Exsitec Holding AB

STO:EXS

Earnings Call Transcript 2023-Q1

[Johan Kallblad, executive]

Welcome to this quarterly update for the first quarter of 2023 for Exsitec. Thank you all for joining. Talking now is me, Johan Kallblad, and I have been the CEO of Exsitec since 2010. I expect this presentation to be around 15 minutes. It is possible to ask questions via the chat or the hand raise function in Zoom, so we have some time for questions at the end of the presentation. So as usual, I will start off by making a short recap about our business, a reminder of what it is that we do. After that, we'll cover our Q1 financials, the short market update, and a recap of our priorities going forward.

So we exist to help medium-sized businesses in the Nordics, use digital tools to improve their operations. And these can be things like software for reducing financial administration through automation, or use data for better decision-making and forecasting, or adopting e-commerce, or managing a sales force. We like the medium-sized companies because they are large enough to get a good return on their investments in automation, and they're small enough to actually listen to our advice.

And there are also many of them, and they usually need someone like us to assist them in their ambitions to use digital tools because they may not have that much experience. We think there are around 37,000 possible customers in our markets: Sweden, Norway and Denmark, and we have around 4,000 active customers today.

A little bit about our approach and business model. So we have made a selection of software components for different business use cases, where we act as a reseller for the software developer. We do in-house development of integrations between the software components that we sell, and we sell that as a subscription service, and we add professional services and support on top.

And so the customer gets the benefit of a faster implementation because of reuse of integrations and they can spend less time on software selection. They also get a good single point of contact for assistance after the project, and they could do a step-by-step implementation using this modular approach, which reduces risk. And we are entrust and scale our engagement with the customer over time.

We sell and implement around 20 software packages today from 10-plus software developers, and these are the primary software providers at this time. We have a revenue share partnership with these software providers where we market and sell their software to new accounts and make the customer successful in using the software over time.

It's a reasonable balance today where we're not dependent on only one software developer, and our ideal customer would probably use 5 to 6 different components delivered by us, but our average customer today is only at just over 2, so there is a lot of work remaining in growing our footprint on existing customers also.

So here are some of our customers. Customer base is spread across many segments, and this makes us less vulnerable to changes in market conditions because we can move our sales efforts between different industries with relative ease. The top 10 customers combined are less than 10% of our revenue. An interesting thing we've been able to do is combining sets of software products to fit different industries where we do a somewhat pre-configured combination of software. So we can also reduce implementation time and reduce risk for the customer by doing this.

We set up this business model more than 10 years ago, and we've had a solid and profitable growth every year since we reached scale. And as we become comfortable with the core business model, we started adding growth through acquisitions over the last 4, 5 years. And at this moment, we're just under 550 employees. Headcount is a little reduced from last quarter. We have been hiring in some segments, but we have also reduced staff a little bit in overhead and -- somewhat in Norway, and in the e-commerce business unit, where we've seen weaker demand. So yes.

Over time -- and all the time, hiring and development talent is a critical DNA of Exsitec. We don't expect to find people that are already skilled in the exact products we work with. So instead, we try to find great people and train them. So we've been named one of the most popular employers in Sweden for university graduates in the technology field over the last 3 years. And then the fall of 2022, we added more than 85 people into our training program, and we have similar ambitions for 2023.

So let's dive in a little bit to the financials for Q4 -- for Q1, sorry. First, some analysts picked up on the fact that the Swedish organization went to asylum for a large kickoff, and they were worried about cost and losing work time compared with last year, and when we had -- still had the pandemic restrictions. And all of that is true. So it was a very valid point. It's also really good for culture that we are finally in a situation where we can do things like this together.

And we've done a lot of small things to work on our margins going back to Q3 and Q4, like price adjustments and more actively working on improving performance, for instance through less use of subcontractors. So we felt that we actually could afford this activity and -- but it's true, we've been optimizing a little more for margin rather than maximum growth. So that's one of the key takeaways from this quarter that we see that in the financial results.

