Nepa AB

STO:NEPA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to Nepa's Q2 2024 Earnings Call hosted by RedEye. Here to present the Q2 report is CEO, Anders Dahl; and CFO, Sonja Thorngren. So we'll start with the company -- a brief company presentation and the presentation of the Q2 results followed by a Q&A session at the end. So welcome, and the floor is yours.

[Anders Dahl, executive]

Thank you. My name is Anders Dahl, and I'm the CEO of Nepa. I've been CEO since March of this year. I was a CEO previous to that from June of last year. So this is kind of a short summary of Nepa, an overview of Nepa, what we do. And as I said during the last earning calls that we are gathering and working with marketing intelligence. We are helping marketeers to understand the complex landscape based on actual interviews and actually aggregated in our platforms and models.

We're collecting all this in our marketing intelligence suite, which contains 3 main components: the brand tracking tools, campaign evaluation and marketing mix modeling. All those tools are platform-based. So they are presented to the clients in dashboards or machine deliveries or in some cases, reports. But they give deep deep deep insights to our clients and customers to navigate in -- with their brands, their campaigns and how they can optimize their media and marketing spends. We also have a high-end consultancy team that works with the client in inside meetings and also help to interpret this data and help them to navigate in order to justify investment, in order to argue when it comes to reducing investments or what is the short- and what is the long-term impact on the brand and also, of course, on the sales side.

We serve brands and clients, global brands around the world. We're active in 60 markets. And we do research in those markets. We have presence with our trackers, with our market intelligence, and we have people built on the ground in Northern Europe, in the Nordics, in the U.K., U.S. and in India. So even markets where we don't have people on the ground, we can still do brand trackers and campaign evaluation based on the interviews that we gather for those markets specifically.

Key highlights for the quarter is that we have continued to see an improvement in profitability. The underlying profitability is now looking much better than before. The market has continued slow. We see very much of a wait and see in the market both from existing clients and also in ongoing discussions with new clients. And that is mainly driven by most of our clients, our consumer-driven brands, totally dependent on the global economy, inflation, interest rates and the overall market economy. And of course, that impacts their willingness to spend money with us, spend money on marketing and media.

The good thing with our products is that we are not really dependent on an increase in the media spend market since we don't buy media, we help the clients to analyze their media spend and marketing impact. So even if they have to reduce the marketing spend, we can help and give advice on those reduction, what will be the short or what will be the long term on their investments. We have seen a decline in ARR, mainly driven by a few clients, but we have also managed to kind of capture some of that decline in ad hoc sales, not all of it. We have seen a decrease in net sales growth, but the underlying profitability has seen a significant improvement.

As I said during the last earnings call, we have hired a Chief Revenue Officer in May of this year. She joined us now with the summer, and she's now working on setting up a new sales organization with a clear focus on new business development and growth. Of course, with in controlled parameters, so we're not going to run away and spend a lot of money, but we're going to make sure that we are investing wisely in marketing spend with clear allowables, what can we pay, what can we afford to pay for a new client, based on what we know about our client's lifetime value, how much they're going to spend with us in a recurring revenue mix.

During the period, we also have a general -- at Annual General Shareholder meeting where the board was reelected, and there was also a decision about a dividend of SEK 1.23 per share. So those were kind of the main key highlights overview for the quarter, and I'm going to hand over to Sonja to give a little bit more deep insight on the financials.

First, this picture, by the way. This just shows the turnaround during Q2 in -- the bottom out in Q2 of 2023, and you see a clear improvement in quarter 2 in 2024. So we're going to continue to work with this ambition to improve profitability even in a growth scenario. So that is kind of our clear ambition. With the solid control systems we have in place now and the change in culture, the change in the overall focus on making sure that the growth is profitable. Sonja?

[Sonja Thorngren, executive]

Thanks so much Anders for this brief overview and the highlights. And as Anders already touched upon, we do have weak quarter when it comes to our subscribing clients due to churn and also cautious demand from subscribers when it comes to ad hoc projects. However, on the positive, when we look at our revenues, we do see a positive sign from our other clients when it comes to ad hocs. And this is driven by our previous clients, which is a good sign that they are returning to us for insights, although they are not subscribing clients as of this moment. So that's a strong sign that we're still maintaining strong relationship with our previous clients as well.

A short comment on our capitalized expenditure. So we have lower levels at the moment, and that is due to our Brand Tracker and our campaign evaluation, which has gone through some longer development cycles, are now in place and on par on where we want them to be. So right now, we're fine-tuning and evaluating our product offering where we see then not the need for longer product development cycles as of now.

