BYGGFAKTA GROUP Nordic HoldCo AB

STO:BFG

Earnings Call Transcript 2023-Q2

[Dario Aganovic, executive]

Good morning, everybody, and welcome to Byggfakta Group's Presentation of Second Quarter 2023 Results. My name is Dario Aganovic, and I'm a Group Executive of Byggfakta. Today, I will be presenting the report together with Johnny Engman, Group CFO for Byggfakta. So the agenda that follows today, I will, as usual, start with the company overview for those of you that are new to the company, for those of you that want to refresh your knowledge about what we do.

Then I'm going to move into highlights of the quarter, both financial and operational, and then Johnny will do a deep dive on the financials. And after that, we are going to concluded with the Q&A.

So a Byggfakta, who are we? So we like to see ourselves being at the core of the construction ecosystem. In the construction ecosystem, all the construction companies are working around the projects. Every piece, be it the environment, be it a house, be it infrastructure, be it anything that is built out there, it's built through a project. It starts as an idea. It moves then into a design phase then design moves into more detailed specifications.

Those specifications are then handed over to construction companies who are then -- there is a general contractor who's going appoint the subcontractors, then buying building materials and then finally building up, building up whatever is built and it's put in operation.

Throughout this whole period or from idea until the building is in operation, there are business transactions ongoing. There are tenders out there. People are doing deals with each other. And there are lots of players that are engaged throughout this -- any construction project that can range from months to several years. And these stakeholders that participating in the project, there're many of them. It's property owners, typically property owners starts with the need, with some type of idea. We have the designers, engineers, technical consultants, architects, of course, constructors, manufacturers, subcontractors, property managers, also, government, the local authorities that are reviewing and approving applications. There are many different players here who are, throughout the project, utilizing data and generating data, next step in the animation.

So this data that is then created and used throughout the process, it is the data about the project itself, what kind of project this is, when does it start? When does it end? Who is participating? It can be data about the standards and regulations that is needed to do specifications, for instance. It can be the product information about the building material that is included and all this data is needed, it's used and is generated.

And this data is used to generate insights. These insights can be, for instance, if you have data about the project, it can be used as a sales lead for anybody that is trying to sell anything to a project. So data about the project, about who is the main contractor can be used by subcontractor candidates to pitch on a project.

And then these insights are created by you viewing and manipulating the data through use of software -- of software. So there are different types of software here that can be used, specification softwares, project softwares, procurement softwares. So what we do at Byggfakta, we are generating the data and utilizing our proprietary software to give insights to the players throughout the construction ecosystem so that they can do a better business.

Next slide, please. So our offering is -- covers several product segments here. We have project information, which is solutions, both data and software, that are covering construction projects. The information about the lots of projects on the market stock and what is it, who are the players, their contact information to different players, contact information to property owners to general contractors, subcontractors, consultants and so on.

And this data is continuously updated. And this data is then used by salespeople to identify potential business opportunities and to contact right people to get in touch with them and to sell whatever they are selling, any type of service and any type of building material or anything that the construction project might need.

And this is a pretty -- I would say, pretty unique proposition. And in this particular industry, for salespeople to actually have information at hand who is the buyer, what do they need and have it at exactly the right time. So this is really gold for salespeople.

Next area here is specification. Specification is the split of software that is used by architects and engineering when they are specifying a building project. And specifications of building projects, they have to be done in accordance with standards and regulations that are continuously evolving and that are rather complex in their nature.

So the architect engineers that are using our software, they have a tool at their hand that is helping them to define specifications that are to the right level of detail and that are in accordance with all applicable regulations, that are following the best practice guidelines that are out there in the market.

Product information is next. In simplest words, product information is a product catalog where building material manufacturers are publishing the information about the products that they sell, for instance, windows or floors or ceiling materials. They publish it there, marketing collaterals, specifications in for 2D models, 3D model, beam objects. They put anything there that the architects are then using when they are doing their specification when they're specifying the building.

Fourth area is e-tendering, and e-tender is exactly as it sound. It is an online platform for executing the deals actually. The main contractors, for instance, they can tender -- or property owners, they can tender anybody that wants to do business with them can do it on our platform. And we're also having a simplest form on immediate tendering. We have a tender notification service that people are subscribing to getting notification about when tender is out there so that actually can search for it.

And then finally, the fifth area, which we are now from this quarter report first time presenting as a separate area is the market analysis. And the reason why is it up now is because of the acquisition that we have done earlier this year, our forecast group and that acquisition has given us enough size, enough substance for this area to become 1 of our key product segments.

And here, it is the market analysis from macro down to micro analysis that is done in a stringent statistical way, and it's used -- and this is data used by anybody who wants to understand construction market in the markets that we are covering. So these are our 5 areas.

