Upsales Technology AB

STO:UPSALE

Earnings Call Transcript 2022-Q2

[Daniel Wikberg, executive]

Good morning, everybody, and thank you for joining our call today for the second quarter results for Upsalses. So today's agenda, as usual, I will do a company presentation and talk about our current business plan, our growth, strategy and then an update on what's going on there. And then I will hand over to Elin, our CFO, for a financial update from the last quarter. So moving on to Slide #2, introducing up sales. When we talk about Upsales, we describe ourselves as a Software-as-a-Service company. We have a long track record of profitable organic growth and more than 90% of our revenue comes from recurring contracts. So we are a company with no debt with SEK 43.7 million in net cash. And the second quarter of 2022 marks our 77th quarter with growth. 51% of the business is management owned, and we are a profitable company with positive cash flow and trailing 12 months, we have a 15% free cash flow margin. So next slide, what we do at Upsales, our mission is to help our customers who are B2B companies to find new opportunities and leads and to win more deals and increase their revenue. And we do this by providing a CRM marketing and sales tool, which we sell to a niche segment of the market where we focus on fast-growing midsized B2B companies in a number of sectors. And by focusing on this niche, we are able to be significantly better and more effective than our international larger competitors. So we have been doing this for almost 20 years. The business was founded by me in 2003. We have our head office in Stockholm, Sweden. We are a team of 65 people and we are working with around 1,800 customers in a total of 11 countries. So moving on to Slide #4. What we have seen in the last few quarters is that by focusing on improving customer satisfaction and raising the bar as to our targets when it comes to customer satisfaction and customer success, we are seeing a very strong momentum from a lower churn rate and from happy, successful, satisfied customers who are adding more services to their existing contracts. So this is a strategy we started working with in 2019 with the aim of driving growth, accelerating growth and also increasing our average contract value. And we focus on 3 core areas, the first one being improving the scalability in our product and the way we deliver the product. The second one is, as I mentioned, improving customer success and making sure that our customers get the results they were looking for when they came to Upsales. And the third one is to have a best-in-class, a world-class selling process to have a very effective sales organization. And it's also worth mentioning that we focus a lot more on the total ARR and the average contract value than the actual number of customers since our customer base is far from homogeneous. Having a few customers paying several million kroners per year, and the smallest -- long tail of small customers that pay only a few thousand kroners per year. So moving on to next slide. We continue to invest in the product with the aim of making it easier and faster to get started and get the results you're looking for when you start using Upsales. And if we go back a few years, we used to deliver more professional services and more consulting hours than we do today to be able to solve the sort of the top 10 problems our customers have. But then we started working tirelessly to incorporate these solutions into the standard platform. So what our customers get today is they get a lot of flexibility. We solve the same problems we used to solve a few years ago, but we don't have to spend a minute of consulting or custom programming to do it. Which is, of course, very appreciated by the customers, and it makes us a more scalable company as well, not having to support customer solutions on a per customer basis. So moving on to the next slide. We also put a lot of focus on improving the customer success and making sure our customers are happy. So of course, there's a lot of things that goes into this. But I want to highlight some of the things we've been working on lately. We've had a lot of focus on improving the initial customer onboarding since we saw in our data that although we have a low churn, the customers who do churn tend to churn in the first year. So we believe that churn starts even in the selling process before the customer becomes a customer. So we try to focus on selling to the right type of customers and making sure that their onboarding is world-class so they get a good start. We also invest more now in having dedicated people in the organization working, dedicated with training since we also saw in our data that the more trainings you attend, the more usage you have and the more growth we will see from those customers. So we're very happy with the results we're seeing in this area, both in the kind of -- in the financials, in the numbers, but also in the kind of more soft KPIs such as Net Promoter Score and customer satisfaction. So the third area I want to talk about is what we're doing in our go-to-market, in our sales and marketing. So Upsales has adopted a land-and-expand way of selling, which means that we don't try to go for the huge mega deals when we bring in new customers. We try to make it as easy and simple the decision to become an Upsales customer as humanly possible and then we work with the customer over time to grow their account. And this also makes it -- it simplifies recruiting and onboarding of new members to the sales team. And I also want to -- when I get questions about this from investors, I mean one of the most important explanations as to how is Upsales able to accelerate growth and improve profitability at the same time? It's kind of counterintuitive, it's not what you're used to see, especially in the tech industry. And I would like to highlight the scalability of the product is a very important piece of that puzzle. But also having a relentless focus on efficiency in the selling process and how we work with the sales organization. So we put a lot of focus on we have to experiment, we have to innovate, but we always want to learn fast from our mistakes. We don't want to burn cash for quarter after quarter after quarter on an initiative without seeing any results. And if you do that, you get a very high level of efficiency in the business overall. So moving on to the next slide. We are expanding to the U.K. We started doing this a little bit more than a year ago. And we still have a very long runway of growth in Sweden. We believe that Sweden can take Upsales to more than SEK 1 billion in ARR. So almost 10 sites, the company we are today. But we believe that over time, we want to have the international expansion becoming more of an important piece for us. So it's a long-term initiative, and we're still in kind of an experimenting phase. However, we are closing deals every quarter. We are getting very good feedback from the customers we close. And we're putting a lot of focus on tailoring and customizing the offering, specifically for U.K. customers. And so we're adding integrations, we're adding data sources, and we're doing all these small tweaks in the product to make it a highly competitive offering, specifically for U.K. customers. And the feedback we get is very good in direct competition with huge international competitors. And of course, the U.K. market is a very exciting opportunity. It's estimated to be worth SEK 24 billion, the U.K. DRAM market. So it's a huge opportunity, but it's a very long-term play. And we believe that Sweden and the growth in Sweden will be dominant for the foreseeable future. So moving on to Slide #9. So what we have seen now in a few quarters is the acceleration of our ARR growth rate. And this is driven by lower churn as a result of all the stuff we've been doing with our existing customers and also improvements in the product. And it's also driven by the land and expand model really start to bear fruit, which we see in an increasing average contract value. So we expect to see a further acceleration and further profitable growth for the remainder of this year and the next year. So now I will hand over to Elin for an update on the financials.

