Nordhealth AS

OSE:NORDH

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Charles MacBain, executive]

Hi, everyone, and welcome to the Q2 2024 presentation. For those of you that are joining for the first time, I'm Charles MacBain; I'm the CEO of Nordhealth, and I'm joined by my colleague, Mari Laine, our CFO.

Today, we're going to go for a few different topics. One will start with a general company update, then dive into the veterinary BU update, the therapy BU update, then Mari will go through a financial update, and then we'll leave some time for Q&A. [Operator Instructions]

Starting with the company update. In Q2 2024, when we look at growth, right, in the last 12 months ending Q2 2024, we grew 17.4%, which is within the range of 15% to 20% that we guided.

Our net retention in the last 12 months and in Q2 2024 has been 108%. Our net churn has been 5.1%. We have had a CAC to new ARR of 0.8. And our LTV to CAC is still quite high at 12.5 based on last 12 months Q2 2024 numbers.

We ended the quarter at EUR 40.8 million in implemented ARR. And our signed ARR was EUR 42.7 million at the end of Q2. This is signed ARR, just as a quick reminder, is the total value of the implemented -- the invoiced revenue that we get from our customers, plus those signed contracts that are signed but not implemented.

Good to note as well on this number is that we do not include post-pilot rollouts for corporates in this number, unless those are sought, right? So we wait until the pilot is officially successful until we include them, which needs a bit of conservativeness.

Our ARR per share, which is the best sort of short-term proxy for free cash flow was EUR 0.52 per share.

Next is just to give a background, right? We've continued growing every year, both organically and by M&A. In 2023 and 2024, we have not done any M&A, but you can see we've got already quite a strong growth path in 2024.

Just to highlight this better because this graph makes it a bit tough to highlight, what the impact of growth. I looked at organic growth, right, on a yearly basis, excluding M&A, right? And you can see that every year, we've improved the organic growth, right? And last year, we added EUR 5.8 million of ARR organic. And in the first half of this year, it does include some price increases, which are much more on the first half year, but it's already EUR 5.1 million. So we've done a very good sales performance this year.

Looking at the quarter-over-quarter ARR growth and the breakdown. We, in Q1 2024, we started at EUR 36.5 million. We've added EUR 1 million of new customers of ARR. And our net upsell was EUR 3.7 million and churn was 0.5%. So which means that we grew quarter-over-quarter 11.7%.

The driver of the net upsell, large number of EUR 3.7 million, was primarily driven by the implementation of the CVS small animal clinics. So how it works is when they're piloting, they're a new customer, then when they sign, because they're a current customer, we actually add those to the upsell numbers.

Now looking at the -- zooming out a little bit and looking at this year-over-year, in Q2 2023, we were at EUR 34.7 million. We have recruited EUR 3.2 million of ARR of new customers. Our net upsell has been EUR 5.5 million , but our churn was 2.7%, where that means that we ended up at EUR 40.8 million of implemented ARR are and EUR 42.7 million of signed ARR. Interesting to note is that 70% of the EUR 3.2 million came from Provet Cloud and EasyPractice. That EUR 5.5 million net upsell is primarily driven, as we said, by CVS, we can see in the Q2 numbers, but also by other Provet Cloud ARPU and user growth.

It's really important to look at the 2.7% of churn rate, which actually means a 7.7% churn in the last 12 months. This is much higher than historical. So let's go through what are the driving factors behind this.

Number one, right, we lost an enterprise customer of Diarium, that was the reason for the loss that we explained in the previous quarters, was that the customer was bought by a company which had both GPs and therapists, and wanted to unify their software. So I have one software that can serve both markets. That is not the case for our software, where we only tailor to therapists. So if we exclude that, our churn rate would have been 6.2%.

The second one-off impact on churn is that with our acquisition and migration strategy, right, there are some customers which were made until the end that are not willing to shift to our software or new software, Provet Cloud, but instead want to go to a new software or not use a software at all.

And so when we've sunsetted Provet Win and Vetserve, right, those last customers are not churned given that we stop their membership. So that would actually have churn to be around 5.1% and we do foresee the long-term average churn to be roughly around 5%. There will always be noises, right? But upwards or downwards, right, because it's highly sensitive given this low churn. But still, if we put into perspective, 5% churn has been that someone stays first for 20 years, which is incredibly long.

