Nordhealth AS

OSE:NORDH

Earnings Call Transcript 2022-Q3

[Charles MacBain, executive]

Okay. Thank you very much, everyone. So I just -- welcome everyone to the Q3 reporting for Nordhealth. We wanted to just briefly introduce myself for those that haven't met me before. I'm Charles MacBain. I'm the CEO of Nordhealth. And I'm here with my colleague, Mari.

[Mari Orttenvuori, executive]

Hello, everyone.

[Charles MacBain, executive]

So for this quarter, we decided to give a little bit more information and breakdown by business units. So we'll start off with the company updates, general company updates similar to the previous quarters. And then we'll dive a little bit deeper on to the two separate business units, the Veterinary business unit and Therapy business units. And thereafter, Mari will go through our financial update, and then we'll be able to answer any questions that you may have.

So starting with the company updates. So our ambition at Nordhealth is still the same, right, to acquire and build great vertical SaaS businesses and select healthcare markets. How do we translate that today to our current 2 BUs is we want to be able to build great software, right, that empowers either Veterinary or Therapy professionals to save time so they can focus on delivering great care, right, delighting pet parents and in one case or patients and growing their business.

In terms of strategy, I think that with the change of market situation, we are focusing quite a bit -- a bit more on profitability and balancing profitability growth. Let me tell you about a couple of different levers that we're going forward to be able to achieve those goals.

One is similar to before, right, we are developing one product per vertical, right? So Veterinary, we've got Provet Cloud and in Therapy, we're developing a product based upon the EasyPractice platform.

Second, focus on ensuring that the people or users on the legacy or hosted solutions are migrated over to our flagship Cloud solutions, right, to be able to have those product and development efficiencies.

Third, is looking to improve our sort of customer acquisition costs, and the new ARR ratio through, a, centralization of the sales functions and b, improvements in the onboarding efficiencies, specifically on the Veterinary business units.

Four, is very lean corporate G&A, right. So we're not looking to add any additional headcount, right? We've got the team in place that we need in order to scale, right? And all other functions are on the BU level.

And lastly, similarly, the G&A, right, we're not looking to for any significant net increase in headcount in order to achieve the 3-year plan.

On the growth side, right. We want to make sure that we're growing in a profitable way, right. So focus is key on that site, right. So focusing on key growth markets. So in Therapy, like we're not going to go after any new markets in 2023 in a major way, right, we're going to focus on migrations, right. Second, on Veterinary, we're going to focus our growth efforts on the U.S., U.K. and Spain. In addition, we continuously grow the markets that we're already in as the market is also growing.

And second point is we'll continue to expand our product offering, right. So we can continue to upsell our customers, right. So starting with building the great PMS, then onboarding people in our payments solution and then at some point, right, going into a booking portal that enables us to capture some of the B2C revenues.

So diving a little bit more detail on what are the business segments, right, what products are on this. On the Veterinary side, right, we've got 2 of products that we include in our Cloud segment. One is Provet Cloud and second is or Nordhealth Pay. That accounted for roughly 22% of the ARR.

Second, we've got the Veterinary hosted solutions, which is Provet Legacy products in Finland, Sanimalis in Norway and Sweden, Vetserve in Norway, and Vetvision in Denmark, and the recently acquired Vetera in the DACH region. That accounts for roughly 27%. We have a big focus this year and in the next few years on migrating those all over to Provet Cloud.

Now on the Therapy side, we've got a couple of different Cloud products, right. EasyPractice, which we acquired earlier this year, right, which will be the base upon which we build the new therapy platform, right, which is a fully product-led self-service platform.

Diarium, which is the current Cloud solution in Finland; Nordhealth Connect, which is our solution for the institution for patients, right, to be able to help the clinic communicate directly with the patients in a secure way. And Navisec Flex, which is our core of the solution.

On the Hosted side, we had acquired last year Aspit. Now Aspit over time will be migrated to this new therapy platform.

Diving a little bit more to the KPIs for Q3. So we grew 33% over the last 12 months ending Q3 2022. Breaking that down, 16% came from organic growth, of which 8% of that came from organic new customer recruitments and the 108% was indeed net retention rates. At the end of the quarter, we stood at EUR 30.7 million in signed ARR and EUR 29.3 million in implemented ARR.

