Smartcraft ASA

OSE:SMCRT

Earnings Call Transcript 2024-Q1

[Gustav Line, executive]

Good morning, and welcome to the SmartCraft Q1 presentation. My name is Gustav Line, and I'm the CEO of SmartCraft. Today, we'll take you through the operational and financial highlights of the quarter but also talk a bit about the recent M&As that we did at the beginning of this quarter because I think it's quite relevant to understand the rationale behind these. We will, as usual, finish off with the Q&A, and you're more than welcome to ask questions in the tool as we go along.

So just for those who do not know SmartCraft that well, let me give you a brief explanation to what we do and what we are. Basically, the construction industry faced several challenges. And this is especially true for SME construction companies because they have really low margins. And as a matter of fact, they also have really high level of bankruptcies. So if you look at the Norwegian market, for example, 1/3 of all the companies that go bankrupt are from the construction industry. There's also a high level of conflict between the construction company and their customers. And again, looking at the Norwegian market, which I think is quite relevant if you compare it to other markets, 1/3 of all the complaints are related to construction industry and their customers.

We also see a high level of accidents and deaths in the construction industry. And unfortunately, 1/3 of all work-related deaths are related again to the same industry. So it is really a challenge for the society that needs to be dealt with. And that's why also there's an increasing demand for documentation and reporting in order to beat these challenges. So what we do is to help these customers with in theory -- or really 3 things that are really important to them. First of all, we help them to be in control of the people out in the field. So they have an app where they can record the use of hours. They can record and document the work they do. They can take pictures. They can record the materials that they use and so on.

And also, secondly, we helped the construction companies with the buying -- digital buying of materials. So they can get the right prices and the right quality in order to be on budget in their projects. And thirdly, we help them with documentation, which is an increasing demand for documentation on different building projects, and we help them with documentation, both for health and safety and quality.

So this way, we give these businesses good overview and control of the people out in the field and the people in the office and that information flows between these people in a good manner. So this way, they are in control of both revenue and margin. I can create better business.

If you look at the construction industry, it's a very big -- it's one of the largest industries in the world, and we operate in one part of the industry that is less affected than the rest. Because the renovation part of the industry is actually bigger than the new build part of the industry, and is fluctuating less and it's actually growing. This is the part of the industry where SmartCraft's customers are mostly present. So we work with existing buildings, we work with service, maintenance, upgrades and so on, on those buildings. So when you read about the construction industry being really, really challenged, it's a lot about architects and engineers and also the big construction companies that have a main focus on new buildings.

We see another thing that is quite positive for SmartCraft is that due to the high energy prices, we see a lot of demand for energy-efficient buildings. And most of our customers, a majority of our customers are actually electricians and plumbers and they are very necessary in order to make these buildings more efficient. And lastly another thing that we think is very good for this segment and for our demand is that this is an under-digitalized industry where digitalization will happen, and it's really a big demand for our solutions.

So let's move to the Q1 financial highlights. Our annual recurring revenue grew by 16% in the quarter, driven by both strong sales and marketing and also some acquisitions. It grew to NOK 401 million. In the past, we've been reporting adjusted EBITDA margin. This quarter, we wanted to change that because everyone wants us to talk about the cash EBITDA or the adjusted EBITDA minus CapEx. So that's what we've done. And the adjusted EBITDA minus CapEx is actually 33%, which is an increase of 2 percentage points, which shows the scalability of our business, how we have a fairly stable cost base which is good when revenue is increasing. And we saw a stable churn in the quarter, which is also something we're quite happy about.

So if you look at SmartCraft, you'll see that we have a leading position in the Nordics, and we have delivered profitable growth over many, many years. And if you look at our growth from 2019 to till today, you see that we have a 27% CAGR. If you do include the acquisitions that we recently did, you'll see that our revenue, if that were to happen was actually 31% or would be 31% growth over those years. When you look at our margin, you can see that our margin has actually increased, which we're quite proud about given the fact that we've actually done 12 acquisitions or 10 acquisitions over the last years, that has sort of been included in that margin, and they come in with a much lower margin than what SmartCraft has originally. So we are able to buy companies and increase their margin as we grow the business.

