Crayon Group Holding ASA

OSE:CRAYN

Earnings Call Transcript 2021-Q3

[Melanie Coffee, PR & Media Relations Director]

Good morning, everyone. This is the Crayon third quarter results. I'm here with CEO, Melissa Mulholland; and CFO, Jon Birger Syvertsen. My name is Melanie Coffee. Welcome.

[Melissa Mulholland, CEO & Chief Services and Solutions Officer]

Thanks, everyone, for joining our Q3 2021 results. Today, we are going to focus on our highlights and successes across the business. Calling your attention to 3 core areas. The first is our focus around mergers and acquisitions to continue to accelerate our growth in the market and our ambitions ahead. Additionally, we'll focus deeper on our culture, our people, which is our greatest asset, and it enables us to be able to deliver the results that we have today. And then lastly, focus on our continued strong performance that we have quarter-over-quarter.Upon our 20-year expansion into this business, we have now 80% global coverage, which has been delivered through both organic business growth through the markets that we have today as well as over 20 acquisitions that we've made. We have bold ambitions as we look at expanding the company in both the markets that we have today but also across acquisitions that we will be making going into the future. So you can see here that we have ambitions to double our company size both in terms of number of employees, but also revenue and, of course, expanding gross profit.Now with that, I want to call your attention to the acquisitions that we've made this year to explain the value of them and how they fit into the strategy that we have as a company. The first is the acquisition that we made last spring, which is Sensa. They are a company of 120 employees based in Iceland with really strong hosting, cloud migration and cloud professional and managed services that they have in their business model today. Already, we've been able to capture growth with them in the Nordics, but also expanding support that they're doing around the world.Cloud Direct, which is a company based in the U.K., has fantastic migration technology capability as well as platform and IP to scale services. They're a company of 200 employees, spanning both the U.K. as well as South Africa. And they fit really well in with our business model around services.And then lastly, the largest acquisition that we've made today, which is Rhipe, 600 employees with really clear scale around channel as well as market presence in Asia Pacific, where we are still relatively small today as a company.Now channel is a fantastic mechanism for us as a business model. As you may recall, we have 2 key areas of our business. We have a direct model where we sell into directly to customers, but we also have a channel or what we also call it indirect model. Now let me explain further with you what this actually means. So today, we work with software vendors that could be anybody from Microsoft to AWS, even IBM or VMware, where we have licenses that the customer wants access to.Crayon serves as an intermediate, so we sell into a set of ecosystem of what we call channel partners, who provide the skill set and deep knowledge to the end customers. So you can think more along the lines of small businesses. This gives us incredible scale. If you look on the right-hand side of this slide, you can see that our quarterly growth continues to be really healthy at 12%. And in fact, this quarter in Q3, this is our strongest performing quarter ever in our history for channel.It also is very scalable in terms of recurring revenue. So it's 100% recurring revenue model, driven by the fact that it's multiyear agreements with our end customers as well as monthly invoicing. And we have 2 key customer bases when we talk about channels, so there's the traditional hosters that need subscription to their licensing, but we also have independent software vendors who are really deep in building out applications. And oftentimes, they want to be focused on building out their IP, being able to deliver that to their customers and not be consumed around how do I access the licensing or how do I provision this.So to take a deep dive further into this, what's really important in our business model for both channel as well as direct is our access to our customer-facing portals, which we call our intellectual property. So today, we have 3 core areas of IP and platforms that we have as a company. The first is Cloud-iQ. Cloud-iQ is a world-class leading provisioning platform for both channel as well as direct customers. It enables customers to be able to self-service their auto provisioning of their billing and reporting and seamlessly have access to their subscriptions today. And we'll take a deeper dive view into what this means momentarily.Then we have Service-iQ, which enables customers to be able to access key services, run reporting, analysis. When we talk about our product around cloud economics, for example, this ties into Service-iQ where they have access to reporting and they can manage their costs. And then lastly, we pull all of this together through Crayon-iQ, which is a seamless front door entry to serve both our customer and partners' needs. Now looking into Cloud-iQ, it's important to give some context around this platform. We were one of the first to come to market globally with the IP that we have today, and it continues to be a leading mechanism for us to be able to support our customers. Today, we have over 60,000 end customers accessing this platform. You can see here that we're supporting those customers with everything from procurement of their licensing, which includes managing multivendors, so not just Microsoft, it expands into software providers such as IBM as well as AWS and others.Then we have instant access to those accounts. So this enables them to provision those licenses in the cloud so they can have easy access to things that we all need at every day to run our business. Then we provide reporting as well as control so that they are able to see their cost optimization savings as well as billing and, of course, self-service access, which is important for our customers today.To showcase this, I want to walk through a real customer use case that we have today. So this is an ISV based out of South Africa. So they are really deep in technology, providing IoT biometric devices for cloud-based access control solutions. iPulse came to us because, believe it or not, while they have this incredible technical skill set, they had a pain point around expense tracking. They had over 17,000 lines in a spreadsheet that they had to assess manually every single month, and they needed support around more predictability, accuracy as well as visibility into their Azure