Crayon Group Holding ASA

OSE:CRAYN

Earnings Call Transcript 2022-Q4

[Kjell Hansen, executive]

Good morning, everyone, and welcome to Crayon Group's Fourth Quarter Result Presentation. My name is Kjell Arne Hansen and I'm the Head of Investor Relations for Crayon. With me today, I have our CEO, Melissa Mulholland; and our CFO, Jon Birger Syvertsen. Together, they will take you through the highlights and financial results for the quarter and full year 2022. As usual after the presentation, there will be a Q&A session. For those of you who are following the live event, you can submit your questions via the platform.And with that, I hand it over to Melissa.

[Melissa Mulholland, executive]

Thank you for attending the Q4 earnings call today. I'm pleased to share our results where we delivered strong Q4 gross profit growth of 37% driven by acceleration in our international markets, which contributed more than 30% to our total results. Our adjusted EBITDA grew by 28% ending at NOK287 million, which is an increase of NOK62 million compared to Q4 last year. For the full year, gross profit grew by 43% driven by APAC, MEA and India growing at 140%, which is due to accelerated market performance and the positive impact of the rhipe acquisition in 2021. Our full year adjusted EBITDA increased 36% to NOK890 million. These results exemplify the resilient demand we are seeing in the market. We continue to see incredible growth across all of our regions and business areas based on our customer-centric business model.Despite continued economic pressures and headwinds in the tech sector, we continue to see resiliency with our customers from requiring cloud-based solutions to delivering increased productivity and efficiencies in their businesses to the increased need to secure their environment and digitize their data estate. Our business is built on people and it is critical we continue to invest in attracting and retaining talent. I am pleased to share that our retention has improved to 94.5% and we have had added just over 547 employees in 2022. As you can see through our financial numbers, they have been restated due to changes in the IFRS accounting policy. JB will give a detailed explanation in the financial section. All numbers on this slide is according to the old accounting policy for comparability. In taking a look at the IT sector, Gartner predicts further acceleration in IT spending until 2026.Despite consumer IT spending being impacted by inflation, the demand for enterprise spend continues strong as companies push forward with digital initiatives in response to the economic turmoil. The compound annual growth rate indicates 12% growth in software and 9.6% in cloud-based services. Rather than cutting IT budgets, CEOs and CFOs are increasing spend on digital business priorities. The focus of new initiatives have shifted from external to internal focus and from revenue producing to optimization and cost savings. In this dynamic, CIOs have many priorities to balance simultaneously. They are using digital technology to realize operational efficiency and cost savings. They are also using digital technology to transform the company's value proposition, revenue and client interactions. They're establishing cloud first for new initiatives while maintaining operational on-premise environments and expanding the operational landscape to include hybrid work, remote and edge environments.There is sufficient spending within data centers to maintain existing on-premise data centers. However, I do see this changing with energy prices continuing to increase. Cloud is still economically preferable despite price increases from suppliers. At Crayon, we are seeing a higher demand for cloud migration than ever before and we were just recently recognized by Microsoft as one of the leading partners on migration through their partner-led program. According to Gartner, new spending has shifted to cloud options, including Infrastructure as a service, which maintains a 27.3% compound annual growth rate between 2021 and 2026 in constant currency. During the height of the COVID-19 pandemic, there was a massive push towards digitalization and remote work. Now we see increased focus on cloud infrastructure and cybersecurity to prevent external threats.Companies have primarily used digital technology as a means to reshape their revenue streams; adding new products and services, changing the cash flow of existing products and services as well as changing the value proposition of existing products and services. This trend has fed the shift from buying technology to composing and assembling technology to meet specific business drivers. This shift is foundational to the growth of cloud over on-premise for new IT spending. However, in 2022 the more traditional back office and operational needs are being added to the digital transformation project list in order to realize operational efficiency, cost reduction or simply cost avoidance. As Gartner so rightly states, enterprise IT spending is recession-proof, which correlates to what we are also experiencing with our customers. In dissecting the industry data further, we see an acceleration of customer demand across markets.In looking at the geographies more specifically, there is resiliency to the software market with growth across Eastern Europe and mature markets in Asia Pacific. In reviewing Gartner's forecast, they continue to project the highest growth to derive out of emerging markets from Eastern Europe to Asia, which correlates to what we are also seeing at Crayon with the adoption of cloud. Seeing the software market continue to grow from 10% to 18% from now until 2026 is considerable and it demonstrates the continuous customer demand and need around the world for Crayon to continuously scale internationally. Key to our growth strategy is expansion across our global markets. Since we IPO-ed in 2017, there has been a clear focus on developing our software and cloud capability outside the Nordics from expanding to Europe, the Middle East, India, Asia Pacific, Eastern Europe and the U.S.Our business is built on a localized model, but consistently scalable through global vendors we operate around the world. In looking at our 2022 gross profit growth across each of the markets, I am proud to share the incredible results. We drove over 