Nepa AB

STO:NEPA

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to the Nepa Q2 2023 Report Presentation. [Operator Instructions]. Now I will hand the conference over to the speakers CEO, Ulrich Boyer, and CFO, Sonja Thorngren. Please go ahead.

[Ferry Wolswinkel, executive]

Good morning, everyone. That's an interesting start. My name is not Ulrich, but welcome to Nepa's presentation and conference call for the second quarter of 2023. My name is Ferry Wolswinkel, and I'm the interim CEO of Nepa as of June 1. With me today, I have Sonja Thorngren, as our CFO.

Before we reflect on our Q2 results, I will go over a brief background of our business. We serve midsize and large brands around the world to continuously adapt their marketing strategies and messaging in a rapidly changing world where consumer needs shifts continuously, competition is strong and media channels are increasingly fragmented. This is challenging enough as it is. However, we're also facing difficult and unpredictable economic times with persistently high inflation and interest rates, resulting in a slower consumer demand in many of the industries that we serve.

As a result of this, an unprecedented test on the strength of brands and their pricing power and as a result of that, a batch of 4 consumer has unfolded. We help marketers navigate through turbulence times like these by providing a continuous understanding on the performance of their brands, effectiveness of their media investments as well as insights and tailored advice to optimize for long-term brand building. Through a combined effort of cutting-edge technology and brilliant analysts and advisers, we help find those golden [indiscernible] and turn data into growth opportunities.

Through our brand tracking solution, I'll just tell you a little bit about how we do it through our brand tracking solution we track 7,500 brands daily and measure the impact of marketing activities on the brand's performance and perception over time. We do this by collecting data in sites from around 5 million interviews and 4,500 unique panels every year from our panel suppliers. We are using in-house systems and production tools based on sophisticated measurement methods. We create automated reports and visualization tools that present continuous value-driving marketing intelligence to more than 300 brands around the world. Additionally, we offer advisory services in our delivery of insights and top provoking recommendations.

As we look at the results for Q2, let's provide some context on our strategic decisions at the start of the year. With my appointment at the start of Q4 2022 as COO. Our vision was and remains to create a dedicated sales organization focused purely on developing strong client relationships and growth, which in its initial phase was largely a restructuring of our consultancy organization and creating more specialized teams.

We use a land and expand strategy, basically meaning that we focus on getting a foothold in brands that fit our ideal plan profile and leveraging their foothold to expand reach and have gained several Tier 1 global brands in H1, we can proudly call our clients and further expand our footprint outside of the Nordics. These new relationships offer enormous long-term growth opportunities. We also focus strongly on building on our core offering of recurring subscription revenue that has led to ARR, annual recurring revenue growing by 7.3% to SEK 174 million this quarter, and subscription revenue increased by 0.7% to SEK 44.8 million.

While the subscription revenue has grown, we are not immune to the economic headwinds and widespread market uncertainty, we countered that affected both our clients and our own operations. Despite these difficulties, our core business has demonstrated resilience, and we have maintained strong relationships with our clients. However, we did suffer a continued decline in sales from clients who are not actively engaged in our tracking business. In total, net sales decreased by 13.1% to SEK 75.2 million. Amidst declining sales, we have not realized sufficiently fast enough cost savings. EBIT in the quarter was negative SEK 9.7 million, which included a restructuring cost of SEK 6.9 million.

Just to go over some key events in the quarter, I assumed the role of interim CEO in early June, and the Board has activated a search process for a permanent CEO, which is proceeding according to plan. There's also a new Board in place, consisting of Dan Foreman as the Chairman, and Ulrich Boyer, Carl-Fredrik Meijer, Adam Lytle and Fredrik Beltzér as our new Board members.

We will -- after the previously communicated cost savings meet our targeted cost base of SEK 220 million by Q4. However, additional measures are taken following declining sales in H1 this year, including redundancies and personnel changes to return to profitability as soon as possible. As one of my first steps as interim CEO, I have appointed Anders Dahl as Interim COO, who is bringing a wealth of experience and will be taking a significant role in driving these initiatives forward.

As mentioned, our net sales experienced a decline of 13.1% compared to the same period last year. This decrease was solely attributable to a significant drop of 54.3% in ad hoc revenue from clients who are not subscribed to our core services given the nature of these projects and the hesitance we saw in the market, the slowdown did not come as a surprise. However, the extent of the slowdown did cut us a part. It is important to highlight that this segment was largely impacted by larger ad hoc projects being put on hold, and I remain positive that a significant number of these projects are not lost.

