BTS Group AB (publ) (BTSB) Earnings Call Transcript & Summary

All right. I think we'll start. So welcome to this presentation with BTS after the Q2 results. So with us today, we have Jessica Skon, who will do a short presentation, and then we will move on with some Q&A. So please go ahead, Jessica.

Thank you. Dear investors. I hope you're having a nice summer calling in today from San Francisco. I'm pleased to report our Second Quarter results. Basically 1 more quarter of profit growth. So across the group, 9% revenue growth, currency adjusted, 13% profit growth and EBITDA margin improvement from $11.7 million to $12.3 million. Reasons for that, BTS South America is back to strong profitability. Maybe I'll pause and see if someone can mute the line? Sorry for that interruption. Q2, 1 more quarter of profit growth. Revenue 9% EBITDA, 13% growth, EBITDA margin and improvement from 11.7% to 12.3%. North America continues to perform. So back to strong profitability again in the second quarter. Europe continues to deliver really strong growth. BTS Other markets still struggling in the second quarter, similar to the first, but we believe is on track to recover. AI continues to drive really fast revenue growth for us, and we feel very differentiated as an AI partner to our clients. If we double-click into BTS' biggest unit, BTS North America, where we had the turnaround starting in the middle of last year, second strong quarter in a row, back to strong profitability. Revenue is super nice to see the biggest unit go back to double-digit organic revenue growth. Profitability up 60 percentage points, talk to 37.5%. EBITDA margin, nice improvement from last year, and we still expect that to continue to increase. I can explain more in a bit. And we expect North America to continue to be strong for the second half of the year due to several dimensions. As I mentioned, our ambition is to get back to higher profitability margin levels over the next coming quarters. And I'll just say 1 thing that happened in the second quarter in North America was we had 1 of our smaller businesses that was unprofitable. We actually shut it down in the second quarter and had about $400,000 of in-quarter severance related to that. Another business we had another big AI diamond level breakthrough that really is revolutionizing the way that the team works across our custom certification and content offerings. So we also decreased the size of that team. Those costs were hit in the second quarter, and it took out about a little over USD 1 million in run rate costs to be realized over the coming quarters. And then our client demand continues to strengthen in the energy financial services and health care sectors. And we expect continued growth to continue during the second half of the year. So we feel really good about the North America turnaround and continuing to perform. BTS Europe had an amazing growth in the second quarter, 25% revenue growth with a 38% increase in profit. And with that growth, we see a nice improvement in the EBITDA margin at 16.2%. What's behind the growth well it's big deals that we had won in the past that continue to perform. Smaller deals that came in actually grew in size bigger than the initial order intake. And BTS Europe in the second quarter saw no project cancellations or delays across the clients. We also see increase in demand from the defense and manufacturing sectors. And all of our offices in Europe, except one, delivered double-digit growth. And given their fast growth rate in the first half, we expect Europe to continue to grow in the second half, but at a slower clip. BTS other markets was basically flat in the second quarter, a decrease in profit of negative 26%. That's due to the same problems we talked about in the first quarter with some of the really low performing units in BTS Asia and EBITDA margin 12.5%, dropped from 79% Q2 2025. All of this is due to the continued headwinds in Asia Pacific. We took those -- we addressed those head on in the first quarter. We've shifted different partners in the region, partner-led activities across different countries. We've had a big increase in AI marketing events, which have been perceived very strongly in those countries, which has led to a stronger opportunity pipeline. We've consolidated some of the offices where we just have less people and we don't need them and some head count adjustments to make sure you have the right team moving forward. All of that said, we expect BTS Other markets to have a strong recovery in the second half of the year. AI continues to be our friend. It continues to differentiate us, and it's a source of revenue growth for the firm. First, we continue to innovate across the portfolio with AI, and that makes