Nordhealth AS

OSE:NORDH

Earnings Call Transcript 2023-Q4

[Charles MacBain, executive]

Hi, everyone, and thank you very much for making the time for our Q4 2023 presentation. For those that have not met us yet, my name is Charles MacBain. I'm the CEO of NordHealth. And I'm here with my colleague, Mari Orttenvuori, the CFO. So we're going to focus on two different areas. First is a general company update. And then -- that I will go through, then Mari will go through a financial update, then we'll end with a Q&A session. So starting with the company update, in the last 12 months and in Q4, so in 2023, our organic ARR grew 23.3%. This was driven by a net retention of 114% and was tampered by a slightly higher churn than historically due to reasons we'll going to later in the presentation of 4.9%.

In terms of growth efficiency, our customer acquisition cost to new ARR that we're able to sign was $1.5 million. And this customer acquisition cost includes marketing, sales and also the profit or losses that we made from implementations in professional services. However, even with the slightly higher churn that we had this year, which is very much a one-off, we can see that our lifetime value to customer acquisition cost is still very high at 10.4. We ended the year with an implemented ARR of 36.6 and a signed ARR of 38.5. The difference between implemented and signed is the amount that we have booked but have not been yet gone live. The clinics are not using the system yet, but they've signed for the system. That means that a year-end 2023, we ended ARR per share at 0.46.

Now taking a look at a step back to look a little bit at the history, right? Over the last 5 years, we've been able to grow the signed ARR over 11x, right? This has been done, as we said, through a combination of organic growth and also acquisition. So this means that we've had a CAGR of 62% over these years. Important to note that in '23, we did not make any acquisitions. So growth came purely from organic. The second thing which is important to note is that within these numbers, the $38.5 million here, we do not include any revenue post-pilot for two big enterprise customers that we signed in -- one in 2022, one in 2023, CVS and Vets for Pets. So only the pilot revenues are actually added to this graph. Now looking at how this is developed during 2023 in the last final quarter. We started the quarter of Q4 with EUR 32.6 million(sic) [ EUR 34.6 million ] ARR. We recruited EUR 700,000 worth of new customers. And we had an upsell of $1.6 million. This net upsell was primarily driven by Provet cloud user growth and also [ RPU ] growth, which was driven by add-on sales. And then we had a churn of $0.4 million, which is mostly coming from Diarium and somewhat from EasyPractice as well. So we ended Q4 2023 with $36.6 million of ARR and they signed, you can see a difference, which is purely Provet cloud signed not implemented revenue of $2 million to get us to $38.5 million.

Now looking year-over-year. So at the end of Q4 2022, we started at $29.7 million, right? We've recruited a significant number of new customers. This is quite well split between veterinarian and therapy. We also had a very strong net upsell year. Again, primarily driven by Provet cloud. So you see this theme not only in Q4, but also throughout the year, Provet cloud's average revenue per user increased quite a bit given that we've been upselling new add-ons such as the whiteboard, referral portal, Provet pay, right, and also driven by key user growth as our current customers are opening new locations or growing their current locations, thereby leading to additional users coming on to the platform. And we had a churn of $1.5 million. The -- next slide, we can see how this divides between veterinary and therapy. As we can see, is veterinary had a very, very strong growth this year, right? We were able to recruit EUR 1.3 million new customers - well euros-worth of new customers. We were able to get $4.7 million in net upsell. So the very, very strong performance of that upsell. And this reinforces one of our core strategies, which is this enterprise strategy in which we can actually -- as we capture a customer, we continue expanding as they expand their user base. And then we had a very low churn of $0.2 million, which is equivalent to 1.6% churn, which is a spectacular number.

