Upsales Technology AB

STO:UPSALE

Earnings Call Transcript 2022-Q4

[Daniel Wikberg, executive]

Good morning, everybody, and thank you for joining the Upsales Q4 2022 earnings call. My name is Daniel Wikberg. I'm the CEO and Founder of Upsales. And today, I'm joined by our CFO, Elin Lundström.

So today's agenda is I will do a company presentation, talking about Upsales, our growth strategy and our product. And after that, Elin will talk a little bit about the financial highlights from the Q4 report. If you wish to ask a question, there is a Q&A function that you can use throughout the webinar, and we will answer all questions at the end of the webinar.

So with that said, let's start the presentation. So I usually want to talk about or why. What we do at Upsales? Why we exist? And the problems we want to solve for our customers. So -- looking at the reason why most businesses fail, the top reason why most businesses never reached pretty much any revenue is because the lack of sales and the poor execution of sales.

So this is 1 of the biggest business problems out there. And this is the problem we want to address for our customers. So at Upsales, our mission is to give companies the tools to turn their business into a revenue engine within 60 minutes. We are a Software-as-a-Service company. So we build software and we sell our software as a subscription. So it's a cloud-based offering.

And we have a long track record of almost 20 years track record of profitable organic growth. And our product, we focus on 4 core areas when we work with our customers and when we build the product. So the first 1 is to help companies to define leads to generate new business opportunities and to fill the pipeline with new prospects. And -- we do this in a variety of ways.

A very popular part of Upsales is our company database, where our customers can access demographic and financial data from all companies in Europe essentially. And our customers can use this feature to find the best bet prospects or companies for them to contact.

The second area is about creating an effectiveness and -- an effectiveness and a high level of efficiency in terms of working with the deals in the pipeline. So in this area, we help our clients to build an effective sales process and to use this process to forecast and to understand what's in the pipeline and what they can expect from the current quarter and the current year.

So the third area we address is about existing customers and growing existing accounts. We believe this is an overlooked area in a lot of companies. And many, many providers of CRM software has also overlooked this area, in my opinion. So this is a very interesting area in our product where we help our customers to find upsell opportunities in a data-driven way by using the data they already have that already exist in their accounting software or invoicing software.

So what we see on the screen is 1 example where we help our clients to figure out which customers have bought product A, but not product B to figure out where to invest more time and more selling resources.

And the final area is where we sort of tie it all together, where we help our customers to build effective sales management and reporting. So all the data that you have in your Upsales account can be used to run reports and to pretty much improve all of the other 3 areas. So that's also a very, very critical part of succeeding with your growth ambitions and your sales.

And our philosophy when we build the product in our industry, it's -- traditionally, you buy the software and you spend quite a lot of money and time to customize the software to solve the problems you need solved. So our philosophy is a little bit different. We try to invest a lot of time and money into the product to make the product as scalable as possible.

We have some services, a little bit less than 10% of our revenue is services. It used to be a little bit more. But we've been investing a lot of time and money into making sure that the software solves the customers' problems in a low code or no code way, which is, of course, very appreciated by our customers because they can get up to speed and get started in a matter of hours rather than months or even years in some cases.

So another core value or operating philosophy we have at Upsales is we want to make sure that our customers get a clear impact by using our software. So no customers come to Upsales or any other software provider to with solely the aim to buy a piece of software. There's always some kind of business problem you won't solve. That's why you go out there and procure software. So -- and in our case, customers come to us because they want to grow revenue. And this is the KPI we're most proud of at Upsales.

Our customers increased their sales by 22% in the first year when they start using Upsales. So it's a good indicator that the product does what it promises. And overall, we have very, very happy customers. We get very high scores when we do different kinds of ratings and when we measure customer satisfaction.

Below, you see some examples of the types of companies we work with. So the sweet spot for Upsales is, we have customers from pretty much all industries. We only work with B2B companies that has a business-to-business selling process. And our sweet spot is companies between around 100 employees up to around 2,000 employees.

And the reason for this is because in this segment of the market, we have identified a gap. So you have probably hundreds, maybe thousands of providers. If you're a really small company, then you can do a Google search for CRM software, and you will find a lot of products you can buy for $10 or $20 a month.

And then on the other hand, you have these major enterprise offerings, primarily U.S.-based providers, which are based or built for -- to be used by Fortune 500 companies, but if you are a 100-man company or a 200-man company, you're growing fast, you've outgrown your homegrown solution or your spreadsheet that you used to manage your customer data with, you need something more sophisticated that solves more problems for you. But you're not ready to invest millions of kroner into an implementation project or -- and you don't have the time to spend 6 to 12 months doing that. That's where Upsales is a very good fit for these types of companies.

