eEducation Albert AB

STO:ALBERT

Earnings Call Transcript 2023-Q1

[Arta Mandegari, executive]

Thank you very much, and good morning, everyone, and thank you for calling in to our presentation of the interim report for the first quarter of 2023. We're happy to welcome you here today and to share our recent activities and deliveries for the first 3 months of this year.

The agenda for today will be as follows. We still believe it's relevant to introduce you to and to reiterate our vision with Albert and why we exist in the short introduction. This will be followed up with a highlight and summary of the Q1 activities, where we also, this time, will follow up a little bit on earlier communication and how we've been delivering against them. Thereafter, we will dig in a bit deeper into the recent acquisitions and how Albert Group has evolved recently. We will follow that up with Martin, our CFO, presenting the Q3 -- Q1 financials. And at last, we will close with the short summary and key takeaways before we end the presentation with opening up for a Q&A session.

As presenting here today are 3 members from the management team. It's me, Arta Mandegari, Co-Founder and Co-CEO. We also have Salman Eskandari, Co-CEO and the other Co-Founder in the founder duo. And last but not least, we have Martin Dahlgren, our CFO, who will walk you through the financials.

As mentioned, starting the presentation, we still believe it's important to reiterate what we're building here at Albert and why we exist. And we believe the best way of doing this is to explain our vision, which is to give every child in Europe a custom learning experience throughout our products, apps and services. And the way we're doing it is that we, through technology, are eliminating the human element in the learning experience. And doing this, it enables us to offer a quality learning experience at the price affordable for the many and being one of the leading actors in Europe democratizing learning.

We started with the mathematics for consumers, but now we're moving into one of the leading European one-stop shops for learning platforms for kids aged 1 to 16. We offer not only mathematics anymore but also basic programming, English, Swedish reading and writing but also geography, physics and biology. We started as a direct-to-consumer company, but now we have a business to business -- business unit selling to schools, which is now contributing with approximately 50% of the sales and the ARR.

We started in Sweden. We -- but now we're active in 7 core markets. We have Sweden, Norway, Denmark, Poland, Finland and U.K. In the consumer offering, we have helped over 700,000 households and millions of students in our B2B offering. These children have solved almost 80 million exercises in our products. We are an innovative team with around 100 people in the group, all diverse backgrounds where approximately 80% of the staff are working with product or technology. Now let's look a little bit on the numbers. And per Q1 closing, our customer base in the B2B and B2C offering combined generate just above SEK 213 million in annual recurring revenue or ARR. And as we've been communicating before, we're having a laser focus on the cash at hand. And closing quarter 1, we have SEK 116 million cash at hand, and we feel confident delivering the plan to reach profitability without any further capital injections.

Worth to mention is that we, during the quarter, thanks to our B2B segment, actually delivered a positive cash flow. Year-over-year, the ARR grew 84% for the first quarter and whereof 16% are organic growth and 68% are acquired. But looking also quarter-over-quarter, the ARR grew with 38%.

From a net sales perspective, it -- we summed up to SEK 47.5 million, which is a year-over-year growth of 93%, whereof 15% are organic growth and 78% are acquired. Looking quarter-over-quarter, net sales grew with 39%. Important to mention here is that in our B2B business, we have finished our yearly Easter campaign successfully like we did last year. And here, also like the previous year, the new intake of free trials are actually converting to paying subscribers at Easter, and Easter was mid-April, which is in quarter 2. Hence, these subscribers are counted as a subsequent event and are not included in the reported ARR figures for quarter 1.

For all the shareholders who have followed us for a while now probably recognize that it's important for us to build trust and to deliver on the promises we have been giving. Hence, we would like to do a short recap on what we have communicated and how we've been delivering on it recently.

And last quarter, we communicated that we, due to macro and financial market climate, will prioritize profitability and cash. And as you can see in our report, now we're trending very well towards profitability, where we've been, through significant cost savings and focus on operational efficiency, improved our EBITA with 45%. And if we adjust the cost for one-offs for -- related to the acquisitions we did, the improvement actually reaches 69%.

During Q4, we also focused a lot on -- and communicated a lot around the rationale behind our most recent acquisitions, where we communicated that the B2B establishment will decrease the risk and improve the financial profile of the company. And now thanks to the long contracts, low churn and invoicing periods in quarter 1, we generated positive cash flow for the full quarter and have eliminated the need of further capital injections in the longer run. Worth to mention is that the invoicing periods in the B2B segments are not only in quarter 1 but also in quarter 3, which gives a slight seasonality in our business.

