Nepa AB

STO:NEPA

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Nepa audiocast with teleconference Q3 2022. [Operator Instructions] Today, I am pleased to present CEO, Ulrich Boyer and CFO and Ann-Christine Fick. Please begin your meeting.

[Ulrich Boyer, executive]

Thank you very much. Good morning, everyone, and welcome to the presentation of Nepa's Third quarter 2022. My name is Ulrich. I'm the CEO of Nepa. And with me to present today, I have our CFO, Ann-Christine Fick. Turn to Page 2, please.

Nepa in brief. What we do is that we use data to help marketeers with the insight they need to understand the impact of the marketing investment. How we do it, our core competences are brandtech and marketing optimization, and we use our tools, brand tracking, campaign evaluation and marketing mix modeling to do most of the work we do for our clients.

We serve lots of interesting and big brands in the world. And we are doing this in 60 markets around the world today and about up 2/3 of our revenue is recurring, meaning that it is long-term contracts.

We have a proven business model, it shows in our financial figures. We have an average growth of about 10% per year, and we have an operating margin around 10% year-to-date, and a strong cash position that will improve again in quarter 4. Turn to Slide 3, please.

Fortifying our brandtech position. In summary, the demand of our -- for our services improved during the quarter, although we had a slow start after the summer and experienced a more hesitant attitude for marketing insight investment. We grew by only 4.2% and 1.6% organically. We are, however, pleased that our largest and fastest moving solutions growing solution area, marketing optimization. It showed a strong growth around of 17% this quarter and accounts for 8% of our revenue year-to-date.

Marketing optimization is also our focus area. And as we have said in all the recent quarterly meetings, it is a report. It is the area where we want to grow and where we also have the majority -- the big majority of our recurring income.

Recurring revenues grew by 10% while our ad hoc declined 5%. This is what we typically see when the -- on what we have also seen during the Corona crisis that we have talked declined when the demand is a little bit going down. But it's also part of our strategy to transition our business towards more recurring revenue. So in some way, you could say that the crisis like this is helping us to do that a little bit faster.

On the other hand, of course, we do not control all factors of investment. On the cost side, we continue our focus on building our sales organization and investing in our brand technology. We report an EBIT of SEK 4.9 million at a margin of 7.1%.

Last year, we had 2 large profitable ad hoc projects over the summer and created -- and that created difficult competitive figures throughout this year.

In addition, we experienced a client loss due to a bankruptcy procedure. Turn to Page 4, please.

And that, our marketing optimization continues to grow 17% and that is exactly in line with our strategy. Our long-term strategy is to really make that growing and we have also seen that this gives us a lot of traction in the market because here, we have like our latest tech, and we also have a lot of AI components that do our product to one of the best you can have as our clients in the market.

There's also -- brand tracking is also our large product in terms of revenue. Here we have like the best technical platform is more scalable. And we have the long-term term contract, and we have long-term client relationships. So this is why we focus so much on this one. Turning to Slide 5, please.

Within brand tracking, we had -- we just recently a few weeks ago, on this year's annual ESOMAR event represented one of our innovation called Brand Noise Reduction and we were the winner of the Insight250 at this conference and it's our proprietary technology. Again, Brand Noise Reduction in AI-driven algorithm that provides 75% reduction of the noise in continuous tracking data, as always, when you have gathered a lot of data, and you have certain noise that makes the data a little bit instable. And this tool is basically taking 75% of that away, which makes it clearer for the -- when you do an analysis to see what is driving your brand compared to what is just accidentally in the data.

That's all, we will also continue our established investment level in line with the previous quarters 2022. So basically, you will -- you can raise the same number of, with the same amount of investment during next year, if not something very special happen in the world around us. Turn to Slide 6, please.

[Ann-Christine Fick, executive]

Thank you, Ulrich, and good morning, everyone. As Ulrich mentioned, we continue to see stable demand in most markets during the quarter. And our focus area of growth, marketing optimization grew 17% compared to the same quarter last year, showing that we are on the right track with our strategy. Net sales increased by 4.2% to SEK 69.5 million and a gross profit decreased by 2.4%, SEK 51.9 million. The decrease in [EBIT] margin from previous year is as Ulrich also mentioned, mainly due to large projects with a very high [EBIT] margin that we had, that affected that year's margin.

Total personnel costs increased by 10%. However, SEK 5.9 million of this are attributable to investments in internally generated intangible assets. We have continued to invest in and focus on development of our platform and digital tools. Adjusting for this, our operational personnel costs increased by 5.6%. And out of our other external costs, SEK 1.1 million are attributable to system upgrade costs. And we have also invested more in marketing this year compared to last year. Also traveling equipments and office costs in general has increased compared to last year when COVID was still affecting the attendance at the office and traveling, et cetera.

EBIT amounted to SEK 4.9 million, a decrease of SEK 6.1 million from the third quarter last year and earnings amounted to SEK 5.5 million, that decreased by SEK 4.7 million from Q3 last year.