16% year-on-year growth in the Nordics, which represents 41% of our gross profit. This is driven by our strong brand, ability to transact across both the public and private sector, acquire net new customers as well as continue to expand the share of wallet with our existing customers. In looking at Europe, we had an impressive 33% gross profit growth representing 20% of our total GP. This set of countries represent some of the world's largest economies and a considerable opportunity for us to continue expanding in. We increased our enterprise customer base and focused on market growth.The U.S. is a strategic market for us and as a result, we had a 25% gross profit growth representing 12% of our GP. We continue to make progress across mid-market customers and expanding across the full United States. Lastly, APAC, MEA and India drove the largest growth for Crayon with 140% representing 20% of our total GP. APAC has been a strategic market for us with the acquisition of rhipe and continued scale within the channel business. We also have a solid channel business in India, which continues to demonstrate consistent GP and EBITDA performance. We see a significant greenfield for further customer acquisition across both our channel and direct business. I am proud of our 2022 global achievements. We have a people-first strategy as our employees are our greatest asset. We strengthened the leadership competency across the industry by bringing known talent and promoting talent within the organization.Coming out of the pandemic, we came together locally and celebrated our 20-year anniversary as a global company. And through our employee development efforts, we focus deep on culture. I'm pleased to share we retain 94.5% of our employees in 2022. Lastly, we demonstrated our commitment in diversity ranking #2 on the SHE Index, which measures gender equality. We have a customer-centric business model, which has and will continue to be our differentiator. We continue to focus on our customers at the heart of everything we do resulting in a 95% logo retention. Innovating and delivering value for our customers is critical. With the surplus of cybersecurity concerns, we are equipped now to respond with a dedicated technical team delivering professional and managed services. For us to remain committed to a customer-centric business, we must continue to deliver on a multi-cloud capability.We were awarded AWS Premier Partner status and continue to be differentiated by providing services across 21 vendors. Data and AI are crucial to our ability to innovate and I'm proud to share we were awarded AI and ML Advanced specialization partner with Microsoft and continue to be the fastest growing E5 partner worldwide and top migration partner-led company. Lastly, delivering shareholder value is critical and as a result, we had strong gross profit growth. We're profitable across all markets and business areas and ensure that the rhipe acquisition was accretive. Lastly, we ensured cash flow performance was in line with historic levels. As we embark on 2023, I want to reaffirm our commitment to ESG. In 2022 we commenced our focus with global implementation of ISO certification across 9001, 27001, 27701 and 14001. We launched our first ESG report resulting in moving from a grade F to a B+ rating according to the ESG 100 Index.On the social side, we came together as a company launching the Crayon Cares philanthropic initiative where we gave back to our communities and raised over NOK400,000 to support local charities and we implemented carbon reporting across the company. For 2023, we will report all GHG emissions, will achieve science-based targets initiative validation, aligning to EU taxonomy and we'll continue to focus on DEI. We will improve our 2022 ESG external rating. Our vision statement is focused on delivering technology for the greater good and it is vital we do so by continuing to make progress on our ESG strategy. To highlight a customer win this quarter, I'm excited to share a story from Parallo, which is a services company we acquired through the rhipe acquisition. Parallo is based in New Zealand and has been a fantastic addition to the Crayon portfolio scaling their knowledge and expertise globally across APAC.For this customer RecruitOnline, they are expanding into new markets and came to Crayon due to the limited in-house expertise that they have and found value with us. RecruitOnline is an Australian-based software company that helps with the entire recruitment process. It has thousands of customers in Australia, New Zealand and the Philippines. The company aims to make recruitment easier and much more effective for businesses. Their recruitment platform and its systems are mission-critical for their users. They were looking to optimize their cloud costs with AWS by moving them from on-premise workloads to AWS, increased security in their platform and to build the foundation for growth. In working with Crayon, we were able to help guide them through challenges and ensured we solve the pain points unique to their businesses. In doing so, we increased efficiency in their business through cloud platform management services and provided guidance on AWS.It's a great example of our customer-centric model and I'm particularly proud of this win as it shows the accretive capability of the rhipe acquisition and cloud growth in APAC. Another win I'd like to highlight this quarter is a U.S. customer. This is a Fortune 500 company with more than 13,000 employees worldwide generating over $9 billion in annual net sales. Our U.S. team identified an opportunity to assist them with consolidating their license portfolio to better align to their business needs. In doing so, we worked across their Microsoft license portfolio to consolidate them into a more effective agreement. This resulted in over $3.1 million over 3 years equivalent to 25%. Based on the trust achieved, we are now proposing continued optimization services, renewal and negotiation support through a 3-year managed service to multiple subsidiaries worldwide. This is a great example of how we simply do not resell, but rather consult and advise our customers based on their unique situation.Now with that, this concludes the business portion of the presentation and I'm going to transition it to JB to talk through the financials.