our core services more differentiated and helps our clients experiment within their functions of new tools and services that are available to keep their functions on the leading edge. Also, we shifted this quarter for services where our clients are hiring us specifically to drive AI adoption, AI workflow reimagination, AI innovation across the firm. We're going to report those out down in terms of revenues rather than bookings. It's just simply a reflection of it's becoming a more significant part of the total revenue of the business. In the second quarter, it hit 10% of total revenue. and the growth of the revenue associated with helping our clients with their AI implementations grew 221% compared to the same quarter of the year before at SEK 76 million. Why invest in BTS? We have a history of sustained profitable growth, and we believe we are back to performing in line with those principles. AI is creating more opportunities for us, not less. The whole market seems to be realizing that AI is primarily not a tech issue. It is a people a change and an innovation issue. And with that understanding, it fits with BTS' core capabilities. And then our growth, as you know, as a business model is capital light. So if we double click into those very quickly in terms of sustained profitable growth, sustained growth is in our DNA at 13% revenue. We had 9% in the second quarter, and I believe we are on track to get back to our historical levels. We're back to growth in our biggest unit, which hit double digit and 60% profit growth in the second quarter. We have an amazing list of global clients. and our win rates continue to be strong and BTS has a brand in the market as a company who has been innovating how companies learn change and perform for 40 years. And that is what every company in the planet needs right now as they retool every person in the company with AI and -- we invent their rules. And we only have 1% global market share ahead of the competition. We believe we're in the sweet spot for this AI era given that it's a people change and innovation problem, and it is not -- it doesn't resemble the similarities to digital transformation or ERPs of the past. We continue to realize that we're in the top 5% of companies who have had 3 different major AI breakthrough innovations across our operations, spanning new products and services all the way to the back end and we can take those learnings of what's required to invent with AI and what's required to mandate the new ways of working to our clients. And we continue to do that with many client events and opportunities and proposals in our pipeline. As I mentioned, it's now 10% of total revenues and growing rapidly. And -- given the IO innovations of the past, I expect we will have many more coming in the future quarters across our functions in particular. We have already realized SEK 74 million in productivity gains related to AI innovation and change implementation. And all of this, while our core remains in strong demand. Clients are investing in getting actually people together to make sure that they understand the strategy that they know how to act and that they're accelerating the innovation of what they're able to do with AI. They also are using us to scale change at big scale and speed. And then some of the companies right now, the native companies are our clients. And I'll give you an example of our work with Anthropic. You can see a quote from the Chief Commercial Officer, Paul Smith. We brought BTS in early. They rolled their sleeves up from day 1, modeled every stage of our sales cycle, built the playbooks across market segments, full simulations of how we go to market, incredibly high impact hands-on work. Now they're part of our Anthropic service partner network and our customers get the same. So we continue to kind of learn at the epicenter of how AI is evolving by helping them with our core services and taking those learnings out to the market. And then finally, as you know, for long-term investors, our growth is capital light. Since our IPO in 2001, we've had 12% revenue CAGR. Roughly 2/3 of that is organic. That has been able to fund 1 to 2 on average acquisitions a year for the last 20 years despite the acquisitive approach to our growth, in addition to organic we typically pay between 40% to 65% of profit after tax through dividend. And we have done all of that without asking for additional capital from our shareholders. And we continue to have a strong net cash position with our cash conversion rate at 84% over the last 12 months. And as a result of the strong first half and what we can foresee in the second half, we're raising our outlook to be significantly better than 2025. And with that, I'm happy to answer questions.