And the metric that we are always focusing on is this ARR per share rate is now EUR 0.38 per share. And one of the most impressive and the real differentiator in this business is the churn rate. So our churn rate remains very, very low at 2.4%, right. And that's probably the main differentiating factor of our business.

Looking now at how we progress over the last 12 months. So we started at EUR 23.1 million of ARR in Q3 of 2021. We've added EUR 1.9 million of new ARR from new customers. We've also upsold our current customers that we had prior to Q3 2021 by EUR 1.8 million. And we have some price increases, right, which were based -- which were spread out throughout the year of EUR 0.6 million. And we had some churn of EUR 0.5 million.

Then looking, we also made acquisitions, right? So we bought EasyPractice and Vetera in the last 12 months, right, which in the beginning of -- in Q3 of 2021 were -- had an ARR around EUR 3 million. And they've also been growing by 36% and 13.5% for EasyPractice and Vetera, respectively.

Now looking quarter-over-quarter, we've been able to grow our ARR at 3.3% this last quarter and price increases were only a EUR 0.2 million in that, and that was driven by the price increase that happened in EasyPractice. What's interesting to note is that the EUR 0.9 million of ARR that we were able to get from new customers, right, 70% of that came from our Cloud customers.

And one interesting thing to note is that if you look at the churn rate, you can see that the annualised churn for the whole business is 3.6%. It's slightly higher than the organic one because of the fact that EasyPractice through its product-led approach, right, has a slightly higher churn rate but also some very low customer acquisition costs.

Now taking a little bit of a step back to look at how we've grown historically, right? So we start -- when I entered the company in 2018, it was November 20, it's almost 4 years from now. We had an ARR of EUR 3.4 million. And we've grown this quite significantly over 80% CAGR per year if we account for both acquisitions and organic growth. And so quite -- the business has changed quite a bit over the period.

What you can see is that 70% of the growth in Therapy Cloud in the third quarter '22 was driven by EasyPractice. That's one thing to note.

On the people front, right, we made some significant recruitments over the last few months. So one is that we recruited Hanna Chiorazzo, right, as our new Chief People Officer. She joined us from BC platforms. Second is -- we recruited Szymon Olko, who is the Engineering Director for Provet Cloud. He joined us from Opera, the browser. And also, we promoted Fabio Carneiro, right, who as VP of Product & Design for Provet Cloud. And previously, he had worked in engineering and design and also in product management at Booking.com and Mailchimp.

So diving a little bit deeper into the financials and what the drivers of those results are. I try to provide a picture of the different drivers by pointing some of that. I'm not going to go through the whole slide, but I want to highlight a couple of interesting points on this slide. One is that excluding migration, right, our Veterinary Cloud products have been growing by 56.7%. And our Therapy Cloud products have been growing by 23.2%. So overall, right, we're roughly excluding migration impact, we're growing those Cloud products at around 37.7%.

However, right, we also have acquired Hosted products, which historically were not growing and there's still a very high -- to a very high degree. However, our Veterinary Hosted ones are growing by 1.4%, excluding migration, right. And the Therapy ones are actually growing still quite nicely at 11.2%. There was no migrations yet in Therapy business units. So that's how we can break down the 17.5% growth rates.

And then it's always good to highlight the churn, right, to really understand this business. And we looked at churn for the Veterinary Cloud, was negative 1.5%, right? For the Hosted solutions, it was negative 1.6%. Then on the Therapy side, the Cloud one was 7.4%. But if we exclude EasyPractice, right, the therapy churn rate was up 2%. As I said before, right, the EasyPractice churn rate is higher because of the fact that they have a product-led growth approach, right. On the Hosted side, we see -- which is mostly Aspit, it's negative 3.3%. Overall, we have a negative 3.3% churn rates, which was quite low.

Now going into a bit more detail on the Veterinary business units. So over the last 2 years, right, the Veterinary business has grown spectacularly, right, through a combination of acquisition but also organically. You can see the huge growth in Provet Cloud specifically, right, which has been driven by our expansion into new markets and our upsell of new products to current customers.