Furthermore, in Q4, we also communicated that we will focus a lot on integration and synergies. Now we can say that we are really, really happy and proud to have been able to recruit Jonas Mårtensson and Anne-Louise as the 2 new Co-CEOs starting latest on September 1. Jonas will focus more on the B2C side, while an Anne-Louise will focus more on the B2B side due to their respective competencies. Even though they are formally starting their positions on September 1, they have already been very operational today and have been working really, really hard on -- and successfully with the integrations. Just to give you a flavor, the B2C integration of the Holy Owly is almost done. And on the B2B side, Strawbees, Sumdog and Film & Skola are progressing very well with the -- we've already initiated synergy projects, both on the cost side and also on the sales side.

[Salman Eskandari, executive]

Thank you, Arta. So I will walk through the acquisitions for those that are following the company and have been doing so. It's some repetition from before. But just to explain what the companies are that we acquired, why we acquired them and how they contribute to the overall group mission.

So if we start by going through the members of the Albert family since before we had Albert, Jaramba and Sumdog that we acquired in February 2022, where Sumdog was the only B2B company in the group. Now in this transaction, we added 3 companies, Swedish Film with their platform Film & Skola, Strawbees and Holy Owly and where it's a significant majority on the B2B side when it comes to net sales.

So Film & Skola offer educational movies and feature films through a streaming site. They are present in 65% of the schools in Sweden and also offer a content type that we were lacking in the group since before, so video content -- educational video content.

Strawbees offers educational toys for schools to learn basically hands-on STEM. So using straws, you build up different mechanical objects, and you can also program them to make them move or basically learn mathematics, programming, engineering.

And last but not least, Holy Owly language learning for children aged 3 to 12, mainly in France, offering only English at the time we acquired them but today also Spanish and French.

So as you can see, what is really common across all the group companies is that we target basically the same ages for children. So the user age range is the same. The markets are the same but with different products that complement each other. And this is kind of key to our acquisition strategy. And we will explain a bit more on that in the coming slide. So why did we do acquisitions? Or how -- what is our view on acquisitions in general? It makes sense to explain the ed tech market in general. And it's a lot of text on this slide, so we will just summarize it. But the ed tech market is extremely fragmented. Only in Europe, there are around 1,000 ed tech companies, fantastic entrepreneurs that have built great products, but they built niche products for local markets. So in each market, you can find dozens or hundreds of companies that have one product that they serve on the local market.

And what that basically means is that all of these companies are competing for the same customer. In the B2B segment, they are all targeting the same schools. In the B2C segment, they are all targeting the same parents, which leaves a lot of room for efficiency. So by basically combining multiple products in the same platform, you can, with one sales force or with one marketing department, target both the B2B and B2C segment.

This also applies to the markets that we were already active in. So we had our offerings in the Nordics, in the U.K. But now when we have added more products, we can also utilize the existing sales and distribution and marketing channels that we had on these markets and add more products to it.

From a financial point of view, Arta already went through the major benefits. It diversifies the revenue flows. It reduces the risk because B2B does not require an equal amount of capital to grow. It does not grow equally fast, but it's not capital-intensive. On the other hand, B2C scales very well. And now we get flexibility in basically how we deploy the cash, both short term and long term to have sustainable profitable growth.

Finally, focusing on the green-marked segments. As Arta said, around half of the net sales is coming from B2C, half from B2B. And apart from just the financial benefits, I think it's important to mention that in the end, no matter if it's B2B or B2C, we are targeting the same child and student, the same learner. So they learn in school. They learn at home. And in the long term, we are building an ecosystem where we're connecting students, parents and teachers in the same ecosystem.

B2B has great benefits, does not grow equally fast, but with a very low churn, recurring revenue and also the yearly upfront payments from schools, it has a very positive impact on cash flow and stability in the revenues. On the other hand, complementing it with B2C, we also get the benefits of a highly scalable business model where we can charge quite a lot per user and month.

And with that, I hand over to Martin to go through the financials.

[Martin Dahlgren, executive]

Thank you very much. Good morning, everybody. I will now walk you through the financials in our Q1 report as well as any highlights for the quarter.

Our annual recurring revenue has grown 84% year-over-year between Q1 2022 and Q1 of 2023. The organic growth is 16%, and the rest is tied to the acquired companies during the quarter, which was communicated in December and closed during January. Most of the acquired ARR is tied to the B2B segment. We have also seen a trend shift in Sumdog, which has increased their ARR quarter-over-quarter, which is good to see in the beginning of the year. Overall, we foresee a decrease in the net sales fluctuation with increased share of B2B going forward.