Then on the therapy side, we had slightly slower growth. Obviously, we're focusing mostly on the migration of our customers from Aspit to EasyPractice in Norway and development surrounding that. However, we did have very strong new customer acquisition, and this is the nature of the product-led nature of the EasyPractice product that we acquired and our flagship product in that they can recruit very efficiently lots of new customers. So we've got EUR 1.5 million working new customers in 2023. And we also had a net upsell through a combination of pricing changes, upselling additional add-ons, but also user growth as the end market is also growing. But we had also quite high churn. This is driven by two things. One is -- the primary impact is that, as we had mentioned in previous quarters, we lost our second largest customer for Diarium. The reason for the loss is that the customer was acquired by an enterprise customer, which also had general practice clinics, or doctors/clinics, and they wanted to have one software for both the GPs clinics and also therapy clinics. And Diarium and EasyPractice, we only focus on therapist not GP's, so we cannot provide a unified software for both.

And the second thing, as in previous quarters, right, the great thing about EasyPractice is that they can actually recruit, very cheaply, lots of customers, but that means that quite a few of the customers try it out for a few months and also churn. Right. So what we see is that the churn was $7.8 million for the year. But excluding this one-off from Physios, so we can see a 5.6% churn. Now diving deep a little bit more the churn rate to see the -- how this looks over time, right? You can see that on average, despite the slightly higher trend that we had in 2023, right? Our average churn rate has been around 2.6% over the last 5 years. And although we do believe that targeting smaller customers of EasyPractice will have higher churn due to nature of these businesses going out of business more frequently. We anticipate churn will return to less than 4% in 2024.

Now on the right-hand side, you can see net retention rate is that we have a net retention rate of 113.7%. So it was slightly above what we've had historically, but not meaningfully. And we anticipate net retention to average above 110% in 2024. Now on the profitability side, our profitability improved quite significantly in 2023 as a result of the fact that our revenues grew, our recurring revenues, but we did not actually increase the head count dramatically, right? It was relatively stable as we'll see in later slides. And also, we're starting to see the benefits of migration, right, and efficiencies that come around with migration. And we'll continue to see those as we continue migrating customers over to our flagship products. But as you can see, our EBITDA minus CapEx loss was decreased from EUR 11.8 million to EUR 6.1 million. And our adjusted EBITDA loss decreased from negative $5.4 million to negative $0.7 million. And just to reiterate that our target is to have adjusted EBITDA and CapEx in Q1 2025 be breakeven.

Now we discussed headcount. As you can see, we ended Q4 2022 of around 400 and we're ending 2023 with around 385. So there's been a slight decrease in the headcounts, but over the period relative to last year. Then on the migration, we have made some progress on migration, as you can see from -- in 2023, on the therapy side, we've increased migration. The reason why we see Q4 2023 migration being lower than the previous months is because of this Physios' churn, right? However, we can also see that on the veterinary side, we're continuously migrating more and more of the ARR onto our flagship platform, Provet Cloud. Thank you. Now on to Mari for the financial update.

[Mari Orttenvuori, executive]

Thank you, Charles. So let's take a look at the final quarter numbers in a bit more detail. Our total revenues in the final quarter grew by 20% year-over-year, and that flow is driven by the Provet cloud products as already presented. If calculated on a constant currency basis, growth in total reported revenues would have been 25%. With 36% of our revenues being earned in Norway and 11% in Sweden when calculated on a full-year basis. The weakening of the Norwegian/Swedish kroner has had a really big impact on our reported revenues. Share of recurring revenues in the final quarter was 86%, and that is impacted by higher level of paid development revenues earned during that quarter. So the relative share of recurring revenues is slightly below our full year share, which is at 90%.

Adjusted EBITDA improved from negative EUR 1.1 million to EUR 0.7 million, and adjusted EBITDA margin improved from negative 13% to negative 7%. On recurring revenue, our reported recurring revenues have grown by 19% from EUR 7.4 million to EUR 8.7 million. And on a constant currency basis, the growth would have been 25% as well. In terms of euros, the currency impact on recurring revenues has been over 600,000 on the final quarter and about $2.2 million on a full year basis. So that is a pretty significant impact. In the third quarter, adjusted EBITDA margin was positive, but in the final quarter, we are back at negative 7%. However, on a full year basis, adjusted EBITDA margin improved from negative 18% to negative 2%. So improvement has been really quite remarkable during the year. The full year numbers are included in the appendices to this presentation.