spend.We supported them with a full based assessment and leveraging our Cloud-iQ platform, we were able to automate this. And it's an incredible story around that scale that we're able to achieve through our channel business. And in looking at companies like Rhipe, who has really great channel presence in Asia Pacific today. This further expands our offering and our availability to support customers around the world.Now I cannot be remiss to say that at the end of the day, the platforms, the skills that we have are all based on our people. People are our greatest asset, and it is so important that we continue to support them with a really fantastic place to work. When I joined Crayon, I was incredibly impressed with just this concept that the company has, which is rooted in its culture, all the way back from when the founders established a company just coming on 20 years ago, which is this concept around a family.We support each other. We look up and we help one another across the company. It's really true in the way that we engage across each of our subsidiaries, our markets, because we're able to bring the best of the best together and be able to achieve what is our customer-first priority. We always put our customers first. In that example of iPulse and other customer examples you'll see here later in the presentation, it really shows that when we are able to adapt to our customers' business problems and support them, we have high customer retention. We are able to deliver more sticky services, such as cloud-based services, and be able to develop a long-term relationship with them, which is important for the customers to support their needs, but also the profitability of the company.We have a culture that is very focused around, I would say, entrepreneurial mindset, being able to innovate, be on top of the best. And of course, we are deeply focused around diversity and inclusion. Our core values are outlined here, but we want to make sure that we continue to deliver with integrity, pace, do it at a very quick pace, stay on top of it, but of course, and always, deliver with quality.Taking a deeper view into the numbers. Today, we have approximately through 3,200 employees today, and this includes the acquisition of Rhipe. You can see that just in 2020, we had just over 2,000 employees, so we are growing. What I'm really proud of is that with our central talent acquisition team, we've had over 458 new hires into the business. Now of course, this is -- does not include any referrals that employees make. This is truly through our recruiting efforts that we have at the global team. We have very low turnover rate in this business, less than 10%, so you can see here that we're at 7.5%, which is a very -- it's a healthy number when we talk about employee churn, especially today in the market that is very fast paced and moving coming out of the pandemic.As I mentioned, we're putting a big emphasis around diversity. And of course, diversity does not just include male and female. But what we can report on today is that we have 30% of our employee work base that is female and 70% male. Now of course, we have work to do to improve that. And when you even look that around at the management level, we've been making a significant amount of effort to improve the distribution at the management level across the organization. And then lastly, I'm proud to say that we have over 7,000 certifications, which is across multi-vendors. So everyone from Microsoft to AWS to Google Cloud and even IBM.So with that, I want to take a deeper dive into our talent acquisition process. Talent is so crucial in our market today. It is a competitive war on talent. But I'm proud to say that we continue to not only hire incredible resources coming into the company, but actually, 50% of the leads generated are applications coming through LinkedIn. That's a fantastic result. It speaks to the importance of culture. It speaks to the importance of the work that we're doing, and we want to continue to make this a destination for employees to attract talent.Also, we see here that the average time from posting a role to hiring to signature is 11 weeks. Typically, on average, you would see that to be 4 months. So we have clearly expedited the process to be able to bring in people and then bring them into the business so that they are productive and can deliver ROI as quickly as possible.Now focusing on people again for a moment. I'm really pleased to announce that we have achieved the Great Place to Work certification in our country of India. On top of that, we also achieved the Best Place to Workplace for Women in India. Just for context, 712 organizations were evaluated to achieve this nomination. Today, you have to have a minimum of 10% of women employees and Crayon is over 31% in India. And then on top of it, we have very low attrition in the India market. So we have less than 5%, so that's even beating our global attrition rate.And I call that out because it signifies that it's not just about financial cost or salary that brings an employee into an organization. It's about the place that they work, the culture that they're in and, more importantly, being able to be supported to be able to do their best work. Of course, we have the ambitions to achieve this across our global business, but I want to just say congratulations to the team, because it's fantastic results, building on the capability of our people.Taking that one step further, sustainability is an important strategy for us as a company. We have adopted the 3P strategy of people, planet and profit and turned it into the 3C strategy, so across our Crayon colleagues, across climate change as well as our customers. For our Crayon employees, we are deeply focused around diversity, inclusion. We have a work stream across the company to ensure that we recognize how we can improve and continue to work with each other, but also that expands into areas such as integrity and, of course, community around our employee engagement.On the planet side, around combating climate change, we have implemented measures to drive more renewable aspects into our offices across the world, but also included that into measures around Green IT and how we can further adopt the supply chain as part of that. And then lastly, on the profit side, we are building out customer-centric solutions. So if we look at areas such as cloud economics, being able to capture that carbon footprint in the way that we're able to serve customers to responsible AI and having machine learning models to support the energy sector.From a time line perspective, we, of course, have a journey ahead of us. Prior to 2020, we had really -- it's local initiatives and activities in place. Now in 2021, we hired our Chief