[Jon Syvertsen, executive]

Thank you, Melissa, and good morning, everyone. Thanks for participating in this earnings presentation. I look forward to taking all of you through the financial section of this presentation. And as a reminder, all numbers are Norwegian kroner unless otherwise stated. Starting off, 2022 has been an important year for Crayon and it has also been a very successful year for Crayon. 2022 has clearly seen significant geopolitical and macroeconomic changes and challenges. And despite this turmoil, Crayon has continued to perform strongly driving profitable growth with 43% gross profit growth and a solid NOK234 million EBITDA improvement. We've also fully integrated rhipe, which was a major step for Crayon in particular in the APAC region, and we're extremely happy to see how this has transformed our performance in APAC with strong growth clearly demonstrating both the resiliency of the demand in these geographies and the strength of the combined organization.Our financial position remains robust as we have demonstrated by paying down the CRAYON03 bond in November with available cash. Finally, as we'll talk about in a second, we finalized the implementation of the agent principle as the basis for revenue recognition. Looking forward to 2023, our priority is clearly to continue driving growth. The market environment is favorable and we again see our business model of cost optimization as our core go-to-market model as highly relevant in the current market environment. Margin improvement is also a priority for 2023. And in addition to continuing to scale, we will also focus more on cost efficiency. Specifically, we'll be working to realign our resources further to drive growth and profitability in 2023. These cost efficiency initiatives is alone expected to contribute with 0.5 percentage point of the margin improvement for 2023 on top of the scale benefits from continued growth.And to be clear, we're not looking to do layoffs as we will continue to drive growth, but we are looking to ensure we focus our resources on driving profitable growth and aligning the organization towards this. Cash flow remains a priority for Crayon and the key lever here is collections from customers. We continue to strengthen our collection processes in order to drive cash flow from the business also in the current market environment and expect these efforts to pay off during 2023. And finally, we will continue to work to identify and execute on accretive M&A opportunities in our key international markets. Q4 2022 also marks the final implementation of the agent principle in our reporting. As a reminder, in April the IFRS Interpretation Committee concluded on the principal versus agent assessment under IFRS 15 for software resellers. For 2022 quarterly reporting, this has been implemented by Crayon by setting revenue equal to gross profit on all relevant software and cloud transactional business.In parallel, we have been reassessing the performance obligation under IFRS as customer per the agent principle is no longer the end customer, but rather the vendor. And as a consequence of the customer changing, the performance obligations are also changing for some programs. And as a consequence, there are 2 categories of changes leading to a restatement of 2021 and 2022 results. Some incentive programs are no longer seen as a reduction of costs, but rather a separate revenue stream recognized as revenue. Secondly, multi-period license agreements are recognized when the agreement is concluded not based on the billing flow to the end user. This results in an update to our gross profit, which generally increases compared to the historically reported numbers and a change to the adjusted EBITDA where we're seeing a negative impact in 2022.To be clear, the 2022 EBITDA impact is an implementation effect and should not reflect on our expectations for EBITDA in future periods. This change in principle is fully reflected in our earnings report with all details on the restatements and the bridge from historic reporting to new restated numbers available. However, to ensure comparison with the relevant expectations for Q4 and the history you are all familiar with, in the following slides in this earnings call, we will base the year-over-year discussion on the historic numbers or the Q4 numbers reported alongside the historic model unless otherwise noted. For future earnings presentation, we will obviously refer to the restated quarters. Now moving back to the underlying business performance in the quarter. We are continuing our growth journey with an annual gross profit growth rate of 31% over the past 4 years driven both by strong organic growth and accretive acquisitions.The growth opportunity is driven both by strong market fundamentals as public and private sector continue to invest into digital platforms to drive efficiencies and address new opportunities and by Crayon's unique business model leveraging both service capabilities and transactional capabilities across all major vendors. This growth opportunity is clearly an attractive opportunity for Crayon as we are driving profitable growth leading to continuous EBITDA improvements. On the right-hand side, we see how EBITDA has increased almost 5x over the past 4 years. We also see a clear indication of the margin improvement opportunity in the business. Historically, we have delivered continuous margin improvements from the scaling of our international markets while in 2022 we have seen stable margins as we continue to invest in building the foundations for further growth.Looking forward to 2023 and beyond, we see both opportunities and a need to focus on driving further margin improvements based on the global scale of the business. Crayon has been and continues to be on a journey going from a Nordic company to an international company and by now, we have come a long way on this journey. The light gray bars represents our international business. As recently as 2018, Crayon had NOK558 million in gross profit from the international segment representing 38% of the total gross profits in the company. As of now, this gross profit has more than quadrupled over the course of 4 years driven by strong organic growth across the portfolio and recently also our rhipe acquisition. Despite the strong growth rates also in the Nordics, our international markets now amount to 59% of the gross profit in the company. Still even at 59%, we are a long way away from realizing the potential in the international markets.The market potential for our services outside the Nordics is orders of magnitude larger than the market potential in the Nordics and we will continue to invest in driving growth outside the Nordics. As to profitability, the change towards our international markets is even more pronounced. The international markets collectively delivered NOK430 million in EBITDA during the last 12 months, which is a significant improvement of NOK444 million over the same 4-year time period. We have now reached a stage where there is clear line of