On the positive side, we observed good developments in ARR, modest growth in 2 key areas: Subscription, revenue saw slight decrease of 0.7% while these incremental gains in subscription and ad hoc revenue from subscribers are encouraging, they were not sufficient to offset the overall decline in net sales. By taking proactive measures such as reengaging non-subscribing clients and net new clients, we aim to reverse it downward trends in ad hoc revenue and ultimately improve our revenue streams.

Expanding our subscription base and exploring new opportunities for growth in both subscription and ad hoc services, we will be instrumental going forward. This will secure a solid revenue base that is less vulnerable for fluctuations and impacting our profitability.

So here an overview of our ARR and despite the challenges that we did face, our core tracking business has demonstrated its resilience through successful upselling to our clients and maintaining a consistently low churn rates. We have achieved a growth of 7.3% in our annual recurring revenue, which now stands at SEK 174 million. This growth serves as a testament to the strength and value our core business -- to our core tracking business.

Our commitment to providing exceptional insights and marketing advisory services have continued to drive demand and position us as highly competitive among global renowned brands. Over the last 12 months, we have surfaced 132 tracking clients at an average of SEK 1.29 million per client. Additionally, we have generated approximately SEK 0.5 million of ad hoc projects -- project revenue per client. This strategic approach of offering both recurring tracking solutions and value-added consulting has proven successful in meeting our client needs.

We have nurtured a close relationship with our subscribing clients leading to long-term retention. The churn rate for the quarter was a mere 1.1%, highlighting the loyalty and satisfaction of our client base. With that, net revenue retention has increased to 103.2% in -- up from 101.3% in the last quarter. We remain committed to serving and maintaining these valuable relationships. But while we focus on nurturing strong relationship with our existing clients, we recognize that sustained growth requires expanding our customer base.

Since the initiation of our dedicated sales team, we have with the significant improvements. Our pipeline growth has accelerated, and our sales efforts have become more focused through a data-driven approach and well-defined incentive structure to boost our subscription business. The addition of new consumer brands to our prestige client roster in the second quarter further affirms the positive direction we're having in.

I also want to touch on upon our tech and product developments. We are continuously improving our products and have in April and May conducted a tech audit to prioritize among development projects as well as driving the current product development initiatives forward more efficiently. During the spring, we launched our automated campaign test tool that reduces the time to complete the campaign as from 2 weeks down to a couple of hours. This really improves the value we deliver to our customers and gaining internal efficiencies as well. We're in the phase of rolling this out amongst our clients and adding more languages to expand this internationally.

We're super excited to keep improving our client offering going forward. On that, we have started exploring opportunities that generative AI offers and leapfrogging into areas of internal efficiency as well as an array of groundbreaking solutions for our clients. We will continue to update you on the meaningful developments on a recurring basis moving forward.

While we have not achieved the required cost reductions to restore profitability, we have made progress in implementing cost saving measures. The lower-than-expected sales in the first half of the year have been a key factor contributing to this challenge. In this quarter, we have taken additional steps to improve our cost base, resulting in restructuring costs of SEK 6.9 million. Now we remain on track to meet our annual target cost base run rate for personnel and other external expenses of SEK 220 million by Q4 2023. During the summer, we have put a plan in place that addresses some of our major challenges, such as cost and organizational efficiency and pricing and packaging. We are clear on what needs to be done, and I'm confident that the steps we are taking now will drive significantly better results in the mid and long term.

To improve internal efficiency, we are continuing to integrate regional functions into a global structure wherever possible. This approach empowers our clients' teams to seamlessly serve brands on a global level. In the second half of the year, our focus will be on optimizing our organizational structure to align with a leaner and more dynamic operations. We will prioritize increasing sales effectiveness and strengthening our go-to-market activities.

The strategic actions are aiming aimed at improving internal efficiency, fostering innovation and delivering consistent value creation for our steam clients through advisory and innovative solutions. By addressing our cost structure, enhancing our efficiency and focusing on sales effectiveness, we are confident that we can work towards restored profitability and securing a sustainable future for our business.

To summarize, we've had good momentum in ARR reaching SEK 174 million at the end of the quarter. The growth in revenue from subscribers did not counterbalance the decline in ad hoc revenue from other non-subscribing clients. We've had weakened profitability but addressed it with additional cost saving measures and are taking these measures to return to profitability as soon as possible.

