Exsitec Holding AB

STO:EXS

Earnings Call Transcript 2024-Q1

[Hampus Strandqvist, executive]

Welcome to this quarterly update of 2024 for Exsitec. If you want to ask any questions, you are more than welcome to use the Raise Hand function in Zoom or to use the chat. And with that said, I'll leave the word to Johan Kallblad.

[Johan Kallblad, executive]

Thank you, Hampus, and thank you for joining. And talking now, me, Johan Kallblad, I've been the CEO of Exsitec since 2010. I expect this presentation to be just over 15 minutes today.

As usual, I will start off by making a short recap about our business. And a reminder what it is that we do. And after that, we'll cover Q1 financials, 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 we aspire to be a one-stop shop, so the customer can focus on their core business and leave the business side of IT to us.

Digital tools, can address areas like reducing financial administration through automation or use data for decision-making, and it can also be creating integrations and information flow between business applications used in an organization. We market and sell a portfolio of software components that we can combine in a modular way into different target markets or industries.

Our target market is medium-sized businesses in the Nordics, and we've created some bundles of software to fit different industries. These bundles are often made up of the same foundational components like an accounting software with some industry-specific add-ons. There's not really a size limit upwards on where our model works, but we don't actively target the enterprise segment in our sales and marketing. We have around 4,000 active customers spread through many different industries. And typically, in a year, no one single customer is more than a few percent of our revenue. All in all, we have selected around 20 software components that we combine with integrations that we develop in-house.

These are the primary software providers at this time, and we have a revenue share partnerships with these software providers where we market and sell their applications to new accounts and make customers successful in using them over time. A dream customer of ours can use up to 5 or 6 different components from us, but the average customer is today only just over 2. So there's a lot of work remaining in growing our footprint on existing customers. Business model has 3 revenue streams.

Like I mentioned, sales and marketing is focused on selling software together with integrations that we develop in-house. And this is sold on a subscription model, where you pay as you use. This revenue stream is around 20% of our net revenue. 2/3 of our revenue is from professional services where we implement software and make the customer successful in using it over time. We also do custom development and custom integrations where needed.

The third revenue stream is that we offer our customers a single point of contact support on a recurring fixed price model. And in this engagement, we also take care of things like infrastructure, internet access and IT security to be a one-stop shop for the customer. So like I've said, I've been the CEO since 2010. During this time, we've had 10 consecutive years of growth with increased profitability. The last 18 months, we've been trying to reduce risk because of uncertain macro environment by focusing on profitability and having solid cash flows.

And historically, our growth is from a balanced combination of M&A and organic growth. In the quarter, we completed our 11th training program. Due to a little less demand in the market, getting to profitability has been harder for the 2023 trainees, the year before. But actually, we've been doing pretty good. So it's actually no difference from the 2021 and 2020 years. So we stay committed to this, and we are actively recruiting for our 12th program that starts in August. Recruiting is a lot easier than the last couple of years. We see around 3x the number of applicants per open position that we saw 2 years ago. And let's dive into specifics for financials in Q1.

First, a super short summary. Overall growth, very slow. We're keeping our margins and profitability solid despite some challenges. We feel the market is passive overall, but we do have some pretty good sales KPIs. So it's actually more of a slower activity level from existing customers that limits us. Not enough positive changes and positive feelings in the society in general, makes people be quite cost conscious. Third, we've had some challenges, but also some good experiences with Business NXT conversions that we started within Norway. And as expected in any major shift in technology, it does affect results a little bit in the quarter, however.

And lastly, we finalized a new financing agreement with Nordea that gives us long-term financing in place to help us finance M&A activities without having to reach out to the capital markets. So net sales, overall growth, only 6%, which is much lower than the last couple of years. Passive market in general has been our main constraint after a couple of years, where resource constraints was the biggest thing. But there are some other specific things also here in the quarter. Actually, I was going to say organic growth, a few percent positive in Sweden, flat in Denmark, around 10% negative in Norway where we lost some working time moving to new office locations in Oslo after having spent 20 years in Asker, around 20 kilometers southwest of Oslo.

