Nordhealth AS

OSE:NORDH

Earnings Call Transcript 2023-Q2

[Charles MacBain, executive]

Thanks. So, hi, everyone, and welcome to our Q2 2023 presentation. Just for those who -- it's their first time joining, my name is Charles MacBain, and I'm CEO of Nordhealth. And Mari?

[Mari Orttenvuori, executive]

Hi, everyone, on my behalf as well. My name is Mari Orttenvuori, and I'm the CFO of Nordhealth.

[Charles MacBain, executive]

Thanks, Mari. So, going through the agenda today, it's quite similar to our previous quarters. We'll start the general company updates. Then we'll dive into the Veterinary business units and update you on what's happening there, then the Therapy business units, and then Mari will go through a financial update and we'll end with questions.I prefer to have the questions all at the end. So if you have questions at the end, there are 2 ways to submit questions. One, you can just raise your hand and we can allow you to talk, or second, you can also add those to the chat function.Great. So, starting with company updates. So, our mission at Nordhealth is to build and also acquire software that empowers healthcare professionals to save time, so we can focus -- so they can focus on delivering great care and growing their business. Thinking about our strategy to achieve this mission, we've got a 2-prong strategy. One is how do we reach profitability; and second, how do we continuously grow, right.So, on the profitability side, right, we -- our focus is to develop one product per vertical, which is Provet Cloud for veterinarians and EasyPractice for therapists. The goal -- we've also grown through acquisition, and our goal in terms of profitability is to improve gross margin and sort of centralize development resources by migrating these legacy products that we've acquired to our flagship products, Provet Cloud and EasyPractice.Third is, we are looking to continuously reduce our customer acquisition costs to New ARR ratio mostly by focusing on onboarding efficiency. So, shifting from sales led to product led growth, and second, shifting from a high touch onboarding to more lower touch onboarding through automation and so on.The fourth is that we've been building a sort of corporate infrastructure to be able to scale to over EUR 100 million of ARR. So, we don't see significant additional headcount required in order to continue through this growth back at the corporate level.And lastly, on the profitability one, we also don't see a significant increase in headcount over the next 3 years. That does not mean that we won't actually have more people working on our flagship products, but we see people shifting from our legacy products to our flagship products. So, the flagship products, R&D team, for example, will continue to grow, but that'll be offset by the savings we've had from the -- or the shifting of resources from one product to the next.On the growth side, our focus is on the therapy side as we're not going to go into any new markets in 2023. So, focus is on Finland, Norway, Denmark, and those are the three core markets that we're focusing on.On the Veterinary side, our focus for growth in terms of new user acquisition is on the U.S., U.K. and Spain. Our goal for growth is very -- as it has been in the past, is to start with the practice management software, which is the sickest part of this ecosystem, which is the store of all the data. Then we can use that in order to expand into many different areas such as payments as we've done with Nordhealth Pay, and the booking portal as we're launching now in Finland, for example, under the Nordhealth brand.Looking at our KPIs for Q2 2023. Our ARR in last 12 months ending Q2 2023 grew roughly 20%. This came from a net retention rate of around 110%, of which churn was 3.7%. We're also improving our CAC/ New ARR ratio, which is now at 1.7.If -- when we think about CAC, we think about 3 items, marketing, sales, but also the net amount that we make from onboarding, which is basically onboarding cost minus the onboarding revenues. So it's a real CAC, not just sales and marketing, and includes the total cost of actually getting someone onboard starting to pass.Then, looking at last quarter versus this quarter, we saw ARR has grown 6.5%, and we ended the quarter with EUR 34.1 million of ARR implemented and signed ARR for EUR 35.2 million. The difference between implemented and signed is mostly driven by Provet Cloud signed ARR which has not yet been implemented. Our ARR per share stands at EUR 0.43 per share.So, let's break down this growth quarter-over-quarter. So, we began Q1 2023 at EUR 32 million, right. We've been able to add EUR 600,000 roughly of ARR from the new customers, right, so new users from new customers. And we had a tremendous net upsell in this quarter, right, which was particularly driven by Provet Cloud user growth and also Provet Clouds of new plan or add-on sales. Our churn remained quite low