Nepa AB

STO:NEPA

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to Nepa Q3 2023 Report Presentation. [Operator Instructions].

Now I will hand the conference over to the speakers Interim CEO, Ferry Wolswinkel; and CFO, Sonja Thorngren. Please go ahead.

[Ferry Wolswinkel, executive]

Good morning, everyone, and welcome to Nepa's presentation and conference call for the third quarter of 2023. My name is Ferry Wolswinkel, and this is my second earnings call since my appointment as Interim CEO of Nepa as of the 1st of June, and currently still acting as Head of the Commercial Organization.

And today, with me, I have our CFO, Sonja Thorngren. It's a pleasure to presenting for you our third quarter results. So for those of you who are new or less familiar with Nepa, I'll give you a very brief background to what we do. So we help marketers with the brand building initiatives and measure the impact of their marketing investments. So we optimize short and long-term effects of their marketing efforts to continuously lower customer acquisition costs and improve our clients' ROI.

In effect, we turn data into growth opportunities by combining technology with brilliant analysts and researchers. Every day, we track and measure the impact of marketing activities for 7,500 brands across 60 markets. Our history of long-term client tenures are evidence of the great value we deliver to our clients. We have quite strong relationships with world-leading brands who continuously search for unique insights and recommendations that will boost our brand equity and marketing investments.

We have a long-term growth subscription base and with an annual recurring revenue of SEK 172 million, but have, in the past 1.5 years, had a challenge to optimize our cost base to lower volumes of consultancy projects contributed by the economic headwinds. Given the measures we have taken in the past quarters and especially now in Q3, we are in a much better position to restore profits.

So Q3, in summary, despite it being a low activity quarter due to the summer period, and vacations, I believe we made a good progress in Q3, where we accomplished many things that I shared with you all in our Q2 earnings call.

More on that shortly. Our recurring revenue grew by 2.3% year-on-year to SEK 172.4 million, and net sales grew by 1.6% to SEK 70.5 million. (sic) [ SEK 70.6 million. ] This marks a record-breaking third quarter in terms of net sales. However, in local currencies, net sales declined by 0.8% due to a weakened SEK currency compared to last year. Adjusted EBIT amounted to SEK 0.6 million for a margin of 0.9%, excluding SEK 1.1 million in restructuring costs. Reported EBIT amounted to a negative SEK 0.5 million. And while we still have a lagging effect to our cost base. But as communicated in the last earnings call, we will reach the targeted cost base in Q4 2023 and beyond that by Q1 2024.

On average, we were 281 FTEs during the quarter. This is approximately 14% down from the peak in Q4 where we reported 325 FTEs for the group. During the quarter, I appointed Anders Dahl as Interim COO; and Robert Beatus as CPO. Anders is an experienced leader with lots of experience in change management and efficiency improvement, and we have, in a short period of time creating the solid teamwork together. Robert, on the other hand, who's been with Nepa for almost 8 years has been a great source of inspiration for the organization, and he's been highly involved in creating our product strategy. So his progression to Chief Product Officer comes as a natural step, where we will increase focus on our offering and standardization of services.

Both Anders and Robert have been important in driving the initiatives we've launched during the autumn. For example, our increased focus on our go-to-market approach, spanning all the way from stronger alignment between product marketing and sales as well as pricing and packaging. This resulted in a consolidated offering of our largest revenue generators and profitable solutions moving forward.

Additionally, the clarity that comes from our newly packaged offerings make it a lot more understandable, both for our clients and for our employees who sell and deliver. We have also been looking at our project management and project profitability, emphasizing all essential parts of the process that drive efficiency and profitability while rotating the value we deliver. This includes a more thorough scoping and planning before a project starts to a continuous review and follow-up of profitability and how we are tracking against our targets.

With a reduction in staff, spending all departments, we have reached an improvement in future cost position. The company is now set to beat the targeted cost base for other external costs and personnel cost of SEK 220 million in 2024.

As we're increasing our efforts in AI development, we just launched a new module, our AI Trend Boost. This is a revolutionary machine learn-led solution, which serves as an enhancement of our brand tracking offering that I will share a bit more on later during the presentation.