When comparing years, we should keep in mind that Easter holiday was very early this year. So this affected all markets with losing 1 or 2 working days, but also more vacations, especially in Norway and Denmark. Of course, we have Easter holidays once a year, so this all evens out. We don't do any adjustments for these things in our numbers. But for someone comparing, it's good to note.

Margins, adjusted EBITDA of around 19% in the quarter. Solid performance in Sweden. More challenges in Denmark and Norway. In Denmark, it's the same reaching scale problem we've had for some time when we changed our offering to be more in line with Sweden. And also generally, even in Denmark, quite a passive market. In Norway, we had specific internal issues with a lot of unpaid work for converting customers to the new cloud product, Business NXT as well as moving to a new office location.

Non-adjusted EBITDA 18%, difference is the compensation related to contingency payments in acquisitions that we adjusted for. Of course, EBITDA and adjusted EBITDA gets closer when we have less of these, so less acquisitions. I'm not sure which is most relevant from an external view, but internally, we measure ourselves against the adjusted EBITDA.

So moving into segments, a little bit more detail. Mentioned again, good performance in Sweden albeit in a passive market. We do see improving sales numbers in the quarter. But we also see many existing customers holding off investments where they have a choice. Norway has good overall growth due to the acquisition of IntegrasjonsPartner in early Q1 that has been performing well in the quarter. Organic growth is actually negative due to fewer working days because of Easter and cost for these cloud conversion projects and the cost of moving the office.

Denmark is underwhelming in a passive market, but key thing for us here is reaching scale over time in our new offering, so I'm actually not that worried about that. We'll have some better quarters and some worse. We're not at scale yet, so it depends very much on getting efficient resource utilization and the right number of projects for where we are. The recurring revenue is probably the most positive part of our financial performance in Q1.

So recurring revenue stream from software shows solid growth with LTM numbers being up 26% year-over-year. Increase in the quarter was 32%, up from Q1 of last year and the increase in growth rate is due to the acquisition of IntegrasjonsPartner that accounts for around half of the growth. So even organically, we saw good growth. In 2023, we saw more partial churn than we're used to, where some customers stayed on a software, so they didn't churn out as customers, but they did ramp down number of users or transaction volumes to save money. We still see some of that, but it's not as apparent as last year.

So we should see transaction volumes and user volumes increase if we are able to keep adding customers through sale and the economy starts to pick up. So we feel there is more upside on this one. I was going to say a few words about the Visma Business NXT conversion. It's a big undertaking for us that's been going on since Q2 of 2023. It's converting our large on-premise customer base from Visma business to cloud software. As you can read in the report, we're taking some charges over the quarterly result in Norway because of this.

This is long term, very good for us as it moves the customer investments from hardware, if they have their own hardware or from hosting if they have on-premise software with outsourced hosting that we have no part of. It moves this investment from the customer side to a software revenue instead where we have a revenue share with a software provider. So it moves the spend from hardware or hosting. That's not a part of our business or a big part of our business to something that is a part of our business.

So there are some significant short-term challenges, including actually our own learning. Having to rewrite integrations for customers, having to refit custom development. And so far, we have underestimated some of this effort in the early projects, which cost us around NOK 2.5 million in the quarter. The product keeps improving and we get better, we will see less of these costs, and it should provide a long-term increase in recurring revenue. So short-term costs, long-term benefits in this area.

So looking forward, some of our priorities going forward and also I'll start with some words about the market conditions. So the market we see in Q1, overall very passive customer sentiment, not necessarily a negative one, but a passive one. Overall, very few customers are increasing user volumes or transaction volumes or suggesting re-architectures on their own. So the growth that we get or any growth is a result of our own sales rather than changes initiated on the customer side. So there are, however, some positive signs in our sales metrics, especially in Sweden.