at 3.7%. So, we ended at EUR 34.1 million. You can see that there's [ EUR 1.1 million ] difference in signed ARR. The important thing to note is that this does not include the rollout to CVS.Looking year-over-year now, we grew roughly 20%, right. So, we started Q2 2022 with EUR 28.4 million, right. We added 2.8 million of new users from new customers, right, of which roughly 41% that -- which roughly accounts for 41% the growth. And interestingly, around 70% of those customers actually came from our cloud products. We also had quite good net retention rate of 110% of which 3.7% obviously came from churn.Despite our strong growth, we've also every quarter been improving our profitability both in terms of EBITDA profitability, but also our cash flow proxy EBITDA minus CapEx, and we foresee that over the next quarters, we'll continue to see [ it ] improve.In terms of the reasons for why we actually have gotten more profitable, there are 2 reasons. One, we've -- as we've said in the previous quarters, we haven't dramatically increased headcounts. You can see it remained quite stable. And secondly, we've grown, right. And thirdly, our operational expenses have actually become more efficient. And those are the 3 drivers of growth.And we foresee that over time, over the next few quarters, the big drivers of growth that will add more revenue than we will be adding costs over the next few quarters. That does not mean that costs will not go up -- just go up slower than revenue. And this is one of the proof points, right. You can see that we've actually decreased by [ 1% ] between Q1 and Q2.Now, going into the Veterinary updates. So, just to summarize what we're focusing on this year. We're focusing on Nordic legacy migrations, acquiring new customers in the U.K., U.S. and Spain, so SME customers, but also going elephant hunting, right, trying to find other corporates like CVS, like IBC and so on in the U.K., U.S. and Spain that we can onboard to Provet Cloud. A little bit of updates, divided in our 2 categories of growth and profitability. So CVS pilot is ongoing with multiple clinics and it's progressing well.Second is that we've got a -- we were able to recruit a small U.K. corporate which is roughly EUR 160,000 of signed ARR to be [ rolling ] on Provet Cloud. Third is that in Q2, we had -- we signed EUR 400,000 of additional SME customers. And lastly but not least, we're continuously adding to our Nordhealth Pay revenue and we actually increased the amount of payment volume that we'd be able to process on a monthly basis from around EUR 700,000 per month in June 2022 to EUR 2.9 million of payment volume in June 2023.On the profitability side, we've seen margin improvements, as we said, driven by revenue growth and more efficient customer acquisition and onboarding. And on the migration part, we've actually been able to migrate 110 customers to Provet Cloud from our legacy products.Now, looking at the breakdown here. So, we've had very good growth this quarter, and I want to take particular attention to the net upsell of 1.6%. And that is impressive because it's not driven by price increases. It's primarily driven by user growth, new add-ons or changes in plans for customers. So, that's a quite unique quarter for us in the amount that we're able to generate from that. What's also interesting and not shown here, as I said in the previous slide, is that the EUR 1.1 million does not include as well the CVS corporates.Looking year-over-year, you can see that although we are growing quite strongly in terms of new customers, right, our net upsell is also very, very strong. This time, it includes price increases in net upsell. And the really amazing thing about the Veterinary business is the churn rate, and the churn is 1.5%. And this is a gross churn, right. So 1.5% includes people that retire and so on. So, it's really, really the most important number that we have about the Veterinary business.And despite this strong emphasis on growth, we've also been improving profitability. So as our revenue grows, right, our cost grows slower, and we'll see this -- continue to see quarter-over-quarter.Now on to Therapy. So, the Therapy business. In terms of strategy for 2023, we've got 2 main things we're trying to do, right. And if this -- one is migrating Aspit customers to EasyPractice. The reason we're doing that is that it's very, very expensive to be able to actually maintain the Aspit product in terms of the softwares that we have to pay to Microsoft and Citrix, right. And second is that we have to maintain 2 different platforms versus one, right.So, migrating from Aspit to EasyPractice will be a really powerful tool for us to be able to increase our profit margins, both recurring gross profit margins, right, because there's fewer costs of COGS, but also on the EBITDA minus CapEx level because there's some -- there'll be more people focusing on one product.On -- the second point for focus