Lastly, on September 18, an extraordinary general meeting was held, that decided on SEK 0.67 per share dividend. So we've seen experienced robust growth in our subscription revenue this quarter. Our subscription-based model continues to be a strong driver for our overall revenue, reflecting the value by our products and services we bring to our clients. Year-over-year subscription revenue grew by 9.6%, but we are starting to see a slightly lower net revenue retention of 99.5%. That historically has averaged out on 100%. So it's a minor decline here.

Our renewal rate that churns of 1.1% in the existing subscription base. So this is explained by budget cuts at some of our clients. It has slowed down the growth base, but does not pose any concerns as of yet. It's within our expectations and it's being cautiously monitored as we address retention efforts simultaneously.

Demand for consultancy projects from our subscribing clients have picked up compared to last year and increased by almost 60%, albeit from low figures. Much of these are projects within our large client segment, and we continue to service our subscribers with value-added projects to maintain and nurture our strong line relationships. This trend is a testament to the depth of our client relationships and the quality of our offerings.

Conversely, as we stated in the outlook of our report in Q2, we observed continued weakness among non-subscribing clients. While we acknowledge the challenging market conditions, we are actively exploring opportunities to address and reverse these trends. This is especially true for our clients in the U.K., which has been a strong contributor during previous years. We have, however, started seeing some of these deals coming back and an increase in new business coming through our U.K. office.

Long term, we focus on expanding our subscription base by adding new subscription services such as our media mix modeling subscription offering, which we are currently piloting with a number of clients as well as strengthening our sales team to boost client acquisition.

Our annual recurring revenue has shown positive year-over-year growth, and it amounted to SEK 172.4 million at the end of the quarter.

However, we've observed a slight decline from the last quarter. This is primarily attributed to lower retention rates compared to the historical averages. And as I said, we're actively monitoring and addressing this development with targeted initiatives aimed at improving client retention. But as said, as earlier, there's no reason for concern.

Our Major Accounts segment continued to show strong retention despite these economic headwinds. Even though quarter-over-quarter retention rate dipped the trends for average subscription revenue per client remains positive, demonstrating continued success of our efforts to enhance the value proposition of our clients.

In the last 12 months, we've served 130 subscription clients with an average of SEK 1.34 million per client and an average ad hoc revenue of roughly SEK 0.5 million for clients. To improve our financial performance, we have initiated a few key initiatives to restore profitability. These initiatives encompass both operational and strategic measures to optimize our resources and enhance customer satisfaction. These initiatives span from price increases, close monitoring and actioning on scope [ creep ] as well as streamlined processes and team structures. As part of our commitment to efficiency and effectiveness, we are undergoing a strategic restructuring process. This will ensure that our organization is well aligned with our goals and client needs. We believe this will position us for a sustained success. And as mentioned in the beginning of the call, we now put a lot more focus on our go-to-market approach, project management and product development.

Firstly, we are strategically reevaluating and refining our go-to-market approach to ensure it aligns with current market dynamics and client needs. This involves a comprehensive analysis of our sales and marketing strategies, customer acquisition channels and pricing models. We are working to identify and target new market segments while optimizing our outreach to existing clients. This initiative includes enhanced market research, competitor analysis and the development of targeted marketing campaigns to strengthen our brand presence and also attract new clients. Also expands all the way to our product offering to make sure we remain competitive with a solid portfolio, offering our dynamic marketing and intelligent suite.

Secondly, to optimize project management and increase operational efficiency, we are implementing initiatives that streamline processes and workflows. This involves a thorough review of our project management methodologies, tools and systems. By optimizing our project management practices, we aim to enhance client satisfaction, reducing costs and ensuring timely project delivery.

Lastly, our project development initiatives are focused on innovation and responsiveness to market needs. We keep investing in research and development to bring new features, functionalities and products to market. This includes a dedicated effort to address feedback from clients and incorporate our insights into product enhancements. This proactive approach to product development aims to not only meet our current client expectations, but also anticipate future market needs. By staying ahead of the curve, we aim to position our products as industry, 1 of the industry leaders in driving sales and ensuring long-term sustainability.