We continue to maintain a strong net cash provision amounting to SEK 62.5 million at the end of the quarter. Turn to Slide 7, please.

[Ulrich Boyer, executive]

Thank you Ann Fick. Finally, I want to give you a brief outlook and a business update. We will, as we started our sales organization just after the summer, and I want you to remember really that we did not have active sales organization. We didn't generate basically any active outbound sales during the last 2 years, which, of course, is not a good place to be in. We created that organization as -- by taking it out from our existing organization. And we will continue to do so. We already see the first positive effect of this. And yes. So we will accelerate our sales. And we are focusing it on our MO, especially on our brand tracking offer.

However, we are aware of that the economic headwinds make it a little bit tougher for us, as I said in the word from the CEO, we will have to work a little bit harder, but we are also sure that it will be evolved in the long run. And it's also the case that when we have the equity in the market in the past, Nepa has always been a winner in this situation. And I'm very confident that we will be again a winner during the next year.

Our -- we will have a very strong recurring business model based on the scalable platform. We have large international clients, and we have really long client relationships. We have taken measures in quarter 4 to save SEK 7.2 million operational personnel costs on an annual basis from December onwards. We have also taken a precautionary measure in hiring freeze in Europe in all non-sales related roles.

So we are very -- we will stand firm in our long-term strategy, and we are very, very confident about our future growth within brandtech. Turn to Slide 8, please.

Thank you all. Thank you all for listening in to our presentation of the third quarter 2022. And I will now hand over to the operator who will handle the Q&A.

[Operator]

[Operator Instructions] The first question comes from Jesper von Koch from Redeye.

[Jesper von Koch, analyst]

So let me just start with some questions on the top line. I mean, it seems that your brand tracker sales continues to develop well. But could you just talk about like the underlying traction that you're seeing from your increased sales efforts for this project?

[Ulrich Boyer, executive]

Yes, if you could just speak up a little bit. And the main part of your question was that if we see traction from our efforts to sales tracking, is that right?

[Jesper von Koch, analyst]

Yes.

[Ulrich Boyer, executive]

Yes, we do. But remember, it's early days. We only -- we started our journey to shape an active sales organization in May by breaking out people we already had. And we -- our CRO is on board since the 1st of October, which is like -- and we're having it now for the last 6, 7 weeks. So it's early days, but we see the efforts yes.

[Jesper von Koch, analyst]

Okay. And then I mean you stated the lower ad hoc sales is partly according to the strategy towards selling like your brand trackers subscription directly rather than first completing an ad hoc projects and then like as an add on selling your subscription. But do you see -- could you just talk about like how you balance this because before you mentioned that the ad hoc projects are kind of important to your sales of the subscriptions?

[Ulrich Boyer, executive]

Yes. And it's absolutely true that you can -- you can basically we have some ad hoc that is just outside everything, and they are like coming in from clients often from existing clients that want us to add-on things on what we already do. And they are like, they are incoming leads. And that is the kind of business that always goes down when the -- our clients are tightening their budget. That's like a natural effect of it. And then we have these ad hocs that we start with when we, for example, do trackers. But it's not all clients that start a tracker that do in, for example, and category insight before, some do, some don't. So you can like -- especially when you are coming into the bigger clients that often are like handling like this kind of through their -- to what is called procurement department. They don't do that. They have most likely track it before or we have this is an idea about what they want and then they ask for it. So yes we see both.

[Jesper von Koch, analyst]

Okay. And...

[Ulrich Boyer, executive]

Yes. So if our ad hocs are going down, this is basically because we had -- we have less incoming leads. And that's why I'm especially happy that we now have a best organization that is out there and trying to get hold of the client because if we wouldn't have that, we would be in a very bad position in the future or the near future...

[Jesper von Koch, analyst]

So it's -- I mean, we should see it like regarding the market climate also that the cutbacks or the hesitancy, it mainly affects the ad hoc revenues and then that -- they are a bit more hesitant, but you could still sell your brand tracker quite well.

[Ulrich Boyer, executive]

Yes but -- and I think there are 2 things. One is, of course, that the overall market is a bit more hesitant. On the other hand, like usually, as our product generally are more price efficient compared to the competitors, I think we have a good chance of getting more client in -- outside of Sweden as well because when they are looking at around and most companies want to keep their trackers, but they maybe want to lower the costs and then Nepa would be a natural choice.

[Jesper von Koch, analyst]

Yes. And you mentioned in the CEO letter that you lost one client due to bankruptcy, but is there any other churn on that?

[Ulrich Boyer, executive]

No. So there's absolutely nothing like that. What you can note is that you can see that, when you look at our net cash position is, of course, that there are some clients that need to be reminded onetime extra to pay in time, let's say it like that. That we noted. And maybe we can admit as well that we maybe were not enough on our toes there in August to remind them.

