Upsales Technology AB

STO:UPSALE

Earnings Call Transcript 2023-Q1

[Daniel Wikberg, executive]

Good morning, everybody, and thank you for joining the earnings call for Upsales Q1 2023. My name is Daniel Wikberg, and I'm joined by our CFO, Elin Lundström. So the agenda for today's presentation, I will start to talk a little bit about Upsales, introduced Upsales and what we're doing in the product. And also an update from our sales effort. And then Elin will talk about the financials from the Q1 report, and we will end with Q&A session.

So introducing Upsales. If you want a question, you can use the Q&A button at the tool bar at the bottom of the Zoom window and we will answer the questions at the end of the presentation.

So introducing Upsales. So Upsales, we're a software company, and our mission is to help companies increase sales and become more effective with everything they're doing in sales. And the problem we want to solve is the #1 reason why B2B companies fail. So all companies start with high ambitions. But in reality of all the companies founded 10 years ago, only 9% of them reached revenue of more than SEK 10 million.

And the #1 reason for this is the lack of effective sales. So what we do, we give companies the tools to turn their business into a revenue engine within 60 minutes. We are a Software-as-a-Service company. We were founded in 2003, and we have a long track record of profitable and 100% organic growth.

So introducing the product. We focus on 4 key areas when we develop a product and when we talk to our customers about the problems we want to solve. So the first one is to help users and customers to generate pipeline and generate business opportunities by finding leads. So we enable our customers to use the data they already have within their existing accounting software to find similar companies, and we also integrate to various company databases. So our users are able to find all the information they need about potential customers.

So the second area is about driving opportunities through the pipeline in order to win more deals and to become more effective when working with the pipeline. So in this area, we enable our users and customers to become more systematic and more data-driven in how do you approach the activities when they are working with deals in the pipeline.

The third area is about existing accounts and how to grow existing customers and increase revenue from the existing customer base. So in this area, we help our users and customers to uncover upsell opportunities that exist within the existing customer base. And what you see on the screen is an example of this to get an overview of customers who bought one product but not the other product. So this is one example of how you can find upsell opportunities within Upsales.

And the fourth area is where we tie it all together and help our customers to run effective sales management, looking at the right KPIs and get the data and statistics they need to make better decisions. And one core part of our philosophy when we build the product is to invest in the product to make it more scalable.

So traditionally, when you buy a CRM or marketing software, you need to either be very tech-savvy or have large IT team or we need to invest in a lot of consulting to configure and to implement and to actually get the value from the investment. So our philosophy is different. We try to build a product that requires as little customization and implementation as possible.

So a lot of customers get started within a few hours and larger customers get started in weeks rather than months or years. And this is also the main explanation to looking at the Upsales revenue, 93% of our revenue comes from subscriptions. And we don't have an implementation partner, so there are no partners selling consulting to the absolute customers either.

So our focused target group is B2B companies that has an active selling process, with employees between 100 employees up to 2,000 employees. So our main focus are the lower end of the mid-market and we have identified this as a very clear gap in the market. So looking at the competitive landscape, you have thousands of providers who are great if you're a startup or if you're a 5-man company.

And then you have a few providers many U.S.-based providers that have these mega solutions that's primarily designed to be used by large enterprises. But if you're growing a fast-growing company, you might just hired your 15th or 20th sales rep. You need something more complex than the spreadsheet you were using, but you're not ready to invest in these mega systems.

Then Upsales is a very good fit. So looking at our growth drivers. So our ARR is SEK 140 million. And we believe that there's a huge potential within the existing customer base that we continue to work with. So we believe we can take the existing customer base to SEK 500 million. And looking at the market as a whole in Sweden, the prime -- the ideal customer, if you look at the ideal customer profile we're working with, we believe we have around 3%-5% market. So there's plenty of new customers to work with us well in the future.

And we also have been working for quite some time now with initiative for the U.K. market, which is still very early stage. I usually say, when I talk to investors that the main investment case for investing in Upsales is not international expansion. We believe the majority of the growth for the foreseeable future will come from Sweden. But we have this exciting initiative in U.K. where we are working with a number of clients, some where we're closing a few clients every quarter. So these are the 3 growth drivers that we see currently.