sight to the international business overtaking the Nordics business not just on gross profit contribution, but also on profitability. Again, we have been able to achieve this improvement while we have also improved profitability in the Nordics delivering a continued strong EBITDA margin of 34% in the Nordics over the last 12 months. The EBITDA margin of 30% plus 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 start operating at similar margins, as a whole we are still only at 17% EBITDA margin for our international business, which clearly indicates the potential for profitability improvements as we continue to scale our international footprint. In Q4 we delivered strong gross profit growth across all regions with a 37% gross profit growth rate and an organic gross profit growth rate of 31%. Even when adjusting for constant currency, we deliver a very strong 25% organic constant currency gross profit growth rate in the quarter driven by strong market fundamentals and continued execution on our growth ambitions. Looking at the different geographies, it is encouraging to see that in the Nordics representing our mature markets, we're seeing a strong growth of 12% with in particular strong performance in Norway and Denmark. In Europe, we see an even stronger 35% growth rate with strong performance across the board.APAC and Middle East continue to perform strongly both in the rhipe business, which we acquired last year, and also in the organic part of the business and we're seeing strong underlying market demand. This is also where we're seeing clear benefits of the geographical diversification of the business as it is important to keep in mind that markets are affected differently and all across APAC and MEA, we are seeing strong growth in business momentum. The U.S. growth rate of 31% clearly demonstrate that the investment in scaling up the organization in the U.S. is starting to pay dividends as it is a clear improvement from previous quarters and we look forward to continuing this trend of accelerating growth in the U.S. compared to the previous quarters. We are also seeing strong EBITDA performance across the different markets. We see EBITDA improvements across all markets, but we're also seeing the impact from continued investment in scaling out the organization in particular in Europe.APAC and Middle East margin is negatively impacted by the tax cost in the Philippines as the EBITDA adjustments as per accounting policies is seen as an HQ and Elim cost. Adjusting for this, we're seeing strong profitability improvements also in APAC and Middle East. Headquarter cost is going down in this quarter, which is also an effect both of the EBITDA adjustments and from a more appropriate cost allocation policy between headquarters and the regions. As we have seen over time, scale is an important value driver for the business. This chart demonstrates the gross profit in the different regions on the vertical axis while the EBITDA margin is represented on the horizontal axis with every year plotted out for the different regions and the circle note the 2022 performance. We're seeing a consistent pattern of growth and margin improvements as the business scales in the local markets and regions and the Nordics continues to represent the margin potential of the business model operating at scale.We've also seen how accretive acquisitions support the value creation both in APAC and Middle East and in the Nordics and we see a clear margin improvement potential in particular across APAC and Middle East and Europe based on the current scale. This is partly offset by the continued investment in driving growth across a large number of markets, but this is also where we expect to drive improvements from our cost efficiency focus in 2023. Now before moving on, there are 2 issues with Crayon Philippines that I think is important to reflect on in order to get the full picture of the Q4 earnings. During Q4 in Philippines, we had a tax audit in the Crayon Philippines revealed incorrect VAT reporting on payments relating to purchases of software from foreign suppliers and to be clear, this relates to the legacy Crayon business not the acquired rhipe business.Crayon has amended and rectified the reporting in Q4 and the incorrect reporting had no P&L benefit for Crayon, but rectifying it had a negative working capital impact as prepayments of approximately NOK55 million of VAT was required. But as a result of the incorrect reporting, Crayon has been charged with penalties of NOK30 million and interest of around NOK10 million and the penalty has been excluded from the adjusted EBITDA as it is not representative from further run rate earnings potential of the business. In parallel with this, we have an outstanding receivable from the public sector in the Philippines. From a macroeconomic perspective, the change of government in the Philippines has led to delayed payments across the public sector affecting all vendors. And Crayon has for the past 2 years served the Philippines public sector on Microsoft licenses with timely payment performance.Starting Q3 2022, the public sector agreement was subjected to an audit from new taxation introduced by the government and subsequently included in the cost of licenses invoiced to the government. The audit has led to delay in payments as timing of payment is dependent on official audit completion. There is no concern around the eligibility of the receivables and this is also confirmed with independent legal advice. However, the payables to Microsoft has been continuously settled resulting in a Q4 negative working capital impact of approximately $45 million for year-end 2022. This is important as it affects our working capital. But looking at our working capital in Q4 2022, we have accounts receivables of NOK6.6 billion with accounts payables to vendors amounting to NOK6.6 billion as well resulting in a trade working capital of NOK17 million, which is an increase of NOK335 million compared to December 2021.Furthermore, we have other working capital which includes things such as payable public duties, taxes, accruals and other short-term receivables and payables totaling minus NOK337 million, which is an increase of NOK75 million year-over-year compared to Q4. This results in a working capital of minus NOK320 million on December 31, which is an increase of NOK393 million year-over-year. However, this increase is driven by the outstanding receivables from the public sector customer in the Philippines specifically and it is very encouraging to see that the underlying working capital performance has improved significantly compared to previous quarters. Excluding the negative impact from the Philippines public sector situation, we're seeing the same level of negative working capital as year-end 2021, which is a strong improvement compared to the previous quarter.And to be clear, we continue to see significant opportunities for improving this working capital position back to historic levels through strengthening our credit and collection process. And we'll continue to drive those efforts aiming at improving the working capital position in 2023 as generating a strong cash flow from our underlying business is obviously a key financial objective for Crayon. When it comes to cash flow, we're seeing a cash flow from operations in Q4 of NOK478 million, which is an improvement compared to Q4 2021 reflecting the improved working capital position in Q4 2022 versus Q3 2022. 