Next important thing to note, which I highlighted in the first page, but I'll rehighlight here, is that the Vets for Pets post-pilot run is not included in this EUR 1.9 million, only the pilots are included.

Now on the profitability side, we're very happy to announce that although we had forecasted, to breakeven in Q1 2025, we actually have been able to achieve that EBITDA minus CapEx margin breakeven in Q2 2024. So this was mainly driven by the fact that we accelerate the implementation of CVS, right, which you could see in the recurring revenue numbers.

Now going into the veterinary update. So in Q1, right, as we mentioned a few times, right, we started the CVS rollout, and we now have 385 locations live on Provet Cloud. We have not -- we still have further locations to implement, but this is a good initial start of this project.

We also were able to deliver this project in record time, which was an incredible fleet from our U.K. implementation team. In addition, excluding CVS, we also signed around EUR 0.5 million of new ARR in Q2 for veterinary customers. And also the interesting milestone is that our payment solution, Provet Pay, has reached over EUR 1 million in ARR in Q2. And ARR, just for everyone, for payments, how we do it, it's just the amount that we make on does not include the full payment volume. That's one way, which is high, right? It does not include the transaction fees that we pay back to agent or the Visa or MasterCard, it's just the additional revenue that we generate above that.

And then lastly, Vetserve has successfully been discontinued and customers migrated to Provet Cloud in Q2 2024, which is a big significant achievement, right?

Now looking at the year-over-year breakdown of ARR growth. We ended Q2 2023 with EUR 18.2 million. We were able to recruit EUR 1.7 million of new customers. We had a net upsell of EUR 4.2 million, which is equivalent to a net retention rate of 118.7%, and we had churn of 0.8%, which is equivalent to 4.4% churn. And again, excluding these one-off impacts of Provet Win and Vetserve, right, that churn rate would have been 2%, which is an absolutely ridiculous number, right? It's very, very low, which is a testament to the stickiness of our products. Then 33% growth in new customer was kind of improve by -- came from new customers year-over-year.

Looking quarter-over-quarter, you can see the more accentuated impact of the CVS rollout with EUR 3.4 million. And we grew over 20% in 1 quarter, which is a great performance by Valter and his team in the veterinary business units. And despite us having very strong buildouts now, we also were able to sign quite a few new customers around EUR 700,000 customers. And you can see that the churn rate is normalizing as well.

From an EBITDA CapEx level, we also were able to -- we improved this quite significantly by EUR 1.5 million year-over-year. And you can see the drivers of that improvement. One was the implementation and one-off license revenues, EUR 1.3 million. Second was recurring revenue growth, that's more of a constant one that we have over time. And however, this was negatively impacted by the investments we have to make to support growth of EUR 1 million.

Now going on to the therapy update. First is our new implemented ARR year-to-date ending June 31, was EUR 55,270, which is slightly above our target. So we've been able to sign up new customers with that as well. Recurring revenue was slightly below target due to higher churn and downsell, and also the delayed price increase of EasyPractice as we're looking to do a more thorough price restructuring to be able to match the pricing of Aspit.

Also on the growth side, our new product, our booking portal. We've had at the end of Q1, a 334 therapists profiles signed up the booking portal, and they've made just over 1,500 bookings. So we're very excited about the booking portal's ability to improve access to care in addition to improving the ability for customers to be able to have a better experience on the booking process.

From the migration side, migrations of gaps between Aspit and EasyPractice have been more extensive than we initially foreseen it. At the end of June, we had only migrated 34 of the 73 single-user private therapists because we've been focusing on all users, we don't use Norwegian Health Net, which is a thick block currently, which we are looking to sell [ medicine ]. Interestingly though, the feedback has been very positive from these clinics, and we've had no migrated customers churn.

For the new joiners perspective in the team, we welcome the new principal product designer, to help improve the design of EasyPractice. We've also hired a principal software architect to help us scale the platform, right? And we've been aggressively recruiting for full-stack developers to be able to accelerate the migration.

Also in Q1, we completed the functional restructuring and hiring of BU CEO was completed. What that means is now that instead of having each product have it on GM, we are split by functions, sales and marketing, support product and design, and engineering. In addition, [ Christian ] is focusing to help us on the implementation of the new upgrades.

