise in-house who knows a lot about both the market, the customer needs and other systems, but it's the real world that is the test.

And we're looking at 2 systems. Webdoc X is live with Mindler, so it's being used. It's a bit of a different type of provider, but it's a good test for the part of the system that's done by now. And I'm hoping that we will add more users during the year. They will probably not be paying users, but they will be testing it in the real world.

When it comes to Webdoc Norway, we have our first customers online, which is Vertikal Helse, and it's running well for that type of customer. Once again, it's a customer that doesn't need -- that have a -- doesn't need a full-fledged system, which it isn't yet. They need part of system, so it's also a perfect customer to start using the system with, who uses the parts already for Norway. So I think that's really the way of making sure that we do the right things is to have them test in the real world and finding customers who are in need of the parts that are usable at each time.

[Svein Bjornstad, executive]

Great. Next question is from Mark from Redeye. How does customer intake outlook look like? And what are the customers telling you and specifically the larger ones?

[Daniel Ohman, executive]

So sales have been quite good the last couple of months, actually. What the customers are telling us, and especially large ones, are that there has been a bit -- what they all appreciated with our major product, Webdoc, is that they've been able to be close with us historically, that we've been quick in making changes. If there have been something that's needed to change but have been revised quickly. We have been lagging a bit in that the last year or so and that they want us to refocus on that. And we've started with some close collaborations with our largest customers with exchange of ideas and regular meetings. We'll actually have our developers being on site with some of our customers just to get a better feel for how it's used and what are the pain points. So we're moving and getting much closer to the customer.

I think that also slowing down the rapid hiring of developers will take some pressure off the organization, which means that we will find so much better. And in combination with some clear structures, we can really move forward.

[Svein Bjornstad, executive]

Great. Next question. How does the clinic mix look like? Are the larger clinics starting to join again? Or is it mostly smaller ones?

[Daniel Ohman, executive]

So looking at the -- if we then talk about Webdoc, if you look at the start of this year, we have some large clinics already online or were signed up. I mean 3, actually. So it -- there are both of it. And I think there are a couple of parts in getting sales moving quicker. The one -- the first one and which is the quickest one is just that the customers feel that we're there listening to them. I've had a lot of customer meetings together with the team showing that we really mean that we will be there for them.

Secondly, making sure that products are running a bit more stable as they used to, and there is no reason why they shouldn't. That takes some time to -- for that to translate into user experience and that they actually talk with each other about it. It's working better. So -- and then finally, it's adding new functionality coming online.

But the first part, I think we have moved quite a lot with lately, in getting closer to customer, having a -- good and regular discussions and feedback with them.

[Svein Bjornstad, executive]

Next question. I can take this one. Consulting was driven partly by certain larger projects for specific customers as we stated in our report. And the question is, is this tied to Norwegian Webdoc? No, this is more tied to customer-specific development projects that happened during Q4 for both Webdoc in Sweden, a specific project and also some of our on-prem solutions. So not tied to the region, Webdoc, that one.

And a question related to Webdoc Norway, I think. How is the launch going in general? What feedback do you receive?

[Daniel Ohman, executive]

So the customer that's online at the moment for Webdoc Norway is happy with product. There has been very little issues actually. But once again, it's a customer using not a full system, but are using more of a part of the system that now is ready for Norway. So I would say so far so good.

[Svein Bjornstad, executive]

Yes. Next question. How is Webdoc X developing? How -- what do you think about this product and the potential 2023 release date that we have communicated earlier?

[Daniel Ohman, executive]

So I think that Webdoc X is a very exciting project. It's not every day you get to build a new system from scratch, so we can reuse a lot of the modules built for other systems also. So it makes a lot of sense from that perspective. We will come back to when and how it will be launched in the strategy, when we've done the strategic plan, yes.

[Svein Bjornstad, executive]

Yes, yes. Final question from Emilie at DNB. It's a similar question related to Webdoc X. When do you expect Mindler to start being a paying customer? So that's an agreement we have with Mindler and the specifics of that agreement, we won't go into, but it's a period then where we have developed those partners. And then when certain milestones are met, we can have a massive customer as well.

Yes, I think that was it on the questions. No, we have an additional question here, actually. Can you say something about the opportunity in the Nordics? How long do you expect to continue to take market share in Sweden and in Norway as there is an ongoing migration to cloud in these markets? Do you have any updates on the share of markets that are still on on-premise solutions?

[Daniel Ohman, executive]

So if you're looking at the Swedish market, there is really a lot of untapped potential for our products and especially, Webdoc. Webdoc is, today, quite large in Västra Götaland, so that means the area around Gothenburg. Stockholm, which is by far the largest market, head of the markets for private projects, which are the customers for Webdoc, is relatively untapped for us. So as I said, we -- there is -- and we'll come back to real figures when -- and full figures when we have done the study work. But we can grow really a lot in Sweden. And if we focus on it and we make sure to add certain functionality, there is really a lot we can do.

And then what's really exciting about Stockholm is that they've said that there will not be a new full system for the entire Stockholm, so it opens up a market which has been semi-closed for us so far. So there's a lot we can do, but we also have, for example, all the private clinics doing surgery and so on, which Webdoc do not support in a good way today. So there's so much we can do in Sweden.

And in Norway, as there is an ongoing migration to cloud, was it that 40% now? I'm curious, did I remember correctly?

[Svein Bjornstad, executive]

I think this is about the market in general that there is still a large share of the market that is using on-premise solutions in Norway, and there is an ongoing migration to cloud now. And that's the same as we have seen in Sweden historically where basically the majority of the cloud penetration in Sweden is Webdoc today, while the other ones are using on-premise solutions. And we see a similar trend in Norway that's happening now where customers are moving to cloud. And there is, of course, a potential there and a market window as well.

We have a question and other questions relating to the employee headcount. Could you please comment on the likely development in FTEs during 2023?

[Daniel Ohman, executive]

Yes. So we will greatly slow down and have already slowed down the hiring pace, meaning that headcount shouldn't increase in any meaningful sense from now on. It takes some time because some people have been hired during the fourth quarter, and they started to -- they're still joining the company, as Svein Martin mentioned. But after that, I wanted to really put a brake on it and have the revenues growing and make sure that we come in a good position again.

We do not need more staff in general. We might need a bit of a different staff here and there, so there might be some changes of that type. But in general, the headcount shouldn't increase because we don't need to. We can grow a lot with the organization we have and that's staying.

[Svein Bjornstad, executive]

All right.

[Daniel Ohman, executive]

Yes, I think that was all the questions for today. But please, if you have any other questions, just reach out to me and Svein Martin.

And with that, I would like to thank you all for participating today and for your interest. Thank you.

[Svein Bjornstad, executive]

Thank you.