Next slide, please. And in these 5 areas, we are covering several different territories. And in territories that we are covering, we are very -- we have a very strong position. Europe, that's our -- the market where Byggfakta Group started. We have a presence today in 12 European markets, and in the markets where we are present, we are holding leading position. We also hold leading position in Australia and New Zealand, and we have a presence in several Southeast Asian markets. And there, we have a strong presence in the U.S. as well. There, we are #3 currently. We are growing today. We have a turnover of approximately about USD 20 million, and we are continuously growing through both organic growth and to acquisition there and our ambitions. In the U.S. are high because we see also U.S. as a very strong growth market where we also are seeing a really good margin development.

So these strong positions here are fueled by underlying trends that are in our favor. We see across the markets we are present powerful tailwinds that are driving the digital organization of construction sector like if everything else in society. We also see a large and addressable -- expanding and addressable market, which is basically driven to the changes in the society, both In our growth of population it is the changes in the commercial property sector.

We have climate change that are driving a need for refitting of buildings and infrastructure. And there is also a focus on ESG that is accelerating change where we have change -- a lot of changes in market rules or regulations across regions, which are also driving digitalization, especially the need for specification and support solutions.

So we are in a very good position, strong position and the underlying trends that are in our favor.

Next slide, please. Today, we have about 50,000 customers that we are serving. And in our databases, we have more than 1.3 million active projects at this very moment. So you can imagine each of these projects is really a marketplace. It is a potential for business for many different companies.

Anybody that wants to sell to any of these 1.3 million active projects who're subscribing to our databases to our subscription service, and we have about 85% of our turnover is coming from subscriptions to our databases. So they subscribe to these projects. They can get all the knowledge about these projects. And our researchers that are creating the information are continuously researching this 1.3 million active projects.

We have about 700 researchers who are calling on these projects. They are calling stakeholders to be in these projects to update the status of the project. And every time they call, they are trained to ask, okay, what more is cooking, what more is happening. And through that question, I get the knowledge about the new projects that are not yet initiated. So these projects are continuously added.

So there is a powerful network effect here, where we to update of the current projects are continuously generating new bundle of projects. And this is basically the data for these projects, both active projects and the historical, SEK 20 million, SEK 25 million project we have in our databases, it's nothing that can be found anywhere else. It is our data. It is not accrual then found something that is something that we created.

So we see with a great optimism, advancement of AI technologies, for instance, we can utilize to infer unique analytics from our proprietary data that any -- that nobody else can really do.

We can do that because we have a knowledge. We have -- we are very strong as an organization. We have 2,000 employees around the world, about 300 of these employees are in our tech team, where about most of them are developers, working with wide range of projects. We have been recently working quite a lot with the AI development in our software suite. We have, as I mentioned, about 700 researches and we have huge sales force. So it's continuous calling and getting new subscribers to our services. Today, we are operating in 26 countries and counting.

Next slide, please. To this structure to our position, we have created significant economic value. Our EBITDA is continuously growing from quarter-to-quarter as you can see, and our ARR is growing tremendously. We had, in the last quarter, we brought -- we broke SEK 2 billion and now this -- our ARR continues to grow. Our revenue is split.

If you look at the split here on the left-hand side, most of -- or the largest area that we are covering in the project information, so half -- almost half of our turnover. And then we have our product formation spec e-tendering inside all of them the growing as well.

And our revenue by geography, Nordics is our largest market followed by U.K. and international, and international here being basically Canada, continental Europe, third largest market; and then Asia Pacific and the U.S. as the fourth, and we grow in all our markets in the split.

Next slide, please. So what has happened during the last quarter. So here, we can see some of the things that we are really, really happy about is that our net sales has increased, and our ARR is now over SEK 2.1 billion. Now we have a business model that has been in operations in 1936. We've been around since 1936, -- it's well program model be having really good growth in our business model.

There are not many SaaS companies out there that are founded in 1936 and have an ARR of the SEK 2.1 billion. So we are really proud about that.

Our adjusted EBITDA is almost SEK 200 million in this quarter, growing again also compared to the last year. And what we are very, very happy to see that organic here or growth is at 7.3%, continuously growing, and we have seen also accelerated ARR development in Australia and Nordics. And those of you who have been following us now for a while, remember that we have had some temporary challenges in these markets previously. Now we see really good development in ARR there.

On operational side, we see that our demand of our subscription services remains really strong. We have been claiming, and it is -- I would say, it is proven in our performance up until now is that our subscription services has not really dependent on the general economic situation. So when there are bad times for construction industry, we also can see some increase in demand for subscription services. We see that our net retention rate continues to increase, and we also see a pickup in the new sales performance in subscriptions.

Where we see a weaker demand is in our direct sales business, and in our direct sales business, that's basically non-subscription services, like consulting services, like advertising, like special reports, for instance. These are of more discretionary nature, and we typically see when the economy goes down, a temporary downturn in direct sales, and we see it also here and it has had negative impact of both revenue growth and EBITDA delivery in the quarter. However, I would like to underline that our focus on subscription services, which is more than 85% -- which is about 85% of our turnover, there is more impact from the general economic conditions on it. We have a continues strong growth there.

We are making continuous investments in our sales organization. We have done that across the board and especially in Australia and Nordics, which is now paying off. We can see -- clearly see it in our results. And the integration of newly acquired units like 4CastGroup that I mentioned, like the investments that we have done in the U.S., it is developing according to plan.