And if we look at our net sales, net sales for the isolated quarter grew from SEK 24.6 million to SEK 47.5 million, which is a growth of 93%, of which 15% is organic and the rest is acquired. The net sales is, therefore, primarily driven by the acquired companies, and most of the increase is tied to the B2B business, both in Sweden as well as abroad. There have been some slight negative effect in the Norwegian crown during the quarter. Based on the seasonality in the B2B business, tied to their yearly subscription, most of the net sales for the year in our acquired B2B businesses are already secured for the full year, which is very pleasing to see.

Here, I just want to highlight the adjusted gross margin as well as our reported EBITA. The adjusted gross margin came down quite a bit during the quarter, which is tied to the new service mix from the acquired businesses, which have slightly more licensed content than our B2C business. I do here, however -- again, I want to reiterate, which was stated in our prospectus, that in mid-Q2 of this year, we will no longer pay any royalties for our Albert Junior products, which is our most popular product. This will, of course, have a positive impact in our adjusted gross margin going forward.

The reported EBITA is negative SEK 10.2 million for the quarter. This is greatly improved by both cost savings in our business as well as a positive contribution from the acquisitions that was completed during the quarter. This is in line with the shift towards profitability that we have stated in previous reports. We have also had a one-off of minus SEK 3.1 million tied to the acquisitions in the quarter. So if we adjust for that, our adjusted EBITA is minus SEK 7.1 million.

Here, we just want to showcase the reported operating result and what is added back to our reported EBITA. Our operating result for the period was minus SEK 22.5 million, and of those, SEK 12.3 million is amortization of acquired intangible assets, such as consumer relations, software, goodwill, et cetera, and are related to the performed acquisition during the quarter as well as previous year.

We have also, during the quarter, have had a positive cash flow from operating activities, which is tied to the seasonality in the acquired B2B businesses, where the majority of their sales are in the first quarter of the year. Our net working capital is also showing a healthy figure, where the B2B segment is receiving upfront payment for yearly plans, and this is a trend that we will see continue going forward. Thank you.

[Arta Mandegari, executive]

We're ending this presentation with some key takeaways that we would like to highlight from this quarter. Firstly, we would like to state that we're delivering a very solid quarter where we take a clear step towards our financial goals, especially from a profitability perspective, where we're improving EBITA significantly. And thanks to the 50-50 split between B2B and B2C and the long contracts, low churn and invoicing periods in our B2B business, we are generating a positive cash flow for the full quarter and have eliminated the need of further capital injections in the long run. Also, we would like to highlight that all integrations are going very well and according to plan. And this is thanks a lot to our new recruited Co-CEOs, Anne-Louise and Jonas.

And with that, we would like to thank you very much for listening into this conf call, and we are open for the Q&A session now.

[Unknown Executive]

Thank you so much for the presentation here. I think we go right ahead and start with the questions.

The first quarter has been marked by strong sales growth. What has contributed to that?

[Arta Mandegari, executive]

Yes. I can take that question. Like Martin said, it's a lot due to the acquired businesses and mainly to our -- from our B2B segment. And like we mentioned in the report, our B2B segment has a bit of a seasonality with 2 major invoicing periods. The first one is here in the quarter 1, and the next one is in quarter 3, which are mainly the periods where the schools actually start after holidays. So this helps the sales growth a lot.

[Unknown Executive]

Your recurring revenue increased by 84%. What will you focus on going forward: organic growth or acquired growth?

[Arta Mandegari, executive]

Well, I mean, looking year-over-year, we will probably see a strong ARR growth throughout the full year, we would like to say. But looking more quarter-over-quarter, it would not be as aggressive growth as -- like we mentioned, we're focusing more on profitability and investing a bit more into the B2B segment, which grows stable but not as fast. And this will probably result in we have a much more focus on the organic side of the business.

[Unknown Executive]

Thanks. You have done a lot of acquisitions recently. How are they performing? And is this according to plan?

[Arta Mandegari, executive]

Yes. Short answer is that all are performing according to plan. But here, we believe it's important to highlight the progress of the integrations. I mean from a business point of view, they're all performing according to budget and delivering what we expected that they will deliver. But from an integration perspective, we believe it's -- we have to say that they're going very smooth. We have fantastic entrepreneurs in those companies. And with the very strong focus and high engagement from Jonas and Anne-Louise, we would like to highlight that integrations are going very well and according to plan.

[Unknown Executive]

How do you view acquisitions in the current market situation? Do you see opportunities? Or do you -- have you taken a more passive approach?

[Salman Eskandari, executive]

Having done 3 acquisitions recently and looking at the current market conditions, the natural answer is that acquisitions do not have the same level of priority now that they had before. However, our fundamental belief in driving growth through both organic and acquisition in the ed tech industry remains. As we explained previously, it's a very fragmented market. We will -- I mean these relationships take time to build. So we will continue to build relationships with entrepreneur to maintain those relationships.