I think about our new GM, we have recruited Karan Wallia to join Nordhealth. He will be joining us in September 2. Prior to Nordhealth, he started his career at Microsoft as a Senior Business Development manager. Then move to Europe, where he worked in products on -- as Director of Product Development, responsible for the Homes & Apartments, hotel chains and new segments. And prior to, at Booking.com, he was also in a similar GM role, focusing on launching a new product in -- as part of Booking.com called BookingLokal.

And prior to joining us, he was at SmartRecruiters as where he was a General Manager and then Senior VP of Product Management. One thing that we're very excited about is Karan's strong and deep product history, which is increasingly important as the therapy business units under our flagship product, EasyPractice, has a strong product-led growth focus.

Now for the results, year-over-year, implemented ARR has grown 5.4%. We've had very strong new customer acquisition growth. Our net retention, however, has been very low at 97.9%. You can see from the EUR 1.2 million And our churn rate, which is most of the driver of this net retention, was very high, given this onetime impact. And you can see excluding that impact, it would be quite a bit lower. We've shaded that separately.

Also important to note, which affects that retention, is that we haven't done a price increase the last 12 months for EasyPractice as we're aiming to change our pricing model in late 2024.

Quarter-over-quarter, we grew at 2.1%, which is EUR 300,000, which came from new customers, net upsell was EUR 300,000, and churn was 0.2%, right? So if you look at this as we go from quarter-to-quarter, right, you can see churn is decreasing, right, from 11.3% when we had this initial loss of customer, which continued in Q1 2024 with 8.8% and now at 6.5%.

And we can see that although we are quite profitable on an EBITDA CapEx level, right? You've seen group allocations, right. In Q2 2024, we decided to accelerate the investments in development to be able to accelerate the migration. And you can see the drivers of the results are known between Q2 2024 and 2023 are yet recurring revenue growth, which accounted to 200,000. But as we said, product development and sales and marketing investments have actually increased. Next, I'll leave it to Mari.

[Mari Orttenvuori, executive]

Thank you, Charles. So let's take a look at the second quarter, reported financials then. Total revenues in the second quarter grew by 33% year-over-year. As already mentioned, the implementation and one-off license revenues were up by EUR 1.3 million, and recurring revenues in total were up by EUR 1.5 million from the previous year.

So this growth was mainly driven by veterinary cloud products. And the currency fluctuation in both Swedish krona and Norwegian krone have somewhat stabilized now. So the impact of changes in these currencies is not impacting the results on a year-over-year basis significantly at this point. But the share of our Swedish and Norwegian krone-denominated revenues is decreasing in proportion as revenues earned in U.K. pounds are increasing, but still weakening of any of these currencies would have an impact on our reported revenues going forward, but we don't see that as a significant factor at the moment.

Share of recurring revenues in the second quarter was 81%. And this is a decrease from 89% in the previous year as the current quarter was impacted by the one-off revenues, which, by the way, more than doubled from the previous year. So it was a big impact.

Adjusted EBITDA improved from negative EUR 0.2 million to positive EUR 1.3 million, and adjusted EBITDA margin improved from negative 2% to 11%. As we announced in July, we had an excellent quarter in terms of revenue and profitability, reaching positive EBITDA minus CapEx ahead of target that was initially set for the first quarter of 2025. But as the quarter was heavily impacted by the one-off revenues. this is not yet the going rate we are able to maintain in the short term.

Moving on to recurring revenue. Reported recurring revenue has grown by 21% from EUR 8.2 million to EUR 9.9 million from the previous year. So not only have we seen major organic growth in our total revenues, we have also been able to grow our recurring revenue significantly with ARR growth rate well ahead of previous years as already earlier presented by Charles.

In the previous year, adjusted EBITDA margin was negative 3%. But since the first quarter, we have been back on positive EBITDA margin, and we expect to stay that way. We are committed to improving our profitability on a sustainable and long-term basis. But with the current revenues, we have also experienced some increase in our cost base.

The cost increases relate mainly to head count as in particular, Provet Cloud implementation and support teams have been strengthened in order to ensure all of the ongoing and new implementations and migrations to Provet Cloud, as well as providing quality support to all of our customers.

