Karnov Group AB (publ)

STO:KAR

Earnings Call Analysis

Company Grows Sales, Increases Profitability

In the fourth quarter, net sales jumped to SEK 634 million, marking an impressive 6% organic growth driven by subscription-based online sales. The company's adjusted EBITA margin reached 19%. The integration in Region South has exceeded expectations, contributing to an increase in net sales by SEK 18 million from last year, with synergies expected to reach EUR 10 million by 2026. The Acceleration Initiative aims for an additional EUR 10 million in cost efficiencies by the end of 2026, with an estimated cost of EUR 14 million to achieve these efficiencies. Strong performance was also seen in Region North with a 7.7% organic growth in Q4 and an adjusted EBITA of SEK 103 million. However, Q4's operating cash flow dipped slightly from the previous year due to delayed customer payments and interest paid, while leverage concluded at a positive 2.8x EBITDA for the last twelve months.

Karnov Group Q4 2023: A Transformative Year with AI Integration and Increased Profitability

Karnov Group's earnings call for the fourth quarter of 2023 painted the picture of a transformative and successful year. The company, under CEO Pontus Bodelsson and CFO Magnus Hansson, highlighted milestones such as the expansion in Spain and France, and the introduction of generative AI solutions designed for legal professionals—a landmark suggesting Karnov's commitment to technology and innovation. Net sales rose to SEK 634 million, marking an organic growth rate of 6%, driven largely by increased subscription-based online sales. An essential component of their success story was the improvement in margins, especially in Region South, spurred by effective synergy harvesting and cost reduction strategies.

Strategic Initiatives and Financial Performance

The company's focus on streamlining operations via the 'Acceleration Initiative' aims for an additional EUR 10 million in cost synergies by 2026, with significant cost savings coming from product rationalization, optimized processes, office consolidations, and IT infrastructure harmonization. Region South's adjusted EBITA margin showed a notable improvement, reaching 12% in Q4—a leap that signals successful integration and cost management. Furthermore, Karnov's adjusted EBITA increased by 15% in Q4 to SEK 122 million, underscoring their robust financial health and the benefits of their strategic realignments.

Investment in Innovation and Outlook for Growth

Investment in innovation through AI is a significant narrative thread of the earnings call, with generative AI solutions launched in Spain and France, and more in the pipeline. In Region North, the company saw commendable growth, with online sales accounting for a staggering 91% of net sales in Q4. Karnov is also enhancing its digital offerings, transitioning from offline to online products. CEO Pontus Bodelsson emphasized the launch of AI-supported services in Sweden and Denmark, foreshadowing an accelerated strategic execution and continued innovation.

Commitment to Customer Value and Operational Excellence

Karnov's narrative is one of relentless focus on delivering customer value and achieving operational excellence. The company's strong subscription-based model, accounting for about 87% of net sales in Q4, resulted in solid operating cash flow, enabling them to continue investing in business systems and AI innovations. They maintained a healthy leverage ratio at 2.8x EBITDA, indicating prudent financial management. The company is set on increasing profitability through operational excellence and is on track to expand its customer base, particularly in the public sector.

The Road Ahead: Synergy, Innovation, and Integration

Looking ahead, Karnov foresees continued synergy realization, especially in Region South where they aim for EUR 10 million in synergies by 2026. The successful migration of over 50% of Aranzadi's content to a new platform suggests a smooth continuation of their integration and innovation strategy. Substantial investments, a focus on AI-driven offerings, and synergy harvesting are projected to cement Karnov's position in the legal information services market, with the next key updates anticipated in their Q1 report on May 7th. Investors can expect Karnov's story in 2024 to be heavily characterized by these strategic elements, alongside a commitment to a more digital working approach.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to the Karnov Group Q4 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Pontus Bodelsson; and CFO, Magnus Hansson. Please go ahead.

[Pontus Bodelsson, executive]

Welcome, everyone, to Karnov Group's earnings conference where we will present the outcome of the fourth quarter and full year 2023.

Please go to Slide 2. I'm Pontus Bodelsson, President and CEO of the company. With me, I have our CFO, Magnus Hansson, and our Head of Investor Relations, Erik Berggren. Magnus and I will present the outcome of the quarter using a few slides, and then we'll open up for questions. With that said, let's get started with the presentation.