Compliance Officer back in Q1 who has supported the building and strategy of our ESG framework. We're also bringing in KPMG to support us along this journey. What I'm really proud of is that we did a unique approach around ESG, in that we asked our employees as part of our culture around entrepreneurial and innovation mindset, and 20% of our workforce has actually nominated themselves to support in building solutions and frameworks for both what we could do internally but also externally.And to support them, we launched an innovation fund of NOK 1 million to support building customer-facing solutions, but also thinking of ways that we can benefit society. In 2022, we will have a separate sustainability report. We are working on aligned internal measurements and targets that we will also put into place. And of course, we'll continue to refine this strategy as we go into 2023. But it's important for us to take a really big stance around our efforts around sustainability and supporting not just our customers and society, but also our employees.Now with that, let's take a deep dive view into the financials. So I'm proud to say, again, we've continued to have outstanding results at 40% year-on-year growth in our revenue, 29% on gross profit and 27% in EBITDA, fueled by our Services business as well as outstanding performance across each of our business areas. As in keeping with standard format, let's look into each of the business areas that we report on.Across the Software & Cloud Direct business, we continue to see strong performance with 26% gross profit growth. In this business, we are expanding the global relationships that we have with key signature customers. This, of course, starts with a licensing-based approach, but more and more we're increasing the services that we're able to support customers across Microsoft as well as AWS. So we've continued to upsell and bundle, I would say, our cost savings aspect with additional services growth.On the Software & Cloud Channel, this is our highest, I would say, performance that we've had to date with 20% gross profit growth. This is a highly recurring base business with high customer retention at 98%. We see great growth across Nordics, APAC, U.S. as well as the U.K., but also expanding across our product mix to be very multi-cloud capability. You can see great examples across France through a company named Smile, who's a cloud-focused service provider as well as PROART Consulting in the Middle East, who focused with us around scaling out their business and dynamics.On the Software & Cloud Economics side, 18% gross profit growth with continued strong progress around our cloud, what we call cost optimization or cost savings, product portfolio that we provide customers today. We are able to support really significant customers in terms of size. So just to give some examples, Generali is a top insurance company in the world with close to EUR 100 billion of revenue and over 70,000 employees. We're supporting them with a managed service agreement to be able to reduce their cost size of their business, which you can imagine in the insurance industry is always top of mind.Also with FEV, a global leading engineering service provider, we're supporting them across multi-vendor engagement as so often we see with customers, they don't pick one hyperscaler, they have a breadth of business today. And then lastly, outstanding results on our Consulting services side with 56% gross profit growth. Cloud services continues to be a focus and a priority and you can see why. We have had outstanding results across the Nordics, in particular, and some great customer examples I want to call out. One is Innovation Norway, or Innovasjon Norge, which continues to be a key area of growth for us around how do we support them around Azure operations in the cloud as well as the NRK, which is in Norway, and we're supporting them across Microsoft infrastructure and security as well as continuous optimization in their cloud business.Now to do a quick view of some specific highlights of customers. Doc Martens is a famous retail provider that's been around for quite some time. Doc Martens is well known around their boots and their shoes and footwear that you can see on the right-hand side. They have over 12.7 million pairs of footwear, and it's also expanded into more than 60 countries today. They came to us around the need to really think about how they optimize their software spend and their licensing. So we started to support them with that. And you could see that we have resulted in 27% annual cost savings in 1 year based on our expertise in this space.But it didn't stop there. We now are expanding that to build in cloud services across Azure and modern workplace resulting in GBP 100,000 of recurring monthly revenue. This is a great example of where we've put our customer needs first. We take our key expertise around licensing and software and cloud and being able to provision and drive cost optimization or cost savings, but then expand it further into areas where we can support them further in more technical areas in their cloud management.If we look at an example of -- on the consulting side, here's an example of a company, KEO, who is based in Kuwait. They needed support around their Azure business. They are very scalable in terms of the work that they do in an international design company. But they needed a way to stay competitive in the market that they're in, being able to connect their IT environment and also ensure that their applications were managed more efficiently. So we supported them around migration in the cloud and also being able to support them with their cloud business all up. It's a great example around how we can scale further deep into the technology areas, but again, this goes back to assessing our customers' needs, really putting forth understanding the business problem and then being able to solve that through our key talent and expertise that we have.Lastly, around data and AI, there's a company based in Norway called Arundo, who works on products and capabilities for oil and gas, maritime and the chemical-based industry. They came to us around our data and AI talent that we have, and we supported them with the energy sector. So you could see here that we're scaling out the people that we have to support them around data and analytics and supporting them in their processes. It's a great example, again, of how we support our customers. And I'm really proud to say that in each of these examples, it all starts with talent. We have best-in-class talent that will continue to scale our business, and I'm grateful to be sharing these incredible results with you today.Now with that, we're going to transition to a deeper dive of the financial review.