Going over to the costs. So we have an increase of our gross margins, which is also an improvement from quarter-on-quarter as well as year-on-year. So we look at -- the reasons behind that is still working close with our suppliers and having a strategy for that, also managing our data quality in a very persistent way as well as the high focus on our project profitability.

And as Anders has already mentioned, we -- so the second part of last year, we implemented a lot of initiatives when it comes to cost control, which is now visible very much in our -- on the cost base. So we have a 26% decline on our personnel costs, for example. And this is, of course, then visible in our adjusted EBIT, which is positive of SEK 1.7 million which is a 6.2 percentage point increase from the same quarter last year.

So this, in total, gives us a very good base from a cost perspective to like Anders already said, to focus now on improving our top line and growing but still with the profitability in mind and in focus, both from project side and product side.

Anders, you want to add something more?

[Anders Dahl, executive]

Great. No, I think that's great. I think we're going to repeat some of those things again. But I think the underlying message is that we have now gone through kind of the cost saving, the cost efficiency put solid systems in place. The next step is to professionalize and be much more aggressive when it comes to marketing and sales. But of course, still within the boundaries of making sure that we have clear allowables and the control system in place.

You don't ramp up marketing spend overnight. You do that slowly step by step when you know exactly where you're going to hit. And also building the new sales organization, we've the very experienced people that are going to join us now during the fall to help us to sell our products. So I think these are the 3 key areas: gross sales and marketing, professionalized sales and marketing, make sure that we have a strong organization than [indiscernible] to run this in the best possible way, continue to increase internal efficiency, make sure that we have an eye on the cost all the time. Not being too defensive, but if we are aggressively trying to grow, we make sure that we keep control on those costs and investments.

And then concentrate development. I think we have been a little bit spread out before with a lot of ambitions in many areas and also being focused in some cases or always solving all the problems for our clients. Now we are really focused on the marketing intelligence suite to make sure that, that is a platform. It's delivered as a platform. It's clear dashboard. It's very easy to explain for client, this is what he gets. But of course, on top of that, we have high-end consulting, but the clients are willing to pay for because we give deep insights, we help the clients to navigate. We help them to explain why things are going this or that way. So concentrate development.

And I think that also reflects the whole look at the capitalization. We have been through long cycles before, but now we have pushed it much more the shorter cycles. So we don't really see a reason to put this on the balance sheet to just take it directly in the P&L to make it more clear how the P&L should be read.

I think also to change the organization to be much more product-oriented to really focus on outside demand. So we have been really good over the years to be efficient internally to make sure that the tools are being good for us internally to be efficient delivering the data to our clients. That's great. The next step now is to make sure that the tools, the dashboards, the AI solutions or whatever solutions we are providing to our clients are spot on what they are looking for to really be driven by client demands.

Looking forward, I think we have said that several times now to focus on profitable growth. And that shows just that we are very prudent when it comes to spend, when it comes to growing the business, but still aggressive when it comes to looking for the right opportunities. To make sure the segment, the market to go after the right clients, we can't be a solution for everyone. We need to make sure that we have a very clear profile of the clients we are trying to attract. [ Then ] also going to determine what kind of marketing we're going to use, and we're going to invest in. That's also going to be very clear when it comes to other marketing activities and sales activities.

Product development, it's going to stay within those kind of core 3 elements and we have some products that we will continue to serve for a while, but these are the 3 key areas: brand tracking, campaign evaluation and marketing mix modeling. Marketing mix modeling is probably one of the highest demand right now in the market that a lot of clients in this ever ever-changing and more complex world of data you need to have, you need to navigate and you need to be able to optimize our media spend based on where it makes the most impact, short and long term.

With the -- it starts with great people. We have recruited great people in the sales and marketing department. We have put good systems in place, so we will definitely see a lot of activity from the sales and marketing team now starting in Q3. We continue to see a soft market even if -- as I said during the last earning calls, we are very close to our clients. We work very closely with them to really understand their demands and be prepared to when they have gone through their organizational changes or when they have more money to spend on insight, on analysis that we can provide, we will be there, and we will help them to kind of continue to develop their business.

So we still think that there will be, in the short term, a soft market, but our long-term growth prospect is still there. We still see that there is a possibility for us to grow in the markets we're active in today. So this is the summary of the Q2 report. Sonja, anything to add or...

[Sonja Thorngren, executive]

No.

[Anders Dahl, executive]

So back to you for questions.