is that we're launching a booking portal in Finland, and we're really excited by this. And -- so we're launching in the next month the Phase 1 of it where we will be targeting therapists in Finland that are using Diarium at first.This is a really exciting first step for us. It's our first foray into -- going into the consumer side. And so it's required a lot of learning in terms of marketing and different ways of approaching the market, but we're very excited by the first versions of product that's only [indiscernible] has worked on who is the original creator of the Diarium. So we're very excited about that.And then a little bit of update on the growth side. Christian and his team at Aspit have been able to secure NEMUS which is one of the largest therapy companies in Norway, that has selected Aspit as their PMS. They had a few clinics on Aspit, but now they decided to migrate all of their clinics to Aspits, which is great news for us.Second is Diarium in Finland has launched for massage therapists. So, we've simplified Diarium and have -- came up with a new pricing model based on Nordhealth Pay where the software is free, however, they have to use our payment solution. And so we -- that's how we actually can provide that for a very compelling price. And so they pay very similar payment transaction rate as usual today, but given our scale, we're able to make a margin on that. And thirdly, as I said, right, we're launching the booking portal.The -- on the profitability side, we're continuing to migrate development and support resources from Aspit and Diarium to EasyPractice. And despite the differences in cultures, right, and differences in countries, we've been really happy with the progress and the work that Christian and his team and Oliver and his team at EasyPractice have been doing in order to make this a very smooth transition. And so, the people from Aspit that have been working with EasyPractice, they have been successfully onboarded into this culture, and they're flourishing very well on that [ one ].The first Aspit clinics which we're piloting for certain specialties have successfully been migrated. And one thing that's really interesting about this is, that's a fully automated migration process. So, in contrast to what we see in Veterinary which requires quite a bit of work to be able to migrate a customer, this is a fully automated self-service onboarding, which is very exciting because of the fact that once we have a certain specialty that we tested and piloted, that's successful, we can activate tens or hundreds on the same day to be able to migrate over. The -- so that's the sort of update on the Therapy business.Quarter-over-quarter, where we see -- although we've seen some good increases in new customer acquisition of around 300,000, we saw quite sort of low net upsell this quarter as we're focusing more and more of our development resources to EasyPractice localization for Norway rather than new add-ons for EasyPractice, Diarium and so on. So, you can see that as one of our profitability later on the slide. We're very much focusing on fewer initiatives, but focusing on quite a bit more profitability until we can migrate and won over and then restart the net retention.So year-over-year, you see again quite strong new customer acquisition, right. The churn rate, however, is a bit higher for therapy, mostly driven because of the fact that it's a much smaller customers which go out of business, quite a little bit more than our Veterinary customers, but it's also much easier to recruit them. So, we see a EUR 1.7 million of new ARR in the last 12 months from new customers.We still see some strong net upsell from price increases, new user add-ons and some add-on sales. Then you also see a slightly higher churn than Veterinary, but still a very good churn in the -- a churn of 5.7%, right, means that people will stay with us for like probably over 15 years, right, so just to put that into context.And now you can see profitability. So, although we have not grown as fast as this quarter, we can see we continuously improved on the profitability side as we've been looking to get more efficient with this business unit. And this is quite driven by the fact that we've had a reduction headcount from 140 to 127 in Q4 2022 relative to Q2 2023.The other thing that's impacting us is that -- which is great for us, despite this increased profitability, we've got a real big headwind from the weak NOK which is quite -- the majority of our revenue is coming up, but a lot of our costs actually are not in NOK, they're in euros, right, or in DKK, and so -- which is sort of somewhat tight in euro. And so as a result, right, once the NOK improves, we'll be able to see improvements as well on profitability. So, despite the fact that we've been able to improve it, further improvements can also be had if there's a change in the exchange rates.Now Mari, for the financial updates.

