Columbus A/S (COLUM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Columbus Annual Report 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Soren Krogh Knudsen. Please go ahead.

Thank you. Thank you, operator. Yes, my name is Soren Knudsen, and I'm the CEO and President of Columbus. I'm accompanied here today by our CFO, Group CFO, Brian Iversen, and I suggest we start by going through the agenda on Slide 4 together. So on today's call, we will start by looking at the financial highlights of the full year of 2022 and also look at the Q4 in isolation, at the last quarter of our fiscal year of 2022. Following that, we will be looking at the operational milestones for 2022. And Brian will then cover a more detailed financial review. We will also share a few words on our new sustainability strategy as well as give an update on our own ESG numbers. We will end the presentation with an outlook for 2023 and provide long-term guidance, and then that will be followed by a short Q&A session. So let start by going to Slide 5, where we will begin the presentation. So I think it's fair to say 2022 was a year where Columbus, as many other companies had to navigate in a very rapidly changing world. We have done so, and at the same time, we have been committed to continue to grow the business and also continue to do what we summon as strengthening the core of our business, so internal streamlining of Columbus. And the strengthening of the operational performance of the business has taken time and also investments. Our growth numbers clearly show that we are on the right track in our growth strategy. We have a goal of 10% organic growth annually by 2023, which we are steadily approaching. We achieved 9% in 2022 combined, but with an upward trend, which showed an 11% growth for the fourth quarter in isolation. The revenue for 2022 ended at DKK 1.4 billion. The positive development covers both new customers. We are becoming much better at cross-selling several services into our existing customers. So the size of the average customer engagement is increasing for us. We've also implemented a number of price increases, and we had -- we saw partial positive effect from that in the last half of 2022, and we're seeing the full effect of that work from the beginning of 2023. All major business lines and most market units contributed to the revenue growth, especially our strategic business lines, Digital Commerce, Data & Analytics, Customer Experience & Engagements showed quite rapid growth above the group average. EBITDA in 2022 ended at the DKK 92 million -- or DKK 98.1 million, corresponding to an EBITDA margin of 6.6%. Given all the investments and the turmoil of '22, we find that's sort of acceptable, but still very far from the full earnings potential of the company, which is also, to some extent, reflected in the uptick in Q4 in isolation. The measures we have implemented to improve profitability are working, but they're taking a bit longer to kick in than expected. But we are seeing the positive trends already in Q4, and we're continuing to see them in the beginning year of 2023. So moving to Slide 6, a little bit more details on how I see Q4 in isolation. We again delivered positive business progress in almost all areas of the business. And despite all of the uncertainty in the macroeconomic business climate, we delivered an organic growth of 11% on the top line, which was broadly in line with expectation. Q4 marked the seventh consecutive quarter of organic growth, which Columbus has delivered. And that was outlined as the main mission in our Focus 2023 strategy. The EBITDA for the period of Q4 amounted to DKK 30 million, which is an increase of 11% compared to Q4 of 2021, and that led to an EBITDA margin that was at 8.1%, which is slightly lower than Q4 2021. However, the efficiency was 63% in Q4, and that's up from 61% in Q3 of 2022. As we've talked about before, increasing efficiency is, if not the, then at least one of the key drivers, I would almost say, the key driver of profitability. And we continue our positive development, both throughout 2022, but we're also seeing momentum going into 2023. So all in all, we are satisfied with the results for Q4, ending the year with positive expectations to continue growth and improve our profitability in 2023. So if we go to the next slide, that will be Slide 7, which is a headline -- the key highlights. And yes, 2022 was a very busy year for us, and this slide outlines and tries to give you an insight into the main operational highlights of this year. And we will not go through all of it in great detail, but just sort of have a time journey through the year. So if we just reflect that briefly, we have the February with the Russian invasion of Ukraine. We talked about this before, but the Board and the executive management group, after a relatively quick assessment, made the decision to divest the Russian business through local management and -- mainly for the reason of making sure that we were operating in line with our own values, but also to safeguard business activities and shareholder value in general. So in April, we started and we initiated this price and commercial initiative to secure profitability. We saw that in a market with increasing inflation, which affected our own salary costs, and also, I think, it was an area that perhaps, in past years, have been somewhat neglected as a discipline. So we put in place a fairly robust program for that. And we already see good results of the program. But as I said before, it was -- the effects kicked in, in the second half of 2022 and gradually giving us the effect