Lime Technologies AB (publ)

STO:LIME

Earnings Call Analysis

Lime Technologies Reports Strong Growth and Positive Outlook for Future

Lime Technologies closed Q3 with an impressive 18% sales growth and a solid 25% EBITA margin. Their annual recurring revenue (ARR) surged by 28%, driven primarily by a 31% increase in subscriptions. Both Sweden and Rest of Europe saw 25% and 6% growth, respectively. The company aims for sustained growth above 18% in the medium term while maintaining an EBITA margin over 25%. With 64% of revenue now recurring, Lime is strategically shifting from service agreements to subscriptions, positioning itself for a strong finish to the year and a promising 2025.

Strong Growth in Key Metrics

In their latest earnings call, Lime Technologies reported an impressive 18% sales growth for the third quarter, with expectations to maintain above 18% growth in the medium term. The company attributes this performance to a robust customer acquisition strategy and expansions in existing markets. Notably, their Annual Recurring Revenue (ARR) grew by an outstanding 28%, propelled by a 31% increase in subscription revenues, which now constitutes 64% of total revenue.

Geographical Performance Insights

Performance was differentiated geographically, with Sweden showing remarkable growth of 25%, while the Rest of Europe lagged, growing only 6%. Over the last 12 months, Sweden achieved 19% growth compared to 15% for the Rest of Europe. Management acknowledged the need for improvement in the Rest of Europe, particularly in enhancing their software offerings and growing market penetration in underperforming regions like Finland.

Profitability Metrics and Future Guidance

The Earnings Before Interest, Taxes, and Amortization (EBITA) margin for Q3 stood at 24.8%, slightly down from 25.6% year-over-year. Over the trailing twelve months, EBITA reached 25.1%. Management aims to maintain an EBITA margin above 25% as they prioritize growth over short-term profitability, reflecting a strategic focus on long-term value creation.

Rising Operating Expenses and Recruitment

Operating expenses saw a 14% increase attributed to the acquisition of SportAdmin and enhanced investments in staffing and marketing. Personnel expenses accounted for 58% of net sales in Q3, up from 57% the previous year. Lime continues to bolster its workforce, having onboarded over 30 new employees recently, which is expected to impact operating costs positively in future quarters.

Strategic Focus on International Expansion

The company is actively working to internationalize SportAdmin, evaluating market opportunities beyond its current territories. Management is making strides to adapt product offerings to meet international standards, while also focusing on building a strong brand presence in new markets. This strategic push is key to increasing their international footprint.

Positive Outlook Amid Market Challenges

Despite facing challenges such as longer sales processes and a competitive landscape, management expressed optimism about future quarters. Strong customer engagement signals and an expanding pipeline indicate potential for increased sales momentum in Q4 and into 2025. The company remains committed to executing strategic projects that will positively influence ARR growth moving forward.

Reinforced Financial Health

Lime Technologies maintains a solid financial footing, as reflected in their net debt to EBITDA ratio of 1.0, well below the target threshold of 2.5. The dividend policy stands resilient, returning 56% of net profit to shareholders. The company’s consistent cash flow from operations further underscores its robust operating model.

Earnings Call Transcript 2024-Q3

[Nils Olsson, executive]

Hello, everyone, and good morning. And welcome to Lime Technologies Q3 Update.

My name is Nils Olsson, been working at Lime since 2006 and took the CEO position in 2021. And today, I'm very glad to have Anders here, our new CFO.

[Anders Hofvander, executive]

Hello, everyone. I'm very glad to be on board with Lime. Looking forward to the journey going forward.

[Nils Olsson, executive]

Perfect. Thanks for that. And let's start giving a brief overview of Lime before we jump into the Q3 presentation.

So yes. [Operator Instructions]

So let's start looking into a bit of what Lime really is about. And we've always been running Lime with a very long-term perspective. And as you can see, that has left us with a fantastic footprint. In more now than 20 years, we have grown, in average 19% per year, with an EBITA margin of 25% in average per year and I think that's something that we, of course, are very proud about.

But no matter how big we've been, how many offices we had, how many customers we had, we more or less have had the same goal from the start, and that is to help our customers to become really, really good and strong in sales and customer care so they can help their customers in a good way, meaning that we focus on the end customer.