[Jon Birger Syvertsen, Chief Financial Officer]

Good morning, everyone. As the CFO of Crayon Group, I look forward to taking all of you through the financial section today. As a reminder, all numbers are Norwegian kroners, unless otherwise stated. To summarize Q3 2021, we have delivered another record quarter. When reviewing the Q3 financial results, there are, in particular, 3 points I would like to draw your attention to.Firstly, this quarter again demonstrates the scalability of the business model with continued strong growth across market segments. In Q3, we delivered 29% gross profit growth versus Q3 last year, while in constant currency terms, we delivered a very strong 23% gross profit growth. This is a clear demonstration of the strength of the business model as we are able to drive significant gross profit growth across all the markets we operate in.Secondly, we are happy to see that the loosening of restrictions related to COVID-19 has enabled us to ramp up our investments in additional people and capacity and onboarding new colleagues at a higher rate than previously. In particular, in all markets out of outside Nordics, we continue to invest significantly in growth. And despite this acceleration of the cost base as a consequence of the investments, we still delivered a solid NOK 17 million EBITDA improvement.Finally, we are now at the last stretch of closing the Rhipe acquisition, which we expect to close on November 3 with only formalities remaining at this stage. We look at the financial profile of the combined business later. But keep in mind that for the combined entity, we are looking at a business with approximately NOK 3.3 billion in gross profit and NOK 740 million in EBITDA over the last 12 months, which is a substantial improvement from the NOK 2.3 billion gross profit and NOK 413 million EBITDA that Crayon reported stand-alone in 2020.Based on a closing on November 3, we expect to consolidate Rhipe into Crayon's financials for November and December this year. This, combined with the strong underlying business momentum, leads us to revise the 2021 guidance upwards and increase our medium-term guidance as well.As highlighted, Crayon delivered a strong gross profit growth of 29% in Q3, combined with a very strong NOK 17 million EBITDA improvement. In total, this implies NOK 145 million increase in gross profit, translating to a NOK 17 million improvement in EBITDA. From a seasonal perspective, Q1 and Q3 has lower gross profit while our cost base is largely unaffected by the seasonality. Even as we have ramped up investments into new resources significantly during the quarter, it is still very encouraging to see that the growth continues to translate into EBITDA improvements quarter-over-quarter.Looking at our growth in constant currency, we see a 23% growth rate as the Norwegian kroner was weaker in Q3 2021 than in previous period. While on the adjusted EBITDA side, the constant currency number is similar to the reported number. It is also important to note that the Sensa acquisition was consolidated into the accounts for the full quarter, and this explains approximately NOK 40 million of the gross profit growth in the Nordics and NOK 9 million of the EBITDA improvement.Looking at the geo breakdown of this growth, we see that the Nordics has delivered a strong growth of 36% and an EBITDA improvement of NOK 36 million. Sensa clearly contributes to this growth, but more than half of the growth is underlying growth, organic growth across our Nordic markets, which demonstrates the strength of our business model in the Nordics as we broaden the scope of services we provide to our customers.Europe delivers 25% gross profit growth and NOK 5 million EBITDA decline. The growth is driven broadly across our entire portfolio of markets across Europe, which points both the consistent strong market and the universal applicability of our go-to-market model, while the EBITDA decline is driven by accelerating investments into new resources as the restrictions imposed by COVID have across most markets progressively loosened up during the quarter and enabled us to accelerate our growth.In APAC and Middle East, we delivered 23% gross profit growth and NOK 8 million EBITDA decline. The major contributor to the growth in Q3 is Middle East and Southeast Asia, while the EBITDA decline is driven by investments in resources across the region as we continue to see strong opportunities for further growth. In the U.S., we are seeing a reported 35% gross profit growth and a NOK 4 million EBITDA improvement, with the gross profit growth driven in particular by the software and cloud segments, which grew 66% year-over-year. And we continue to invest in the U.S. with a year-over-year growth of 30% on the cost base.Finally, we also onboarded new leadership for our U.S. offices and as such are paving the way for further acceleration of growth and investments in the U.S. going forward.Shifting focus to the business areas I mentioned. We are seeing overall strong performance across our segments. Consulting is driving significant growth, but less than half of this growth relates to the Sensa acquisition, while the remaining growth is distributed across all geographies, which is a clear reflection of our commitment to build a strong service business globally in parallel with our Software & Cloud business. And it is, again, encouraging to see how this ramps up across all geographies, with gross profit growth on services outpaced software and cloud growth across all markets outside of the U.S.Across Software, Cloud Direct and Channel, we're seeing strong growth again across all markets, even as Q3 is one of the slow quarters from a seasonal perspective. We continue to see a strong underlying market and deliver solid growth across the regions with the U.S. as a clear standout with very strong growth rates on Software & Cloud Direct. Also important to note is how the gross profit in the Software & Cloud channels translates more or less directly to EBITDA improvements, which is driven by the scalability of the platform-based business model.Finally, Software & Cloud Economics delivered solid growth and profitability improvements across our markets, which is important as the Software & Cloud Economics service represents the cornerstone of our customer engagement model.Crayon has, for the past 4 years, been on a journey from a Nordic company to an international company, and Crayon has come a long way on this journey. The gray bars represents our international business. And as recently as 2018, Crayon had NOK 558 million in gross profit from the International segment, representing 38% of the total