So this is what has happened during the second quarter this year.

So now let's move into next phase of this presentation, which is a deep dive on the financials. And I will be handing over now to Johnny.

[Johnny Engman, executive]

Yes. Good morning, everyone. So it is a solid quarter. As you can see, we are growing both our net sales with 15.6%, of course, a lot coming from acquired units and acquisitions, but also there is an underlying reported organic growth of 2.9%. And it's -- for those of you that follow us, it's quite a lot weaker than our ARR development. So we can see a very strong trend in the subscription part of the business, the 85% of our revenue, but it has been a tough quarter on the non-subscription services, as Dario mentioned.

There we see a tendency above some hesitation from our client base on advertising, in, for example, our construction magazines, attending events in some of the markets and then this discretionary one-off spend. So it's been a particularly tough quarter on that business. That is why the reported net sales looks weaker in this quarter. Normally, that bounces back, right?

You see that saving come in a couple of quarters maybe over a quarter, and then they start spending again behind our magazines and events and then buying the one-off services we were tendering process. That has been a rough quarter. It's primarily seen in the Nordic region. For that, where you also feel the -- maybe the slowdown of the construction market the most. We are a global company today, and we don't see that tendency, for example, in the U.K. or U.S.. It's mostly visible in the Nordic segment, which I'll come to later.

So that is why there is a difference in this quarter between ARR growth and reported growth. And we're very happy to see that our ARR is increasing strongly. It's up with SEK 150 million in 1 quarter. So we are continuously developing our subscription base in this business, but then also an increased momentum on the ARR growth. We are up to 7.3%. If you remember, last quarter, we were around 6%. Then this is a rolling 12 basis, so it's only 3 months added and 3 months deducted. So the performance in the quarter is, of course, quite strong on the subscription business.

Our retention remains very strong. We're reporting 85.1%. The last quarter a year ago is not adjusted for the acquisition. So you can't really compare to the 85.9%. I'll come to that on two slides from now, you will see a like-for-like comparison, and we have a nice pickup in retention. We are continuously improving our retention on the client base in accordance with our new forever problems, right? We want to take care of our clients and who we see that actually having effect across all markets.

And then those of you who are that should be worried about the impact of a slower construction market, we see nothing on that when we see the retention of the client base and the subscription services going up and up quarter by quarter.

The profitability for the quarter on the total group was SEK 198 million, slightly better than in Q1. But as we have said, when we invest behind the sales forces, the first thing that happens is you take on a cost base, which is seen then in the EBITDA for a couple of quarters, and then you start seeing the ARR pickup, which we see now. It's accelerated in the quarter. And then that ARR falls through the reported revenue and then you see the EBITDA momentum coming through a couple of quarters later. So we're quite happy now that we see the strong effect on accelerated ARR, and therefore, we are quite confident that the EBITDA will gradually pick up and that is [ 1/12 ] per months added to our revenue in the coming months and quarters. So it is a very good indicator that we have a good future ahead of us.

We have some items affecting comparability, which I'll cover. And cash flow was according to expectations. It's a good cash flow in the quarter. Those of you that follow us, again, know that the strongest cash flow was in Q4 and Q1, and Q2 and Q3 is slightly lower. So that is the seasonality of the business, but SEK 111 million is at what we expected for the quarter.

We are increasing our net debt-to-EBITDA ratio. We are continuously acquiring companies. One acquisition in the U.S. closed in the quarter. We bought out a minority in our Swedish healthier business. And so we have spent quite a lot of cash in this quarter and also previous quarters. On the other hand, this number is not a pro forma number. So if we would actually report pro forma, it is a bit lower than what we have in the report.

And as you can see, we have spent almost SEK 1 billion in the last 12 months on acquiring companies. It's quite a good market to be active on M&A. And we see a good chance of getting exclusive in processes early. We see valuations being at reasonable levels. It's quite a good environment for strengthening our footprint through these small and midsized acquisitions. So that's the top level on the quarter, and we can move on forward.

And here, you're starting to see the ARR growth accelerated. Total growth was 22% in the quarter, 7.3% of that is organic. Normally, when I look at this bridge, I look at the difference between the new sales number and the net churn. And you can see we are now SEK 130 million positive in that delta basically. And that is clear that we see a good new sales pickup, especially in Australia and New Zealand, for example, which had a really strong quarter on new sales activity. And again, it's very comforting to see that the investments we are making in strengthening the sales force, which costs money initially, is then clearly paying off in increased subscription momentum. We also see some of that in the Nordic region, maybe not as strong as seen in Australia and New Zealand, but we are starting to see that region also accelerating the subscription momentum.

We will get some help from acquisitions and FX, of course, but overall, a very good ARR trend and this is 84% of our revenue base, so the most important area to keep track on.