And we do our best. We help our customers at their best when we combine really strong software, which we deliver in our 4 platforms with great expertise. And we help our customers to solve mission-critical problems, which means that we become a natural part of the company's core processes.

Over the years, we have scaled our business into several markets. We started with Norway and Finland in 2010. We opened up Denmark in 2015. And from 2020, we entered Netherlands and Germany. And we also welcomed Lime Connect and SportAdmin to the Lime Group.

And today, we are present in 7 markets, 11 offices and we have almost 500 employees.

And looking into some of our key success factors, as I started with, I think, the long-term profitable growth. Combining that gives us a really, really strong foundation. We have a goal to have -- increase the share of recurring revenue, and today, we see that we have 64%. So we are moving in the right direction there. And it's a predictive model. So I think that gives us a good starting point. We also have a sticky customer base, meaning that we do business with many customers every month, every year and we are not depending on 1 or 2 big customers.

And something that I would say is the foundation of Lime that has built the success over time is a strong corporate culture. We are combining strong performance with care.

So looking into a little bit of Q3 then, and I give you a little bit of a sum-up before we jump into the more detailed slides. And as you can see, we closed the third quarter with 18% sales growth, 25% EBITA margin and 28% ARR growth. So overall, I would say strong numbers.

And as always, the third quarter is a little bit special when it comes to the summer holidays in July and it also, of course, spills over into August. August and the beginning of September this year were a little bit more challenging than usual in this period and it was tougher to close deals with both new and existing customers.

However, I'm very, very pleased with our mindset and our activity level to get closer to our customers. And this led to a great pipeline development over the month and a much, much better finish in the quarter with many nice deals in all our business units, and I will come back to that in a few slides.

But looking into our 4 different business units, starting with Lime CRM. We are focusing on speeding up Lime CRM, especially on the Expert Services side. We know that there are no shortcuts. And the solution is to really work close with our customers and focus on creating value for them, and of course, solving their pains and challenges.

As I said, I'm really happy with our mindset and our way of working. And doing this also means that we are increasing the pace on the sales side and that will leave us with a good position when the market is opening up.

If we look into Lime Go, I would say the good performance has continued. Our focus on attracting larger companies is getting results and the value of our average deal has increased over the year. Due to this, we can see the good development. We are strengthening the Lime Go team with a number of nice recruits, both on the sales and in product development.

And talking about Connect, we also see a good trend continuing there. And this quarter, we have done some really nice product features -- we released some nice product features. And talking about one of them, our first version of our mobile app during the quarter, and it has been one of our most requested features and I would say it has a great potential, both to our new and existing customers.

And another thing that I see -- have seen a good progress within the quarter in Lime Connect is a strong development in our marketing team. We have done many webinars over the quarter and I would say it gives us a steady stream of leads, both that we can target on new sales and in upselling.

And if we look into SportAdmin, the business in SportAdmin is a little bit more term-based where you see many deals happen at the end of each term. So a strong start in each term is really important for good sales in the coming period.

I'm pleased if we're looking to how we handled the start in the autumn. Great activity levels and we have built a strong pipeline, which I really hope that, that could give us a good closing for the end of the year. But of course, there is some nice deals, which I will come back to also now in Q3.

Last bullet point, investment in future growth. I think it's important that we continue to focus on long-term profitable growth. We are doing this by keeping investing in sales, marketing, product development and recruitment. During the quarter, we have recruited more than 30 new employees, onboarded them here in August, which means that we are always we are building for the future. And already now, we are starting to fill up the positions for the onboarding in January.

In general, we know that the game on the market is tough and demanding, but it's something that we've been playing successfully for over 20 years. And with a strong position, we think that we have every possibility to keep gaining market shares regardless of the market conditions.

So jumping into a little bit more slides on Q3. Today, we will cover the order intake, the revenue, the profit, and at the end, some summaries, and of course, questions.

But starting with the order intake. As we have communicated before, our customer concentration is low. Today, our top 10 customers stands for 7% of the revenue and the biggest customers 1% of the revenue. And I would say, in this type of business climate, it's very good for us that we're not depending on one or a few big customers. We are making deals with many customers in different regions, in different geographies, in different industries every month.