We also saw a lot of improvement in Norway, where we actually are seeing pretty good growth and a clear margin improvement. So -- on the disappointing side, the demand for e-commerce solutions is still weak, and we have been and are still doing some reductions in capacity to fit the current market conditions as we see them. So overall, we feel good about this, 23% growth in the quarter. Around 8% is organic. Somewhere in the range of 4% to 5% of this is due to price adjustments. But it's also -- total growth is lowered a little bit because we've been working actively to take out some business and projects that was low margin, like deliveries done through subcontractors.

So we actually reduced our use of subcontractors with almost 30% in the quarter. This reduces organic top line growth a little bit. But overall, we feel good about total growth, and we feel that the market remains pretty strong.

Margins of over 21% was really nice in the quarter. It wasn't one of those quarters where everything fell into place. We had our fair share of challenges also. But still growing EBITA with 26% and 23% revenue growth means that our improvement in the core business paid for the entire kickoff costs that I mentioned before. So I'm happy about that. We also reached SEK 100 million in adjusted EBITA LTM for the first time. So strong earnings quarter.

Going through the segments in a little bit more detail. Sweden, again, had a really strong quarter with good growth and solid earnings. EBITA margins a fraction lower than last year, caused by -- well, first, obviously, of the travel expenses that I mentioned, and also by a weaker demand in business units specialized in e-commerce that we acquired in Q2 of 2022. We think that long-term growth in business-to-business e-commerce is a great opportunity for us, but the short term has been challenging.

The stability and growth in financial automation software, primarily from Visma, from Medius, from Planacy has been great, however. So the actions we've taken in Norway in Q3 and Q4 feel good. And margin in Q1, that is on an acceptable level. We also have double-digit -- or about 10% organic growth and a pretty clear path forward. It was Q2 and Q3 of 2022 that was really weak last year. So of course, the proof of lasting improvements is in the coming quarters, but so far, so good. We have no leadership in place in Norway also, since Q1.

Denmark is performing really well on a smaller scale. The improvement is that we divested the point-of-sale business in Q3 of 2022, which gives us a better focus. And we've gotten better traction in sales of ERP, especially Visma.net. It's a nice growth and nice margins, albeit in a smaller business units.

The recurring revenue stream from software is a nice consequence of our business model that helps us having more stable results and cash flow than if we were strictly a professional services company. In Q3, we did divest our FlexPOS point-of-sale business in Denmark, which does reduce these revenues a little bit. We've not -- we have not gone back and made adjustments for that in the graph, but that is one of the reasons for what looks like a little bit slower growth in the last 2 quarters.

Several of our suppliers made price increases on the start of the new calendar year. So we do get -- we actually we get a positive effect from that, that will -- this is LTM number. So we get a positive effect from that, that will last all of this year. We have somewhat of a feeling that the churn in Sweden is a little bit higher this year than the last few years where it has been extremely low. But all in all, a solid and growing revenue stream with total growth of 38% year-over-year.

So a short update on market conditions and our priorities with 2 slides remaining here. Earlier on in 2023, there are obviously a lot of challenges and uncertainties in the world around us. But what has remained strong for many years is the demand for digital solutions. And so far, we have not seen this changing. The sales cycle is a bit longer than our historical average. There is a shift where we have relied a little bit more on selling add-ons to existing accounts and less new implementations to new customers. But the total volume is actually solid.

In terms of acquisitions, we've felt for a few quarters that it has been very hard to find price levels that work for both buyer and seller given the current interest rate environment and the new interest rate environment. So we feel towards the end of the quarter that some of the discussions are opening up a little bit more and that the expectations for valuations are a little bit lower. So maybe there will be some attractive M&A opportunities going into the coming quarters.

And summarizing our business priorities here. Overall, we think that we are in a really good shape. We've taken actions to improve margins, and we intend to keep on doing this. There will be challenges, of course, but we have a lot to work with on developing existing accounts. So no changes in terms of strategy. We're executing on a business model that we've implemented and refined for over 10 years.

So the plan is to continue on a long-term profitable growth journey. The macro environment may become challenging, but we think we will be mostly restricted by our own ability to execute. So all in all, a solid quarter, and we think we are in really good shape financially.