And of course, as we acquire and grow organically, we also grow our number of customers, gaining market share. Today, we have 16 offices in Sweden, Norway, Finland and the U.K., and that's a good basis for further growth. Together, we have about 260 employees, including the latest acquisitions that we did in the beginning of this quarter. For us, it's very important to see how we can be very good at marketing and sales and how we can continuously improve our processes. And when we look at what we call brand exposure, meaning how visible we are in the market, you can see that we are 6x more visible in Q1 than we were a year ago. And this creates inbound leads. This and, of course, the sales efforts that we do with our sales teams and create inbound leads, which has grown by 18%. And again, these leads result in meetings that increased by 17%. And when you know that we have a track record of more than 50% conversion from meetings to sales, we think it's very important to keep up that good pace of increased sales meetings.

Last quarters, we've been talking about the importance of being present with solutions for electricians. And that's why we also attended to import fairs in the Nordics for electricians.

So moving to the different segments. In Sweden, we saw an organic revenue growth of 14%, which is actually a 1.5 percentage points increase year-over-year. And we saw an increase of 6 percentage points in the adjusted EBITDA margin as well. And we think that again shows the scalability of our business. One thing that I'm very pleased about is that our biggest solution when it comes to revenue in the group that is Bygglet and they continue to see strong demand from potential customers. So we actually see a more than 100% increase in booked meetings year-over-year for the quarter. And I think if you look at the organic growth, I think that's a result of several things. First of all, we are very targeted in our market towards certain customer groups. But also that we have some very structured sales processes, making sure that we maximize the sales force and that we use really good procedures in order to be efficient in the sales, which actually leads to increased sales velocity, meaning that we spend less time per customer, which is also a good thing. And again, with high meetings to sales conversion, that's a good thing.

Another thing that was successful in the quarter in the Swedish market was our integration with Visma eEkonomi, which also contributed to the strong quarter. In Finland, we still see a challenged new market. We have larger customers in Finland than the rest of the group. And they are more focused towards the new building sector, and that's why we see a negative organic growth because these customers have less construction projects, and that's why they have less revenue or actually resulted in less revenue to SmartCraft.

On the positive side, we see some positive signals. We see revenue from the smaller customers, the ones that are not the 20 largest actually grew by 18% year-over-year for Congrid, which is the biggest solution in Finland. And we also saw a nice increase in the number of incoming of leads of 92% quarter-over-quarter. And revenue pipeline is strong and on the same level as last quarter. We have done what we call a Digimeter survey, which we have done in both Norway and Sweden, and this quarter or Q1, we also did it in Finland, and it's going to be released quite soon in a few weeks' time. But one key takeaway from the survey was that out of the 626 respondents, 63% said that they would expect to maintain or increase their investment in digital tools, and only 2% said that they would decrease. So hopefully, we can see that the market is picking up. And since this is project-based revenue, and we have fairly low churn, we expect the market to -- when -- we expect the revenue to increase in the market terms.

When we look at the Norwegian market, we continue to have a positive development. We have an organic growth of 13% year-over-year. What we've done in Norway, which I think is an important move is that we do more together as a team in Norway. More sales and marketing activities together which has created a strong revenue pipeline, which is at the same level as last quarter. We do, however, see that some of our sales is actually hampered by a similar effect to what we see in Finland, which was to a smaller degree that some of our larger customers actually downgrade their solutions because they have less activity because they are more, a little bit more exposed to the new build market.

We continue to have strong focus on partnerships that has increased a lot over the last quarters. We have signed multiple agreements with existing partners. And also, a nice thing is that we have packaged several of our solutions together into a multi-brand package. So you will actually -- that should enable more cross-sells as well. We do see that churn is decreasing, which is actually similar to Finland, we expect a tailwind of revenue when the market improves.

So that was a bit of a summary from the segments, and let me give the word to Kjartan, who is going to talk about the finances.

[Kjartan Bo, executive]

Good morning. So let's jump straight to our most important metric. We grew ARR in Q1 by 16%, and to a total of NOK 401.5 million. If we disregard acquisitions and currency effects, ARR grew by 12% organically. We do have a good traction in sales. New sales is higher than it was the same period last year. Also, gross upsell is higher than last year. But at the same time, we're hampered by increased downgrades from our existing customers. So churn is also stable and the market is giving mixed signals.