[Elin Lundström, executive]

Thank you, Daniel, and good morning, everyone. Let's continue to Slide #11, looking at ARR and revenue. Annual recurring revenue grew by 31.5% compared to the second quarter of 2021, and ARR as of the end of the period was SEK 129.3 million compared to 98.4% during the same period last year. And net sales grew by 46% to SEK 32.2 million. Let's continue to Slide #12. So this was the eighth quarter in a row that we have increased our revenue growth rate and revenue is growing faster than the ARR in the comparison period. And I've talked about this before, but I think it's good to again shed some light on the improvements that we made that we're seeing in the revenue growth rate right now. So first, lower churn. A higher churn in the beginning of the quarter is off of revenue during that quarter. So meaning that with a lower churn that we're seeing, we can collect more of the new from the ARR during that quarter. So I'll try to illustrate this. The ARR changes every day, of course. And you can think about this as if a higher average ARR during a quarter will give us more revenue from that quarter. So this is an effect that we're seeing right now on revenue compared to the comparison period. Let's continue to Slide #13. The second reason is the timing on closed deals. So typically, if very common that sales organizations tend to close most deals at the very last minute, for us at the end of the quarter. And as we defer our revenue from ARR, closing new ARR at the very last minute on the last day of the quarter will only give us 1 day's worth of revenue during the quarter compared to closing a deal the first day of the quarter will give us 90 days' worth of revenue. So timing on the ARR growth also has a large impact on revenue during the current quarter. So our sales team has worked hard on is so deals are now being closed more evenly during the quarter. And this is one of the effects that we're seeing on revenue this quarter compared to the comparison period. So let's continue to Slide #14 and profitability. So in terms of profitability, we're seeing a significant improvement despite negative impact from currency fluctuations. These are not directly related to our business, but having a lot of cash, we decided to diversify our cash in a number of currencies when we saw turbulence in the market during the beginning of this year. Our EBITDA was SEK 7.6 million compared to $4.1 million during Q2 2021. And EBITDA margin was 23.4% compared to 18.5% during the same period last year. And EBIT was SEK 5.8 million and net income of the quarter was SEK 4.6 million. And I spoke previously about that we made some investments, the biggest one being the move of our head office to a bigger space. And we're now seeing increased margins and thus we're starting to grow into this larger cost base. Let's continue to Slide #15 and cash flow. So during this quarter, we had an operating cash flow of SEK 3.3 million compared to SEK 2.2 million during the same period in 2021. And total cash flow was negative due to that we paid a regular dividend and also an extraordinary dividend in May of a total of SEK 33.7 million. And we're continuing to go without any debt with a net cash at the end of the quarter of SEK 43.7 million. Thank you. Let's continue to Slide #16 and the Q&A section.

[Operator]

[Operator Instructions] Your first question comes from Hjalmar Jernström from Erik Penser Bank.

[Hjalmar Jernström, analyst]

Daniel, Elin, my first question is on the ARR and the drivers of growth in the quarter. Could you elaborate a bit on whether the growth mainly comes from the admissive customers or growth within the existing customer base? And maybe give us some flavor on what we could expect going forward into 2022.

[Daniel Wikberg, executive]

Yes, sure. So historically, around 50% of our growth has come from the customer base and 50% from new customers. And we're seeing that starting to shift since we adopted the land and expand strategy in 2019. So a little bit more now comes from existing customers since our definition of new customer here is the first contract we signed. So everything added by the customer after that is defined as expansion revenue or existing ARR revenue. So now we are at around 60%, 70% from the existing customers. I don't have the exact number, but somewhere around there.

[Hjalmar Jernström, analyst]

And second question, more about macro question. Do you see any indicators at the moment that the customers may be experiencing headwinds relating to inflation or other macro conditions, something that may make potential new customers act more restricted?

[Daniel Wikberg, executive]

We haven't seen any negative effects yet. I mean since we're a net cash company, we're not kind of affected by the turbulence in the capital markets and we're running a profitable business with 100% organic growth. And when we talk to our customers, I think that the segment we're working with, like the medium-sized fast-growing businesses, since we're not really targeting the enterprise segments and since buying Upsale is not a huge CapEx decision where you take a SEK 10 million investment, like you need to do with other computing systems. I think we might be better positioned because of the kind of the low threshold to start using Upsales. But of course, we track this on a weekly basis, even on a daily basis, sometimes, and to make sure that the companies we target when we go after new companies, that we target the ones that we have the highest chance of winning. And I think that's the benefit of us being still a relatively small company. It's fairly easy for us to kind of switch our focus as to which industries we should target because no matter what happens to the economy, there's always some industry that's experienced growth and success.

[Operator]

There are no further questions at this time. I would now like to turn the conference back over to Mr. Wikberg for any closing remarks.

[Daniel Wikberg, executive]

So thank you very much for joining the call today. We are very happy with the results from the last quarter, and we continue to push for even faster growth in the future. Thank you.