we're looking for. And now we're sort of towards the end of 2022, we started to see the full effect, and we now have that in '23. And you could ask, why is that? Why is it not just a policy decision and then you change the prices. And the reason is that we increasingly work for very big customers, and we negotiate master service agreements with most of them, and there are call of orders to these service agreements. And we -- sometimes we finish one project and then the new conditions kick in on the next project or we have to renegotiate new terms altogether. So that's why sort of it's a gradual buildup of the improvements. In May, we launched a global customer development program towards our most strategic customers in our main markets. The purpose was basically to ensure we have a more proactive, more coordinated approach with all our business lines present to think in terms of value creation for our customers. In line with our customer development program, we also increased our engagements with several of our existing larger customers through greater cross-selling, and that is kind of what we are after with these investments. And as an example, one of our key customers, Schibsted, has added a customer experience solution to an already existing Microsoft Dynamics, which is sort of more in the ERP world and has basically combined that to their advantage, and that's 2 different aspects of the services Columbus can deliver that they benefit from. Another key focus for 2022 has been the improvement of our efficiency. And again, here, efficiency, just to make sure we're all familiar with the term, is the expression we use to describe of all of the invoiceable or deliverable hours, how many do we manage to sell. That's what it is. And as I said before, it's a key measure. We have -- we've improved in general, as I said before. We continue to improve, but we've also had some special focus areas that we've given extra attention and that has been part of driving the overall improvement. And here, I think we should mention that following COVID and many other things, we were at a critically low stage in our Indian global delivery center in Hyderabad, which is a quite large center, and they started 2022 with around 40%, and they ended the year at around 60%. And even now as we are in the first month of 2023, we can see they continue their upward trend, which has been very important to us. So going to Slide 8, where we continue the -- with the second half year of the timeline. Key focus has also been the strengthening of the organization. We've executed a range of, I'd say, important organizational changes during this year to build a much stronger one Columbus approach. It's always important for global companies to agree on the best things. But for us, particular, we needed to focus on this following many acquisitions in previous years. We implemented new values, new leadership principles, which has led to a much higher level of employee satisfaction and engagement. And also during 2022, we welcomed many new colleagues. We ended the year with about 1,550 employees. Also as thing worth special notice is our young professionals program, where we've -- where we endeavor to onboard younger talent or earlier in their career stages, and we're really successful with that. I think that's largely also down to a very focused HR strategy, investing heavily in their integration in the company once they joined rather than just getting them to join in the first place. It's a very intensive first half year that they go through, and it ensures that they are very valuable for us. In October, we merged our project and care units for both of our biggest business lines, so Dynamic and M3. So what does that mean? It's the -- it's the project delivery organization that joins forces with the ongoing care once they are into what we could call a live -- we've kept them separate for a couple of years, and that's for a good reason. But as we see the majority of the, let's call it, the cloud list is now completed. There's a need for these 2 units to work so much together all the time that it didn't make sense for us or more importantly, to the customers to have them separately. So we've successfully merged those 2 units, and we can already see that it improves the way we have customer interactions, but also our own efficiency. This will continue to benefit us as we go more and more into this, what's described as the evergreen cloud environment. Finally, I would just like to mention that we have strengthened our executive and senior leadership team as well during the year. Brian, who is with me here today, has joined as new CFO. We also have a new business line executive for our strategy change, Michael Navon. We have a new market unit executive for Denmark, Claes Kongsdam, who has also joined us. Actually quite important but perhaps to just mention briefly on Denmark is that 2022, although, modestly, Denmark returned to growth with -- 2% growth, but if we look at Q4 in isolation, which I did, I think we are -- we booked a 7% growth. And we continue to see a buildup of momentum in our original home market, if we call it that. So just as a final point here, we also could announce that we won the Microsoft Partner of the Year in Sweden in '22, quite important because Dynamics -- the Dynamics unit in Sweden is quite a big growth driver, so we are satisfied with that. And Columbus is also the largest Dynamics partner in Northern Europe and has been part of the Microsoft inner circle for more than 20 years now. Yes. So I will now hand over the presentation to Brian, who will cover the financial review.