Looking now at year-over-year, the Veterinary business unit has been growing at 20% organically and 34% if we include the acquisitions. Similarly, right over the last 12 months, organic ARR growth churn was 1.8%. Interesting to note here as well is that Vetera has been growing at 14%. So even though it's a Hosted platform, right, we're still seeing some growth into that region, which is sort of lagging slightly on the Cloud option versus other regions.

Now we've been asked a lot about breaking down the information by country. So Provet Cloud is the main platform that we use to go internationally, right? And it's the flagship platform that all other users will migrate to at some point in time. So if we compare Q3 2021 versus Q3 2022 per market, you can see we've had strong growth in the Nordic still as we continue to conquer new markets, at 38%. Our expansion in the U.S. we've been growing by 165%. We're roughly at EUR 400,000 of ARR now. The U.K. is at -- has been growing 85%, and we're roughly at EUR 700,000 of ARR.

Interesting to note on this one is that the full rollout of CVS is not included in that number. We just added the same pattern. Then we also have Spain, which has been a very strong performer. And we've had some great new opportunities, and we're working on some very interesting opportunities in Spain.

And then we've got other markets, which is basically markets which do not require significant additional localizations that we serve from an international team, and that's been growing just over 100% per year.

Now diving a little bit more into Therapy. The therapy ARR also has been growing quite significantly, right? You can see Diarium and Nordhealth Connect has been capturing market share in Finland, right? Now we're at EUR 3.5 million of ARR. Aspit, which we acquired last year, is growing quite nicely still and we can see the impact in Q3 2022 of the acquisition of EasyPractice, which has added EUR 2.2 million.

An interesting thing to note here is that Diarium new customer recruits accounted for 30% of the growth in your state Q3 '22 and that EasyPractice, new customer recruitments account for 21% of the growth in year-to-date Q3 2022.

Now looking at the same deal as we did for Veterinary. The Therapy business unit organically is growing slower at 13% as we're not adding too many new countries currently. We're focusing on the migration and however, with acquisitions, right, of EasyPractice, we've been growing just over 30%.

Interesting to note that there's very strong growth in EasyPractice. But over the last 12 months, they've been able to grow ARR by 36%, right? And that only includes a price increase of EUR 0.2 million.

Looking at EasyPractice specifically, right, because I think it's really good to understand the dynamics of that business because they are slightly different from the dynamics of our other businesses. So they are able to acquire new customers at scale, fully self-service, which is a wonderful thing that we're trying to also adopt in the other Therapy countries by localizing the platform for those countries. They are also able to upsell their customers quite significantly through their app store model, where depending on the complexity of the operation, you can select, self-select to add functionality, fully self-service.

They do have a churn as we said, which is quite higher or quite a bit higher than our current products. And that's mostly proven by two reasons. One is there's a very, very low barrier to entry in this self-service for people to start using it given the self-service model. And second is basically, the deal is slightly smaller types of clouds. I think this is a huge opportunity for us to be able to learn from how EasyPractice those things because if we can bring this self-service model to our current Therapy customers and also partly in Veterinary, and we can reduce our customer acquisition costs quite dramatically and making it much easier for people to onboard.

And now financial time for Mari.

[Mari Orttenvuori, executive]

Thank you, Charles. Can you take us to the next slide, please. Thank you.

So if you first looking at our recurring revenue. So our third quarter recurring revenues, they grew by 36%, amounting to EUR 7.2 million. On a year-to-date basis, our recurring revenues have grown by 66%, and they were EUR 20.8 million.

Recurring revenues, they represent 92% of the total revenues of EUR 22.6 million, and that is on a year-to-date basis. EBITDA minus CapEx, that was negative EUR 2.7 million in the third quarter. And on a year-to-date basis, it has been negative EUR 8.4 million.

So we have made significant investments in our core platforms in all of our markets and especially, we've been investing to expand our business in our Veterinary growth markets.

We've also made significant recruitment in key positions during the year. And as already mentioned, we do not anticipate making any new recruitments in the large scale like we have done during this year. Instead, we believe that our organization is now at the right size to continue on the growth part.