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 evolved. In Q4 2021 we had NOK1.2 billion in cash.During the last 12 months, we had unadjusted EBITDA of NOK751 million while the change in net working capital had a negative impact of NOK366 million as seen from the cash flow statement. CapEx had a negative effect of NOK142 million while increased RCF utilization increased cash with NOK900 million. Tax and interest amounted to NOK292 million while bond repayment and lease payments under IFRS 16 amounted to NOK351 million. Finally, currency translation and other effects amounted to NOK188 million negative leading to a net cash position on December 31 of NOK1.5 billion. It is also encouraging to note that despite the net working capital headwinds we're seeing, we have been able to pay down the CRAYON03 bond and excluding the repayment of the bond are seeing a liquidity reserve in the same levels as we saw a year ago, clearly demonstrating the financial solidity of the company.When it comes to the profit and loss statement, we have already covered the items down to EBITDA and the operating performance underlying this. Depreciation and amortization is in line with plan increasing year-over-year due to amortization of intangible assets identified in the rhipe and Sensa acquisition and depreciation and the investment into IP and ERP systems in previous periods. In addition, there is a write-down of IP acquired by rhipe prior to our acquisition. No goodwill was allocated to this IP as we acquired rhipe and it was not part of our rationale for acquisition nor has it resulted in any cash flow in the period after the acquisition. Interest expenses increased year-over-year as a consequence of a NOK1.8 billion bond and increase in underlying interest rates.Other financial income and expenses is a positive contribution of NOK55 million, which is driven by currency effect on our balances denominated in other currencies than Norwegian kroner while partly offset by an impairment of NOK14 million on internal loans following our divestments of our Russian operations. Altogether, this results in a pretax result of NOK63 million, a reduction of NOK136 million year-over-year driven by depreciation and amortization, higher interest costs and lower contributions from other financial income. Income tax expenses are higher than in Q4 2021 driven by strong profitability in multiple markets while being unable to book the tax loss carryforward in other markets with negative profitability. In total, this provides a net income of NOK23.5 million in the quarter. Summarizing the adjustment items, which is between the EBITDA and the adjusted EBITDA. We are seeing share-based compensation with NOK8.8 million as a noncash effect.We're seeing the Philippine tax reassessment cost of NOK30.5 million previously indicated. We also have a fair value adjustment on earnouts as there are multiple historic acquisitions with earnouts, which has overperformed the expectations. In particular, this relates to Navicle and EMT, which was a historic rhipe acquisition. Finally, we have other personnel cost and business development expenses and legal restructuring primarily relating to the rhipe integration costs and other smaller transaction opportunities. When it comes to the rhipe acquisition, we see no material costs remaining from an integration perspective. Looking at the balance sheet. We already discussed the net working capital and given the fact that rhipe was integrated year-end 2021, there's also less significant movements when it comes to the goodwill and other intangible assets.What is important to note is the increase in other interest-bearing debt, which is driven by a reclassification of the RCF into an interest-bearing debt offset by us paying down the CRAYON03 bond. Finally, and with that having reviewed the Q4 financials, let's now turn the attention to our new 2023 outlook. In this slide, we have included both the 2022 comparable numbers and the 2022 restated numbers. That is important because in order to evaluate our performance relative to our guidance, it is critical to look at the comparable numbers. While for reviewing our outlook, it is important to compare them with the 2022 restated numbers. Starting with the gross profit, we delivered 43% of gross profit growth outperforming our guidance. For the 2022 restated numbers, we are looking at 42% gross profit growth and for the 2023 outlook we're looking at 20% gross profit growth, in line with the medium-term outlook.Here it is important to note that the 2022 performance -- the reduction in performance or growth relative to 2022 is driven by the fact that the 2022 growth rates includes the acquisition and integration of rhipe. When it comes to adjusted EBITDA margin, we're looking at 20.4% for 2022 as we have been able to -- as we have invested significantly more in driving the business and outperform on gross profit growth leading to absolute EBITDA in line with expectations. The 2022 restated EBITDA margin is 18.7% and we're looking at 20% to 21% EBITDA margin for FY '23 as we're continuing our growth journey while also actively improving our cost efficiency to drive margin improvements. When it comes to net working capital, we achieved negative 6% of working capital in 2022. For the restated number, that's minus 0.8% driven by the fact that as a consequence of our restatements, we are carrying a provision for future margin as part of the other current receivables, which reduces our working capital performance.The change from minus 6% to minus 0.8% has no cash impact, but it is a delta which we will continue to carry in the balance sheet over time. As such, the FY '23 outlook is a minus 5% to minus 15% reflecting the clear improvements we are expecting in the net working capital while still highlighting that there is over time significant variability into the net working capital position. In the medium term, we continue to target the minus 15% to minus 20% as we expect to normalize the medium term driven by working capital improvements. On CapEx, we had a total CapEx of NOK142 million in 2022 driven by extraordinary investments during Q4 into tangible assets related to the office moves in Australia and in Norway. As part of this, we took a conclusion that it was better as opposed to leasing these assets, acquiring them leading to a negative cash CapEx impact in Q4. However, for FY 2023 we're not seeing any such effects and continue to expect a level of approximately NOK125 million, also in line with the medium-term guidance.With that, I'll turn it over to Melissa for some highlights on the key priorities for 2023.