Please go to Slide 3. It has truly been a successful year for Karnov Group. During the year, we've got new colleagues in Spain and France, while progressing ahead of plan in a transformational integration. We have also launched our first generative AI solution for legal professionals, which is a great opportunity to increase customer value going forward.

Net sales grew to SEK 634 million in the fourth quarter. The organic growth was 6%, adjusted for the divested legal training business and the significant one-off sales of publications we had last year in Region North. Our positive sales development is thanks to higher subscription-based online sales. The adjusted EBITA margin was 19% in the fourth quarter.

In Q4, we can also see major margin improvement in Region South due to our harvesting of synergies. At the end of December, our leverage was at 2.8x EBITDA last 12 months. That is thanks to our strong cash generation, and it's positive, we are now below our financial targets.

Let's move over to Slide 4. 2023 was a transformative year. The Region South integration, which was initiated at the end of 2022, has progressed ahead of plan throughout the year while synergies have been harvested as expected. At the beginning of October, we launched our new profitable growth strategy with updated financial targets. The strategy and financial targets were presented at our very first Capital Markets Day.

During the year, we have continued to innovate with a special focus on generative AI. The first solution was launched in Spain at the end of September, and it has now been launched also in France. Together with great colleagues, we integrated the new common core values. We knew that the Region South businesses had similar legacies to the businesses in Region North. But during the year, as we have got to know each other better, it has become evident that we also share a common purpose, [Foreign Language], as well as a common vision. That is really encouraging for our plans for further collaborations between Region South and Region North.

Next slide, please. The Region South integration has progressed ahead of plan during the year and synergies are being harvested as we expected in Spain. It is now time for us to accelerate our strategy to the rest of the group. Today, we announced our Acceleration Initiative. The ambition of our Acceleration Initiative is to further strengthen customer value, while also improve the group profitability. The initiative shall generate additional cost efficiencies of EUR 10 million, with full effect on run rate basis at the end of 2026. Cost to achieve is estimated to EUR 14 million.

The cost efficiencies relates to the rationalization of products, streamlining our processes, consolidating offices and harmonizing of the IT infrastructure within the group.

In parallel with the Acceleration Initiative, the Region South integration will continue uninterrupted. This means that we will have two cost efficiency initiatives running until the end of 2026 with the ambition of harvesting efficiencies of EUR 20 million in total.

Please go to Slide 6. So how can the Acceleration Initiative generate further customer value? Well, in the beginning of October, we presented our strategy and the strategic enablers, talent and culture, common tech infrastructure, implementing AI, all contributing to profitable growth.

Talent and culture is about fostering a culture, which drive profitable growth and implementing an even greater commercial mindset. Common tech infrastructure is about developing with many markets in mind and then enhancing with local authored content. Generative AI enables great interaction with our content and make our customers more efficient. We have an ambitious pipeline of AI innovation to come.

Please go to Slide 7. I will now comment a little on our segments, starting first with Region North. It has been another successful year in Region North. We continue to achieve strong growth in the segment, driven by increased subscription-based online sales.

During the quarter, we have grown the customer base among municipalities in both Sweden and Denmark. Our focus is on operational excellence and increased customer value. Our common tech and product organizations in the region are now working on a generative AI solution to be launched on the platform during the year.

Our Norwegian business, DIBkunnskap, has now become a Scandinavian business. Under Karnov's ownership, DIB has expanded to Sweden. They have now operationally merged with our Danish business, Forlaget Andersen, to generate great customer offerings, combining the best of both businesses.

Turning the page to Slide 8. Region South has now been part of the Karnov family for a little more than a year. In Region South, we've seen concrete steps in AI. Our generative AI solution was lately launched on our label or service, Liaisons Sociales.

The financial performance has improved through the year. And in Q4, we took another leap in terms of profitability in the region. Magnus will talk more about that later on.

We have made strong integration progress during Q4. We continue to press ahead of plan, both in terms of content migration and IT carve-outs. In the fourth quarter, the Aranzadi product, Siapol, was launched on the common tech platform. We have also completed decoupling of LA LEY from the seller.

During the quarter, we initiated office consolidation in Spain. And at the end of Q4, we have generated synergies of EUR 2 million on an annual run rate basis. As earlier announced, our intention is to harvest synergies of EUR 7.5 million with full effect starting at the end of 2024 and synergies of a total of EUR 10 million reflect starting at the end of 2026. Cost to achieve synergies are estimated to amount to EUR 24 million. The Region South integration will continue in parallel with the Acceleration Initiative.