When it comes to the total growth, we grew more than 16% revenue at NOK 209.7 million and we have a stable and high recurring revenue share. We have decreased our CapEx in Q1 compared to last year, which is related to a lot of new projects being in the research phase, which is not capitalizable. And as such, the capitalization is a bit lower. But looking at the margin and profitability, profitability is good. The CapEx affects the EBITDA margin a bit, but looking at adjusted EBITDA minus CapEx margin, that is increasing by 2 percentage points, which also includes a 0.7 percentage point dilution from acquisitions.

Now our financial position and our balance sheet is still very strong. We have very few changes in Q1. Obviously, with the M&As we have done in Q2, more changes will come in Q2. And our balance sheet is now -- still net cash positive, and we hold almost 2% treasury shares. Mind you, of course, with the M&A in May, we spent just less than 200,000 shares on Clixifix. When we're looking at the cash flow for Q1, we are still growing from last year. We are now at an all-time high, NOK 73.5 million in Q1, operating cash flow. It is a small increase from last year, but we see a high increase in tax payments. We paid NOK 7 million more in taxes, which is more a timing effect in Q1 which, of course, affects the growth. The important thing is that we are still generating cash every quarter, and we have a very good cash flow from operations, the whole year through.

Thank you. So Gustav.

[Gustav Line, executive]

So to sum up the Q1 financials, we will continue to stay very close to our customers. That's, I think, very key to our success so far, being very customer-centric and also to continue to work to be even better at sales and marketing, utilizing all the smart people out there to make sure we get better and also see how we can do more sales automation and self-service for our customers, which I think is a great potential that is really untapped for SmartCraft. And we'll continue to be smart on how we spend our costs, both people cost and other costs. to make sure that we are scalable, and we increase our margins.

So we're going to -- we will continue to -- we reiterate our guiding of 15% to 20% organic growth in the medium term, and we expect our margins to increase due to the scalability of our business. So I also see that -- also wanted to say that we are very pleased about the acquisitions we've done recently. The market has been a little bit difficult, in my opinion, in order to make some good acquisitions. With good acquisitions, I mean, good technology, good people and good metrics at a decent price. We think the price expectations have been a little bit too high. That has come down, and I'm very pleased to announce the 2 acquisitions that we have done and also talk a little bit about the rationale for these.

So we acquired Locka 15th of April and Clixifix in the beginning of May. Together, they had an annual recurring revenue of about NOK 55 million and 600 customers. Maybe most importantly, they add great people with a lot of knowledge of the construction industry and parts of the construction industry, which we think is important.

Clixifix opens up the door to a massive market in the U.K. which is actually twice the size of the Nordic market. So it's very exciting to see how we can use Clixifix as a platform into a new market.

So to start with Locka. Locka provides 3D visualization, customer interaction and aftersales service for construction companies and property developers. To build it a little bit simply or try to explain it in a easy way, they provide sales and marketing tool for construction companies for a construction company or property owner to actually be able to visualize what you're going to buy if you want to buy a flat in a tower block. You can choose whether you want this flat or that flat or whether you would like to change some of the interior and you can see it all in 3D, and it's all digital, and you can see the prices and everything.

The company had a growth strategy and of course, being hit by the downturn in that part of the construction industry. They struggled a bit financially and had reduced from 56 employees a year ago to 21 employees today. So it's a slim and lean organization. And we think it's -- we're now at the core of what we're really, really good at. The financials, it's about SEK 37 million, and about 50% of the revenue is annual recurring revenue. We'll see how we can increase that. And the revenue growth in the first 2 months of 2023 is only 3%. But much more importantly, we see a cash EBITDA of about 10% in those 2 months, which is very important for us. And we see some great potential synergies with both HomeRun and Clixifix operating in the same part of the business.

So with that, I want to show you a video so you can actually see a little bit what they do.

[Presentation]

[Gustav Line, executive]

So I hope you got an impression of what Locka can do for SmartCraft and how they interact with their customers.

So let's move to Clixifix. We've been in dialogue with Clixifix for about 6 months. We think it's a great company. They are located outside Newcastle, and they focus on having a SaaS solution, managing defects, complaints and repairs, basically working between the -- they have their main customers as construction companies and property owners. And they basically do similar to Locka, but they handle the defects. So let's say you -- you have bought a solution based on Locka. And then you get the keys and you move into the flat and something goes wrong, the tap is leaking. Well, then you use Clixifix, the solution to contact the construction company, tell them something is not working.