[Unknown Attendee]

Perfect. Thanks so much for that presentation. All right. So I first want to dig into the profitability a bit. I mean, as you said, you no longer do barely any capitalization of your costs on the balance sheet implying that EBIT shows a more negative figure than the underlying profitability. So I mean you delivered in the quarter, strong underlying profitability of EBITDA less CapEx of SEK 5.6 million, implying a margin of 8%. So considering that you intend to ramp up sales and marketing effort, how should we view this 8% margin? Is that kind of a floor that you're looking to build on? Or yes, if you elaborate?

[Anders Dahl, executive]

We don't normally give any future kind of expectations. But I can say that our ambition is to stay at this level and improve this level. That is where we are setting kind of the bars when it comes to our market investment and our sales efforts. So I think building up a sales organization, start spending money in more kind of demand creation, you need to have a framework. And we have built that framework on allowables and KPIs and performance indicators. And that is based on that. On a pro forma P&L, we should be able to be where we are right now or even better.

So I think that gives us a tool to kind of push forward [Audio Gap] that gives us a tool to kind of hold back when we don't see that we're getting the impact we are looking for in our marketing efforts and our sales efforts but also when it comes to hiring more people in the sales and marketing organization. So we can be cautious when it comes to spending, but we can also be kind of keeping an eye on the bottom line at the same time. So we're not going to say [indiscernible] growth at every price for even a short period if we're going to continue to see that we have profitable growth within those parameters.

[Unknown Attendee]

Perfect. And apart from a lower cost base or OpEx, you have quite significantly improved your gross margin, which stood at 77% despite a rather negative product mix in the quarter. So could you just elaborate on what you've done there?

[Anders Dahl, executive]

I think overall, the whole industry is suffering from data quality, and you have seen that in the industry. So I think we already, last summer, we started to have discussions with our partners on the data side. The products that are helping us with panels, [indiscernible] how could we do to improve this. How can we expand into new techniques, new ways of gathering this information, how can we make sure that we are kind of securing a cost base that we can live on in the long term.

So I think mix of a more kind of blended vendor based, more active cooperation -- collaboration with our partners and also with a much stricter kind of internal control when it comes to really see if we get problems into our system so we can kind of stop that much earlier and go back and make sure that we have the correct data to make sure that we are basing our conclusions on the best possible data.

And AI, for example, helped us a lot internally to work with to see deviations, to see changes in data and that definitely help us to reduce time, in turn on time, but also to be more active with our partners on the data side to make sure that they can also prohibit or stop and be proactive when it comes to getting better data to us.

[Unknown Attendee]

Good. And moving on to top line and the ad hoc from subscription customers, which has actually been quite stable even under these like quite poor economic times, but it dropped by 38% in the quarter year-on-year. Could you elaborate on the reason to this? Is it like pushed forward or more of canceled?

[Anders Dahl, executive]

From a pure kind of client behavior perspective, we are meeting a very active season of last year. I think we had a lot of clients that were doing a lot of things before the summer kind of before the summer impact. We have seen that some of those activities would happen this year as well, but they have been pushed out in time due to timing, due to other reasons, softness in the market, changes in their product mix and their launches. So I think for me, that's more of a temporary quarter meets quarter kind of perspective than anything else.

[Unknown Attendee]

All right. And on the other hand, ad hoc from new customers was strong. Could you elaborate on what's happening there?

[Sonja Thorngren, executive]

Well, like we already mentioned, some of these have been subscribing clients before that have turned previously. But then they are returning to us now for insights, which, like I said, already, we're keeping close dialogue and close contacts also with the previous clients. So they are returning to us for more continuous insights on an ad hoc basis. So there is also maybe a shift from the subscribing part to the ad hoc part in the quarter.

[Anders Dahl, executive]

And like I said before, I think [ there is ] a big change in our kind of ad hoc strategy in general is that ad hoc is not the go-to tool to save a quarter, for example. It's very much of a strategic reason to offer any kind of ad hoc that that should be a kind of a land and expand strategy. If we sell an ad hoc, [ there should ] always be [ kind of ] an idea, how do we make sure that we are getting a recurring relationship with that client because that is the basis for our whole business idea that we want to stay with the client over time. We want to make sure that we can kind of track changes within brand, within campaigns, within marketing mix modeling.

[Unknown Attendee]

All right. And you -- I think you lost 3 subscription customers in the quarter. Do you see any specific drivers, and also you're feeling ahead of I guess, your current base of the subscribers?

[Anders Dahl, executive]

In many of these cases, it's that the one company has been acquired by another company. So they already have an incoming partner. And that was -- in some of those cases, that was the case. That helps us to come back and sell ad hocs [indiscernible] and maybe on the later stage to sell a new recurring revenue.