In summary, our initiatives to restore profitability, encompass a holistic approach that addresses our go-to-market strategy, project management efficiency and product development. By strategically implementing these initiatives, we are confident in our ability to adapt to market changes, improve client satisfaction and ultimately enhance our final financial performance.

For the past months, we have diligently reviewed our organizational structure to identify and eliminate redundancies. This involves a comprehensive assessment of roles, responsibilities and workflows across departments. By streamlining the operations, we aim to enhance efficiency and ensure that our resources are allocated in the most optimal way. This process has been conducted with sensitivity, and we have been and will continue to be highly committed to support affected employees through this transition. All of this has led to restructuring cost of SEK 1.1 million in the quarter, and we are now set to beat the targeted cost for the external costs and personnel cost of SEK 220 million in 2024.

Although we reported a negative EBIT of SEK 0.5 million, the operating profit is blurred by the capital expenditures, looking at operating cash flow deducted by the capital expenditures, we made a significant improvement from Q3 last year from minus SEK 17.1 million to plus SEK 2 million.

We are excited for our product road map aimed at driving new sales, retaining existing clients and increasing scalability. These launches are strategically designed to meet evolving market demands and offer innovative solutions to our clients. We've continued to build upon our 3 phases: automation and benchmark, predictive capabilities and integration and prescriptive capabilities where all of them fit perfectly into the building of our Dynamic Marketing Intelligence Suite.

In line with our commitment to cutting-edge technology, we have trailed to introduce a groundbreaking AI tool, and this AI Trend Boost is sold to our clients as an add-on to tracking modules. So obviously, a very good upsell opportunity for our 130 clients who are currently subscribing with us. It's a revolutionary machine learning lab solution that make the data sample go further.

It effectively gives the accuracy of a sample size that is 5x the size, while it increases the depth and granularity of the data by 5x. We can now enhance low incidence target groups for meaningful insights and give the smoothness of a moving average, while the responsiveness of near-time data. I'm really excited to bring this to market.

In summary, we had a record-breaking net sales for the third quarter, thanks to the strong development in the subscription client base. The quarter -- this quarter did offset the lag in cost base, hurting profitability, but the actions taken during the [indiscernible] set the company on a promising path back to profitability.

We will, as previously communicated, meet the targeted cost base for other external costs and personnel costs of SEK 220 million by Q4 this year and even beat the target going into next year.

Having said this, a slightly higher drop in retention impacts overall growth and is being addressed with client retention initiatives. This is not unusual in times like these and nothing we haven't seen before. Some clients got back in their spending and reduced scope or paused trackers for a while, while we're not seeing any noticeable shift to our competitors.

This was all from us. Thank you for your time, and I now welcome any questions.

[Operator]

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

[Jesper Henrikson, analyst]

I really like the individualization and yes, well through. All right. So let's just start with the subscriptions. As you say, some increased churn here. So could you just like to elaborate a little more on like what measures you do to kind of prevent increased churn?

[Ferry Wolswinkel, executive]

Absolutely. So yes, we -- as I said, we have noticed a trend of clients cutting costs and scoping down their spend with us, but it's rather a negotiation of scope or pausing some of the trackers rather than switching to competitors. So 1 thing that we do that we put a lot of focus on is our contracting. So we used to have more contracts that are on a sort of ever green base. So that means that our customers could cancel their contracts with 1 to 3 months' notice. So of course, that increases the risk for us with short-term cancellations. We have moved over a lot of these contracts into contract terms of 12 months and longer. So that for obviously, we have a positive effect. We also work with the team to put ask at -- what we call it, initiatives in place where we basically review in our quarterly meetings with our clients, if clients would continue and renew with us at this point in time.

When positive, we continue and actually try and set new contracts already when possible and not waiting until it's renewal date and basically leaving the risk until the very end to lose customers. So I think that alongside, of course, strong client focus, and you've seen that in the growth of the existing client base. So growing clients, obviously, is also a sign that retention will improve, and this is particularly true for the larger client segment. So the churn is more visible in the smaller client base. So as you know, we have a long, long tail of smaller clients were churning slightly higher.