[Melissa Mulholland, executive]

Thanks, JB. To reaffirm our position for 2023, we are confident we will continue to deliver strong gross profit across all our markets. In the Nordics, we will continue to expand across our existing customers and extend the services in market with security, cloud and data and AI. In Europe, we are focused on gaining market share in the largest economies globally with France, Germany and the U.K. Across each of these markets, including Switzerland, we are gaining traction with enterprise customers which increases the ability to attract and expand in the upper end of the market. In Asia Pacific, India and the Middle East; we will continue to scale our channel business driving reoccurring revenue and expanding across multi-vendors delivering increased services and value to our partners. We are expanding into large scale enterprise customers in developed markets due to the combined strength of our organizational competency of rhipe and Crayon.Lastly, the U.S. continues to be a strategic focus market where we are now seeing the delivery output of the resources we have hired in 2022 and we will continue to focus on growth in the mid-market range of customers where we have found success and a competitive advantage with our customer-centric and agile approach. For 2023, I have 3 priorities. The first is our people. We will continue to deliver a people-first culture focused on enabling our employees to be at their best each and every day. Second is our customer-centric business model, which is the foundation of our 21-year success and is the differentiator in how we are able to attract and retain our customers. The third is delivering on our shareholder value. In doing so, we are focused on driving profitable growth internationally and intentional cost management to preserve and increase margin. I am confident in our ability to continue to deliver strong results due to our resiliency, customer centricity and dedicated employees.Thank you for joining the presentation and now we will transition to Q&A.