Turning the page to Slide 9. The synergies from the Region South integration will come progressively over the period. But you can see that we have three peaks. As you can see, the office consolidation in Spain will have a positive impact on the EBITA margin in Q1 this year. Then we have another peak in Q4 '24 with a common tech platform.

Please go to Slide 10. Moving forward, we will report using this slide, which includes both the Region South integration and the Acceleration Initiative. In total, our ambition is to have synergies of EUR 20 million on an annual run rate basis by the end of 2026.

Please go to Slide 11. With that said, I will now hand over the floor to our CFO, Magnus Hansson. He will tell us more about the financial results in the fourth quarter and full year. Magnus, the floor is yours.

[Magnus Hansson, executive]

Thank you, Pontus. So let's start with an overview, Switching to Slide 12. The net sales development in Karnov Group has been strong for the past few years. This growth trajectory continued in the fourth quarter. Net sales during 2023 was SEK 2.5 billion, an increase of 8% compared to pro forma 2022. The growth is driven by increased online sales across the group. The increased online sales is due to a mix of volume and annual price adjustments. Of course, currency effects had a positive impact on net sales.

Please go to Slide 13. Net sales in Q4 were at SEK 634 million compared to SEK 600 million on a pro forma basis in 2022. The organic growth reached 6.4% in the fourth quarter adjusted for the divested legal training and significant one-off sales of school publications we had in Q4 last year. Organic growth is driven by online sales within the public sector, both municipalities and public administrations, supported by our EHS business and tax and accounting business.

Next slide, please. On Slide 14, you see that the net sales development within online and offline split into segments. In Region North, the online sales increased by 13% compared to Q4 the previous year and accounted for 91% of net sales in the quarter. In Region South, the online sales increased by 6% compared to pro forma numbers in 2022 and accounted for approximately 73% of net sales in Q4.

Please change to Slide 15. Subscription-based sales increased during Q4 and represent about 87% of net sales in the quarter. The subscription-based sales also generated a solid operating cash flow as our renewal season is Q4 and Q1.

Please change to Slide 16. The adjusted EBITA increased 15% in Q4 and amounted to SEK 122 million. This corresponds to an adjusted EBITA margin of 19.2%, 1.5 percentage points better than before margin 2022. Region South was the driver of the improved margin in the quarter as synergies are starting to have an increasing positive impact. Items affecting comparability amounted to SEK 36 million in Q4 and is mainly related to the integration of Region South. At the end of Q4, we have decreased costs in Region South by EUR 2 million on an annual run rate basis.

As earlier announced, the ambition and short-term focus in Region South is to harvest synergies of EUR 10 million on an annual run rate basis by the end of 2026. And as Pontus just mentioned, with the new Acceleration Initiative, we are now aiming to -- for an additional cost synergies of EUR 10 million by the end of 2026 on an annual run rate basis.

Let's move to Slide 17. The Region North has a strong net sales development. In Q4, net sales amounted to SEK 271 million. The organic growth was 7.7%, adjusted for the divested legal training and one-off sales, while the weaker Swedish krona generated currency effect of 1.7%. The growth is driven by online sales, and we continue to strengthen our market position in the public sector, EHS and tax and accounting.

Adjusted EBITA reached SEK 103 million in Q4. This is an increase of SEK 6 million compared to last year. The adjusted EBITA margin amounted to 38.1%. The slight decline is explained by the increased depreciations of SEK 5 million compared to the previous year due to completed capitalized development projects.

Please move on to Slide 18, which is the Region South segment. Net sales in Region South increased by SEK 18 million compared to pro forma Q4 last year. The increase is due to positive development within legal training supported by currency effects. The adjusted EBITA margin was 12% in the fourth quarter, which is an improvement of a little more than 5 percentage points. Harvested synergies amount to EUR 0.4 million in the quarter.

Moving to Slide 19, which represents the Group Functions segment. Group Functions consist of functions taking responsibility for group-wide tasks. The underlying cost base, excluding ordinary D&A is unchanged in Region North Group Functions compared to 2022. During the quarter, we have invested in group-wide projects such as business system enhancements and AI innovations. Expenses in Q4 reached SEK 26 million compared to SEK 21 million in the third quarter.