[Jesper Henrikson, analyst]

All right. Yes. And then, I mean, you started I guess you started some of your like outbound sales efforts like, I don't know, like 1, 1.5 year ago. So I guess that signals, pipeline is becoming increasingly mature. So could you just talk about the status of the pipeline?

[Ferry Wolswinkel, executive]

Yes, absolutely. So you're right. We started that just about a year ago. It didn't mean that we were still in the early days, setting up the team, onboarding the team and that took some time in the first couple of months. But since then, we significantly did grow our pipeline. What we did notice is that the sales -- the length of the sales cycle has increased a bit this year. And then again, that I put a lot of that on the economic situation that we're in. But we have seen a lot of these new clients come to fruition. And again, we've been focusing in our outbound efforts a lot on larger clients that tend to take longer as well. But the good thing is now we have won a significant number of them that they offer a lot of potential for upside, whereas historically, we focused on any client.

And yes, hence, the long tail where our upsell potential is a lot smaller. So there's -- the initial results are coming through. Having said that, we do need to invest in a different profile of our sales force that is more experienced in enhancing for new business. So I do believe that we still have a way to go. When it comes to it, we definitely see improvements but we still have a way to go, I think, to reach the potential that we have.

[Jesper Henrikson, analyst]

All right. All right. And then -- I mean, as you say, a focus on larger clients where there is an upside in ARPU. So could you -- and now you -- like, for instance, you launched the AI Trend Boost. But how do you view the dynamics of like increasing ARPU, both in terms of like new markets, like new additional products and so on?

[Ferry Wolswinkel, executive]

Yes. Of course, in Sweden, we are, yes, quite a mature player and a large part of our revenue and clients are based here. We have been putting a lot more focus this year on global clients, even if they were left from our Swedish office but also from our U.K. office and others. So we focus more on global clients that -- that means that we don't necessarily need to physically move into new markets like the U.S. until we have built a more mature and a number of clients that are already generating revenue before taking that step.

In terms of focus outside of the Nordics, though, where we do believe the bigger revenue potential and jumps will come as we are putting more focus on our U.K. presence. And as said, there has been a turnaround in Q3 and into Q4 with business coming in there. And that's where we will strengthen most of our sales efforts. It's a region where our brand is not as strong, and we're not as well known. So we need to put more effort in that into the new year.

And in terms of our products, AI Trend Boost is an excellent product to -- yes, to go to all of our existing clients and with quite a strong proposition generate additional revenue into the new year. We just launched it. So it's not really shown yet in the current figures, but I do expect that to be the case in the following quarters.

And in addition to that, I mentioned in the last earnings call that we are exploring different AI initiatives, both to further optimize processes internally as well as developing new products for our clients that offer exciting possibilities. So we are still kind of in the exploration phase and often evaluating different use cases. But yes, that's kind of where we are right now.

[Jesper Henrikson, analyst]

All right. Good. And regarding the -- because you say that you expect the boost from the AI Trend Boost in the upcoming quarters. Just because then I guess you have already like started some discussions with clients, existing clients about this product and -- so how is the response?

[Ferry Wolswinkel, executive]

Yes. Sure. Initial response has been very good because most of our clients, and I think this is typical in the industry, always want more sample. Unfortunately, that comes with an associated costs. So now we can show our improved effectiveness through AI Trend Boost not requiring a lot of additional sample to achieve the same results. So the initial feedback has been positive, but we have been cautious in kind of selecting a number of key clients to have these initial discussions with, also to take in their feedback, and making sure that's when we do roll it out and go to market we take into account anything that we haven't considered. But overall, the reception has been very positive.

One other thing that you mentioned is that, -- at the moment, our brand [ AI Trend Boost ] offering is our only -- or our key ARR product. Soon, we are launching our or into the next year, we're launching our subscription on media mix modeling. So that just brings an additional revenue generator that wasn't available up until now.

[Jesper Henrikson, analyst]

Okay. Good. And then, I guess like considering that the AI Trend Boost like does not really require any more data, I guess, that would be like growth from there, would be a boost for the gross margin?

[Ferry Wolswinkel, executive]

Exactly. Absolutely.