gross profit in the company. Today, this gross profit has more than doubled over the course of less than 3 years, driven by strong organic growth across the portfolio.Despite strong growth rates also in the Nordics, our international markets now amount to 49% of the gross profit in the company. Also relevant to note that if Rhipe and Sensa, as the recent acquisitions, have been fully consolidated into our last 12-month numbers, we would be looking at 54% of our gross profit in our international markets, further demonstrating our pivots to a global company.Still, even at 54%, we are a long way away from realizing the potential in the international markets. The market potential for our services outside of the Nordics is order of magnitude is larger than the market potential in the Nordics, and we will continue to invest in driving growth outside the Nordics.As to profitability, the international markets collectively delivered NOK 198 million in EBITDA over the last 12 months, which is a significant improvement of NOK 229 million over the same time period. As recently as year-end 2018, we had a negative EBITDA margin in our international markets in aggregate. While today, we are at 15% positive margin.Again, we have been able to achieve this improvement while we also improve profitability in the Nordics, delivering a strong EBITDA margin of 34% in the Nordics over the last 12 months. And as we have repeatedly pointed out before, the EBITDA margin of 30% plus, which we see in the Nordics, is what we see as representative for our business model when operating at scale. Although some of the international markets operate at similar margins already today, as a whole, we are still only at 15% EBITDA margin for our international business, which clearly indicates the potential for profitability improvements as we continue to scale our international footprint.For Crayon, generating a strong cash flow from our underlying business is obviously a key financial objective. And for a high turnover business like Crayon, working capital is a critical part of our cash flow results. As a management team and as a business, we invest significant time and effort into driving working capital improvement. And it is thus very positive to see that these efforts across the organization are paying off.Before diving into the Q3 working capital, it is important to keep in mind that our business is seasonal. And as a consequence, the relevant comparison for working capital is always year-over-year. However, independent of the seasonality, Crayon has a consistent track record of negative working capital, which is attractive as it implies working capital as a source of funds, not a use of funds.Starting with the working capital in Q3. We have accounts receivables of NOK 3.3 billion, while accounts payables to vendors amounts to NOK 3.1 billion. This results in a trade working capital of NOK 167 million, which is a reduction and thus an improvement of NOK 123 million compared to September 31, 2020. The improvement is driven by continued focus on credit and collection process globally.Furthermore, we have other working capital, which includes things such as payable public duties, taxes and other short-term receivables and payables totaling minus NOK 623 million, resulting in a net negative working capital of NOK 456 million on September 31, which is a reduction and thus an improvement of NOK 357 million year-over-year.Cash flow from operations follow the same seasonal pattern as the net working capital on the previous page as changes in working capital is the major driver for the variability of the cash flow between quarters. As we illustrated on the previous page, the reduction in working capital from Q3 was less drastic in 2021 than in 2020, leading to a significantly better cash flow from operations in Q3 this year compared to last year. However, in order to look across the cycles, it is helpful to look at the development of the liquidity over the past 12 months. The waterfall below illustrates how the net cash position and liquidity position has improved significantly.End Q3 2020, we had NOK 413 million in cash. During the last 12 months, we had unadjusted EBITDA of NOK 548 million, while the change in net working capital had a positive impact of NOK 314 million as seen from the cash flow statements. CapEx had a negative effect of NOK 82 million, while acquisitions net amounted to NOK 159 million, and tax and interest amounted to NOK 89 million, while new equity in total has increased cash with NOK 63 million and currency translation and other amounts amounted to NOK 212 million negative, leading to a net cash position on September 31st of NOK 796 million.In addition, the business has an RCF available, which leads to a total liquidity reserve of NOK 943 million on September 30. The upcoming acquisition of Rhipe is financed through a NOK 1.8 billion bond and an increase in the RCF with NOK 650 million, which implies that even after the NOK 2.4 billion payment for the acquisition of all shares in Rhipe, the business remains in a strong liquidity position.Finally, after covering the reported numbers, I would like to spend a little time on what Crayon will actually look like post the closing of the Rhipe acquisition, which is anticipated on the 3rd of November. To show this, we've included a view of the financials, including the full effect of both the Sensa acquisition and the Rhipe acquisitions, as this is in practice the historic financials, which are relevant for the Crayon shareholders today.Starting with the gross profit, we're then looking at a gross profit of NOK 3.3 billion compared to a reported LTM gross profit in Crayon of NOK 2.8 billion today. 