Looking ahead, we have continued to experience the same pattern in July while subscription revenue and ad hoc revenue from subscribers have continued to show modest growth. Ad hoc revenue from non-subscribing clients is still contracting. We are currently addressing this better and strive to reengage non-subscription clients to reverse the downward trend in their ad hoc revenue. We're also expanding our subscription base and exploring new opportunities for growth in both subscription and added services to create a more reliable revenue base.

Lastly, we are taking further actions to rightsize our teams and find ways to become more efficient and effective. Having said this, we are dedicated to stick to our long-term strategy, expanding our footprint with global brands and increasing our subscription business, fostering stable long-term growth and reduced volatility. We closely monitor market developments, adapt our approach to meet changing client needs and leverage data-driven insights to drive sales growth.

Lastly, I wish to acknowledge and commend our incredible employees who have demonstrated remarkable resilience in the first half of the year and dedication in shaping the future of our company. The hard work has been instrumental in the progress we have made. As the interim CEO, I'm grateful for the outstanding teamwork, and I'm still able to devote a significant amount of time to revenue-generating activities. Thanks to the support of my extraordinary coworkers. Thank you for your time, and now I welcome any questions.

[Operator]

[Operator Instructions] The next question comes from Jesper Von Koch from Redeye.

[Jesper Henrikson, analyst]

Thanks for the presentation and also welcome to the company, Ferry.

[Ferry Wolswinkel, executive]

Thanks, Jesper.

[Jesper Henrikson, analyst]

All right. Yes. Let's talk with the efforts that you're prioritizing. So if you can start with the organizational efficiency, I mean, could you describe your actions towards becoming a more efficient organization and also perhaps quantify what level of the cost base you aim for with the additional cost taking that we described.

[Ferry Wolswinkel, executive]

Sure. So the organizational efficiency. I mean, have been working in a certain way for a very long time. So of course, we could look at how can we optimize things we do today. However, we are looking more in new ways of working, that I believe will drastically improve the way we work together, hence, increasing efficiency. That is one example. And there are a number of things that we're looking at.

We have looked at the data that shows where our weaknesses are. And one of the areas that we're addressing is of course, charging the hours that we work on with our clients. So we tend to be very client-centric and client-friendly and sometimes that is costing ourselves by spending more time than we charge. Of course, that's something that we will be looking at more closely moving forward.

There will be other metrics and KPIs that we will monitor more closely to create a more organizational efficient way. Another thing that we already started at the start of the year was to become one global network. That meant that we integrated the markets that were operating independently before into a global structure. This allows us to benefit from economies of scale and to benefit from resources that we have in other parts of the world.

So whenever there is low capacity in, for instance, Sweden, we can leverage resources from, for instance, the U.K. And of course, that makes it much less volatile than relying on locally-based resources. I would say those are some of the key areas that we are working on right now. It's -- I cannot comment yet on any level of impact that will have on the cost base, but that will be visible shortly.

[Jesper Henrikson, analyst]

Okay. Good. And thanks also to the organizational efficiency answer is very clear. And then regarding I mean, packaging and pricing, Obviously, you mentioned not charging a sufficient number of hours, but I guess this is another thing. So what is the problem that you see in the current packaging and pricing? And also what products are you overlooking the present moment?

[Ferry Wolswinkel, executive]

Yes. So in terms of what I'm overlooking it, it is both subscription and had hogs our full portfolio. challenge with pricing and scoping is that some solutions we offer are highly customized and not as easy to scope from the beginning. So by way of packaging, we kind of streamlined the process more. We have looked into the data from all of our clients, we have looked at patterns and we, of course, understand the clients quite well.

So we see where there are patents, what business questions we're answering in general and what different segments that we tailored to. So the way we have been selling our solutions historically is much more inside out and focused on the product or the solution whereas now we're looking at, okay, in what client segments are we addressing which problems that we are addressing. We are packaging these solutions at that way. This will also, I believe, increase our deal size.

We will look at working with our clients in a different way that is much more tailored around the expertise that we have in the areas that we saw for our clients, while streamlining operations and making it easier for our client services team to understand how the scope and the number of hours to put into these offerings.

[Jesper Henrikson, analyst]

All right, clear. And is that more of like the packaging and pricing towards new customers? Or do you also aim to go on to your existing base of -- I mean, the client base and do some stuff there, too.

[Ferry Wolswinkel, executive]

Yes, of course. So Particularly, this will be tailored towards new customers. At the same time, we've already started. There's a lot of opportunities to package certain solutions that our clients have been buying from us on a recurring basis. So they tend to be both ad hoc, but on a high frequency. So that one gives us already opportunities to package them in a way that makes it -- that will improve, again, our revenue and deal sizes. But at the same time, it makes it easier for us to plan our resources as we expect and know what is coming from that perspective.