[Mari Orttenvuori, executive]

Thank you, Charles. Like Charles already mentioned, we've had a very solid financial performance during the second quarter in terms of both revenue and profitability. I'm proud to present these results. Although our second quarter reported revenues were impacted especially by the weak Norwegian krone, also Swedish krone, our total revenues grew by 22% year-on-year. The reported recurring revenue grew by 15% in the second quarter, but on a constant currency basis, we grew by 28% in the second quarter and 30% in the first half year-on-year.The difference in the reported recurring revenue growth and ARR growth of 20% in the last 12 months is a big [ quarter ] [indiscernible] that was not consolidated until June '22 and instead were not included in the first half '22 reported numbers, except for June. We have also seen an increase in other revenue that is driven both by ongoing implementation projects and by Vetera acquisition as the one-off license fees are reported within other revenues in our profit and loss statement. So clear improvement there as well in terms of numbers.Adjusted EBITDA margin has improved significantly from negative 26% to negative 2%. This has been achieved both through cost savings and growth in revenues. If we look at our personnel costs in a little bit more detail is that the personnel cost for the second quarter and for the first half are slightly higher than in the comparative period, but they now include also better personnel that we didn't have until June '22. Also, reported salary costs in the first half include one-off items of EUR 0.3 million.On the other hand, personnel costs in the second quarter are below the run rate by some EUR 0.2 million due to holiday impact which pretty much equals the salary inflation impact from the second quarter onwards as we've had a majority of the pay increases as of the second quarter. So taking all that into consideration, the run rate of operational costs have decreased with our headcount, also having come down by [ 23% ] since the end of the year.So overall, we have succeeded very well in maintaining Q2 cost control during the second quarter, and we have not increased our headcount and have improved profitability significantly. Also, our adjusted EBITDA minus CapEx margin was negative 15%, which is again a clear improvement from negative 48% in the previous year. So we are seeing a more positive trend in profit margins, as expected. And this result is quite impressive given the weak Norwegian krone, especially considering our Norwegian units are profitable.Then onto the balance sheet. During the first quarter already, the EUR 4 million payment relating to EasyPractice was paid out to the sellers, but despite of that, our cash position remains strong at EUR 29 million which comprises of cash and money market funds. At the end of the first quarter, we had EUR 32.2 million in cash and money markets.At the end of the first quarter, we were in the process of reinvesting our money market funds and those were only partially reinvested at the end of the first quarter, and that temporarily impacted our cash and money market fund balances. This reinvesting of the funds has now been accomplished and we have in total invested EUR 18.2 million in money market funds as of the end of the second quarter and excess cash is invested in short-term money market deposits.At the end of the second quarter, we saw an increase in accounts receivable at the end of the quarter that is due to a couple of things. One, invoicing volume in terms of euros was high at the end of June as we invoiced a lot of implementation projects and new customers that were not due for payment at the end of the quarter. And secondly, the timing of invoicing of certain part of our customers was delayed in June, so we have more open receivables at the end of the quarter than we would normally have. So therefore, the comparison between quarters is a little bit impacted by this fact.Our final point on the balance sheet is goodwill that is mainly denominated in Norwegian krone and that has depreciated quite significantly. So there has not been any impairment of goodwill or disposal of businesses anything like that, but the change is driven by currency fluctuations and amortization.Then on to the cash flow. Our first half adjusted EBITDA minus CapEx was negative EUR 3.3 million, and if we look at our adjusted free cash flow, the outflow was EUR 5.7 million. And here, the difference is due to this temporary growth in outcomes receivable balance as we had a lot of receivables that were not due for payment at the end of the quarter.So, as a result of improved profitability, we are also starting to see improvement in operating cash flow as well. And we are expecting to see a less negative impact of accounts receivable movement in the coming quarters. Cash flow from investing activities include capitalized R&D expenses and it's practice earn-out payment for the first quarter that was financed through the proceeds from money market funds.In total, during the first half, we had withdrawn EUR 5.7 million from the money market funds, and whilst EUR 4 million of that has been used for the EasyPractice earn-out payment, the rest has been utilized for net working capital needs. Any excess cash we have invested in short-term money market deposits which are yielding quite decent interest rates in this current interest environment.We also completed a share buyback program during the second quarters. And in connection with that, we acquired approximately 154,000 shares, and those shares were acquired for the purpose of the performance share plan for key personnel that we announced during the second quarter.But for the time being, we are not expecting any further significant one-off payments such as earn-out or restructuring-related payments, but as we have seen, again, in this quarter, there will be fluctuation in operative cash flows between quarters due to our billing cycles.