If we move on, and here is the net retention. The reported one is not pro forma for the acquired units. That's why we have it at the bottom part of the page, which is really the like-for-like development. And as you can see, we have been very stable over the last couple of quarters, cruising around the 85% mark on like-for-like. And between Q1 and Q2, now we picked up [ 7 ] percentage points, also strong, the best we have reported for like-for-like, 85.7% and a year ago on a like-for-like, we had 84%. So we're keeping the 1% plus improvement trend we have seen for the last years. and slightly better than the 1 percentage point per year. We're trying to accelerate that. We have some internal targets to drive that even stronger with the strategy we are putting in place. But it's very good to see that the demand for the subscription product is holding very, very steady and increasing.

So we -- again, people are worried that we will see an effect here. We see nothing on that. And now we have reported, since we IPO-ed, 7 quarters of increased retention on the subscription base.

Next one, please. So if we dig into the segments then on the Construction Solutions, we start with the Nordic segment. And the positive part is bullet #3, right, that the organic ARR is picking up, and it's driven through the effect of the investments in the sales force. We're starting to see that paying off. That the ARR growth is increasing to a -- it's not 10%, but it's up to 5.7%, so we can see that starting to move in the right direction.

The weaker point in the region is that the reported sales growth was only 1.7%. It has been a really tough quarter on the non-subscription services in the Nordic region, where -- which then hits immediately reported sales, and it also hits EBITDA because we cannot compensate on the cost base for a weak non-subscription quarter.

And so we still have the cost where, therefore, the EBITDA is, is weaker than we thought the impact, if you want to run numbers, it's probably around the SEK 10 million on EBITDA and revenue from this weak quarter on non-subscription business.

However, normally that turns quite quickly in a quarter or 2, and we are quite low on the non-subscription services at the moment. So I would view it as more upside than the downside going forward that will bounce back.

So that was the Nordic region. If we move to U.K., well, it is a strong region. It has been very strong for the last quarters and the last years. It's just steaming ahead with now a 9.4% organic ARR growth. The margin is strong, as you can see. It's steady at 42.8% in the quarter, same level or slightly improved versus last year. SEK 7 million of improved absolute EBITDA. It's moving very steady and very nicely with both revenue and margin.

Here, we also see a small effect of some one-off deals that was very strong last year in Q2, which didn't bounce in the quarter this year. So there is also a small effect of lower non-subscription revenue here, therefore, the reported net sales is 6.1%. It was a very big deal we had luck with last year, which didn't come this year. It might come in Q3 or Q4, but -- and that's the temporary effect of that [ Byggfakta ].

If we move to the 2 other regions. Continental Europe is also some moving according to expectations. The ARR is keeping up at a good speed of about 8.8% organic. It was even stronger a couple of quarters ago, but we're happy to keep the momentum around the 9% mark. We are also there seeing the same effect as we've talked about, weaker net sales reported. The ARR picked up in end of last year, so it hasn't fully filtered through to net sales reported. We will gradually do so, so I would expect that net sales growth to gradually pick up over the year and then be closer to the ARR development.

This is a region where we're also investing in some increased activity. We are rolling out some of the product information services to Portugal. For example, we are investing behind the integrations in Spain through the acquired businesses of Nexus and Construdata. Spain has also had an election during this quarter and then the spring, which is not great for the buyer business versus the public segment. So it's been a slightly tougher quarter in that -- a core part of this business continues to deliver a solid EBITDA and a solid margin, good retention levels.

If we turn then to APAC and U.S., here, we clearly see the pickup in ARR. On a rolling 12, we are now at almost 4%. If you remember, a couple of quarters ago, it's been weaker. And adding 3 months, deducting 3 months, you can really see the impact of the strong delivery. It's growing quite nicely with over 2 percentage points up just because of 1 good quarter.

EBITDA is following, and we're still investing in these markets, in the U.S., in particular, but also in the sales force, as we talked about in Australia. So the margin hasn't fully filtered through yet, but it remains solid at 22%, which is quite a lot up from a year ago where we had 18.5%. So we're starting to see also the margin coming through in the APAC and U.S. business. And U.S. in particular, is strong on both growth and margin.

We're very happy about the performance we see from the U.S. operations and the integration of the 3 acquired businesses. It's moving very nicely according to our plan.

Then, of course, we have the last segment, which is the nonconstruction activities, which is the health care and media segment. It's not much left of the media. As you know, we divested a big portion of our niche media operations, our hunting and fishing magazines in Sweden. So it's, I would say, almost 90% health care now.

It's actually doing really strong on the ARR or subscription part of that health care business, where we have seen the ARR pick up to a very solid almost 10% now in the second quarter. It picked up nicely in Q1, but it picked up even further in the second quarter. And it's driven by very good new sales level on the subscription business, but also a retention of the existing client base, which is picking up to kind of the 90%, 95% level.

So that subscription part is doing exceptionally well at the moment, while the organic is slightly weaker because this is direct or non-subscription portion, which is doing okay, but not as strong as the subscription part of the business.

So we -- and this is probably the most positive surprise on the ARR side in this little health care business, which is exceptionally well at the moment.