Great. Thank you so much, Jessica. I'll start with a couple of questions, just feel free to write the questions in the chat or you could raise your hand if you wish to ask a question to Jessica. So first of all, obviously, very strong on the top line with improving growth to 9% here. And I just wondered, I mean, looking into H2, when you talk about the outlook statements, both from North America and other markets to improve. So what can you say about bookings? Or is it more that you expect continued momentum to remain.

For North America, we expect the momentum to continue in the second half. And for BTS Other markets, we expect them to get back to growth. So.

All right. Perfect. Then just on the costs in North America specifically, I think that was the the segment or division where the margin didn't really live up to the expectations. You talked a little bit about severance costs, et cetera. I'm not sure if you quantified this exactly, but can you just clarify a little bit what the sort of underlying margin you think was in the quarter do you exclude us?

If I exclude the 2 businesses that we either shut down? Or was that your question? Or just more details on the margin?

Yes. Just if you could add some color on the underlying margin development, if you sort of exclude the more one-off related items. .

Sure. Okay. If I exclude the one-off items. And keep in mind that those 2 businesses that we either canceled or reduced the team because of the innovations we're actually hurting our profit through the first half. So now they will be profit accretive in the second half. The third reason for the lower margin was the Soundinborg acquisition from a year ago for coaching for skilled coaching was basically an unprofitable tech company. And so by bringing them into the firm, they naturally reduce the margins in North America by a bit, right, compared to the old service model that we had. So that was a strategic decision. If we actually remove those 2 unprofitable businesses in the first half and the Sound inborn, our margin would have been up 4 more percentage points. So that -- I mean, -- my guess is that's probably more what you were expecting and that would explain it. .

Perfect. And that's related to North America margins. .

Only North America, yes, correct. .

We had some questions from Granath at ABG. I think the first 1 we have already answered a little bit -- the second part of it, I think, is interesting. It's about the token cost. So given that you obviously can reduce your head count quite a bit by improving the efficiency with AI. So how is the token costs evolve? And is this a part of margin pressure, et cetera?

Not this year, it will not be a part of margin pressure. Next year, we expect it to increase quite a bit. So I can tell you our more details under our hypotheses there. Our -- so we switched from ChatGPT to Claude suite for the whole company in May of this year. But the deal we struck with Anthropic for the Cloud Suite was a typical total enterprise license for the first 12 months. We did not shift to a token consumption model, and that gives us time to learn, right, by function and by role, which modes to use and at which levels for the tasks that our team needs. So we have time. We have time for our leaders to learn this and as a company to learn it. And we have some hypotheses in the IT function that we're testing across our teams. So -- but however, that said, given the what we're learning. We expect our token cost with Anthropic to go up 4x probably next year. For us, that's a magnitude of, let's say, we're spending 400,000 with them this year. We think that it might be USD 1.2 million, USD 1.5 million, USD 1.6 million next year. Now that is not our total software costs. that's just would be the cost associated with token consumption from cloud, right? And we're doing a really good job of reducing our other software and SaaS cost on a regular clip to try and balance out keeping our total software spend. Maybe it will grow next year a little bit, but it's not going to grow 4x, right? A percentage of that is going to go up. And then we have more pretty big innovations hitting our operations in the second half of this year. We have a major platform that supports almost all of our work for our clients, and we're launching a new 1 just this month. And it is an absolute breakthrough in efficiencies and productivity and ease for our teams and so forth. And so as the new platform comes online, and the old 1 starts to go into maintenance mode and we let that run out with the existing clients. The cost savings from that would easily make up for the increase in token costs next year. But the timing of all this will be playing out over the next 4 quarters.

Perfect. And kind of a related question on the efficiency. Another question from Donny here. The number of employees on a group level is down for the fifth consecutive quarter. And any question on when do you expect that to trough -- and also, the second part of it is, if it's sustainable to continue to shrink employees when growth covers almost double digits on an organic basis this quarter.

So first of all, we are increasing the number of billable consultants that we are hiring and the total number of billable consultants is going up. The group of employees that is declining is and has primarily been the operational back-end office functional staff of the company. So that for a while now, you'll probably see that reality play out. And at the same time, we will continue to hire as we need. But we're just balancing the impact of the AI innovation, specifically on the operational side with growing the little consultants. So my guess -- it's hard because we need both of those things to be true. Probably, we would start to see. Yes, it's hard to say. I would give us another 4 quarters of this back-end front-end balancing to play out before we would see total net adds unless we make more acquisitions in that time.

Sorry, I think we have a question from John Hilton, if you want to.

Perfect. On the same topic, net reduction of employees, but you also say that you've added a billable consultants. So -- if you just look at the cost impact, is it negative so far because it pays severance for the 1 you lay off and then you add -- you don't get a reduction on the total salary cost because you had on the other hand, so to speak, did you understand what I tried to ask.