Good. Thank you, Soren. I'll now briefly cover the financials and start with the income statement. You should now see Slide 9. And overall, it showed a positive ending to 2022. In Q4, revenue grew by 11% as Soren stated earlier, with the increase mainly coming from our service revenue. Staff costs increased by 16% to DKK 260 million. This increase is mainly related to the increase in average number of FTEs and salary adjustments as well as lowering the use of subcontractors that then favor our own equities. Other external cost increased by 33% to DKK 42 million. The increase is primarily related to travel due to increased customer activity and IT expenditure. Also, as mentioned earlier, EBITDA for Q4 amounted to DKK 30 million. This [indiscernible] to an increase of 11% in Q4 or a margin on 8.1%, which is on par with Q4 2021. So overall, 2022 has shown a strong growth on the top line. But on the bottom line, not fully where we would like to see it. But we are having different measures, as Soren had mentioned, to improve that going into 2023 . Next slide, please. You can now see the business line overview again with Q4 and the full year for 2022. And basically, we are seeing a growth spread across most of the business lines. Only our M3 business is lagging slightly behind in Q4 with a minus of 6.2%. Dynamics, our largest business line, increased by 10% to DKK 169 million. As mentioned, M3 declined with 6% in Q4, and the decline is partly due to a very strong Q4 in 2021, but performance is also slightly below our expectations. Digital Commerce continues to show a high pace, growing 32% in Q4 to DKK 59 million, which is primarily coming from Sweden and Norway. Data & Analytics grew by 30% to DKK 15 million. The revenue increase is driven by Denmark and Sweden. Our customer experience and engagement grew by 19% to DKK 11 million. This increase is, again, primarily coming from Sweden, U.K. and Norway. For the first time, we are presenting our strategy and change business line on a standalone basis. The business line is still in its very early stage, although we have high expectations, and we will, therefore, continue to present this on a standalone basis going forward. The full year performance is showing the same development as we saw in Q4, with our smaller and more strategic business lines growing rapidly. Our core business Dynamics and M3 has also shown growth, although in a more steady pace. We are satisfied with the revenue growth in our business lines, and we expect an increased growth in the coming years. Now we are on Slide 11. Increase in our recurring revenue. Firstly, it is important to mention that the recurring revenue figures are affected by our updated accounting policy related to measurement of product sales. This is due to our sales from subscriptions and cloud now is being measured on a net basis. Last year or earlier, we used a gross sales accounting principles on that one. This has brought the recurring revenue percentage of total revenue down from 22% to 14%. Recurring revenue increased by 33% to DKK 52 million in Q4 of 2022. For the full year, recurring revenue follows the overall revenue increasing by 8%, and those remain on a stable part of our total revenue. It is our expectation that cloud will continue to gain a larger share of our product sales and subscriptions will decline, although this change is going slower than anticipated. Next slide, I'll briefly touch on efficiency. As Soren mentioned, one of our absolute key performance indicator. Here, we continue to measure it -- and therefore, we continue to measure this quite closely and follow up. And we are starting to see an improvement on this KPI, especially our global delivery center in India has improved their efficiency, and we see a positive trend in other markets as well. In Q4, the efficiency was 63% for the group. This is an increase, both compared to Q3, which was 61%, but especially compared to Q4, which showed 60% client efficiency. We expect efficiencies to increase further in 2023. Next slide. Now we have a view of the market unit development. And here, we can basically say that all our market units delivered growth in Q4, except our smaller U.S. business. The Swedish market, which is our largest market, delivered 1% increase in service revenue in Q4, although this is impacted by the significant drop in the Swedish krona at the end of 2022. This is present on both Q4 figures, but also the full year. In 2022, the Swedish margin unit was negatively impacted by around DKK 24 million due to the weakening of the Swedish krona. In Denmark, Denmark is back on track with a 7% growth in Q4, and in 2022, with