If we turn to the capital side, well, I would say no surprises on the -- either the working capital or the CapEx level. We are continuously expanding our capitalized development, which is the red part of the middle of the graph there. It's cruising around the expected level some -- between SEK 30 million and SEK 35 million per quarter. As we have said, we would intend to keep that absolute level of spend behind our software platforms and that we have done now for a number of quarters. As you can see, it's quite stable.

There is an increase, as you know, in the tangible CapEx. We are now finalizing the construction of the new office in Ljusdal, which will host 200 staff, more or less. We have built that and we'll own that building, and so it will be another -- 1 more quarter before the building is in final operations. We actually can -- we're moving in, in November in the fall. So there is 1 more quarter of higher tangible spend and then that will move down to a very low level following that.

Yes, leasing, we have reversed the bookings we did in Q1. So therefore, the leasing in the quarter looks negative, but it is an adjustment versus the Q1 high booking we had for when we renewed office leases in Portugal and Indonesia, in particular. So according to expectations on the CapEx side.

If we look at the leverage, it is increasing, as I said, because we see lots of good opportunities to strengthen our footprint, which we have done gradually over the years. As you know, we have bought 3 companies in the U.S.. And as Dario mentioned, we're now have a revenue around $20 million. We see further opportunities in the U.S. and really want to accelerate our presence in the U.S., both organically and potentially through further acquisitions of small and midsized companies to really build that U.S. footprint and platform.

And we also had a small buyout in HelpHero during the quarter. And the Ljusdal office. We have bought back shares. So we spent quite a lot of capital. The positive side with our company is that we have a very strong underlying cash flow. So we see the deleveraging potential clearly quarter-by-quarter. We are not worried ourselves about this level.

Even though some of you on the call might think this is high, we are quite comfortable with the cash flow profile we see the predictability of the business, the retention levels increasing, the ARR momentum, which we know will filter through to good revenue performance in the coming months. So this is nothing that worries us internally, but then therefore, we are executing on add-on acquisitions because we believe those will add a lot of value to this company over time.

We're also hedged on the interest side, so we won't see any impact of that before the end of this year, depending on how we renew those hedges. So that was the leverage. And we are, again, always ending up with our financial targets, which remain the same, 10% organic growth, 5% to 15% through acquisitions, which we have met now. We have acquired enough companies to be in that range or above the midpoint of that range. We also aim to have a 40% EBITDA margin.

We see that margin level in some of the markets. But it will take some time as you know to get that to filter through. When we invest, we drive down margin for a couple of quarters and then we're starting to see the margin pick up which you can actually see now in Australia, for example, we have invested for a couple of quarters and then you see the margin starting to pick up in the business.

Our leverage target is 3%. So we have a bit to go to get down to [ 3.0 ] and -- but we can go to [ 4, 4.25 ]. So there's no risk on the upside. But as long as we see good acquisition opportunities, we like to execute on those, and that is more important than deleveraging at the moment. And we have no dividends proposed by the AGM in May. So that was the overview of the financials. And then as a final reminder, we have invited to a Capital Markets Day.

And for those of you that can attend, it will be on the 4th of October. Erik is managing invites, and you probably have got it. If you haven't, that was no. It will be held in Stockholm for a half a day. And so we are really looking forward to meet you on our first Capital Markets Day as a listed company.

That was the end of the formal presentation, and we can now open up for Q&A.

[Operator]

[Operator Instructions] The next question comes from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

Perhaps, Dario, you can comment just a bit about to what extent you think the visibility, today has -- call it, how that has changed versus where we were in relation to 1 or 2 quarters ago? What gives you confidence for the rest of the year to, I mean, really not only have that improved ARR profile, accelerated organic net sales growth, but also improving the ARR growth from where it was in Q2?

[Dario Aganovic, executive]

Yes. So we feel quite confident about the market, how it looks like. We have been continuously communicating that we do not really see dependence in our business model and what is happening out in the general economy. You can see it, for instance, if you look at the -- I know that many of you and many of us as well as, I am Swedish and I am getting impacted by the very, very dark news in the Swedish press about the development or construction market. We think it's a doomsday, and we really can't see that. You can see in the economy like U.K. economy, for instance, that it -- it is, as darkest industry this morning, call it, Sick Man of Europe. And I mean in the U.K. right now, general sentiment in the society is pretty negative, but still, we are growing there, like you can see it in our figures.

And there is nothing in the current development in what I see in our sales of subscriptions that would suggest any downturn in the way we are performing. So given the visibility we have, given the retention rates that are increasing, continues as you've seen in numbers, our -- we feel pretty optimistic about future.

[Joachim Gunell, analyst]

And perhaps, John, if you could comment a bit about the non-subscription business, which, I mean, obviously resulted in almost a 2 percentage point headwind on the group margins here in Q2. And I mean, if that is the best way to look at it as it also the very short term going forward. While I also note that capitalized work on own account was slightly higher here in the quarter, is that the best way to think about the run rate going forward as well?