We will -- as we are more developed in the packaging and depending what the result of it is, we will, of course, also use that as a way to open up new conversations and expand our relationship within our existing clients to get to grow our up sells that we have been growing quite successfully over the past few years, but to continue opening up areas where we can open up new doors and conversations.

[Jesper Henrikson, analyst]

All right. And then, I mean, I guess, also your problem today has been that your profitability is too dependent on ad hoc sales from non-subscribing clients. So what I'm wondering is if you aim to reach any kind of like a baseline level on the EBIT margin for periods with muted ad hoc sales such as the one that we're in right now.

[Ferry Wolswinkel, executive]

Yes. I mean, it's -- we're definitely vulnerable by this phenomenon. So it's -- we don't want to be too dependent on volatility in ad hocs that we are now. But it's a strategic service that we offer in addition to our subscription business. So we will -- through packaging and through leveraging our resources more broadly, it just creates a more dynamic organization. So I think partly, it's an internal challenge where we just need to find ways to counterbalance supply demand when it comes to these ad hoc projects.

And at the same time, as we continuously grow our subscription business, as you've seen, that's growing faster than our at hocs than the overall impact of volatility will reduce at the same time.

[Jesper Henrikson, analyst]

All right. Good. And then just 1 last one around I mean, you've obviously only been appointed for a few months and you're also like only the interim CEO for now. But I mean if you were to continue like steering Nepa into the future, like where do you see Nepa would be in like 3 to 5 years from now? I mean product mix positioning, profitability. Yes, please.

[Ferry Wolswinkel, executive]

Yes, sure. And maybe this comes back to the reason I joined that. I mean I think this is a bit of a hidden gem in Sweden despite the results. But I think our offering is very strong, and it's shown by the loyalty and the retention figures that we have and the relationships we have with our customers. I think the challenge has been to replicate and scale this success outside of Sweden.

So my vision for the next 3 to 5 years, it's not going to change as much in the product mix because this is our expertise. This is our strength, and this is what our clients want to collaborate with us with. Of course, we will leverage new technologies and especially I'm quite excited about the opportunities that generative AI offers us to really make a step change in the way we offer our services.

But I would see exponential growth opportunities by -- in our new sales motion. We are working more with global brands. Of course, being a Swedish company, even though we have fantastic brands, we also have a very large focus on local brands. And I think now we have a much more global operation that focuses on global brands. And with that, the ceiling is much higher and our opportunity to continuously grow with them is much bigger. So my vision for the next 5 years is to -- for growth to continuously come more outside of Sweden and outside of the Nordics. It will be with larger brands where our deal sizes will grow.

And of course, we will continue to focus on increasing our subscription revenue, making it a much more stable business year after year. And you'll see that from next year already. Of course, our goal is to become profitable. I can't really tell you in 3 to 5 years what the levels of profitability will be because it will also depend on our ambitions to grow. So we have to balance the two. But it will definitely be the ambition to be profitable as soon as possible.

[Jesper Henrikson, analyst]

All right. And then you say that you're aiming to increase your subscription revenue, obviously, but that we'll see that from next year already. I mean we are seeing -- or we are already in a tough market. So what makes you so confident in you growing the subscription revenue significantly over the next year.

[Ferry Wolswinkel, executive]

Yes. I mean you can already see this quarter that our subscription revenue is at all-time high. So that's not the area where the issues lie. It's also where our retention is highest. So that is our segment where we are strong, and we will remain to invest in, in terms of our resources. We are very focused on this. So based on the client demand and what we see amongst our existing clients, either -- that is one that makes the most stable segment that we have. And as we are continuously to grow pipeline, I'm confident that this will continue to be despite the challenging times. I do believe, of course, there can be somewhat of a higher impact on retention, given the economic uncertainty. But as you've seen in the last number of years, our attention on subscription business is extremely high even in difficult times.

[Jesper Henrikson, analyst]

All right. Good. That's all for me. And yes, good to see you on Board and good luck going forward.

[Ferry Wolswinkel, executive]

Thanks a lot, Jesper.

[Operator]

There are no questions at this time. So I hand the conference to Edvard Hagman from Investor Relations.

[Edvard Hagman, executive]

Thank you. There are no other questions in the questions queue from my side either. So I hand it back to you, Ferry.

[Ferry Wolswinkel, executive]

Fantastic. Well, thank you all for listening in, and I wish you all a fantastic weekend. We look forward to speaking to you again in 3 months from now.