[Jon Syvertsen, executive]

Thank you. And we have a number of questions and we'll try to address as many as possible of them in the 20 minutes we have for Q&A. First question is on profitability in APAC and Middle East and the year-over-year or quarter-over-quarter effects and whether we could provide any additional color on this.And I think as I highlighted in the presentation, what's important to note when looking at the EBITDA for APAC and Middle East for the quarter is that the EBITDA adjustments are as per our accounting policy and consistent historic principles allocated at HQ. And as such, you would need to add those adjustments back to the APAC and Middle East to get a true quarter-over-quarter or year-over-year perspective and that goes for both the adjustment for the tax cost in the Philippines and the earnouts, which were also part of the APAC business. And adjusting for this, you see an EBITDA margin close to 30%, well in line with the historic comparables.Then there is a question on the technology impairment in rhipe and what it relates to.To be clear, this was an investment made by rhipe prior to the acquisition by Crayon. We have not allocated any value to it. There's no goodwill allocated and there's also been no cash flows from this asset in the period. It was basically a file encryption Software as a Service tool. So that has now been impaired and we're looking at alternative uses for that asset.Then there is a question for Melissa. How big is your AI and ML organization today?

[Melissa Mulholland, executive]

We've spent the last few years building up our AI and data team. Now we're a team of over 100 people comprised of data scientists, data engineers and developers with over 150 solutions in market that have been delivered. So it's a very successful part of our business and I would say when we look at the business, it's a cornerstone of the strategy and we continue to see growth opportunity here across all cloud providers.

[Jon Syvertsen, executive]

Good. Then there are a number of questions around the Philippines and I'll try to fold them into 1. The first is whether the audit case in the Philippines is related to legacy Crayon or legacy rhipe business?This is related to the legacy Crayon business to be clear on that.There's also a question of whether the underlying tax rates in the Philippines has changed and whether you should expect a higher tax expense going forward.That's not the case. The audit is driven by the fact that there is taxation introduced, which we are passing on to the customer, but that creates a change. We have the right to pass those on in line with the agreements, but those changes has triggered an audit and that audit is what needs to be processed before public sector due to the stringent regulations around paying out from public sector will be paid out.Then there is a question around the VAT reporting and basically sort of how can we be comfortable that there are no additional cases like this in the portfolio and what measures have you taken to ensure correct VAT reporting across our portfolio?And fundamentally and just to be clear, this is one of the fundamental priorities of the finance organization globally. We do operate across a large number of markets and we always strive to operate in compliance with local regulation -- local rules and regulation. But of course based on the learnings from this, in particular in markets with high complexity, we have introduced -- we have both onboarded additional capacity and competence to make sure we have an ability to support and we've also introduced additional controls to ensure that we report VAT correctly on an ongoing basis.Then there is a question on cost initiatives which I believe you can address, Melissa. Could you elaborate on the cost initiatives? What does focus resources on profitable growth mean in practice?

[Melissa Mulholland, executive]

Great question. So we've really invested over 2022 in the consulting side of our house delivering professional services. We have skill set and competency around the world and need to leverage those resources more effectively to drive higher margin. So for example being able to deliver in lower cost areas to more high expensive markets increases the margin capability, but also we're able to hire talent in those countries. So this is a clear focus area to deliver more profitability on our consulting side of the business now that we've staffed up in 2022.

[Jon Syvertsen, executive]

And related to this, there's a parallel question. What are the key cost drivers in the quarter?

[Melissa Mulholland, executive]

Key cost drivers are hiring and people. That has always been our focus as we think about it. We're still in growth mode. Now as I mentioned for us going into 2023, we want to deliver shareholder value and that means margin improvement. So clearly that's going to be a focus area for us going into this year.