I think so. And there's been a couple of waves of these initiatives. So the reductions that we did in last year right now are net positive on the P&L. -- right? And then the ones that we adjusted in the second quarter that are resulting in about USD 1.15 million in annual run rate. Those will only start to be positive in Q3, Q4, Q1, Q2.

But you said you added billable consultants. .

We are adding them. We are now adding them. Like our recruitment pipelines are -- we have open reqs across the system. So we'll only start to see those coming in now in the second half. .

Okay. So overall cost levels, what should we expect really the will they kind of grow with your top line? Or otherwise, I thought you had kind of fixed cost on regular consultants and developers, but then you have pretty variable cost if you have an off-site event, et cetera, where there's just a lot of variable costs. So how should 1 view your ability to scale the margin if you continue to grow.

I mean the -- the biggest factor in growing the margin right now is the continued AI innovations across our back-end operations. Because we still have well over 30% of our total employees in back end operation roles. But yes, in terms of growing billable consultants and number of sellers, those costs would pretty much grow in line with the rep top line growth.

And then final for me here. The impact on pricing given that you can develop a simulation, I think some over a day, which took 2 weeks a while ago. We still build the same you charge for the value you give them, despite you being much quicker to actively develop.

Yes, 2 things have happened. One, we've -- we're still doing price for value, especially for the simulations that are around new strategy creation and strategy execution, and we're doing a lot of working sessions with the clients. but we've also been able to say yes to deals that have a fast turnaround time that we weren't able to say yes to before. And in those deals, okay, maybe it takes us 3 weeks to work but then it's getting deployed for many people. And so the total deal size is very -- I mean at least the rollout, which is the most profitable part of our project is the same size as before. So we've done a lot more projects with very fast turnaround times, being able to meet our clients' speed expectations.

And then just a final, if that's okay. I mentioned 10% of revenue is now in direct AI-related sales -- it sounds like that's more traditional consulting? Or is this your -- do you use your normal building simulation type of work style with this AI or are you just telling your customers how to use AI.

No, it's a mix. It's a mix of our core capabilities and core simulation services with helping them get hands on keyboard and starting to like work activity activity through their work. So for example, there's plenty of companies who want to introduce new AI tools to specific teams and they need to just drive early adoption for that. . In order to do that, those workshops will feel more like both simulation and hands-on keyboard, a combination of both. We have clients that are giving us 22 different workflows to begin with and working with those teams for each workflow that need to reinvent their work. And in those cases, it's a combination of workshops. We simulate what's possible together with them. We do ongoing coaching for the teams in terms of continual AI innovation and the change management associated with it. We're doing our executive advisory work like before. So it's a big mix of core capabilities and some net new.

Right. We had a question from Dauvet. If you could elaborate on the direct AI service revenues, what does that directly mean? And what kind of services are included in that?

It means our clients are saying, help us with our AI ambitions. And right now what those demands sound like we're not happy with the adoption of the tools per team or per role or for every employee in the company. So help us drive the adoption up. It's also -- we're realizing this is a cultural leadership issue. So help us get our leaders to shift to create the type of environments where their teams can experiment and innovate with AI. It also sounds like, as I just mentioned, we want to have workflow specific AI adoption. So can you help us figure out who should be doing the workflow innovation across the team and then how do we make sure it gets done over the coming weeks and months. And then when a team actually drives an innovation that's so profound that we would need to change the ways of working. Help us with the change management associated by getting everybody on board with the new way of working. And then the final piece, which is kind of at the end of that process is help us understand what it means for our teams to wake up every morning and manage agents. And that gets to token consumption and agent management and what type of -- like just how does that look and feel. Help us understand that and help our leaders understand what's coming. So those are kind of the 4 different buckets that we've been asked to support so far this year.

Right. And are there any specific types of projects that are driving the vast part of the 220% AR revenue growth? Or is it broad-based?