[Jesper Henrikson, analyst]

Good. And then, because regarding the U.K., I mean, you say that the U.K. market is improving. And first, I interpreted this as kind of the U.K. market for ad hoc projects to non-clients. But it appears that you're talking more broadly? Or could you just elaborate on what products you mean there?

[Ferry Wolswinkel, executive]

Yes. So you're right, mostly for the most part. So we historically have been selling these very large ad hoc projects to global clients. The very good thing is that they come back, they come back to do these projects. So we're very differentiated and strong in doing these projects. The challenge is that they are projects that our clients tend to do once every 2 to 3 years. So of course, that leaves us vulnerable in times that they don't do them. And as well, some of them simply have been on pause at the first half of this year and are now kind of -- as I said before, sales cycles just were a little bit longer than normal, which is part of the reason as well.

But yes, on the other hand, we've also, of course, focused on a lot of new business generation being part of some events, and we've managed to also with new logos. Again, I would say that this is a smaller portion of the overall cake, if you will, but that is something that I expect to take on a larger part heading into the new year.

[Jesper Henrikson, analyst]

Okay. Good. And then, I mean, you talked some about like pricing and packaging initiatives. Is there anything there that, that you have not mentioned so far because that's an interesting point?

[Ferry Wolswinkel, executive]

Yes, we -- just maybe to put some context, we've done a number of initiatives. So we've done an analysis also on our RFP performance and deep dive into areas that where we -- especially the ones where we do not win, understand why. When it comes to pricing, we tend to be extremely like client-centric when it comes to customization, when it comes to making sure that we onboard new clients as well as we can, so putting a lot of effort into that. I believe that comparing this to others, we could be perceived as more expensive in some cases because of it. But I think by offering a clearer package and deliverables that are clearer rather than quite custom and as they have been so far, it makes it easier for us to be more competitive from a pricing point of view.

It makes it clearer what is included in our packaging. We've looked at our clients and we've looked at the needs and looked at, okay, how can we capture 90% of our client needs fit that into a package that makes it more standardized for ourselves to deliver and to make it easier for our teams to deliver in a standardized way. As well as packages that also boost our gross margin by adding features and modules from the start as opposed to adding them once they become a client and try to upsell later on.

[Jesper Henrikson, analyst]

Okay, sounds promising. So less customization. And I guess this is also, I guess, both more clear for the customers, but also helping you become more like a slim organization in terms of like product delivery, not needing as many like onboarding specialists and so.

[Ferry Wolswinkel, executive]

Exactly. And also for our marketing and sales, it's more focused. It's hard to get your head around 20 different solutions and become an expert that's positioning those on comparing that to yes, a slimmer key core focus of products, both from product investment, selling and marketing them.

[Jesper Henrikson, analyst]

Okay. Good. And then moving on to like the ad hoc sales to existing clients. I mean, the -- looking at, like the Q1 and Q2 were practically like identical figures or almost identical to the 2022 figures, but then came a big jump. So could you just like to explain what was behind the strong Q3 figure? And is that kind of like sustainable or mainly like some one-offs?

[Ferry Wolswinkel, executive]

Yes. I think, of course, it came from relatively low numbers. So it was a big jump, nevertheless. And -- the reason for it is, again, the sales focus we did put on our largest clients from the start of the year already. It just didn't materialize yet until Q3. And yes, we -- of course, we know we are in difficult times where we've put a lot of focus on working with our existing clients. They offer a lot of potential, especially our larger clients. So it's been a combination of existing, expanding scope, scope into new markets, new categories, but also adding added value services. Yes, that's again -- have already started in the first half of the year, just hadn't materialized to an extent.

[Jesper Henrikson, analyst]

Okay. But considering that, I mean, the ad hoc sales to existing clients. I mean, it's -- at least some of it is like semi-recurring. So would you say that the increase, is that like much from the semi-recurring or more from the -- like the one-off sales to that segment?

[Ferry Wolswinkel, executive]

I would say it's a combination of both. We also, as mentioned, the negative impact a lot on the ad hoc sales has been driven by the larger ad hoc projects from the U.K. And as mentioned, they've been coming back so they will also contribute to the net positive effects on that. And yes, they can really move the needle by quite a bit. But overall, I'd say it's a combination of both.