As Charles just mentioned, we have also been able to build key positions and new roles in our product teams as well as the mentioned senior management hire as a new therapy lead starting next month, and we have also seen an increase in direct costs as our user base has increased. However, that is not impacting our gross margin negatively.

On cash flow, we have improved our free cash flow by EUR 3.5 million from the previous year on a last 12-month basis. This is a really huge achievement. And in the first quarter of this year, we did have some positive -- we did have positive free cash flow for the first time since the IPO, and we then discussed that we had some delayed customer payments and also better annual invoicing took place in the first quarter, impacting the quarter's free cash flow positively. And we had a positive impact from changing the Aspit bi-annual invoicing to monthly billing schedule that impacted both comparability and actual cash flows positively in the first quarter.

In the first half of this year, the impact from Aspit billing change has been some EUR 1.5 million negative in comparison to previous year. But overall, on the last 12-month basis, the impact has been quite about EUR 1.3 million in comparison to 2023. So although we are still likely to see fluctuation in our cash flows between quarters and comparability between years, explaining until the end of this year, we are still steadily improving towards our long-term positive free cash flow.

Despite the fact that we have removed EBITDA minus CapEx target from our guidance. But we are committed in developing our products to gain market share to support long-term profitability, and we have the means to do that.

Our cash balance still remains strong and cash equivalents and investments in total decreased from EUR 22.2 million to EUR 20.4 million from the beginning of the year. And of this, EUR 16 million was invested in money-market funds as at the end of June.

We have EUR 45.4 million of goodwill on our balance sheet, and there has been no new acquisitions or impairments of goodwill during the quarter. The EUR 13.1 million of intangible assets consist almost entirely of capitalized development expenses where we have recorded additions during the quarter amounting to EUR 1.3 million, that is reflecting our commitment to product development.

The capitalization ratio, however, our total product development expenses is not very aggressive. And that was approximately 47% on a year-to-date basis. So we are, in fact, investing a lot more in product development than what we capitalize.

We have not had any material equity transactions during the second quarter and equity remained strong at EUR 78.3 million.

During the second quarter, we made a share payout from treasury shares under the performance share program that was launched in 2023. In total, approximately 21,000 shares were transferred to the participants still leaving the company to hold over 1.1 million shares in treasury. And we continue not to have any external financing or material earn-out liabilities on our balance sheet, and the liabilities consists of operative items, accruals and advances received and the like. So no change there from previous quarter.

And the more detailed second quarter and first half financials, you can find in the appendices.

[Charles MacBain, executive]

Thank you, Mari. Just to conclude the key points looking forward. One is that we will be focusing on adding development resources as we have in Q1 and Q2 to accelerate the migration of Aspit and EasyPractice. This is a really important goal for us as once the migration will actually lead to a EUR 3 million of synergies, and these are not hypothetical synergies, it's money we spend on license, software license fees for Citrix or for Microsoft, and having a dual development team have to maintain 2 products versus one, right? There's also a lot more support questions on the legacy products than they are on EasyPractice, the number of support tickets per user is much higher. So we see a huge amount of synergy potential, of which hopefully over half comes from -- we were able to capture as we migrate issues and the other half is upon the end-of-life of the product.

The second is that as you -- we saw in this quarter, we've seen some very good traction from enterprise customers in Europe and in the U.S. and as a result, we want to invest in our Provet Cloud engineering to be able to capture these enterprise opportunities that are arising in the U.S. and EU.

Lastly, right, we are also looking to accelerate the entrance of the booking portal to Norway and Denmark for therapy in the next few quarters.

So looking at the updates. On the first part, we are saying that we are maintaining our recurring revenue growth guidance of 15% to 20%. The second one, we decided to drop the EBITDA on this CapEx breakeven by Q1 2025, to focus on the growth opportunities above, right? So a few key points on this.

One is that we foresaw that we were able to have EBITDA minus CapEx breakeven in Q1, but we were able to do it sooner in Q2 2024. So we reach our guidance earlier.

The second is that due to the previous 3 points, right, we are looking to continue to invest in developments to be able to grow. So we foresee H2 2024, EBITDA minus CapEx to be negative despite this Q2 being positive.