[Johnny Engman, executive]

Well, if I start with the non-subscription services, yes, it has been a tough quarter on that non-subscription revenue side, and most of it, as I said, comes from Nordic region, where we see some sort of hesitancy to spend behind those services, and it's also the biggest portion of the revenue from the -- in the Nordic region compared to the other regions. As you know, the non-subscription part in the Nordics is around 15%, 20%. In the other regions, it's 5%, 10%. So of course, there is where we would see more of the effect. And it is mix of many different things. It's some events, some advertising in Big Bang, the construction magazine we own, which is the leading construction magazine in Sweden.

There is some of these helping our clients to book meetings, invite for events. Last year, it was no big fair, for example, which drove the non-subscription business. So there is a few of the market spend. We will see a better one-off effect. And if you have a weak quarter on direct revenue, you also see that filtering through to EBITDA in the region and in the group. So yes, you are correct. It impacts both reported net sales growth and reported EBITDA and it has quite a big impact on the margin.

And as I said, there're also a bit of effect in other parts or other segments, a little bit in Europe, a little bit in U.K., a little bit in Australia, which I wouldn't view as to the same that there's a hesitancy to spend. It's more of a bad luck nature, right? For example, in the U.K., a really good quarter last year with a few big deals. And then this quarter, missed those few big deals on the non-subscription side. Australia, Asia is more driven by that last year in Q2. It opened up after COVID. It was much later opening of the markets and the events business in those parts of the worlds was really heavy loaded with a lot of events in Q2 in '22. And this year, we have spread that events business more evenly over the year and also into the autumn. So it was a bit of a peak.

We also had an earn-out in the small consulting business we own in Australia, the Specification Consulting. So they had a very good revenue last Q1 and Q2 in '22 and then this year, it's something weaker. It's really coming back. But -- so you have these kind of one-off events in the other markets, which also hit with a couple of million here and there, and it hits some revenue and it hits on EBITDA. So that is a weak quarter because of that.

The positive side when it calms down, it can also bumps down. It can also bump up in the same way and then we get the tailwind in the same way in the quarter in the future, right? Because if you get a SEK 10 million positive on that non-subscription business, it would drive growth and will also drive EBITDA in that quarter because it falls down all the way to profitability.

On the second part of the...

[Joachim Gunell, analyst]

Yes, the second part of the...

[Johnny Engman, executive]

No. Well, we are investing behind the software platforms gradually can move a couple of million quarter-to-quarter. We have also acquired a few businesses, as you know, in the U.S. in particular and also forces group, and there is a bit of spend in the acquired businesses, so that it moves up in absolute terms because we are becoming a bigger business with more companies in the group.

I wouldn't be surprised, but therefore, the indication is probably the current quarter, given that it includes the spend in the acquired units, is a better indication than if you look a year ago, for example, which didn't include acquired companies.

[Joachim Gunell, analyst]

Great. And then just finally, if you can just shortly comment also a bit whether you think there is room for, call it, more portfolio pruning to say, only own the core strategic asset with regards to, yes, the recent sell-down in Jakt and Fiskejournalen.

[Dario Aganovic, executive]

Yes. So it -- we are action -- your loss connection. Okay. All right. Yes, I can take it. So -- we do have -- as you see how we are presenting our business in these 5 core product segments, which are all oriented towards the construction industry. And we are construction tech player. However, we have a health care and media business.

We've been pruning as you've seen, the media side, which was not construction related. The construction-related media is still a part of our core business. We do have a health care business as well. And as Johnny was telling you when he was present in this segment, it is performing very well. We like our business, and it started as same type of business as we have in project information. In construction, it is the -- which we now call like lead the service, it is health care or health care business, it's a lead service for a health care segment.

It is not a part of our core construction offering. However, it is performing well. It is contributing to the group result. And we -- since we like the business and it's a strong business, we're continuing to back that business. and continue to invest in it. What happens down the road, who knows? That's -- so it is with everything we are maintaining our focus on the construction sector, while, at the same time, being a good owner for health care business.

[Johnny Engman, executive]

If I can answer that came with the divestment of the hunting and fishing magazines and an associated kind of online business, which was SEK 50 million roughly. Now in the first half of the year, there's only by SEK 15 million of our revenue remaining on our niche media operations, which gradually we might also to prune, as you say. And so the that segment would become health care only.

And we are also pruning some in the main construction portfolio. There are some, for example, construction-related magazines, which we have gradually phased out. We have done a little bit of that in Norway. We're doing a little bit in Finland, which we don't feel is close enough to the core offering.

So that has an impact also on the reported growth in the Nordic region because we are gradually divesting or moving out of those noncore construction magazines as well, which are reported as part of the Construction Solutions segment.

We will not -- [ Big Bang Ads ] for example, is very close to the core, and that is something which adds a lot of marketing power behind our presence. So we wouldn't prove those type of things, but there are some kind of further away magazines as well in the construction solutions segment. Quite small, but still, we are not still generating that much revenue in the quarter, so it can be seen on the organic reported side.

[Operator]

The next question comes from Nick Dempsey from Barclays.