a 2% increase compared to 2021. Norway continued their strong momentum, growing 15% in Q4 2022, thus delivering 14% growth for the full year 2022. The growth is driven by all business lines. The U.K. market unit delivered 34% growth in Q4 2022 and comes out of 2022 with 16% increase. The growth is mainly driven by Dynamics and Customer Experience & Engagements. As mentioned, the U.S. market unit continues to struggle and decreased by 5% in Q4 and 1% for the full year 2022. This is despite the U.S. dollar is providing a tailwind of around DKK 10 million on the year alone. We are working on the initiatives to regain profitability for the U.S. market unit as we speak. Overall, the development in our market units is considered satisfactory. With that note, I would likely like to thank all our market units for a great commitment and support in 2022. I will now hand over to Soren to present our new sustainability strategy and give an update on ESG.

Super. Thank you, Brian. Yes. So I'll run through the sustainability and ESG prospectus now. And 2022 has been a really important year in our own sustainability journey. In September, we launched our new sustainability strategy. We think that with our purpose digital transformation for better tomorrow, we need to and we are determined to address climate change with a dual approach. So we provide our customers with the means in terms of advisory, with digital solutions to decrease their environmental impact while simultaneously evaluating and mitigating the effects of our own operations. So it's a dual strategy. It addresses both Columbus' needs to improve, but is very, very centered around assisting our clients as well. And the reason for that is that the digitalization and especially data is key in a green transition. And at digital advisers and basically custodians of all of these very core systems to our customers. We have the expertise to help our customers in all of the key industries where we operate to achieve their sustainability goals and comply with the increasing requirements for nonfinancial reporting and compliance regulation that they are having to fulfill. So in essence, that means that we need to assist them in terms of our ability to measure, to track improvements, to document improvement, to report on improvements. And the more this can be drawn out of the systems that we excel in, the lower basically the burden for the customer, the more they can emphasis on creating actual improvements. So we'll soon launch new offerings that specialize in our customers' needs. And for instance, these offerings include an ESG program management solution. which is meant to help our customers accelerate and manage their ESG compliance and reporting initiatives. Another offering provides ESG advisory services that will enable companies to lead sustainable business culture and provide governance for the organization's sustainability initiatives. The sustainability strategy has an important focus on our own operation as well, and we aim at reducing our own footprint and focuses -- and it focuses on increasing our diversity and inclusion globally as well. So the -- I guess, the S in the ESG as well. And if we go to slide -- the ESG Update. Is it Slide 15? Sorry I can't see the number from here. Yes, it's Slide 15. In 2022, we started monitoring our own greenhouse gas emissions. And we have now established a confident baseline from which we can further improve. After having said this, we strive to establish specific targets and develop concrete steps to reduce our own carbon emissions in 2023 and beyond. Our ambition is to establishe and become a carbon-neutral organization. Just as an example, currently, 60% of our electricity consumption is renewable, but the goal, of course, is to reach 100% within the foreseeable future. On the social aspect, our diversity and inclusion program focuses on growing a diverse talented culture within Columbus. Key focus here is to increase the proportion of women in Columbus globally, both on an employee and manager level. And from 2020, when we started measuring the agenda distribution globally, the percentage of women has increased slightly from 28% to 29% -- from 28% in 2020, 29% in 2021. And again, we've risen to 31% in 2022. So good to see here that when you look at the young professionals that I talked about before, if we look at the 37 we hired, 43% of them are women and will continue to improve our ratios. In the period from 2016 to 2021, the percentage of women at a management level in Columbus increased from 26% to 29%. And at the end of 2022, this percentage actually declined slightly to 28%. And we've initiated