[Jesper Henrikson, analyst]

Yes. All right. And then like for the year, like ad hoc to non-clients as you say, they can really like move the needle in terms of profitability. And you say that -- so it appears that the market has bottomed out. Like what do you expect here? Because you still put very little like outbound efforts here? So is it only like incoming?

[Ferry Wolswinkel, executive]

It's not only incoming. But I think it's -- it's partly a resource and focus question as well. So of course, our sales focus on our larger existing clients they typically have shorter sales cycles, whereas our new business focus on companies where we are new and kind of need to prove ourselves and work with on a smaller scale is something that will take more time to show significant growth there, but also it requires some additional investment in that strengthening of the new business sales, both from a marketing and sales perspective.

Additionally, if you look at tracking as a product, for example, it's a commoditized market where clients are very resistant to change. It's same as in CRM business or others. So those transitions, especially in markets where we are fairly unknown, it takes more time and effort to win this over. So I think it's going to be a big transition once we start increasing in awareness, when we start bringing in more of those clients, and I believe that will accelerate more rapidly.

[Jesper Henrikson, analyst]

All right. Good. And then just a reminder for me what you said about the MMM to be added to as a subscription module. When was this?

[Ferry Wolswinkel, executive]

So this is something we're currently piloting with a number of our clients. So it's not fully rolled out yet. But again, initial results are very promising and full rollouts of this -- while we are able to also sell it in a larger scale, it's more likely to be due to early Q3 next year.

[Jesper Henrikson, analyst]

Okay. Good. Perfect. And then -- yes, and also just last regarding your cost base. Obviously trimming that quite much like the sequential decrease of the number of employees from 303 to 281. So like by how much more do you expect to trim the organization?

[Ferry Wolswinkel, executive]

The 281 was actually the average during the quarter. So at the moment, we are around 270. So again, as you say, it's a significant reduction in our workforce and we've been working hard on redefining processes and teams to kind of cope with a smaller workforce and still deliver the same value to our clients. So we've already exceeded the 281. But yes, of course, we are now consolidating and looking more ahead into -- get back into growth mode, not necessarily from an employee base, but a focus of the businesses. Last quarter has been very much focused, of course, on cost savings and finding a better way to run the business.

[Jesper Henrikson, analyst]

Yes, yes. And also -- I mean, you have some capabilities already in India working for you. So how do you view -- like how do you view the responsibilities they have and if you're able to move any more like qualified work to there and like lower the cost for that kind of delivery?

[Ferry Wolswinkel, executive]

Yes, absolutely. So we have already started moving more responsibility and more task to our teams in India. So that's already been part of the exercise during the summer, and we continue to do so. So we really want to increase the high-value adds, consultancy and client support and keep that in our Stockholm and local offices here where we work directly with the clients while we are moving more and more responsibilities to the teams in India. So yes, this is ongoing and this will continue to be the case.

[Jesper Henrikson, analyst]

All right. Good. And do you have regarding the efficiency measures that you're taking. When -- do you have like a date that you expect like now, we should be -- now we should be having like a slim and trim organization in place?

[Ferry Wolswinkel, executive]

No, I would say we are pretty much there. So those -- it's not that those initiatives are necessarily done because, of course, many of these initiatives are continued, but that's more a new way of working, where we are more efficient and better in the process than before. But we -- yes, we have completed the cost savings that we set out to do. And as I said, next year, we'll be more focused on revenue and profitability growth from a sales side.

[Jesper Henrikson, analyst]

Yes. All right. So I know that you said it just shortly before that like, almost fully completed cost savings in Q4, but seeing the full effect first in Q1?

[Ferry Wolswinkel, executive]

Correct.

[Operator]

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

[Ferry Wolswinkel, executive]

So concluding. Yes, thank you all for listening. It's been a pleasure. As -- yes, in a nutshell, this last quarter, there's been a lot on getting us back to profitability, saving costs. The next call we'll have -- I'm planning to talk to you more about our growth initiatives and results coming from that. But yes, for now, thanks a lot and until the next time.