So looking at our growth drivers. So we believe -- we have an existing customer base. We believe we can take that to SEK 0.5 billion without bringing in a single new customer. So we see a huge opportunity within our existing customer base.

On top of that, we -- looking at the type of sweet spot customer that we want to work with, how many do we have and how many are they out there? We see that we still have a rather small market share. So there are plenty of new customers for us to go after.

And for the last 18 months, we've been working with the U.K. market which is estimated to be worth SEK 24 billion. So our U.K. expansion is still at an early stage. We closed a few deals every quarter. We're investing in the product. We're getting good feedback from the customers we're working with. But when I get questions about our international expansion, I usually say that the investment case for investing in Upsales has very little to do with our international expansion. It's a very long-term initiative. And we expect our -- the majority of our growth to be in Sweden for several years to come.

I also want to talk a little bit about the -- when you look at the numbers, we get -- we get great feedback and when we talk to investors, they are usually quite impressed by the effectiveness of how we're running the business, balancing profitability and growth. And the reason for this is the strong culture we have in the company.

So we have 3 core values, which we try to focus on when running the business and making decisions. And these are moved fast and get shipped done. We like to be pragmatic, take extreme ownership, meaning that we believe in the capability of each individual, and we believe in giving people a lot of responsibility as opposed to creating a lot of hierarchy and just hiring more people for hiring sake.

And the third 1 is no prima donnas allowed. We are a very down to earth, and there's no room for prestige at Upsales. So these are the core values that we try to -- that we talk about every day when we are running the business. And growing effectively means a high revenue per employee. So this is probably 1 of the most important KPIs we have in the company.

So we try to focus on optimizing this number and increasing this number. And as I mentioned, we try to have an efficient organization with minimal nice-to-have stuff or things that simply does not contribute to growth or customer satisfaction.

And the second explanation as to how we are able to grow revenue with 30% with high margins, it's about our strong sales culture we have at Upsales. We spend quite a lot of time and effort and money into making sure that we have a world-class sales team, and this is also something that it will always be 1 of the most important parts of our business together with having a [ kick-ass ] product, of course.

So some KPI highlights. 92% of our revenue is recurring revenue, subscription-based annual contracts. We have 0 debt and SEK 64 million in cash as of the end of the last quarter. So Q4 was the 79th quarter in a row with growth. So again, we have a very long track record of growing the business, almost 50% of the business is still owned by the management team. And trailing 12 months, we are growing with a 17.4% free cash flow margin.

So before I hand over to Elin, I just wanted to address resilience in terms of -- there's a lot of talk about the situation in the market in general and inflation and a possible recession and so on. So I think that the problems we address at our customers will always be important. So sales effectiveness is always important, and I would argue it's even more important in a contracting market because finding new business is harder when the economy gets sour. So you have to improve your sales effectiveness.

The second part is our -- the scalability in our product makes us very attractive for clients that still want to do something. They want to invest in some kind of sales and marketing improvement but they don't have the money or -- the money or time maybe to invest in these larger competitors. So we are actually seeing an increased interest from companies that typically would go with the larger providers. And again, having 92% recurring revenue makes us resilient and being net cash profitable with 0 debt.

So that was all I had. And now I will turn over to Elin.

[Elin Lundström, executive]

Thank you, Daniel, and good morning, everyone. So for the financial highlights, let's look at ARR and revenue. Annual recurring revenue grew by 30.4% compared to the fourth quarter of 2021. And ARR as of the end of the period was SEK 145.8 million compared to SEK 111.8 million during the same period last year.

We are now seeing that revenue growth has normalized compared to ARR growth as net sales increased by 30.6% to SEK 35.2 million compared to SEK 26.9 million in Q4 2021.

Let's continue and look at profitability. Our EBITDA was SEK 9.3 million compared to SEK 4.9 million in Q4 2021, and EBITDA margin was 26.5% compared to 18.1% during the same period last year. We had an EBIT of SEK 7.5 million compared to SEK 3.3 million in Q4 2021. And net income as of this last quarter was SEK 5.9 million.

So looking at cash flow. We had an operating cash flow of SEK 18 million during this quarter compared to SEK 18.4 million during the fourth quarter of 2021 and Q4 is a typically strong quarter in terms of cash flow for us.

Total cash flow of the quarter was SEK 15.6 million compared to SEK 13.7 million in 2021. And net cash at the end of the year was SEK 64.4 million, as Daniel mentioned, this is slightly lower than the SEK 66.4 million that we had at the end of 2021, but we also paid a dividend of about SEK 34 million in May 2022.