Third is that we will provide updated guidance on 2025, as we do every year in our Q4 2024 report. That being said, right, we do foresee, as Mari mentioned in her presentation, improving free cash flow versus the 2024 Q2 last 12 months over time.

Perfect. Thank you, everyone. Now the finalizing financial calendar, Q3 2024 results presentation will be on the 12th of November 2024, and you can, as usual, see the full year financial calendar on our website.

Now on to Q&A. [Operator Instructions]

[Unknown Analyst]

Can you hear me?

[Charles MacBain, executive]

Yes, I can hear you.

[Unknown Analyst]

All right. Very good. Just a couple of questions on the changed guidance. You sort of specified that this will lead to higher investments or a higher cost level. Do you also expect it to accelerate growth beyond what you had expected previously? Or is there any sort of additional top line effect that makes this NPV positive investments because I see no change as to sort of longer-term ambitions or comments about longer-term growth rates or so?

[Charles MacBain, executive]

Sure. So the way we think about investments relative to growth is that I look at the contribution margin of each of the different products, which are basically full cost and revenue, excluding our investments in R&D, which is basically linked to CapEx plus OpEx plus our investment in customer acquisition costs, which is basically made up of professional services, and sales and marketing. And we expect a 20% more return on those. So that means that the more we invest in R&D, right, or on CAC, right, the more we expect an improvement in contribution margin.

But there's two different things that contribution margin claims. One is that we grow the top line faster. That's one part. But second is also marked the impact of migration, where the margin can go from a 75%, 80% margin on the recurring gross profit, which fees after COGS and customer service or to a -- from the original, for example, for us, that will be like the 60%. So I think that that's the best we look at it. We look at the improvements in sort of cash flow before CAC and R&D investments. Does that make sense?

[Unknown Analyst]

Yes.

[Charles MacBain, executive]

So we are increasing the level of R&D. We are also increasing the expected cash flow to generate, either which will come from growth or from the migration.

[Unknown Analyst]

Yes. But is there -- and sort of what necessitated the acceleration in cost because you've added quite a lot of sort of quite a significant -- you've built quite a big organization, and you seem to see sort of need to accelerate migration and do more development faster given that you're now ramping up investments. So what's happened to drive that?

[Charles MacBain, executive]

Sure. So I think the primary one is that we're seeing great corporate interest on the veterinary side, okay? Because not only the fact that we've been successful in many markets. But also our approach to implementation where we can do implementation much faster than the other players in the market, right? And so that has driven a lot of interest. And every corporate will need -- so for example, integration or accounting software or like integrations for their customer-marketing platform or app, right?

So we want to -- in order for us to be able to capture those opportunities, we can decide to continue invest in the same method as we do today. But that will mean that we have to delay those. And a lot of these enterprises are looking to make a change quite soon. So we want to be able to support them fast. That also means taking a little bit more risk on implementation, right? An implementation to person takes roughly 6 months to get to full productivity right? And so in order to be able to implement those enterprise customers that we foresee coming, right, we also need to have the capacity to implement that. So that was the primary reasons for veterinary.

On the therapy side, we just saw that it was a better ROI to go faster because it's such a massive saving from this migration, and especially as some of our costs are rising for supporting these legacy products, and also the risks are rising as we have like a legacy platform being used for longer and longer, shifting them over to EasyPractice is positive.

[Unknown Analyst]

Yes. I got it. Very clear. And if perhaps a last one for me then. Regarding the CVS contract, have we seen the full effect of that implementation now in Q2? Or will we be seeing additional growth contribution in the coming quarter from that?

[Charles MacBain, executive]

We've seen a significant percentage, but we still have the -- we've currently rolled out only in their small animal first-opinion clinics in the U.K. We have not rolled out yet the referral hospitals, except for one, right? And we have not rolled-out in their non-small animal clinics, for farm animals, production animals and so on. In addition, we have not rolled out to internationally beyond the U.K. So there's still quite a bit to go there.

Any other questions? Well, thank you very much, everyone. There's no other questions. Thank you for your time, and we will see you again in November for an update on Q3. Thank you. Have a nice day.

[Mari Orttenvuori, executive]

Thank you.