Please go to Slide 20. Karnov Group has a strong cash generation in our invoices. We will renew the majority of our customer contracts during Q4 and Q1, which then generates a solid operating cash flow. The operating cash flow is slightly lower in Q4 2023 than in 2022, mainly due to interest paid and a slight delay of payments from customers in Region North, a matter of time. The leverage was 2.8x EBITDA last 12 months at the end of December, meaning we are below our cash.

I'm now passing over to Pontus again, who will present our last slides.

[Pontus Bodelsson, executive]

Thank you, Magnus. Please make sure we are on Slide 21. These are highlights of 2023. Region North has generated strong results also in 2023 and focus moving forward is generating greater profitability through operational excellence and value enhancements. The Region South integration progresses ahead of plan, and synergies are being harvested as expected. We are now launching Acceleration Initiative to advance our profitable growth strategy across the group.

Please go to Slide 22. And by this, I'll end our presentation, and we are now ready to take questions. So I'll hand over the conference to our host.

[Operator]

[Operator Instructions] The next question comes from Daniel Ovin from Nordea.

[Daniel Ovin, analyst]

So first question is on the South region and the quite strong uplift we saw there. If I remember correctly, last year's pro forma adjusted EBITA was SEK 23 million, and now you delivered SEK 45 million. And I think you mentioned here synergies of EUR 0.4 million in the quarter. So there seems to be -- have been quite a big uptick also ex the synergies. So maybe you can elaborate a little bit on why the South region was so strong and if that trajectory is something that we can expect also going forward? That's the first question.

[Magnus Hansson, executive]

Yes, you're absolutely correct. The synergies are about EUR 0.4 million in the quarter. And then we are also having a stronger cost control in other areas. And also a slightly lower -- or not slightly, but a lower depreciation in Q4 this year than we did last year. And also, remember, we actually got the [ keys ] on December 1.

[Daniel Ovin, analyst]

Okay. All right. Yes. But that lowered depreciation, I mean, that's something that going to stay around this level? Or is that -- was that kind of a one-off only for Q4?

[Magnus Hansson, executive]

Yes. So we expect that to stay at the level of Q4 2023.

[Daniel Ovin, analyst]

Okay. That's great. And then just follow-up also on South because you mentioned that you were now EUR 2 million synergy run rate, end of the quarter and I just wanted to check for Q1. Do you expect to derive additional synergies also in Q1, more than those EUR 2 million run rate that you have now from 1st of January?

[Magnus Hansson, executive]

Yes. So by the end of Q4, we had EUR 2 million. And then, of course, we have the office part that we've spoken about, the EUR 1 million synergies on an annual run rate due to office optimization. That will start January 1.

[Daniel Ovin, analyst]

Okay. So that's on top of the EUR 2 million?

[Magnus Hansson, executive]

Yes.

[Daniel Ovin, analyst]

Okay. So that's a EUR 3 million run rate now actually from 1st of January then?

[Magnus Hansson, executive]

Yes.

[Daniel Ovin, analyst]

Okay. Great. And then just a question on this -- the cost of this accelerated initiative of EUR 40 million, if I remember correctly. How -- is that going to be evenly split? Or is it heavy in the beginning? Or is it back-end loaded? Or can you say anything of how we should expect the cost for that to play out?

[Magnus Hansson, executive]

First of all, I would like to say that we will come back with -- time as we move along. But to answer the question, it will be slightly shifted towards the end of 2024 and 2025.

[Daniel Ovin, analyst]

Okay. All right. So quite back-end loaded then it sounds.

[Magnus Hansson, executive]

The program is running until 2026. So I would say that it slowed towards the middle of the program rather than actually at the end.

[Operator]

The next question comes from Simon Jonsson from Berenberg.

[Simon Jonsson, analyst]

Simon from Berenberg. A couple of questions from our side as well. Starting up with the organic growth in Region North. It was excellent in 2023. Could you help us understand how much that will be accelerate when we're entering 2024? Because I assume that the pricing component in '23 was greater than it will be in 2024.

[Magnus Hansson, executive]

Yes. I agree with that as well. Of course, the inflation played a greater part in the price adjustments for 2023 than it will for 2024. So the pricing adjustment component is slightly stronger in that sense, yes.

[Pontus Bodelsson, executive]

And in general, we see no big changes in the demand on the market like municipalities and law firms. And so the municipality products in both Sweden and Denmark are so far enjoying the customers' appreciation in a good way. On top of that, of course, we've got the Norwegian company, as I mentioned before, DIBkunnskap launching in -- now in Denmark.