And in terms of dividend to be paid in 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 a total of SEK 2 per share.

That was all of the financial highlights right now. Thank you. Let's continue to the Q&A section.

[Daniel Wikberg, executive]

All right. So first question, operating cash flow weakened due to slower passive working capital inflows, what drove this development?

So -- in terms of cash flow, there's nothing material or significant reason. I would say it's a pure timing effect that makes up that difference.

So the next question. Your headcount stayed roughly flat during 2022. How do you see the headcount developing during 2023 and maybe in 2024?

So looking at headcount, my view is that I mean, our organization is constantly developing, and we're constantly trying to find better ways of working and the more effective ways of working. So -- some people naturally leave the business, and we -- every quarter, we hire new people.

But I mean, I think -- the most important KPI for us is to have a high revenue per employee. So that's more important than setting a target of we want to hire 40 people next year. Having said that, we -- I mean, for Upsales, as for any business, finding the best people is what's going to make it or break it. So we are constantly looking for more talent to our sales team. We are constantly looking for more talent to our product team.

And when it comes to our customer success team that manages like operations and the customer support and stuff like that, there, we see a kind of more organic growth as we grow as a business and as we get more customers. So it's -- yes, I mean I expect us to grow headcount, but it's very difficult to say by how much.

So the next question, have you seen any increase in churn?

So we don't report churn in our financial reporting. But what we are seeing is that, we have not seen an increase in churn. We have seen an increased kind of weariness, customers are a little bit more -- on top of all of the contracts they have with all of their suppliers. So we have more renegotiations with some of our customers. But we're not seeing any slowdown or increase in churn or anything like that.

Okay. Next question. What drove the SEK 3.4 million increase in other external expenses from Q2 to Q4 2022?

I'm not sure there's a specific answer to that question. I mean, as we grow the business, we grow, yes, all parts of the cost base. So nothing material that stands out, I would say.

So next question, can you please discuss the mix in growth, new customers versus growing an existing customers?

So as we have a land-and-expand strategy, slightly more than half of our growth comes from the existing customer base. Yes. So it was a kind of typical quarter in terms of the mix.

So next question, where do your new customers come from? Did they mainly not have a CRM or did you win them from other CRM providers?

So this is kind of funny, I would say, because -- you might think that the CRM market is very mature, but in reality, it's not. So still -- more than half of the customers we bring in don't migrate from something they used in the past. So I would say a lot of companies, even companies with a few hundred employees still use spreadsheets to manage the pipeline. A lot of companies are using some kind of add-on or their ERP to manage customer data. So it's still a very fragmented market.

So next question is, do customers have to pay 1 year in advance? Are there exceptions?

And the answer is yes, our customers pay annually with very few exceptions, mainly for our largest customers, but very, very few exceptions. Most of them pay 12 months ahead.

Okay. So next question, is growth from existing customers, primarily driven by more seats or more functionalities used or something else?

So I would say the majority of growth comes from our add-ons because we don't have any bundles. We used to have like the typical pricing model as a lot of software companies have with the gold and the silver and bronze package, but a while back a few years ago, we changed that. So we sell seats and then we sell add-ons. So most of the growth is coming from these add-ons.

How much of Q4 growth was driven by the premium version tailored to large customers?

So that version is still early stage. So it's not the main driver yet, I would say, but we expect it to be increasingly so in the future.

Okay. What do you think about the average pay per employee? Do you see pressure coming from this direction?

I guess you're referring to salaries. I mean, I see 2 trends in the labor market. Obviously, with inflation, we need to make sure that we stay competitive, and we have risen salaries. On the other hand, there's a lot more talent available now because of all the layoffs in the tech industry. So I would say it goes both ways actually.

And a question, you've been running ads in [ DACH ] industry and there's been a big increase in marketing. Can you comment on the marketing strategy?

So we -- yes, we've been actually running this print and outdoor ads for many years, and it's working very well for us. But the majority of our leads -- I mean, the majority of our new deals still comes from outbound activity where we contact customers directly. And the deals we get from marketing comes primarily from all the stuff we're doing in our content marketing with webinars and articles and stuff like that.

Next question. Are you planning to invest in an international expansion, '23 or '24?

So -- we will continue working with our U.K. expansion, but we have no plans for additional markets in the near term.

So next question, can you comment on which KPIs you think are most important for Upsales?

So I think I mentioned that revenue per employee is very important for us and ARR growth, of course. And I mean, internally, we try to look at a bunch of KPIs to make sure that we deliver top quality to our customers.

So the last question is about our new data center. So we're actually moving from having used AWS to maintaining our own servers.