a range of programs, initiatives to increase these numbers, which will be rolled out during 2023. And on the people side of things, we continue to see an improvement in employee satisfaction and it went from -- and it's referred to as an eNPS score from 40 in 2021 to 47 which is a significant improvement and is certainly considered satisfactory given that 40 was already a satisfactory level. You can also see in addition here that our sickness leave is at 2.34%, which is considered very low. All in all, we are satisfied with our ESG reporting for 2022, and we'll work on a range of initiatives during 2023 to further improve because we obviously still have a lot to do and further ambition. Good. So now we move to the outlook, which should be on your Slide 17. So just going back for the last 2 years, Columbus has been very deeply focused on building the foundation and recreating organic growth. Based on this, we implemented organizational changes, strengthening of the management, newly defined business approaches, investments and systems, focusing in on our larger customers, focusing in on our core industries. And we're now entering the last year of our growth strategy, Focus 2023. So in 2023, we expect organic growth close to or above 10% and earnings improvements through enhanced efficiency and focus on contract profitability as well. Based on the financial performance in 2022, and the current order book and pipeline sales forecast, our full guidance for 2023 is as follows: Revenue is expected to be in the range of DKK 1.50 billion to DKK 1.550 billion. So that would correspond to a growth of 8% to 12% in constant currencies. EBITDA is expected to be in the range of DKK 115 million to DKK 135 million, which, again, would correspond to a margin of 7.4% to 9% EBITDA margin. So basically, what we are doing here is we're continuing the growth, but we are growing at a pace where we can allow ourselves to focus more on improving our profitability, which we find prudent in -- after the changes in the macroeconomic climate. Yes? Good. So let's just see. Yes, obviously, the outlook is subject to other general uncertainties in our markets, such as the current macroeconomic conditions, higher than normal exchange rate volatility and recession period in some countries. Although we continue to see a very strong demand for our digital solutions and transformation, we do anticipate that what we're already seeing now is that a little bit slower decision pace on new projects in our customers and their sort of desire to divide projects up in smaller bites will continue. It's something we've already adapted to. So we're kind of used to this by now. They want some proof points earlier in a project. But obviously, if the general uncertainties worsen during 2023, it may impact the group's growth and margin negatively, and we will adapt accordingly just as we have in 2022. And then on Slide 18, I'm just going to share a few operational milestones that we are setting out to achieve for 2023, and that will then take us to the questions session. Basically, we have defined the following key strategic milestones. We're going to continue this development, which we are already seeing and which is bringing us success, which is becoming digital advisers, basically stepping into new space where we're not just delivery partners, but we are working alongside the customers with defining the plans. We're going to continue our development and deployment of sustainability offerings where we can leverage the very deep industry expertise that we have built in the past years. We're going to further strengthen the global delivery model. This is already working. This is where we see India, for instance, coming up in efficiency. We are going to focus on further improvement of our efficiency. And I guess, with the first month of the year being behind us, we can say that we are on the right track. And then we're going to focus more on specific contract delivery, improving the quality and the customer experience of Columbus delivering, but that also leads to improved profitability from our side. We look forward to launching our new strategy with long-term operational and financial goals, and we'll do that early in Q4 of 2023. Yes. So the next slide, please. And I will now hand over to the operator for questions.

[Operator Instructions] Speakers, there are no questions over the phone at this moment.

Okay. I think we're also slightly over time, to be honest. So I just want to thank the audience for your participation, and we look forward to talking to you again next time. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.

Thank you.