And that concludes my presentation. Do we have any questions?

[Hampus Strandqvist, executive]

Yes. We have a question that you had SEK 4 million of intangible investments in cash flow in Q1, which was 0 last year. What is this?

So this is actually when we bought the customer base in our ERP system business from our colleague, Amesto. So this is what the SEK 4 million is from in the cash flow.

[Johan Kallblad, executive]

So [ income for ] in Swedish, we didn't acquire the entire company, but we acquired a customer base of around 45 customers. And so far, so good. I think not maybe almost -- I don't think it's been performing better actually than expected. This customer base, or at least as good as expected.

And -- and so that feels like a really -- there was actually, the only acquisition, M&A activity deal we closed this quarter, and it was very, very small. So...

[Hampus Strandqvist, executive]

Next question is Norway seemed to deliver ahead of plan. Any reason to not assume a continued gradual improvement in Norway going forward?

[Johan Kallblad, executive]

Any reason, yes, historical performance is the reason to not take things for granted. But because if you -- some of you remember here, it was in Q2 and in Q3 that we had really poor performance in Norway. We do think that we've done things to create a lasting change. And we do feel good about the new head of the business unit, the new Managing Director.

And -- but -- so I mean, we do expect continual improvements. But we know that it also takes -- it takes a long time to do long-lasting -- to make long-lasting effects. So I want to set a reasonable expectation. But I mean, obviously, we hope -- we all hope for proof in Q2 and Q3 that we've been doing the right things.

[Hampus Strandqvist, executive]

Next question is about acquisitions. You mentioned [Audio Gap] price look better. Can you say anything on your pipeline?

[Johan Kallblad, executive]

We can't talk too much of that into details, but I can say some things. So we've continued to talk about -- we decided in Q3 that we weren't going to do any big acquisition activities unless a special situation arises, then we also have to look at that. But we decided to focus more on margin improvements and to make sure that we've taken care of the acquisitions we had already did.

But we kept in touch. We have some things that we feel are lower risk, like, for instance, buying this customer base. So looking at improving market positions in areas where we already have a presence or adding things, adding volume and competence and customers to something that we already know in the market where we already are, that's something we always want to do.

So we are talking to quite a few companies about possible business opportunities. But what we saw in Q1 was that we were very -- or actually early Q1 and in Q4, that it was a far -- a big distance between the multiples and the valuation that the sellers expected and what we think is a reasonable price. But it does seem over the last months, maybe actually that this has changed a little bit. There's a shift that people have gotten used to a new interest rate environment.

So we do feel actually that we have a decent pipeline going forward. Again, making sure that we get these lasting improvements in margin is a higher priority than maximum growth. But at some point, I do expect actually -- I'm more optimistic about M&A now than what it was 3 months ago.

[Hampus Strandqvist, executive]

Next question is, could you touch upon cash flows and changes in working capital?

[Johan Kallblad, executive]

That's a good question, actually. And the other ones were also good questions, but that is -- we have an increase in working capital. It's actually -- that has increased more than the total revenue has increased. So we are tying up a bit more money in working capital.

And almost all of that -- and I think actually all of it is -- it's on accounts receivables. We don't see any -- we have not seen increases in late payments and such. It's actually -- we did a lot of invoicing in March. We had a really, really strong March. And we did a lot of invoicing around month end, and a lot of that is coming due.

And we don't actually see -- we were a little bit -- we saw that as the risk causes. So we did a deeper analysis on the accounts receivables. And it's just an unexpectedly strong March compared to last year and a lot of invoicing due to that is -- so we think that's a temporary effect actually.

[Hampus Strandqvist, executive]

That concludes all the questions.

[Johan Kallblad, executive]

I hope that was enough of a detailed answer. Feel free to -- if anyone wants more clarification, feel free to send an e-mail to [e-mail], and we'll be happy to elaborate.

[Hampus Strandqvist, executive]

Well, that concludes our call. Thank you for listening in.

[Johan Kallblad, executive]

Thank you.