I usually also talk about the kind of background as to how are we able to grow with profitability. And I usually like to talk about our culture. So we believe in hiring the best people, investing a lot in individual learning, and making sure that everybody working at Upsales has as much personal growth as possible. And the culture at Upsales is a lot about moving fast, not getting stuck in endless strategy sessions or planning. We like to get our hands dirty and execute. Our [indiscernible] in the team a lot about taking extreme ownership since we are a smaller team than many of our competitors. So the people at Upsales take -- have, on average, a broader set of responsibilities in the roles. And the [indiscernible] is all about working as a team, helping each other out so we will talk also about no [indiscernible] on us allowed at Upsales.

So more specific updates what happened in Q1, starting with the product. So we're moving up market. We're targeting the kind of higher end of our target group increasingly. And when working with these customers, we realize that there are many more problems that our customers need our help with solving, which enable us to invest in the product and to add features and ad solutions, which also drives revenue from existing customers.

So 2 initiatives I want to highlight from Q1. So we have seen an increasing trend from certain industries that after GDPR and more specifically after the Shrems II verdict, some industries are very wary to work with U.S.-based software providers in order to stay compliant. So we recently set up a local data center, which we sell as a premium service to some of our larger customers.

And we actually won a specific deal in Q1 that where this was a very specific requirement. The second thing I want to talk about is we're increasingly working with companies that have a more complex quote and order process. If you sell a complex offering where you need to -- where it's not so straightforward to put together a quote and order to a potential client.

So we have had a number of features for a long time now that enables customers to handle these complex situations. But now we are investing more in this area. So we are investing in a full fledged CPQ offering, which will be part of Upsales. So one part of this is already released and is being used by some customers. And we're releasing the next phase in the end of Q2, which is also something we believe will help us win, help us stay competitive and drive revenue from existing customers.

So talking about the sales organization. So our mission in the sales team, the sales team is divided in 2 separate teams. So we have one team working with specifically new clients, and then we have the expansion team working with net revenue retention and driving Upsales revenue from existing customers. So we've done a lot of changes during Q1. So as we are moving upmarket, we have put together a new tailored offering in terms of -- our top 10 clients, we will have their own pricing. We're also launching enterprise pricing to differentiate between our smallest customers and slightly larger customers.

And we're also investing in more experienced profile when we are looking to hire people to the sales team. We are hiring more experienced people, adding more specific competence related to these larger enterprise deals. And as you already know, I guess, we released ARR numbers in the beginning of April. Sales was slower in Q1, which led to slower ARR growth year-on-year and slightly negative growth compared to Q4.

Before we talk about the specific financials, I just want to talk a little bit about resilience related to everything that's going on out there in the market. So we are not seeing a slowdown in the market. We are not seeing an increase in churn or longer selling cycles or anything like that. And we still believe that sales effectiveness is kind of an anticyclical thing because in challenging economic times, all companies need to focus more on sales when business don't just come walking through the door.

So we also believe that the scalability of Upsales makes us an attractive alternative for the larger end of our segment, where you might not be as willing to invest in these large consulting projects as you might have been 2 years ago.

And again, the stability, these are actually old numbers, we are now 93% recurring revenue. Makes us -- yes, it creates a stability for the business and we are net cash profitable and have zero debt. So moving on to the financials.

[Elin Lundström, executive]

Yes. Thank you, Daniel, and good morning, everyone. So let's begin to look at ARR and revenue. So compared to the same period last year, our annual recurring revenue grew by 17.4%. And ARR as of the end of the period was SEK 141.4 million compared to SEK 120.4 million during Q1 2022.

Net sales increased by 22.7% to SEK 36.2 million compared to SEK 29.5 million in Q1 2022. And looking at revenue, we divide our revenue between recurring revenue from our subscriptions and one-offs that comes from onboarding and consulting just as Daniel mentioned. So in Q1, subscription revenue accounted for 92.1% of total net sales compared to 88.4% in Q1 2022. And trailing 12 months, the number is 93% of our total revenue. that is subscription revenue.

And I saw that we had received a question regarding our revenue compared to our ARR. So annual recurring revenue decreased by SEK 4.4 million during Q1, while revenue grew by SEK 1 million compared to Q4 2022. So I think that the easiest way to think about this is that if we begin Q1 with a higher ARR than in the previous quarter, we have more deferred revenue going into that specific quarter. So that's why we can see an increase in revenue even though the ARR at the end of the quarter was lower.