[Jesper von Koch, analyst]

Okay. All right. I see. And then, of this 10% year-on-year growth in the recurring revenue, how much -- or could you say anything about like how much is price adjustments and how much is volume?

[Ulrich Boyer, executive]

On the recurring side, the price adjustments during this year, like usually, we adjust prices like in the end of the year when -- often these contracts go yearly. So the main price adjustments will come now with the beginning of 2023 and some even bit later. So that is how it is. Because we can rise what we have done during the years, of course, that we have sold our ad hocs at a higher price. But the recurring, the revenue if you have like a 12-month rolling contract, then you can rise the prices once a year. And usually, that is around the end of the year, beginning of next year. We will see that effect next year or from [indiscernible].

[Jesper von Koch, analyst]

Okay. But you have mentioned previously this year that you have made some price adjustments already. I think it was started in Q1.

[Ulrich Boyer, executive]

Yes, that is everything that -- Absolutely. We raised our prices for everything that we sold as new but you can't go in at fixing when we have a contract with a big company, you cannot just call them and tell them that, well, you have to keep to the contract.

[Jesper von Koch, analyst]

Okay. So basically, of your recurring revenue base, you plan to raise prices, but so far, we haven't seen any of that effect?

[Ulrich Boyer, executive]

Yes. So let's say it like that, it's a bit better than planned. So now we have raised prices but the effect of that, we will not see before next year or maybe give you some understanding that like it's affecting the autumn a little bit. Basically, we only -- we can only rationalise the prices when you have a 12-month contract, then 3 months before the contract is at the end, then usually, you have a window of like a few weeks before that, where you discuss, okay, how should the work we do during the next year or the delivery look like. And at that time, you also if you look on the prices and discuss what kind of delivery, what kind of guide. And that typically is in the autumn.

So what we did in spring was raising all prices on everything we were selling from then on and all the ad hoc campaign measurement and all that, we already raised the prices in, I think, in January of this year. But it is -- that is not the big volume. It's helping a little bit, but it's not where the big volume is.

[Jesper von Koch, analyst]

Okay. Understood. And then also regarding your cost base, I mean you said that you will decrease your cost base in 2023 and freeze hiring of non-sales employees in Europe. So does this mean that you expect like your cost level in 2023 will be lower than for full year 2022? And if you could just provide some more comments to the cost base.

[Ulrich Boyer, executive]

I think it should -- you should always see this in relation to sales. So in relation to sales, I would say the cost base needs to be lower, yes, as it will be. Maybe not every quarter because I cannot like, even if I would like, I would like exactly have an idea about how much we will sell in quarter 1, quarter 2, quarter 3, quarter 4. And of course, I can -- we have a budget for that. But like how the world looks like, right now, I think you need to be [indiscernible] different scenarios. But we will absolutely try very, very hard. And I think also achieve that we will be -- have a better ratio between sales and personnel costs, yes.

[Jesper von Koch, analyst]

Okay. And it sounds like you have a kind of a strict profitability target that you're looking at and depending on how your sales is developing you will adopt your cost base to that. Is that a correct assumption?

[Ulrich Boyer, executive]

Yes. Yes, that's exactly. We will take the action needed to keep that, then, of course, there's always the risk of depending on how fast the development in the world is like we try to be as fast, but how the rules are -- because you cannot always be as fast as you wish.

[Jesper von Koch, analyst]

Yes. And then, so I guess this also goes for the sales expenses that they will kind of depend on how everything is going and how your margin is looking to be. But the -- could you say anything more about like how you expect to grow your salesforce from today's level?

[Ulrich Boyer, executive]

Can you repeat that? Yes, I didn't really get you.

[Jesper von Koch, analyst]

How much do you expect to grow your salesforce going forward?

[Ulrich Boyer, executive]

Well, what we basically, what we are talking about when it comes to growing is that we are -- what we will need is -- we will need like 3, 4 [ STRs ], what people that are doing -- your people that are trying to get hold of the clients and qualifying leads. That is what we -- is the only recruitment -- active recruitment we are looking for. That's what we are talking about. And that will be like neutral to our personnel costs because what -- we will equal that out.

That's something I already said like a few months ago when we were talking about the sales organization, that it will be -- it will be carved out from the existing delivery organization or consulting organization because, of course, they have been doing this kind of sales, but maybe not efficiently enough. So we believe that, to having that a more clear role will make us more efficient in that -- in sales. But not more people.

[Jesper von Koch, analyst]

No more people in the sales organization, like the only possible additions that will be made is that you carve out people from the existing organization and perhaps move them.

[Ulrich Boyer, executive]

Yes.

[Operator]

[Operator Instructions] There are no further questions at this time. Dear speakers, back to you.

[Ulrich Boyer, executive]

I thank you all for your time, and I hope to present the great support in a few months' time. Thank you so much.