There are cases where we have been with the client for a very long time. They just need to do a tender that they have new procurement department. It's very [indiscernible] that people come back. The net promotion score is high. I think we are, clients in general, are very happy with us. So it's normally want us to reasons that they need to do a change and they need to do a differentiation of the offer that they have with us or that they have been acquired by someone else.

But of course, again, in this example, for example, we don't wait for them to come back and buy something else. We actually proactively come back to that client and use the data we have. We know an industry in the vertical very well, so we can sell additional ad-hoc solutions to them and hopefully that over time, will lead to that we are back again to being the deliverer of our marketing intelligent suite over time.

[Unknown Attendee]

Okay. And then, I mean, a competitor of yours, YouGov recently stated that it aims to pull back from some of its smaller markets, possibly then like implying a bigger potential market for you. Is this something that you notice in any way?

[Anders Dahl, executive]

No. I think we have the usual suspects in most of the discussions we are in. So no, we haven't seen that and not really. I think there are movements in the market. I think we are also looking at now being contacted even from the bigger markets that they want to have different types of solutions. I think we are big enough to be a player to be in those discussions, but we are also small enough to be not too corporate to be able to do creative solutions and tweak in a way that maybe not the bigger one can do.

So I think we have a strong value proposition of where we are. Nordic has always been our base, and we continue to kind of increase and want to increase our presence in the Nordics, but we are also actively looking into other markets outside of the Nordics and Europe.

[Unknown Attendee]

Got it. And so moving on from some of the figures and so on to perhaps more of your organizational work. So could you just give us an update there?

[Anders Dahl, executive]

Organizational, we have been much more, not country-specific, but we have driven -- I went through that during the last earnings call, much more functional driven. So now we can serve clients across our different offices in the U.K., in the Nordics and in India and the U.S. I mean that is one of the big changes. I think the other thing is like we have said before, that we are now building out a much more well-equipped sales and marketing department with very clear performance indicators. 2023 was the first year or late '22, when [ we ] actually had a sales department. We have always been relying on coming leads and of course, strong relationship with our clients.

I think that is probably the biggest change that we now have a strong leadership, a strong focus on delivering our service and marketing, and being much more of an international company. We are using our colleagues skill set in India in a much better way. We're working very closely with our team in Mumbai. And they are now part of -- most of them [indiscernible] to all our deliveries and also part of the ongoing client teams. So it's a mix of people from Helsinki, Stockholm, Copenhagen and then Mumbai in most of those client works we are doing.

So it's a much more -- it's a functional organization, it's much more global. And also we have much better tools in place now to really measure product profitability and -- all the way from quoting and setting the prices to the market. We've also established a go-to-market team that we didn't have before. That was already last year, and they are doing a great job of making sure that we have clear products, clear pricing, a strong kind of contract structure that we didn't have before. So already from the first step sales close to 1, all the way to delivery. We have much better control than now than we have ever had before.

[Unknown Attendee]

Yes. And in the quarter, you employed a new Chief Revenue Officer. Could you tell us about her plan to start accelerating your sales growth once again?

[Anders Dahl, executive]

She came in the month of May. So she has been kind of putting together her team now with the summer. Some of them will join early September, late August, but also with the mix of the account directors we already have within the organization. So her ambition is definitely to make sure that we have a strong new business team, but also making sure that for the existing clients, we have a very strong paths to cross-sell and upsell. So much more professionalizing the setup, much clearer KPIs, focus on data, very data driven, but also with a strong collaboration with the marketing team.

We have done marketing activities before, lots of events and other activities, but we have never really invested in lead generation and having a clear funnel, how do we drive from lead, how do we define our segments, how do we drive our leads all the way to the first lead in the first contact, hopefully conversion and hopefully an ongoing business.

So there is much more a professional view on KPIs, key performance and great people. People that have done those things before from an established company like Meltwater and other companies. So they have done those journeys before, growing business and doing that with a strong kind of cost control.

[Unknown Attendee]

Got it. And I mean, Nepa's focus until very recently has been to slim down the cost base to ensure like sound profitability being not so dependent on high ad-hoc sales in each quarter. And would been into like the matter of like your focus on profitable growth. But is there anything else that you'd like to add on to your plan here?

[Anders Dahl, executive]

No, I think the underlying thing is that this is -- of course, you can put the best system in place. We have great products, but it's all about people instead of the country and the company, too. I think we have always been very service-oriented and client-oriented. Now I think we have more of a business acumen that we have kind of really pushed and try to changing the culture that -- we need to make sure that we are thinking like owners, we are thinking about driving profitability, we are thinking about how can we make sure that my contribution to the organization drives growth and profitability or profitable growth.