Our year-to-date revenues, they grew by 63% and amounted to EUR 22.6 million. Our third quarter revenues, they were up by 39% year-on-year. Organic growth in recurring revenue quarter-on-quarter was 19%.

The high level of the talent acquisition activity, that has significantly increased our cost base during the year. Our third quarter EBITDA was negative EUR 1.3 million and our year-to-date EBITDA was negative EUR 4.4 million. The net increase in our headcount during the year has been 161 employees, which is quite an impressive number, and that has significantly increased our employee cost base by over 140% year-on-year basis, which is about EUR 3 million per quarter.

Then on the balance sheet, well, the changes on the balance sheet, they are mainly driven by the acquisitions of EasyPractice and Vetera, which were completed already during the first half of the year. Despite of the acquisitions and other investments into especially our product development, our cash position still remains strong at EUR 42.1 million, that is comprising cash and money market funds. And the acquisitions, which were completed in '22, they were mainly paid in cash.

As a result of these acquisitions, our goodwill has increased to EUR 59 million also our minority share in PetLeo, that was acquired as part of the Vetera, that is reported under other shares.

The increase in other current liabilities, that is mainly due to EasyPractice earn-out debt that amounts to EUR 4 million. And also, we had an earn-out debt relating to Sanimalis acquisition that dates back to 2019, that was, in fact, classified as other non-current liability at the end of last year, but that was already paid out in the first quarter.

Then on to the cash flow statement. Operating cash flow this year has been heavily impacted by the growth investments and the recruitment activities, especially in product development, which has been in accordance with our growth strategy.

Our cash flow from investing activities, that includes the cash payments related to EasyPractice and Vetera acquisitions that were financed through proceeds from the money market funds. And also the capitalized R&D expenses are shown here as investments in intangible assets.

And cash flow from financing activities in the third quarter, that consists of a repayment of long-term debt of Vetera, which they had at the time of the acquisition. When we acquired them, plus then the repayment of the earlier mentioned Sanimalis earn-out debt that was in the first quarter and also then in the second quarter, we made a repayment of a short-term debt of Vetera of about EUR 0.2 million.

[Charles MacBain, executive]

Thanks, Mari. On the financial calendar meeting?

[Mari Orttenvuori, executive]

Sure. The fourth quarter results, they will be presented on March 7 and the '22 annual financial statements release will be on April 14.

[Charles MacBain, executive]

Just to summarize a bit and to provide some insights on going forward for the year, right? So we started the year at EUR 24 million of ARR, right? We've acquired roughly EUR 3 million of ARR. And then we've been able to grow that to mine base by EUR 5.5 million organically.

We are looking to land in the lower end of the range, right? So roughly around EUR 32.5 million, the initial range that we had suggested.

And on concluding remarks, just the three things that I think we'll be focused on going forward. One is we're all focused on improving profitability, right? So -- and the three main levers for that are migration, right, which brings a lot of operational efficiencies, that not to support many different products. Second is focus on key markets, not going after too many markets at the same time, right, to make sure that our CAC/ARR payback remains low. And third is we built a team. We had to spend the last sort of 18 months, recruiting and now it's time to stabilize and make sure that those teams that have recruited, people can focus on as a delivery value. So we don't foresee any significant net new hires in the next few quarters and the next few years.

Second is new customer acquisitions in current markets, right, was the U.S. and the U.K.

And third is continuously improving the value proposition that we have for our customers that we can upsell, right? So building a great PMS, making sure that we're the best in the world in our individual verticals in providing that solution.

Second, upsetting payments, right? It's a great thing for our customers as they want an all-in-one solution, right, we don't want. And second, it's a great thing for us in that with our scale, we can negotiate quite good rates. And then third is, over time, right, not in the next 2 quarters, but we will be looking to also expand it to sort of the B2C area what we looking for to be able to help customers find steps.

Now I go to Q&A. So if anyone has questions, please feel free to raise your hand or add them to the chat.

All right. So it seems like we don't have any questions. Thank you very much, everyone, for your time. And we'll see you next quarter.

Bye.

[Mari Orttenvuori, executive]

Thank you. Bye-bye.