In general, if we look at the market situation, I would say it remains similar to previous quarters with long sales processes and more decision-makers involved. And as I started with, I think this quarter in Q3 was a little bit slower than expected in the beginning, but it gave us -- despite this, we built the pipeline and our order intake closing the quarter is quite -- is solid, I would say, with many important deals in all business areas.

Looking into some of the deals that we closed, you can see that on the right-hand side. We continued to do business in our industry verticals in Lime CRM. During the quarter, we welcomed companies like the utility company, Skagerak Energi, really nice brand; Finnish wholesale company, Masino. That's actually our biggest deal yet on the Finnish market. And the Swedish comparison side, [indiscernible].

It's also nice to see that we are building a stronger and a better reference base in our membership vertical with the case, as you can see, [indiscernible].

And continuously, we are working with our transformation deals. This time, I'm really glad to announce OBOS, which is actually one of our first Lime CRM customers back in the days.

Lime Go, we welcomed customers such as Park Nordic, where they offer parking solution for commercial buildings and office buildings.

And if we look into Connect this quarter, just to give an example where we welcomed LeaseTeq. This is a new customer for us and a Swiss digital leasing provider. One thing that I really like with this deal is that it shows that we not only have a strong offering on the German market, but it's also actually growing in the DACH region.

And from a SportAdmin perspective, one of our core verticals in SportAdmin is swimming. And therefore, it feels extra good to welcome Svenska Elite Swimming to SportAdmin. And it's an organization who wants to improve the sports of swimming.

So let's look into the revenue side. Starting with the ARR, and as you know, we are a product company and a very important KPI for that is the ARR growth. Looking into the different drivers there, you can see our subscription alone is growing by 31% compared to Q3 '23, which is a strong number. And looking at the service agreements, you can see that they are decreasing 22% in the quarter, which is in line actually with our strategy. It means that we are converting customers with old upfront agreements into new subscription agreements. And that's an ongoing project that I've been talking about and we will continue working with this kind of transformation.

But in total, it builds up to a 28% growth in our ARR, which is a strong number.

Looking at our different revenue streams. And you can see that this is the revenue streams development since 2018. Looking at subscription is steadily growing, 31% in Q3, and also last 12 months, you see a 31% growth in subscription. And today, that stands for 60% of our revenue. Service agreement stands for 4%. So it means, as I said, we continue to transform our customer base from service agreements into subscription.

And in total, this adds up to 64% recurring revenue, which I'm really happy about to see that kind of development, moving around from 60% up to 64%, and this is exactly in line with our strategy.

The old upfront payment model is more or less the same amount as last quarter, less than 1% today. And Expert Services today stands for 35% of that revenue. As you've seen, we see a little bit slower pace on the Expert Services side. And it will -- I will definitely see -- we are working for better improvements in that area. So it will continue to grow, but in the long run, decrease as a part of the total net sales going forward.

If we look at the revenue side and looking at the growth, we reached 18% in Q3; and the last 12 months, we have 18% as well.

And if we look at the split between our segments, we see Sweden growth by 25% and the Rest of Europe, 6%. And last 12 months, 19% in Sweden and 15% in Rest of Europe.

And of course, the growth in Rest of Europe is nothing that we are satisfied with, but we need to look into 2 different angles here. Looking at the software side, we see a growth that are an okay level in the quarter. But looking at the full revenue where we also include the Expert Services side, we are definitely not satisfied and we have an improvement potential going forward.

And as I said, over time, we want to build a more international company. That's where we put our focus to put in more employees, we put in more marketing money, so we are building a stronger brand, so we can go on an international expansion.

Yes. Anders, let us look into the profit side.

[Anders Hofvander, executive]

Thank you, Nils. Looking into the profit, EBITA in the third quarter reached 24.8% compared to 25.6% for the same quarter as the year before.

Looking at the last 12 months figures. EBITA Q3 '24 amounted to 25.1% compared to 25.5%, which is in line with our financial targets.