We track a number of qualified leads, the number of days from a qualified lead to a closed sale, the average order size and the total number of deals. And this quarter was actually the first one in 6 quarters where we saw a significant reduction in the number of days from lead to close deal, which was reduced by around 20% from Q4 and we also saw an increase in average order size. So total order volume for new sales was around 10% higher than the same time last year for similar business units. This is excluding IntegrasjonsPartner and this was entirely driven by Sweden.

Sweden was also the first market that shows a sign of weakness in the market around 18 years ago, which moved our priorities into margins over growth, but we do see positive sales metrics here, which I think is very interesting looking forward. So what does this mean? Even though a majority of our customer base is very cost conscious and actually passive, there are segments and individual customers that have started to invest and often making big investments. This could be customers in defense or some in infrastructure or various business-to-business operations.

So it's more like 90% of customers are reducing spend with 5% and 10% are doubling their spend rather than a 10% increase over the board. It's a little bit more difficult for us, but it still is a positive sign, I think. So looking forward to priorities for 2024, while the overall market has been challenging, it's actually quite an enjoyable time to be in charge of this operation. We know that when we close a deal, it's not because of the market being favorable, it's because we've done a good job in sales and we have a good offering. I love the business model with a large portion of recurring revenue, and I feel that we're in really good shape and in a really good position for long-term growth when we can deliver a 19% margin in a short quarter, in a tough environment with specific challenges in Norway.

We are very active in our sales and marketing, and we are pushing ourselves to compete in some sectors that we have not prioritized before, like public bids, and the enterprise segments. We actually do this more to learn than to make money in the short term because competition is obviously tough. We're trying to learn where we can have success and add value, and our strong margins make it possible for us to invest in long-term capabilities when competitors have to focus inwards.

We just announced a new financing agreement with Nordea. And of course, this is because we think there are M&A opportunities, especially we are looking for smaller bolt-ons that can improve market position and add to our offering with reasonable risk. We have a long list of active discussions ongoing. So all in all, macro environment may be challenging, but we will mostly be restricted by our own execution and our own ambition.

So that concludes the presentation for the first quarter of 2024. And if there are any questions, please feel free to ask them. Hampus, did you get any questions?

[Hampus Strandqvist, executive]

Yes. We've got one question from [ Ferg Nielsen. ] Can you elaborate around a sudden drop in organic growth quarter-over-quarter? Is the weaker overall consulting market we have seen in H2 of 2023, something you are starting to experience now? Or are there any other factors?

[Johan Kallblad, executive]

Well, first, there is a change in working days and also Easter. So you have to take that in and we don't adjust for that. And it's not that easy, but it's not only working days. We actually got an additional working day on 29th of February also, but the quarter is shorter in a working day perspective, but it's also vacations and things because the last 4 years, Easter has been entirely in Q2, right? So that's just something to keep in mind. But even accounting for that, it is slower growth. We see a little bit lower utilization rate, but it's actually not that much.

We have -- we measure that internally. We don't think it's an extremely relevant measurement for us externally because it's so different in different business units for us, and they should be different because they have different levels of recurring revenue. But it's around 1.5%, so lower -- a little bit lower resource utilization, but not a massive drop off. It's actually -- so the main thing -- to get answering the question, the main thing is just a slow general customer sentiment where they don't call and like we get a lot of our automatic consulting work driven through support because customers call support and they need help. And then we tell them when something is not actually support, it's actually a consulting engagement.

We tell the customers that this is something we're going to charge you for and it's a lot more common now that they say, "Oh, this can -- we can wait for a while if this is not covered by support." So it's a general customer sentiment that's pretty slow. We don't see any changes in -- the behavioral change in a lot of places, it's not a big change other than that. As for the general market, if I were to guess, I would expect that everyone who's involved in consulting sees a fairly slow market and behavior like that. But I don't actually know. I care about Exsitec. I don't look so much at what other companies do.

[Hampus Strandqvist, executive]

Yes. And we also have a raised hand from Tom at Pareto.

[Johan Kallblad, executive]

Actually, can I elaborate. So he didn't actually ask especially about consulting, I think. Maybe he asked about the entire growth. We had good growth in software revenue and in other revenues, so it's actually only consulting that was low. Yes. Sorry, Tom, you're welcome.