But looking at the current market conditions, our valuation and the importance of keeping the cash at hand, we will not prioritize doing more acquisitions but rather focus on integrating and gaining synergies from the already-done acquisitions.

[Unknown Executive]

What will be the next important milestone in the next coming 12 months?

[Salman Eskandari, executive]

As of now, we appointed Jonas and Anne-Louise as Co-CEOs of the company starting September 1. We have done these 3 relatively large acquisitions during quarter 1. It will be very important to get the new management in place and also to actually start. So now we have done the analysis during quarter 1, how should we form the group, which synergies should we target. And now it will be a matter of actually executing on those and reaping the benefits from the acquisitions that we have done.

[Unknown Executive]

Can you please elaborate a bit on the climate on marketing? Do you see any difference in customer acquisition cost/loan to value? And have you noticed that the price for marketing has gone down during the quarter?

[Arta Mandegari, executive]

Yes, I think we actually elaborated, or we had a hypothesis that we communicated in the quarter 4 that usually, when this kind of financial crisis come up, many of the consumer-heavy companies actually withdraw their marketing budgets. And this usually result in less competition on ad spaces. And this is actually something we've seen during the first quarter. We have had an Easter campaign. It's not shown in the ARR because it's a subsequent event. Like we mentioned, they will convert to paying in quarter 2. But we had a very high intake of new customers at very good KPIs from a customer acquisition cost perspective.

So yes, summarizing it, we are seeing less competition on ad spaces, which drive down prices on the CPM level, and it helps our KPIs in the B2C business.

[Unknown Executive]

Did number of subscribers grow organically quarter-on-quarter in both B2C and B2B?

[Arta Mandegari, executive]

On the B2B side, yes, we -- like Martin mentioned, we have a positive trend in Sumdog, where we're actually growing the business. This is something we have not been successfully -- been able to do previously, but now we're doing that. So that's very positive. We're growing it. On the B2C side, not really because like we mentioned, the high intake of new free trials during the quarter, they will not be converting to paying subscribers until after Easter, which is in quarter 2. So reported subscriber numbers in quarter 1 on the B2C side are not showing growth. And the reason is because they're converting to paying subscribers during quarter 2 instead.

[Unknown Executive]

Thanks. Could you elaborate what kind of efficiency measures you have taken to save costs? And how does this impact your business?

[Salman Eskandari, executive]

Yes. I mean, primarily, if you have been following Albert for a while, you know that the majority of the cost in the P&L has been from marketing, so reducing marketing costs and gaining efficiency in the customer acquisition-oriented metrics has been priority 1 during the quarter.

[Unknown Executive]

If we're looking at your reported numbers, account receivables are up in Q1. Could you elaborate what kind of sales this is relating to? And do you expect a similar kind of sales activities in the future?

[Martin Dahlgren, executive]

Yes. So if we look at the reported figures for Q1, the accounts receivable has gone up quite a bit. And most of the account receivables that are reported for the first quarter are tied to the B2B business, which has the seasonality which we have discussed. So in the future, I would say that the accounts receivables should increase quite a bit from the B2B in Q1 and Q3.

[Unknown Executive]

Could you elaborate a bit on the accrued expenses and deferred income in the balance sheet? What is driving the growth?

[Martin Dahlgren, executive]

Yes, of course. So I would say it's basically similar metric. So the reported accrued expenses are tied to prepaid income basically. So when our B2B business is increasing and that has more yearly subscription, the deferred income of those businesses are increasing basically.

[Unknown Executive]

Thanks. Moving on to the last question here. We talked a little bit early about market spending, but how is market spend trending? And could you provide some color on the planned marketing spend for this year?

[Arta Mandegari, executive]

I mean we don't guide marketing budgets usually. But I think you can draw or all our shareholders could draw the conclusion that when we are having a bit more focus on profitability and cash flow and cash at hand, it naturally means that we don't spend as much money as we've previously been doing in marketing. However, we hope that we can deliver good KPIs on customer levels. The ratio between customer acquisition cost and lifetime value are still performing good in quarter 1, and a lot of this is due to the efficiency measures we're doing, very strict optimization activities we're doing in the organization but also like -- we also -- like we mentioned, that the competition on ad spaces are actually decreasing, which drives down the customer acquisition costs and helps our B2C KPIs.

[Unknown Executive]

Thanks so much for presenting today and answering questions, and I thank all your viewers for your patience regarding the change of the time, and I wish you all a pleasant weekend.

[Arta Mandegari, executive]

Thank you very much.

[Martin Dahlgren, executive]

Thank you very much.

[Salman Eskandari, executive]

Thank you.