On the right-hand side, we have the last 12 months EBITA development over the last 3 years. As you can see, we reached a higher EBITA margin of around 28% during the pandemic. Now we're back to normal and lasting level to support our future growth, investing in sales, marketing, staff, other products and so forth. The last 12 months in Q3 2024, we have reached an EBITA of 25% as we're now able to invest more in future growth. And as we have already communicated, we will continue to prioritize growth over profitability.

Change to the next slide. And here is our OpEx development. On the left-hand side, we have our personnel expenses, which is the largest expense in our profit and loss. Personnel expenses in relation to net sales LTM in Q3 2024 amounted to 58% compared to 57% in Q3 2023. The increase in our personnel expenses for the last -- latest 12 months is partly explained by our acquisition of SportAdmin, which was done in January 2024, but also due to our continuous investment in staffing and employee activities. The investment in our employees is contributing to a lower churn.

Looking on the right-hand side, we have our operating expenses. As you can see, our other operating expenses increased by 14% in the last 12 months. The increase is partly due to the acquisition of SportAdmin and also that we are investing more in future growth by marketing, physical sales and product development.

[Nils Olsson, executive]

Perfect. Thanks for that, Anders. Let's move into a summary here and looking into our financial targets. So starting with sales growth, our objective is, in the medium term, to have a growth above 18%. In the last 12 months, we are in line with that, 18%.

If we look at the EBITA margin, we should have in medium term an EBITA margin above 25%. And today, we are last 12 months at 25%.

Net debt in relation to EBITDA should be less than 2.5, and we are at 1.0 today.

And if we look at our dividend policy, our dividend should correspond at, at least 50% of the net profit. And we ended up at 56%.

So let's see if there is any questions in the chat that we can answer.

[Anders Hofvander, executive]

Yes. And we have -- first one is from Stefan Gauffin, and it says, in CEO statement you say that you have seen positive signals in customer engagement and increasing pipeline. What does this mean? Should this give a better momentum in Q4 or should this be more positive for 2025?

[Nils Olsson, executive]

Great question there, Stefan. I think you should see it that, of course, we closed less deals than expected in the first, yes, 1.5, 2 months in -- or a little bit more than that actually in Q3. So what we've seen then is that you, of course, then should build pipe. The thing is that how good then are you in converting that pipeline that you actually built. Due to that we didn't close any deals, either they are more or less postponed in the future or they are more or less lost to a competitor.

The good thing that I saw in this quarter that we built up the pipeline over the first -- the months, but then we actually executed and we had a good inflow of new closed deals, both on existing customer base, like the ones that I mentioned, OBOS, that transformation deals, but also on the new sales segment, which is really important for us.

So of course, when we have that with us now and I also think that we've started the first, yes, weeks after Q3 in a good way, in a good momentum, so I think that what we will see now is that we start working with these projects and hopefully that can then increase the pace on the Expert Services side.

Looking at the ARR development, it really depends on what you can see when are these projects done. And of course, then there will be a split. Both you will see some positive effects in 2024 and Q4, but that's more normal business. But also you're building up that ARR, committed ARR, into 2025.

So it will be a mix. But of course, more closed deals will help us to gain a better speed. The most important part now for our Expert Services department is to get these projects started so we have a good momentum within them.

[Anders Hofvander, executive]

Okay. Good. Going into the second question is from Viktor Lindstrom and he has 2 questions. And first one is how is the coming internationalization of SportAdmin progressing?

[Nils Olsson, executive]

I mean, we have been working with an internationalization question more or less since we started the -- since we took over SportAdmin in January, which means that from a more like internal perspective, we are preparing the product so it can handle the international markets. There are some features that we need to have to be able to export the software internationally. And I would say that is going according to plan, which is good.

Then on the other hand, we are more, from a market perspective, looking into and are investigating different markets and how is the landscape for sports software actually working in U.K., in Denmark, in Netherlands, in Germany, in Finland and so on. And I would say that we are narrowing that down to see, more or less, okay, maybe 1, 2 markets are a better fit to start with if we look at the whole sentiment of the market conditions.

So I would say it has a good progress in general the internationalization question.

[Anders Hofvander, executive]

Yes. And second question is, can you elaborate on SportAdmin's impact on profits and margins in the quarter?