54% of this gross profit is outside the Nordics, which clearly demonstrates our international orientation.On the EBITDA side, we are looking at an LTM EBITDA of NOK 715 million, compared to a reported last 12 months for Crayon of NOK 567 million. On top of this NOK 715 million, there is significant synergy potential in the business combination with Rhipe. In particular, on cross-sell of services and vendors and general acceleration of the growth across APAC and accessing the benefits of scale, and identifying and addressing these synergies is a critical part of the integration work we have initiated. However, we have already now identified more than NOK 15 million in cost synergies relating to the delisting of Rhipe and the integration into Crayon. And including this, we are looking at the last 12 months run rate of NOK 740 million EBITDA for the business.As to the Crayon P&L, we have already covered the items down to EBITDA and the operating performance underlying this. Depreciation and amortization is in line with plan, with depreciation increasing year-over-year due to the investments in IP and ERP systems in previous periods and a slight increase in capitalized lease costs under IFRS 16, while amortizations are higher than in Q3 2020, driven by an increase in intangible assets as a consequence of the Sensa acquisition.Interest expenses increased year-over-year as a consequence of the NOK 1.8 billion bond, which was raised on July 6, even though this is not included as a long-term bond in the balance sheet as the final issue of the -- as the final payout on the bond is contingent on closing the transaction with Rhipe, but we're still paying the interest costs as of July 6.Other financial expenses increased and this is primarily related to the hedging of the cash outflows that are anticipated under the Rhipe acquisitions, as we entered into a hedge on the committed cash flow following the acquisition, as we raised financing in Norwegian kroners to cover an Australian dollar expense for the acquisition of the Rhipe shares. Altogether, this results in a pretax result of minus NOK 131 million in the quarter, a reduction of NOK 180 million driven by the financial impact of the currency hedging of Australian dollars. Income tax expenses is higher than in Q3 2020 as there are more markets in which we achieve profitability also in the seasonally weaker quarter. And this leads to a net loss of NOK 143 million in the quarter.Excluding the impact from other financial impacts, we would have a net income of minus NOK 21.2 million. This would represent a flat development year-over-year, which is a very strong result in light of the significant increase in the interest expenses as we have expanded the bond up from NOK 300 million to NOK 2.1 billion.When it comes to the balance sheet, we have already discussed the net working capital. Intangible assets increased year-over-year driven by the Sensa acquisition, leading to increases in particular on contracts and goodwill. Also important to note on the asset side is that the NOK 1.8 billion bond is seen as a short-term liability, as the release of the bond is contingent on the closing of the transaction. Similarly, the bond is seen on the liability side as a short-term deposit.Elsewhere on the liability side, lease liabilities are reduced as the contract portfolio is maturing, while public duties increased from a combination of underlying business growth and a reclassification of the VAT liabilities leading to a like-for-like increase in public duties and other current receivables of NOK 187 million as we are booking this gross in Q2 2021 as opposed to net historically. Finally, Crayon also has a NOK 300 million bond outstanding, maturing in November 2022. This, combined with a cash position of NOK 796 million, leads to a net interest-bearing debt of minus NOK 197 million on September 30, representing a leverage of minus 0.3.The upcoming Rhipe acquisition is fully funded through a combination of the bond loan and an increase of the RCF by NOK 650 million. If we include the expected NOK 2.4 billion payment for Rhipe and include the cash in Rhipe, which we will consolidate in as part of our accounts, we're looking at a net debt of approximately NOK 2.1 billion after the acquisition compared to an LTM EBITDA of NOK 740 million, reflecting a leverage of 2.8, which is a level which is well below our stated goal of ensuring leverage is below 3.0 over time. As the business continues to grow, this leverage ratio will over time decrease further.Cash flow is important to us in Crayon as delivering a net cash flow, which can finance acquisitions, investments and/or dividends or share buybacks are a critical part of shareholder value creation. As always, cash flow from operating activities in Q3 reflects the change in net working capital. As the change in working capital is less positive in Q3 than in Q2 from a seasonal pattern, the cash flow is negative in Q3. However, since the working capital position in Q3 this year is better than in Q3 last year, the cash flow is also less negative, which reflects the strong achievement from the business in collection and credit performance.Cash flow from financing activities in Q3 is related to the existing bond loan and interest payments on capitalized leases. Acquisition of assets is primarily related to the ERP system in Cloud-iQ as we continue to invest in these platforms to build a scalable business model, while the cash outflow of NOK 36 million for acquisitions related to the Cloud Direct transaction.Having reviewed the Q3 financials, I'm happy to present our updated outlook for 2021 and for the medium term. As indicated in the interim, we continue to see a strong momentum across the markets we operate in. In Q3, we delivered 29% growth year-over-year, which results in a last 12-month growth rate of 25%. We continue to see strong growth momentum across the markets we operate in. In addition, we expect to be able to consolidate Rhipe's financials for November and December, which will add 3 to 4 percentage points to the growth rate in 2021. In total, the strong growth momentum and the Rhipe integration implies we lift guidance for the full year gross profit growth for 2021 to 28% to 30%.As part of the Rhipe integration process, we have also reviewed our medium-term guidance. And based on the growth platform we have built across markets, we are updating the medium-term guidance to around 20% of gross profit growth. As to the EBITDA margins, we expect to continue to drive investments and future profitability in Q4. But despite this, we are seeing improving EBITDA margins as we drive growth and onboard Rhipe, which is accretive to our margins. And as such, we increased the 2021 EBITDA margin guidance to 20% to 21%.For the medium-term guidance, we increased EBITDA margin to around 22% as we expect to continue to invest in order to drive growth, but also to continue to drive margin improvements in parallel with this growth. The average net working capital for the past 4 quarters is currently minus 25.8% of the last 12-month gross profit, and we maintain our guidance of 20% to 25% for the full year 2021.Finally, CapEx for the last 12 months is NOK 82 million. And for the full year 2021, we maintain the guidance of NOK 80 million to NOK 85 million as we continue to see opportunities for investments into our platforms, such as the new ERP system, our Cloud-iQ platform and the other globally scalable service offerings in order to drive growth and improve margins.This now concludes the formal part of the Q3 presentation, and we now open up for questions from the audience.