[Nick Dempsey, analyst]

So first of all, just on the 31% adjusted EBITDA margin in the quarter, you've got a 40% target for the medium term. Of course, you're investing in the sales force right now, and you hope to see some benefits from that. But you also mentioned investing in AI. Won't there always be something next to invest in? And won't it be really difficult to get all the way up from 31% to 40% EBITDA margin while continuing to invest appropriately?

Question -- yes, just on the 16% of revenues that are not subscription, do you have any confidence that those won't get worse? So in other words, the market is pretty focused on group organic revenue growth. Of course, we can hope for subscription to get better because of the ARR dynamic we've seen already. But is there a risk that everything else gets worth so we don't see any improvement in organic in the second half? How much confidence can we have that it won't get worse?

[Dario Aganovic, executive]

Yes. So first, on the margin, we are maintaining our target of 40%. We believe in it, and we can see in many of our markets that we are operating on those levels, the level side and that. So we see that our business model really can carry. We can generate those margins. So we are working towards that. And on the investment side, when you look at it on the sales force side, we -- it is -- the future of the model is such you're investing in a sales force, it takes couple of months for new sales people to become effective and then it generates. It generates revenues and the scalability of the model drives the margin up.

And we have seen that you can clearly see it if you follow our segment reporting how it goes in those segments where we have done that. When it comes to investments, as you say, we will always need to invest in something. And on the sales force, it is really -- you get -- there are not many quarters between investment and generation of results and generation of superior returns.

When it comes to our tech investment, what one should keep in mind is how we have come about as a group. We have come about as a group through acquisitions. And each of the units that we are acquiring, it has its own tech team, a small team, a large team. We have historically not been doing much on integrating across the portfolio, neither on the product side, nor on the R&D operations side.

We have changed that. We have started working on the merging product portfolio. We have hired our Group Chief Product Officer, who is starting in August. And we see lots of opportunities to generate synergies in R&D operations because we see lots of solutions that are overlapping that when it comes to back end, there is no reason why it should be different solutions there.

So when you merge those solutions as products, both on the front end and technically, on the back end, it gives you a possibility to reduce maintenance work, and it gives you a possibility to get teams to work more together. It uses the possibility also to in source more of the work. For instance, if we are utilized -- if our developers in the U.K. are utilizing external partner in Poland or Czech Republic or wherever as a temporary capacity increase, they can now utilize resources from all the global, for instance, in Indonesia to do that type of work.

And that would also reduce costs. So what we see is that when we are working with our product portfolio and our R&D operations footprint, it will not increase the need for investments in tech now when we are moving into more development within AI. So we are maintaining the same CapEx levels going forward while embarking on AI-based development. So that's the first question.

And then for the second question, when it comes to what we call direct sales, non-subscription sales, we do not believe that -- we do not see anything that would neither in our past experiences, knowing what is happening in the market right now that would indicate that the situation would significantly worsen.

Of course, it is not -- we cannot give any --we have not given any detailed forecast. -- on the things there, but we really do not see the reason why [ Whiting ] should get even more sour in that part of our portfolio.

[Johnny Engman, executive]

And on that point, Nick, we're also gradually meeting weaker and weaker comparator numbers on the non-subscription services, right? Because that is something that started weakening during last year. in the Q3 and Q4, and it's weak now in Q1. So we would be meeting easier comps going forward and some of the businesses in that, which is a bit sensitive and suffered now are at a really low level, so there is more room to bounce up rather than to bounce down. But again, it's no guaranteed, but I would view that as some positive signals for the future.

[Operator]

The next question comes from Dennis Berggren from Carnegie Investment Bank.

[Dennis Berggren, analyst]

Just following up on the last commentary. I mean you've been operating at around 7% to 8% organic ARR growth over the past 1.5 years. I guess that direct revenues clearly is what affects negative here, but when should we really start to see sales growth starting to converge with ARR growth given the current non-subscription trends? I mean, you said that it started to become weak in Q3, Q4 last year. How much weaker was it in Q2 this year versus Q3 last year, for example?

[Johnny Engman, executive]

I haven't done that on top of my head, Dennis, so I wouldn't shift that from the head, right, and then we can come back on that. But again, the ARR is a rolling 12 months number. So it takes a couple of quarters before it filters through fully into the subscription revenue line. But of course, we follow the subscription revenue on a monthly basis and a quarterly basis and the direct revenue part or on subscription.

And we can, of course, see that it's coming through gradually, and we release a bit higher portion of subscription revenue month-on-month when we have seen the ARR pickup. That's how the accounting work. You build the deferred revenue portion in the balance sheet, and then you release that monthly into the reported numbers. So yes, we can see that effect starting to filter through. But when you have a dip in the non-subscription businesses in the quarter like we had, we also had a quite weak Q1 on the non-subscription business that distorts the reported number.

And we are not so big on the revenue. So if you look at the revenue in a segment, in a quarter, it's SEK 200 million. It doesn't take much to -- if you have a bad quarter to have SEK 4 million difference on the non-subscription side, and that hits 2 percentage points on the reported sales organic.

So that is what you see now in this quarter. You also saw it partly in Q1 that it is hurting the reporting number in these quarters. But once that is gone, the ARR will filtered through to a very strong reported organic.