[Tom Guinchard, analyst]

Can you hear me?

[Johan Kallblad, executive]

Yes.

[Tom Guinchard, analyst]

Perfect. I was just wondering about consultancy services in Norway. It looks like you had about negative 8% organic. Is that fair to assume adjusting for the calendar effect as well?

[Johan Kallblad, executive]

We don't adjust for calendar effect internally, and I think calendar effects even out, but I understand that you need to. So could you repeat what was the number? I'm looking at the...

[Tom Guinchard, analyst]

I'm looking at around negative 8% adjusted in the Consultancy Service segment in Norway.

[Johan Kallblad, executive]

That would make -- something like that would make sense. Maybe even more because we had -- we did a lot of -- it's not actually because we didn't have work to do, we did a lot of unpaid work. It's a bad business model, but it's actually long term good. We need to get through these problems, but I understand it looks bad in the quarter.

[Tom Guinchard, analyst]

And the revenue split for IntegrasjonsPartner was around 50-50, as you stated before, or was that any different during the quarter?

[Johan Kallblad, executive]

It was -- IntegrasjonsPartner was performing as expected in the quarter.

[Tom Guinchard, analyst]

Yes. But yes, we had 81% software revenue growth and 10% consultancy growth in Norway.

[Johan Kallblad, executive]

Software growth both in the old business and in IntegrasjonsPartner.

[Tom Guinchard, analyst]

Yes. So around 3% to 5% organic software revenue growth?

[Johan Kallblad, executive]

Probably correct. Maybe a tiny bit more than that, but I think that's a fair assumption. I can -- we can get back to you with a more detailed analysis on that. A few percent positive growth, correct. There is -- I can elaborate one more thing here also on a detailed level, if you're -- especially maybe for Thomas very detailed in our numbers, we have -- when we move to Visma Business NXT, we will get higher recurring software revenues, but it's not the initiation of the project that drives their revenue increase, it's the completion of the project. And when we have a problem of completion projects, for many reasons, we don't get the increased revenue. So this should -- the organic revenue growth should improve over time as we are completing more of the projects.

[Tom Guinchard, analyst]

A follow-up on Business NXT as well. You said you will be deploying in Sweden and Denmark as of '24, '25, which should be quite a significantly smaller market for the new software, right?

[Johan Kallblad, executive]

Relative to the overall, actually, in Denmark is somewhat similar to Norway to -- if you compare/adjust for our relative size, but it's fewer customers, but the operation in Denmark is also a lot smaller. In Sweden, it's a lesser part of the business because we're actually more relying on -- we have 2 other Visma offerings in Sweden that we are -- that is in total a larger part of the operation. But Visma business in Norway is the most important software and it's not as large in Sweden, that's correct.

[Tom Guinchard, analyst]

Around 80% in Norway and, say, 15%, 20% in Sweden?

[Johan Kallblad, executive]

No, a little bit more than 15%, 20%. It's probably around 70% Norway, maybe and 70% to 80% in Norway and maybe 25% in Sweden?

[Hampus Strandqvist, executive]

Thank you, Tom. We also got another question from [ Ferg Nielsen. ] You increased your M&A firepower recently? Is the increase motivated by a substantial improvement in the M&A market?

[Johan Kallblad, executive]

Is it motivated by a substantial improvement? It's motivated by a substantial improvement in ambition. So in a way, yes, we don't see -- it's not actually -- it's not necessarily that the market has been that bad over the last 18 months that has reduced the number of deals we've done, it's that our ambition has been lower. We've had other things to focus on, and we thought it was wise to focus on having solid profitability in units that we acquired earlier. So -- but we feel we are in a good place. So our ambitions are higher. Is it a significant change in the market? I don't necessarily think so. So -- but we do feel that there are a lot of active discussions that we have that do feel good. So yes.

[Hampus Strandqvist, executive]

And that concludes all the questions we had. Thank you for listening in to the quarterly call. And we wish you a very good day.

[Johan Kallblad, executive]

Thank you.