[Melanie Coffee, PR & Media Relations Director]

Are there any questions from the audience?

[Jon Birger Syvertsen, Chief Financial Officer]

Christoffer, you need to unmute in order for us to hear.

[Christoffer Wang Bjørnsen, Analyst]

Can you hear me now?

[Jon Birger Syvertsen, Chief Financial Officer]

We hear you.

[Christoffer Wang Bjørnsen, Analyst]

[indiscernible] they have Cloud-iQ, they have another platform. There may be some significant synergies on the cost related to that and other synergies. Can you give some more clarity now that the deal is basically closed on what kind of synergies we can expect over the next, let's say, 12 to 24 months, that will be helpful.And then on Cloud Direct, maybe some comments on what kind of valuation you're looking at if you were to kind of exercise the option to acquire 100% of the company. And then the last question from my part is if you can give some more color on the organic growth in the Nordics across your business in software if you adjust for Sensa.

[Jon Birger Syvertsen, Chief Financial Officer]

So to repeat for the -- in case the sound didn't come on properly, the questions was basically around synergy outlook for Rhipe, Cloud Direct and evaluations of the future of any future acquisitions there. And the final question was on basically sort of the organic growth on software and cloud in the Nordics.So to start with the first question, and Melissa, you can contribute as well because we're now running a structured process with the Rhipe teams in order to identify the -- basically the opportunities to accelerate value creation for customers and accelerate the growth rates in the regions. Of course, we're also sort of -- and to be clear, that's the category where we see the major opportunities of synergies. There are also elements of cost synergies. But by and large, those are predominantly related to us being able to redeploy resources in order to accelerate the growth rates across the regions.When we look at the markets, we see significant potential for the combined entity. And we look forward to being able to work better and more effectively in driving that growth across the region. And as such, we have not set -- as this is a structured process where we wish we work through the team, we have not communicated beyond what we've shared previously on the long-term synergy ambitions beyond significant value capture. But I also highlighted that we've identified some very clear and obvious synergies, which will be implemented in the near term amounting to around AUD 2 million.

[Melissa Mulholland, CEO & Chief Services and Solutions Officer]

And Christoffer, to your question regarding CapEx, yes, there will be CapEx synergies, undoubtedly, on the platform side. So as JB described, we're going through that assessment and due diligence effort now and we'll be able to report in the future regarding those synergies.

[Jon Birger Syvertsen, Chief Financial Officer]

Your second question was on Cloud Direct and implied valuation. And given that this is sort of a -- given that this is an agreement, we're not in a position to share more specifics on the future there than what we have already shared in the announcement. But it's also very clear that we look forward and are hopeful that we will continue to drive a process, which will lead to us integrating and acquiring majority and full control over -- of Cloud Direct over time as we believe that will be beneficial both to us and to the existing shareholders because we do see significant opportunities and synergies. Anything you want to add there from a business perspective, Melissa?

[Melissa Mulholland, CEO & Chief Services and Solutions Officer]

Yes. So they've done over 200 cloud migrations to date. They're going to fit really well into our channel strategy and supporting ISVs. We've already started to engage there, and we do see the ability to scale them beyond the U.K. and into clearly Europe, but beyond that as well. They have -- similar to us, they have the Azure Expert MSP status, which is an indication of their technical skill set that they've accumulated. So we see the ability to expand that as part of our M&A strategy. It's not just about increasing where we have low market presence, but it's also about augmenting skills, and Cloud Direct is a great example of that.