So that's -- it's going to be interesting to see. And as I mentioned, around AI-supported services. In the second half of 2024, we will be seeing a launch of AI-supported service in Sweden and Denmark. So it's going to be an interesting year.

[Simon Jonsson, analyst]

Very good. And then to the acceleration program. Could you perhaps provide some more tangible example here what you will do? And also, will you reduce any staff in this program? And maybe a final question on that one is, will this be more tilted towards Region North or Region South?

[Pontus Bodelsson, executive]

Well, the ignition for all this is, of course, part of a greater plan that we've had for a long time. Starting out with the first step in our integration is the post-merger integration plan as we have been reporting on for several quarters in Spain. And when we now can see actually the plan in Spain taking off, and we are, since quite some time, ahead of the plan, we will take the opportunity to also continue that and do the integration for the whole group.

So we are now expanding sort of the same thinking and the same actions from Spain on to also the other parts. So it's a part of an integration for Karnov Group as a whole. And that's where we'll find the harvesting of synergies and also letting us focus it more and accelerate our strategy execution.

So where we find, we will find definitely in the whole group, speaking about, for example, product rationalizations, harmonizing of IT infrastructure, which will support us and give a chance to launch one product in one market and then easily transform that into the benefit of customers in our markets.

And then, as Magnus mentioned, office -- continued office cancellation not only in Spain, but also in the other markets. And final example I can give is that we are accelerating the process of transforming offline products to online products and also the way we work. We will work a bit more digital than we have done before. So it's several parts enabling us to accept strategy execution as a whole.

[Simon Jonsson, analyst]

Okay. Great. But this does not include any integration of the tech platforms sort of getting one big tech platform in Europe?

[Pontus Bodelsson, executive]

It's definitely in our plans going forward. The exact timeline for that, we haven't set. But we are taking the first steps. And there are, as you know, several different components in having a global tech platform. But we will take important steps already during 2024 and 2025 in harmonizing this, making it possible to work more efficiently, for example, with the content creation and reaping the benefits in North for the very innovative products and internal tools that we have found in the Spanish market within -- especially LA LEY, which is 1 of the 2 companies in Spain we acquired.

[Operator]

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

[Erik Berggren, executive]

So we have one question from the audience around the number of license subscriptions, the development in Region North in the quarter. Perhaps, Magnus, you could elaborate a bit about the development here in the fourth quarter.

[Magnus Hansson, executive]

So we continue to see a strong development of our subscription base in Region North. We grew by, was it, 13%? Yes. 13%, on revenues in our subscription base. Of course, that's related to the number of licenses as well. So strong development in Region North in that.

[Pontus Bodelsson, executive]

And coming back to the customer segments, you see that we have more licenses to our existing customers and then again, new municipalities joining us for our municipality product kind of come in.

[Magnus Hansson, executive]

And of course, the churn continued to be at a low level in Region North.

[Erik Berggren, executive]

Thanks, Magnus. Thank you for that. Question around the Region South integration. So the migration of Aranzadi is, of course, key. And you mentioned in the report, more than 50% of the Aranzadi content is now migrated on to the common content platform. Given this progress, how derisked would you consider the overall Aranzadi migration? Any potential pitfalls emerged by now?

[Pontus Bodelsson, executive]

Well, it's difficult to quantify, of course, the risks. But you can tell by the fact that we are now launching the new Acceleration Initiative that we are quite certain that it will go on in a very smooth way. We have seen very good energy and focus from our colleagues in Spain during this -- in this process.

What we can see apart from the content, because we see the content migration going faster than we have hoped for from the very beginning, now having more than 50% migrated to the new platform. And I would like also to mention a very specific product. It's a -- it's an Aranzadi product from the very beginning, and it's now on the new tech platform, and it's working perfectly.

So that's a very good example of actually taking those small steps all the time, making sure that we keep up the speed and we will definitely be able to deliver going forward.

[Erik Berggren, executive]

Thank you. No more questions from the audience. So, Pontus?

[Pontus Bodelsson, executive]

Okay. I guess that then that we can end the presentation and the questions. Thank you, everyone, for listening and for your questions, of course. We will disclose our Q1 report on the 7th of May. So we hope to hear from you then, if not earlier. Thank you for joining. Have a good day.

[Magnus Hansson, executive]

Thank you.