[Dennis Berggren, analyst]

And then just a final question on the resilient. I mean start of discussing it in terms of subscription versus non-subscription revenues? And if you would look at it from the sort of 5 key product segments, where do you actually see greatest resilience against the market weakness? And what areas could potentially be more affected? I mean, are you convinced that all of these 5 key product areas are entirely resilient against a softening construction market?

[Johnny Engman, executive]

If you look at the resilience. If you know -- you know us quite well by now. And you know that the product mix is different in the different regions, right? Europe has a much higher portion of e-tendering for example. U.K. has the high portion of specification and product as well as project. While the Nordic is more heavy on project information and a bit of product, same in Australia, right? You can see that the resilience is there in all 4 regions and the retention is strong across all 4 core segments.

And the new sales is continuing to be strong in the U.K., for example, and it's picking up in Nordics and Australia. So I wouldn't see any tendencies that there is a certain product area or a certain market that is hit or has a more difficult environment.

On the direct side, yes, we have seen a difference. But on the subscription side, it is no clear evidence that there would be a difference between the product offering nor the geographies.

[Operator]

The next question comes from Charles Brennan from Jefferies.

[Charles Brennan, analyst]

Just 2 quick questions from me. Firstly, on your outlook comments and your expectations that ARR growth is going to continue to improve into the second half of the year, I'm conscious that Q3 last year was actually a pretty good ARR quarter. Are you confident that we're going to see a sequential improvement in ARR growth in both Q3 and Q4 this year? Or do you think all of the improvement will come through in Q4?

And then secondly, it's not entirely clear to me why we're seeing a decoupling of trends between the direct sales and the new sales component within the subscription business. I would have thought both driven by in-quarter decisions and both would be reflective of market conditions and customer confidence. Do you think that those can remain decoupled going forward? And I guess I'm wondering whether the direct sales performance this quarter is in some way a leading indicator to new sales in the subscription business going forwards?

[Johnny Engman, executive]

No, I wouldn't -- again, the subscription part, it's a must-have service right, and that's why we see it being very strong on both retention and new sales level, while the non-subscription parts, of course, you can save on advertising spend, for example, for a couple of quarters. That's why we see a bit of decoupling currently in the current market environment between the non-subscription side and the subscription side. Normally, that's not the case, right? They normally go more hand in hand. But again, we have no signals that the subscription business is slowing momentum.

It's doing quite well. And as you comment on Q3 and Q4 last year, where we see an acceleration or an accelerated performance now in Q2 in two of the regions, and there shouldn't be any indication that couldn't continue. You will, as you know, as you commented, it was very strong in Europe in Q3 and Q4 last year. And there you have seen a little bit of ARR slowdown in Q1 and in Q2.

Now it's creasing 9% and not 12%, 13%. And I wouldn't -- so that will maybe tell it down a little bit in Europe segment, while the others can continue to tilt it up. So from a total group level, we are quite confident on the coming quarters.

[Operator]

The next question comes from Viktor Högberg from Danske Bank.

[Viktor Högberg, analyst]

Just 1 question on the usage. What did you say that you see from your users in terms of their interactions on the different platforms and the different products. Can you share anything on the usage? And if that usually is an indication of future demand?

[Dario Aganovic, executive]

Yes. Usage on our platform is good. It is, in many places, increasing. We don't really see any decrease anywhere it continues to be strong. And yes, you can see it as an indicator of the activity in the market. We see it also as a -- when you zoom down on usage, you can identify the churn risks and so on, but we see strong use.

[Johnny Engman, executive]

Yes. And we follow that as example, number of specifications written numbers of product specified number of projects in the data. It is number of log-ins on the project platforms. it's very solid across the board. So there's no slowdown seen in any market on the activity from our clients. And if we don't really see the slowdown in activities on a number of specifications created or a number of products.

You saw a bit of slowdown when it started a year ago on project inflow, for example, but the activity on the platforms are just ticking up very nicely. And that's probably why we see good retention level as well, right? Because the clients are using our services. They clearly get the value delivered, and therefore, they renew.

[Viktor Högberg, analyst]

And that is on a net basis, I would assume. What you see in the tail of smaller construction clients? Do you see an increased bankruptcy rate and increased churn? Is that somehow affecting the numbers even in a small way? Or is that not even visible?

[Johnny Engman, executive]

In a small way, if I'm, I'm sorry,. If I look at the bad reservation, for example, or realized that, yes, there is a small tendency that is picking up a little bit on the small contractor side, for example, smaller contractors can suffer, but it's not materially moving the needle on a group level, but it has a small impact on the EBITDA in the quarter and also have been in Q1. But as you can see, it's not anything that impact the retention number. We're more than compensating for that with increased retention of the other rest of the client base. So on the margin, yes, but not in any material way.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Dario Aganovic, executive]

Very good. Thank you, everybody, for your questions and looking forward to meet those of you that can make it to Stockholm in October for our Capital Market Day. And until then, take care. Bye.

[Johnny Engman, executive]

Thank you.