[Melanie Coffee, PR & Media Relations Director]

And the next question, Oliver [indiscernible]. Please unmute.

[Unknown Analyst]

Yes, sure. But I think maybe you had a last question from Christoffer as well on the organic growth in the Nordics adjusted for Sensa. I can ask that as well.

[Jon Birger Syvertsen, Chief Financial Officer]

Yes. No, so the organic growth, so basically you strip out around NOK 40 million of gross profit in the Nordics from the Sensa acquisition, which leaves you with a growth of approximately NOK 45 million in the Nordics, excluding Sensa. So a bit more than half of the growth rate in the Nordics of 36% is organic, and the remainder is driven by the Sensa acquisition. And really to the question, which I also sort of see we have multiple questions online sort of the drivers of that organic growth really comes across the combination of services and Software & Cloud, which is the cornerstone of our business model.

[Unknown Analyst]

I'll jump to my own questions then. I think just to get some color on your medium-term guidance. You're getting to 20% medium-term gross profit growth now. As I understand that your gross profit growth guidance for '21 is partly an effect of consolidation of Rhipe. Is there any consolidation effect in the medium-term guidance, I mean, for example, related to Rhipe in 2022?

[Jon Birger Syvertsen, Chief Financial Officer]

No, there is no -- there will be no -- obviously, no consolidation effect of Rhipe in the medium-term guidance is what we see as a 3-year horizon. And of course, over the course of the next 12 months when we report year-over-year growth, there will be a consolidation effect from Rhipe. But we will also make sure to help you decipher that over time to be able to track our organic performance. But of course, we are -- we do believe that we have the opportunity to continue to add gross profit growth through acquisitions as we have demonstrated over this time period, over the last 12 months with Sensa and with Cloud Direct.

[Unknown Analyst]

All right. So just to make sure I understand you, that means that 20% is purely organic guidance.

[Jon Birger Syvertsen, Chief Financial Officer]

20% would be organic plus minor acquisitions, which we can finance through our own cash flow basically.

[Unknown Analyst]

Very good. That makes sense. And maybe as the last one as well. So what does that guidance imply for your thinking about the Rhipe's growth going forward?

[Jon Birger Syvertsen, Chief Financial Officer]

It's a good question. And we are clearly positive that -- I mean Rhipe has a fundamentally attractive business model with a solid footprint in the channel in -- across APAC. And we're positive that, that has the opportunity to continue to grow significantly, also leveraging the service portfolio and vendor portfolios we have available throughout our portfolio. So we are positive also on continuing to drive organic growth on the existing Rhipe basis.

[Melanie Coffee, PR & Media Relations Director]

All right. And a question from Kristian, please.

[Kristian Flørnes Støle, Research Analyst]

I was wondering if you could help me a bit with the objective of doubling revenues by 2025, which I think it looks a bit conservative versus your own targets and other statements. So I derive it doubling in revenue by 2025 by assuming a 15% revenue CAGR from 2022, which is quite below your 20% gross profit growth target and indicates very small acquisitions. So could you help me elaborate a bit on this?

[Jon Birger Syvertsen, Chief Financial Officer]

Yes. I think sort of basically, we're looking at sort of -- when you look out to 2025, you're looking a long way into the crystal ball. I think we have a clear ambition of doubling the company size by 2025. I think to your point sort of continuing on the trajectory we are now, so that would likely imply a higher revenue contribution than doubling the revenue.

[Melissa Mulholland, CEO & Chief Services and Solutions Officer]

Yes. I would just say it's an excellent call out, but it's also not just about revenue. It's also about employee base and scalability in markets that we know we need to be much larger in today to capture that additional upside growth. So yes, we will get there before 2025.

[Kristian Flørnes Støle, Research Analyst]

Okay. So more focus on the 20% gross profit growth target and some bolt-on acquisitions?

[Melissa Mulholland, CEO & Chief Services and Solutions Officer]

Yes.

[Melanie Coffee, PR & Media Relations Director]

Okay. And now we'll move to the public portion of the question-and-answer session.

[Jon Birger Syvertsen, Chief Financial Officer]

Yes. A large share of the questions are all really covered, but just to point out 1 important question which I see is the upgrade -- update to the medium-term outlook is not the consequence of the Rhipe acquisition as such. That's a consequence of the strong underlying momentum we see globally and the demand for sort of the services and the combination of the business model, which we are able to position. And basically, what we have demonstrated in terms of international scalability of the business model over the past years.Besides that, I think we've covered the questions already now. If there are no further questions, I thank you all for your participation. Thanks for listening in. It was a pleasure having you here. I look forward to presenting Q4 in the middle of February. And in the meantime, if you have any questions, you are, of course, as always, welcome to reach out to Crayon.