[Jon Syvertsen, executive]

Yes. Then there are a few questions on CapEx, both why it's so high this quarter and how much visibility we have on the 2023 CapEx?And the drivers for the CapEx in this quarter is tangible assets as you will see from the notes of the financial reporting basically driven by move into new office premises in our 2 largest markets being Australia and Norway. And as a consequence, we did make a choice around certain categories of office furniture and fit-out that it was financially attractive to buy those outright instead of leasing it over time leading to higher CapEx in Q4 2022. In terms of visibility on the CapEx in 2023, I'd say we have a fairly decent visibility in terms of the 2 categories being intangible investments and intangibles, which is basically driven by the personnel we have in place and that we plan to take on and the planned utilization of those resources to continue to develop our tooling and platforms. And basically sort of tangible CapEx driven by, to some extent, the existing employee base for replacement and also for onboarding of new resources, basically devices and similar items.Then going back to the list of questions. We have 2 questions around the restatements. And Christoffer from DNB has a question basically. Restated numbers have adjusted EBITDA NOK11 million lower for 2021 and NOK50 million lower for 2022, NOK62 million in total. Is it due to prioritization? Where is the balance? Should it be recognized in 2020 and earlier periods?And that's indeed correct. And if you look at this, alongside the P&L adjustment, there's also an adjustment to the opening balance of 2021 which has a positive impact on equity and an offset on other current receivables. So that's basically where you will find the offset of this historically.Then we have a question on whether we see any demand impacts in the Philippines due to the tax audit in the regions.No, I wouldn't say we're seeing any demand impacts. On the contrary and, as Melissa also highlighted, sort of across APAC and Middle East we see continued strong market demand and we see in those markets some market growth which is continuing to outpace what we see in the more mature markets.Then there is a question which I think you can also elaborate on, Melissa, as it pertains to the commercial dynamic from Martin Jungfleisch. What is your expected benefit from vendor price increases on gross profit growth?

[Melissa Mulholland, executive]

We always see a benefit when our vendors increase prices as it gives us an opportunity to guide our customers around how to optimize their full software and cloud portfolio. We saw that with Microsoft back in Q1 of 2022 where they had a price increase for the first time after a long period of time on Office 365 and we continue to see benefit around that. So this is clearly a driver for us when we look at the overall market and at this point don't expect further price increases from the cloud providers.

[Jon Syvertsen, executive]

Then there is a question on our new accounting principles. To get a sense for your new accounting principle, what would be EBITDA margin guidance for FY '23 using historic accounting?And of course there's not a straightforward answer. We're also careful to ensure that the guiding is -- what we guide on is based on the new accounting policy because at the end of the day, that's what we'll be reporting going forward. Still to provide some color to the answer. There's basically 2 things that is happening. One is that gross profit increases at constant EBITDA and of course that has an impact on the margin without having an impact on the absolute EBITDA. That effect amounts to approximately 1 percentage point. And you can clearly identify that as well by looking at the historic versus restated gross profit effects. Then there is the 2022 implementation effect, which is something we see as a onetime effect and not something that would reflect in the future and as such, that should not have an impact on the 2023 guidance. So if you want a very simplistic answer, you would be looking at an EBITDA margin guidance under historic principles approximately 1 percentage point higher.Then we have a question on our expected lease payments for FY 2023.Those are generally in line with what we see in Q4. We don't see any sort of significant increases expected across the portfolio for 2023 relative to Q4.Then we have a question from Christoffer on when we should expect to collect in the Philippines.This is something we as a management team, given the amounts outstanding, have high on our priority list and we follow up on an ongoing basis. It's of course a public sector process, which will run its course in due time. But perhaps, Melissa, given that you also recently were in Manila, do you want to comment?

[Melissa Mulholland, executive]

Absolutely. So I just had the opportunity to be in Manila with the team and also the agency supporting us through this cash collections process. What I will reaffirm is that we are confident that the public sector government will pay as they always do. This is due to changeover in the government as JB described and the payment will be concluded. Of course timeline we cannot say at this moment, but we do expect it to be soon. Additionally, I just want to reinforce in the Philippines, this has been a really strong business for us over the last 5 years. In fact it was the leading market for us prior to the acquisition of rhipe across APAC and that's really important to say because we have the capability and also the team in place to deliver against customer demand. So we continue to see that as a growth market for us.

[Jon Syvertsen, executive]

Thank you. I think we have addressed the questions I see at this point in time. But of course if there are any future questions as you as investors work through this report and the accounting policy changes, please reach out at [e-mail] and we'll do our best to help you understand our financials. With that, thank you for participating and wish you all a nice day.