So I think that culture change is something that we have worked very hard. We are not fully there yet, but that is a work that we have kind of really pushed a lot of assets and energy. And that is a combination of making sure that the people we have in the business that have been with us for a long time, and also the new people that are coming in now have the same kind of -- being the carriers of that message and that culture.

[Unknown Attendee]

All right. And one of your communicated, like strategic focuses is to look at acquisitions. And I mean in the last quarterly report, this was a very new thing and everything was very like in the beginning of your thinking about this. But what's the status on M&A?

[Anders Dahl, executive]

We are still in the beginning, but maybe a little bit more organized beginning, but we are still very much in the beginning. So we can't really tell anything about those plans yet. We are still evaluating. And like I said last time, they are both kind of in the different buckets and the different thesis why we would like to do this. One is, of course, to look into additional technology that can support our existing technology platform, clients, geographical markets. So that's where we are mapping things right now. But we don't have any -- we don't have anything to share right now, but there is, of course, things going on in the kitchen.

[Unknown Attendee]

Good. And you see -- or you stated before that one of the hottest products or areas is probably the MMM offering out there because of the ever-changing market and so on. And you stated -- you stated in Q1, I think, that you launched a new subscription product for MMM towards the end of the year. Is this still the plan? And if so, do you have any like precommitted like customers?

[Anders Dahl, executive]

Yes and yes. We have -- the plan is still to launch in Q4. And yes, we have committed clients. And yes, we have already delivered version of this. So it's definitely getting more and more real. And that is -- and especially since we are coming from this, there's a lot of MMM's in the market. A lot of them are driven by kind of making sure that you can organize your Meta and Google data in a good way. I think we have a more holistic view and we also have our brand tracking data. We have the campaign evaluation.

So I think the customers that are really taking full advantage of our marketing intelligence suite and adding marketing mix modeling will definitely have a extremely good hub tool to navigate in a changing landscape. So I think, yes, we have a lot of curiosity questions, demos, presentations in Europe but also in other presence of the world. And so yes, Q4 and yes, we do have interest already.

[Unknown Attendee]

Great. And then -- that's can bring all of my questions. Then we have 2 questions from the web. One regarding your net revenue retention. So if you exclude the big customer who reduced its commitment, roughly, what was the adjusted net revenue retention? Would it be like -- above 100?

[Anders Dahl, executive]

A 100. 100, yes.

[Unknown Attendee]

And I know that you kind of mentioned this before, but once again, could you elaborate in your decision to stop capitalize R&D on your balance sheet?

[Anders Dahl, executive]

Mainly because we have shorter lead times, we have been in those long projects before. And so mainly because we have much shorter lead times, the time to market, much more of a product organization, product-driven, client-driven organization that are developing products based on client needs. So we don't really have to. There is nothing that is close to kind of R&D. It's more of a let's do this, let's put it in the market very quickly and to take that directly into the P&L, is a much clearer way for us and for investors to really understand where we are.

Of course, if we are kind of embarking in on a very long hole in idea more of an R&D we will, of course, think about that possibility again. So it's not kind of a definite way of doing. But the way that the business is being run right now and the demand and the products we are developing, this model as it is, fits us the best way. Right?

[Sonja Thorngren, executive]

And it doesn't mean that we will stop development of our current products or having a look at new development areas either. But it's more, like Anders is saying, it's more on a shorter lead times as we see right now.

[Anders Dahl, executive]

Yes. So like I said, reading it from an EBITDA perspective is the way to kind of see the clear underlying profitability. And so we are not developing less. We're developing the same, but we're treating it as a cost, not as something that we put on the balance sheet.

[Unknown Attendee]

Sounds reasonable. Great. That's all of the questions. So I leave the word over to you, Anders, for some final remarks.

[Anders Dahl, executive]

No, I just want to say that I think thanks to an extremely committed organization for the last -- over time, but I think the hard work everyone has put in now for the last 8, 9, 12 months, really focused on profitability, and we have turned this around to actually having -- making some money.

We are not at all happy with this as a future kind of statement, the commitment. We want to make sure that this company starts growing and -- but also in a controlled way, not falling back to old habits. We're going to continue to focus on profitable growth. And so we're really looking forward to come back to this forum again and present, but also looking forward to bring on more clients on -- especially on the MMM side and the whole marketing intelligence suite. So thanks a lot from us.

[Unknown Attendee]

Perfect. Thank you so much.

[Sonja Thorngren, executive]

Thank you.

[Anders Dahl, executive]

Thank you.