Although there has been some decrease in headcount overall during the year, recruitment activity has a little bit picked up again in the second half of the year. So, our personnel costs have increased slightly during the final quarter. But primarily, the final quarter profitability has been impacted by payroll seasonality and additional spending on marketing and security audits for our products. On cash flow, we've improved our free cash flow by EUR 2.1 million in 2023. This is a good improvement in itself, but it's pivotal to know that majority of our Aspit customers in Norway have, in fact, changed from biannual to monthly invoicing cycle as of the beginning of this year, meaning 2024. And what this really means is that previously, our Aspit customers were invoiced in June and in December and majority of the customer payments were received already in December, for the December invoicing. However, in December 2023, we did not do any invoicing. And as the first invoicing under the new billing schedule was made in January this year. This has had an estimated impact of EUR 3.5 million on our net working capital for 2023. So had we not made this change, our 2023 free cash flow would have been approximately EUR 7.2 million instead of the negative EUR 10.7 million. Likewise, this will have a positive impact on our net working capital this year when compared to 2023.

So our balance sheet remains strong, and cash on the balance sheet remains strong, and withdrawals from the money market funds related to either to the payment of the EasyPractice earnout, $4 million that was paid in January or to the share buyback programs that were completed this year as we finance the share purchases through withdrawals through the money market funds. We now have scalable processes in place, and we are looking to become EBITDA minus CapEx positive by the first quarter of 2025. So, our cash spend was further decrease and will turn into positive. And that allows us to finance our investments in product development or in any potential M&A going forward.

We have EUR 49 million of goodwill on our balance sheet, and there's been no new acquisitions or impairments of goodwill recognized during the year. The EUR 12.6 million intangible assets consists almost entirely of capitalized development expenses where we have recorded additions during the year amounting to EUR 5.2 million and amortizations amounted to EUR 3.2 million on the capitalized development expenses. Equity is strong. During the year, as already mentioned, we completed two share repurchase programs. Those amounted to EUR 2.3 million in total. During the first half of the year, we issued a performance share program that is targeted for the key personnel and the shares that we have acquired have been acquired also for that purpose. The company has no external financing, and we have no material earnout liabilities remaining on our balance sheet and the liabilities consist of operative items such as the [indiscernible] received. The detailed final quarter and full year financials, you can find in the appendices, and we have also issued the second half interim report today, and that can be found on our company webpages. And the consolidated finance statements will be issued on April 12. And our first quarter results will be presented on May 14.

[Charles MacBain, executive]

Thank you, Mari. Now just to conclude, so I think the key points from 2023 and also Q4 and then looking forward to 2024. So in 2024, recurring revenue growth will continue, and we're not expecting any significant increase in headcounts. And thereby, this will drive EBITDA minus CapEx margins improvements. Diving a bit by business unit. On the veterinary business unit, where our focus will be on implementing CVS and Pets at Home in the U.K. The second will be to continue to acquire new customers, both corporate and independents in the U.S., U.K. and Spain. The third is this migration in Norwegian custumors as well as Danish customers over to Provet cloud and in addition to some Finish customers. On the therapy side, we are focusing on migrating Aspit customers over to Easypractice. Scaling the booking portal, which was successfully launched last year in Finland under the domain Nordhealth.fi. And third is to be able to acquire new customers in Finland still on Diarium and in Norway and Denmark on EasyPractice. J

ust reiterating our guidance for 2024, right? So -- and looking at 2023 guidance. So we grew recurring revenue to 21% in 2023 on a constant currency basis, beating our 15% to 20% guidance. We're on track to reach our EBITDA and CapEx breakeven by Q1 2025. And then the guidance for 2024 remains the same for EBITDA minus CapEx, right? And also, we are forecasting a 15% to 20% recurring revenue growth with constant currency. That means that December 2023 constant currency actually. Thank you very much for your time.

[Charles MacBain, executive]

[Operator Instructions] It seems that there's not no questions. So thank you very much, everyone, for your time, and we will connect again for the Q1 2024 results. Thank you.