[Nils Olsson, executive]

We don't disclose if we look into exact numbers, both on the ARR side and on the profits. But in general, as when we did the acquisition, we think there was an EBITA of 17%. So of course, it has a little bit negative impact on the profit side and that was what we expected over the years.

We acquired SportAdmin mainly for the growth going forward, and that's the important part for us as well. So we will continue to invest in SportAdmin so we can have a high pace going forward on the growth side as well.

So far, I'm very satisfied with the acquisition of SportAdmin and it has delivered what I expected, both on growth and profitability.

[Anders Hofvander, executive]

Okay. We have another question coming in from Predrag Savinovic. How will the increase net recruitment impact the cost levels going forward? Are they fully reflected in the operating expenses for Q3?

And answering to that one is that we did recruit a lot of people, a lot of new employees, in August, which means that all expenses are not fully reflected in Q3. And going forward, you will see a different level on that.

[Nils Olsson, executive]

Yes. And I would say, in general, we recruited in line. When we look into the recruitment, I think that we had a good onboarding in August. So they start in, I would say, the sixth of -- yes, was it like 6th or 10th of August and it was around like 30 new employees coming in at that time.

And we continue to see a quite low employee churn. It's more or less on, yes, historically low numbers, which I think is an effect of that we are doing things better internally, better leadership, we are good on attracting and developing our talent, but of course, it's a question on the market as well. That has been a little bit more -- a little bit tougher and then, of course, that also reflected people are staying.

So I think over time, we will probably see a little bit higher employee churn when the market is opening up again. That's why it's also important now to fill up the onboarding program in January, and that's a big focus for us at the moment where we are looking into both junior like the training program will run, but also find a little bit more senior, especially on the sales side in Rest of Europe.

[Anders Hofvander, executive]

Okay. Next question is coming from Anders Knudsen. Can you comment a bit on the very strong cash flow versus last year?

And as you can see from the cash flow, it's very, very strong. It's mainly due to that we have a very good business, operating business, generating positive cash flow each and every quarter.

However, there is -- looking -- comparing with the 2 years here, you can see that we have a very strong effect on cash flow from current operations. That is mainly due to a timing effect from previous year basically. So that's an answer on that one.

And when do you expect to see Europe to be satisfactory, is the second question from Anders.

[Nils Olsson, executive]

Yes. And I think there are differences in Rest of Europe. If we look into and I think give a little bit flavor on that, I think still we are doing -- we are continuing to do better in Lime Connect. As you know, we had a tough '22, but I think we've seen better progress in '23 and even better progress here in '24. So I think that we have more potential.

So of course, we are aiming for high growth in Lime Connect as well. But in general, I feel quite -- looking into where we are, I actually am quite satisfied with that development.

Looking into Germany, in general, from a Lime CRM perspective, I'm also happy with that development. If we put them -- compare that to previous markets that we entered with Lime CRM, Netherlands, Denmark, Norway and Finland, we are actually having a much better pace on the German market compared to the other markets if we put them on year 1 and year 2 and year 3 and so on.

So there are some markets where I think that we could expect more. I think that we could expect more from the -- especially on the Finnish market. I think that we have -- we are staffed in that way that we could actually be able to deliver more results and more sales going forward. So that's a market where we are working with.

And I'm happy to see the new deal there with Masino. As I said, the biggest case ever on the Finnish market. Hopefully, that could create some ripples on the water and we can get some momentum and positive motivation from that.

[Anders Hofvander, executive]

Okay. Next question is from Ina Djupsund. And she asks, how is the mix between upsells versus new sales trending?

[Nils Olsson, executive]

The mix is quite similar as before. I think that we are -- yes, since after COVID, we became much better on doing the upsell side. So looking at the revenue split, we see approximately a 50-50 split on -- especially on the Lime CRM side. Lime Go side, we see a little bit more -- higher on the new sales side. And if we look into both Connect and SportAdmin, we see also a split of around like 50-50.

So I think that was the last question for today. Thanks a lot for the engagement in the chat. And let's -- I wish everyone a fantastic, yes, start or end maybe of the fall and start of the winter.

And if you have any questions, don't hesitate. Just reach out and give me a call. Thank you very much. Bye-bye.