[Charles MacBain, executive]

Thanks very much, Mari. Next, we'll go to the financial calendar. So, as we announced last quarter as well, we'll be doing an extended quarterly presentation in Q3 on the 14th of November 2023. This will be held as a physical event with an opportunity to participate either virtually or physically. We really hope you can join us in-person, right, so we can get to meet all of you. The key things we'll be focusing on will be, one is a reflection on where we are today versus where we started when we went public at the IPO. Second, we'll be looking at our key initiatives and road map for those initiatives over the next few quarters. And then third will be giving you a bit more flavor on the -- an update on what we're trying to do over the next few years, probably around 3 years, in our Veterinary and Therapy business units. So we really hope you can join us.Now just to conclude what's -- this presentation. First is we've had solid growth and profitability improvement in Q2 2023. Second, signed ARR -- implemented ARR are on targets. Third is that we are confirming our guidance between 15% to 20% growth in recurring revenue in 2023 relative to 2022 in constant currency. And the second part is that EBITDA minus CapEx breakeven by Q1 2025. We maintained this one as we are looking at opportunities to get a little bit more aggressive with hiring for certain parts of the business such as EasyPractice and also Provet Cloud as we see a stronger opportunity to grow. And lastly, EBITDA and EBITDA minus CapEx improvement better than expected.So thank you very much, everyone. Now off to questions. So, for questions, please feel free to simply raise your hand. We'll allow you to talk or you can add questions to the chat.

[Charles MacBain, executive]

So, we have a couple of questions here. So I'll go through them one by one. The first one, is it possible to quantify or carve out the price increase effect in the total net upsell ARR price increase of 1.7 for Q2?So, this was a decision that we made this quarter in that -- it's really tough to differentiate between what's a change in, for example, add-ons versus price increase changes. So, if someone is upgrading from one plan to another, is that a price increase or is that an add-on change, right. So, it was too blurry. So, we decided that -- and in the end, if there is a price increase as well, is it because we added more features in that plan or is it because of the fact that it's just a pure price increase. And in our case, it's a little bit of both.So it just got a bit too blurry so now we're just reporting it as one, right, because I did not want to have any judgment in that. Also, it's better for us to -- from a customer point of view to also report it in a consolidated basis. So, going forward, we will continue to report on a consolidated basis. We do announce our price increases publicly. Normally, it's around inflation for each of them, but that's announced to the customer [ only ]. And the net effect is some -- usually is inflation plus 1% normally.The second, notwithstanding our current focus on profitability, can you comment on the acquisition environment? Are attractive targets becoming more available on attractive pricing or not really?Well, we're still looking for targets in Veterinary, Therapy practice management software in different countries. For now, we have bid on some. We've been outbid on a few, right, and -- but we're trying to keep very disciplined, and especially now with where the stock price is, where it's -- from a capital allocation standpoint, I wouldn't want to buy a business I don't know as much about in Veterinary. That's trading significantly higher than our stock, right? Because we -- I know everything about our stock and probably our stock is – and our sort of products are quite a bit higher quality than legacy product we require. So, that's why we're being quite disciplined on that. But we're still looking, and I'm sure opportunities will come up over time.Any other questions? Good. If there's no other questions, thank you very much, everyone, for your time, and we look forward to meeting you, hopefully, in-person in November. Thanks, everyone. Bye.

[Mari Orttenvuori, executive]

Bye-bye.