The construction company can digitally actually contact the subcontractor, which might actually be a SmartCraft plumber using one of our solutions. And then all of this happening digitally. So everyone is updated on what's happening. And we think this is a great solution. It's got really good reviews from their customers. And it's actually great technology, and we think they really hit the spot in the market, a very important part of the market.

They have 34 employees, and the revenue was -- the annual recurring revenue was GBP 2.8 million at the end of February, and 85% of that was recurring. The nice thing is they also have nice growth. Of course, they're growing from a fairly small number, but still a 50% revenue growth in 2023 and so far, a 30% growth in the beginning of the year.

They had also put all their funding into growth. And actually, the first quarter of 2024 was the first quarter they turned cash EBITDA profitable.

So we see some great synergies again with HomeRun and Locka, and I'm going to show you a video of Clixifix as well, so you can see a bit of what they do. And what you're going to see now is not a whole of Clixifix but actually solution handling the repairs and the repair van coming and so on. So you can get an idea of what they do.

[Presentation]

[Gustav Line, executive]

That was a taste of Clixifix. And again, we think it's a really nice fit with Locka, Locka being the first part of the process. Clixifix take over when the guarantee and maintenance and repair period continues.

So to summarize, the way we see it is that a lot of software companies that deliver software to the construction industry try to solve sort of parts and bits of the puzzle and to try to fit something into the puzzle. SmartCraft works to actually fulfill the whole picture. And if you look at the slide, and I'll try to take you through it, we have solutions that are specialized for different parts of a property's life cycle.

First of all, if you look at the marketing and sales process, we have Locka I just showed you. And HomeRun is also doing similar things, but they're doing it for -- a lot for pipeline renovation. They're really specialized in that.

And then in the construction phase, we have solutions that are specialized in quality assurance and health and safety. And then we have the guarantee period that we just looked at where Clixifix is a specialist. And then we have other solutions that are really good at the whole property life cycle, like Cordel, who is a great project management tool for plumbers and electricians. We have Bygglet, that's a great project management solution for general SME contractors and so on. So basically, this way, we sort of fill the big puzzles to give you the bigger picture.

So that concluded the presentation, and now let's move to Q&A. Kjartan, please join me.

[Unknown Executive]

Very good. We have several questions from the webcast, and please continue to submit questions during the session.

So first of all, a couple of questions on M&A. Do you see more M&A opportunities outside of the Nordics? Or is it difficult to find suitable candidates.

[Gustav Line, executive]

Well, we're very pleased with the recent acquisition. We're very picky when it comes to M&A. We don't guide on M&A. So we will continue to look outside the Nordics. I think it's quite natural that we look together with Clixifix to see what we can do in the U.K. That will be priority #1 outside the Nordics. But we will also have an open ears and eyes to what's happening in the other countries in the Northwestern Europe.

[Unknown Executive]

On the expansion to U.K., will you be able -- or is it possible to take some of your successful Nordic solutions to that market?

[Gustav Line, executive]

We definitely think so. We think there's a really nice fit with Locka, HomeRun and Clixifix as they're actually addressing exactly the same customers today in 2 geographies with different needs. So we think that's definitely something we're going to look into for a start. But we also think of Clixifix as a platform for further growth for other solutions. It's a little bit early to say which solutions, but definitely, that's part of our thinking.

[Unknown Executive]

A couple of more financial questions. Can you provide some more flavor on the growth in other OpEx, particularly year-on-year? Was there some extraordinary effect? Or -- and what should we expect going forward?

[Kjartan Bo, executive]

Yes. Other OpEx is if you look year-on-year, yes, it is higher, but it also includes acquisitions and organic growth. But if you look quarter-on-quarter, Q1 is actually lower in OpEx than Q4. So we are at a higher level than the year before, which is both organic and inorganic growth.

[Unknown Executive]

How much of your organic ARR growth is from new sales to new customers?

[Kjartan Bo, executive]

As we now in Q1, see an increase in downgrades, the share of our growth that comes from the new customers is higher than before. So of our growth in ARR, roughly 2/3 or 70% is now from new sales and the rest is from existing.

[Unknown Executive]

Another question around the same kind of topic, is the downgrades from existing customers, primarily a challenge in Norway?