Let's continue to look at profitability. We had an EBITDA of SEK 9.4 million compared to SEK 5.6 million in Q1 2020. And the EBITDA margin was 26% compared to 19% during the same period last year. We had an EBIT of SEK 7.4 million compared to SEK 3.9 million in Q1 2022. And we had a net income of this quarter of SEK 5.9 million. So let's look at cash flow. During the quarter, we had an operating cash flow of SEK 13.6 million compared to SEK 5.2 million during the same period in 2022.

Net cash at the end of the period was SEK 72.6 million, and we don't have any debt. And I can mention again that we paid a dividend in 2022. And for 2023, the Board has proposed a dividend of SEK 1.25 per share and also an extraordinary dividend of SEK 0.75 per share. So the proposed dividend to be paid is a total amount SEK of 34 million. That was all for the financial highlights.

Thank you, and let's continue to the Q&A section.

[Daniel Wikberg, executive]

All right. So we have a question about the ARR development in Q1. So there's not one main reason as to the decrease in ARR. I mean the obvious explanation is that during the quarter, churn was higher than new sales and expansion. But the main thing that had affected Q1 was weaker sales. And I mean, I would say we have done a lot of changes in how we approach customers and how we run our selling process.

With the aim of increasing sales by increasing average deal size. So we typically do these changes 1 or 2 times per year. I mean we have evolved as a business in the last few years. And the effect in this quarter was not as -- we were not seeing the positive effects as quickly as we hoped. So that's the main reason for weaker sales in Q1. We have a question about the number of employees, which is down compared to last year. So I mean looking at the team, I'm very happy with the Upsales team. It's a very effective team with ambitious and smart people.

And we continue to have an ambitious hiring plan, both for the sales team and for the product team. The customer success team grows a little bit more linear with growth and number of customers. So I mean, as we grow, we expect to add more people to the team.

There's a question about, "Are you going to increase the personnel going forward? Or is this a more mature level?" I mean, driving sales and investing in the product, we need to add headcount but headcount per se is not a KPI that we -- I mean there is no specific number as to the number of people we want to add. It's more about finding the right people, finding the best people and working in the most effective way.

And there's another question about, if we make changes to our pricing or how we bundle products that had an effect in Q1. So we used to have one version of Upsales and now we have 2 versions. So we have a differentiation between the lower end of our segment and the higher end of our segment.

But that is not the main explanation as to the weaker sales in Q1. The main explanation is that the deals we were hoping to close, these newer category of larger deals took longer time than we expected. All right.

And then we have a question regarding churn. So we don't report churn as a KPI, but I think I touched upon this, that we're not seeing a general increase in churn. And we -- on a weekly basis, we also track the kind of early indicator of future churn, which is cancellations, contracts that are canceled, then we're not seeing a trend there either. So all in all, we don't expect the churn to increase or making it tougher to grow in the future.

And all right. Then we have another question regarding team and the kind of people we expect to hire. "So do you plan to hire external people, senior, who have significant experience in scaling up the company? If yes, can you share how the average salary will move in the future?"

So I expect the average salary to slightly increase. But this is also -- I mean, the main bottleneck for growing Upsales or for growing any business is finding the best people. I would say that's 99% of the game. And the challenge we have is to find people who can bring outside experience and help us scale the business. But people who are at the same time, hands-on and people who are used to work in a smaller business, like Upsales, so these sort of people we're looking for.

And one trend we are seeing is that, I mean, the labor market in Sweden is not as crazy as it used to be with a lot of layoffs happening recently in the tech industry. So we are seeing that it's slightly, it's less hard to find talent than it used to be just 1 year ago.

"Are you reversing the changes to the sales process or do you see better outcomes going forward?" Not at all. We are very happy with all the stuff we've done in Q1. I mean we're not happy with the ARR development, but we're very happy with the changes we have done. And I mean, I always take a long-term view of everything we do. And I think that -- I mean we never try to optimize growth, profitability or revenue for a specific quarter in the short term. We always look at long term when making decisions. And sometimes, they have a negative effect in the short term, but we always try to make decisions that best for long-term growth.

"Do you expect these new contracts with larger enterprises to be finalized in the coming quarters?" So I mean our view for the rest of the year is positive. So we expect Upsales to have growth in 2023, yes.

Let's see if we have any more questions. Okay, so as there are no further questions, this concludes the Q1 earnings call. Thank you very much for joining, and have a good day.