[Gustav Line, executive]

No. It's primarily a challenge in Finland, but also a bit of a challenge in Norway.

[Unknown Executive]

All right. On your first slide, you note that margins are tight for your clients, typically the construction industry and the players there. Could you touch on how you navigate the risk reward of pricing your software?

[Gustav Line, executive]

Well, I think it's fair to say that we have a strategy to make sure that our solutions are -- have a very easy to understand pricing model, should be cheap. We should have very few up-front costs, should be very predictable for our customers using our solution at a low cost. And that way, it becomes an operating expense and not an investment for our customers, and I think that's been very important to keep it. And I can't remember, Kjartan, we did some analysis of how much the cost was per customer or for a certain customer group, but it was very low. You member?

[Kjartan Bo, executive]

Yes. And we did analysis of this a couple of years ago. And our take rate from the customer's wallet was 0.7%. So we are absolutely a small OpEx cost for our customers. And our strategy is not to do the aggressive price increases, but we do, of course, do the CPI adjustments every year. And yes, right now customers and the market is quite sensitive to increases. But in the longer term, we absolutely have the potential to increase prices more.

[Gustav Line, executive]

Maybe just to add as well that when you have a solution from SmartCraft, it helps you to increase revenue and decrease cost. So the cost is actually quite low. The cost aspect is not that important. It's more like how much can you increase your revenue. If your people out in the field can actually invoice more of their time and if you can buy material at a better price, that will outbeat the cost of SmartCraft many, many times. Thank you.

[Unknown Executive]

Also, you have improved your brand exposure, which you demonstrated in the presentation. Can you elaborate how -- a little bit more on how you have achieved that without a noticeable increase in expenses?

[Gustav Line, executive]

Yes, I think there are several reasons for that. One of them is that we have 1 marketing team in the group. I think it's now counting close to 15 people, actually working as 1 team using best practices and trying to really get the maximum out of our marketing spend, but also learning what actually really works, which media do we get the best results from, what type of campaigns works the best. What about advertising and social media and so on, how do we do PR and so on. So it's basically, and what do we do when we do -- when we will go to trade fairs, we go together rather than to go as 4, 5 different teams. We save money and we get better results. So it's a combination of a lot of things we do together.

[Unknown Executive]

Thank you. We're nearing the end of the questions so far. So please submit any more if you have that. How will the 2 latest acquisitions affect the operating margins and net profit margin in the short term?

[Kjartan Bo, executive]

The 2 latest acquisitions will not majorly affect the gross margin. When we're looking at the profitability and the EBITDA minus CapEx margin, that will, of course, be diluted. Both acquisitions have quite a low margin. So the dilution will likely be higher in the coming quarters.

[Unknown Executive]

Perfect. And finally, at least so far, any flavor on how Q2 has started?

[Gustav Line, executive]

I think we do get sort of mixed signal from the market. I think like I demonstrated or talked about, we think the Swedish market, what's happening there is quite positive. We work with -- we have -- that's where we have the sort of the biggest SME customer base. In Finland, we still see challenges, but hopefully some good signals, some signals that things are turning a little bit more positive.

In Norway, we have seen an increase in downgrades, which we need to watch very carefully. So it's actually a bit mixed, some positive signals and some negative signals. So it's a bit neutral when it comes to outlook in the short term, I would say.

[Unknown Executive]

And one final question. What products and features are you working on for the time being? Anything you can highlight?

[Gustav Line, executive]

Well, we have talked about our solutions for electricians and how we're going to create a more coherent experience integrating those. That's very important. That's the probably one of our biggest initiatives for 2024.

We're also doing work in other areas. We're doing work in AI to make sure we can be better in customer success and be more efficient. That's a little bit early to show any concrete results. We are launching a solution for tender calculation earlier and most likely this quarter, which I'll be able to talk more about next quarter, which I'm looking forward to, and some other initiatives. But I would say calculation and the initiatives for electricians is probably the 2 biggest ones.

All right. So thank you very much for tuning in. I hope you enjoyed this session. We are very enthusiastic about going forward. We love to be in this business. We think there are great opportunities. And we also super happy to welcome both Locka and Clixifix to the team, and I think it's going to be a very interesting journey ahead. So thanks a lot for joining.